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A foolish investment

June 13,2019
이미지뷰
이미지뷰
Scotch whisky on sale at a store in a ski resort in North Korea. [YONHAP]
Kim Byung-yeon
The author is an economics professor at Seoul National University.

One episode can illustrate how much North Korea has changed. A Japanese government official said he was surprised by what he discovered from a North Korean fisherman whose boat had sailed into Japanese waters. The captain claimed he had bought the fishing boat and recruited his crew himself. The official did not believe his words at first, as he knew there could not be private ownership or recruitment under the state-controlled socialist system of North Korea. But the fisherman did not change his account. The authority finally believed him upon hearing an explanation from a North Korean expert. North Koreans can now buy a fishing boat upon registration and hire men.

Another foreign government official was stunned by a local government official from North Korea. The North Korean official did not discuss their formal topic of concern and was only interested in making money. He inquired about business opportunities that could bypass international sanctions on North Korea. Given the passion he was hearing, he joked that North Koreans must be the most business-minded people in the world.

An institution in North Korea is on its own if it cannot draw subsidies from the local or central government. The organization can be sustained by income from firms owned by the state after handing over the bulk to the power elites.

The changes have also seeped down to the grassroots. One lecture of North Korea’s Central Committee of the Workers’ Party was on the theme of “people being contaminated by the taste of money.” A survey of North Koreans asked which period of rule they preferred in their experience with the three leaders of the Kim family dynasty: Kim Il Sung, Kim Jong-il or Kim Jong-un. The top answer was the early years under founder Kim Il Sung when the rationing system performed well. But asked whether they wished to go back to those days, respondents said no. They prefer making their own living in the marketplace. The market has not only generated income for North Koreans — it has also taught them to be independent individuals.

Such changes pose a major challenge to the Kim Jong-un regime. Adam Smith, godfather of free-market economics, called 18th-century Great Britain a “nation of shopkeepers.” He predicted politics would inevitably have to serve the merchants and traders. North Korea must be the nation with the largest past of its population engaged in “unregistered” trade. Before sanctions were in place, markets were prevalent across North Korea. Assets and properties of state entities had also been traded in the black market. Apartments were sold to individuals and miners solicited overseas trading opportunities on their own. Bribes established a business cartel with bureaucrats. The rise of individuality and placing personal interests before the nation’s and collusive ties with bureaucrats weighed heavily on the Kim regime.

The young leader has had a very urgent first few years in power. He may have thought his power would be safe once he completed missile and nuclear weapons development and the revival of the economy. He carried out practical economic policies. He made some markets legitimate by levying taxes on market activities and allowed autonomy in business management. Competition was granted to cooperative farms. Instead of equal profit-sharing by appropriating the exact farm grounds and quota, several farmhouses made a unit to keep the income from their farming areas to themselves. But the general socialist framework remained intact. The state still controlled enterprises and farmlands. There was a limit to the North Korean reform model because it did not change the constitution to legalize privatization as China and Vietnam had done.

Kim has made his biggest mistake by underestimating the importance of the market and trade to the North Korean economy and pressing on with nuclear development instead. The sanctions on North Korea went straight to its Achilles’ heel. Pyongyang is in the bind of letting the economy go down if it refuses to dismantle its nuclear and missile weapons or give them up if it wants to save the economy. Kim tried to somehow compromise by seeking a lifting of sanctions through partial dismantlement, but that was flatly rejected by U.S. President Donald Trump in Hanoi, Vietnam. Kim would try all other means to remove the sanctions. North Korea prizes regime guarantees more than removal of sanctions. But the two are now inseparable. The North Korean leadership cannot be sure of public support or regime security if the economy is not saved.

Getting sanctions lifted while withholding some nuclear assets does not solve problems. The economy is reliant on the market. As the French philosopher Montesquieu said, commerce and liberty go hand in hand: “Commerce flies from the place where it is oppressed, and stays where it has liberty to breath.” The market overrides the socialist system, changes the values of the people and engages bureaucrats. Markets and trade make a national economy. Nuclear weapons then become accessories. The opportunity cost of owning nuclear weapons becomes too high. As long as sanctions are in place, a dual nuclear economy policy is as impossible as coexistence of war and peace. When sanctions are removed, the market will begin to neutralize nuclear weapons. In a marketized North Korea, nuclear development would be a foolish investment.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, June 12, Page 31