Don't Believe North 's Economic Reforms By Nicholas Eberstadt Posted: Thursday, April 8, 2004 ARTICLES Asian Wall Street Journal Publication Date: April 8, 2004

Anyone who has spent much time following North Korean affairs will be familiar with a hardy perennial in the trade: The prediction that would soon be embracing economic reform. Scholars and analysts have been detecting quiet signs of reform and opening in the North Korean economic system since at least the 1980s. The intensity of those premonitions typically waxed and waned according to the current temperatures of Pyongyang's relations with Washington and/or Seoul--and the failure of those predications to actualize, of course, never dissuaded proponents from reintroducing the notion for consideration.

For decades, looking for signs of incipient North Korean economic reform seemed to be a pastime akin to waiting for Godot. Then suddenly--at least according to some--Godot arrived. In July 2002, Pyongyang enacted a package of macroeconomic policy changes that marked a notable departure from practices over the previous generation. Moreover, North Korean leadership now sometimes openly describes these measures as "economic reform"--a term North Korea had vigorously rejected before, on the understanding that no reforms were needed.

The 2002 package introduced radical increases in the price of basic goods and services such as food, fuel, electricity, transportation, rent and wages, steep but not quite so radical wage hikes, the devaluation of the North to about 150 to the dollar from a previous exchange rate of 2.15, and the formal dissolution of a ration system that had, at least in theory, previously provided for most basic household goods.

Scholars, analysts and policy makers from the U.S., Japan and especially have since offered cautiously optimistic--and incautiously optimistic--assessments of the significance of these changes. Some argue that North Korea is now at last moving toward a pragmatic economic policy, and maybe even toward a market-oriented of the sort that has transformed and energized the economies of Vietnam and China.

There are many reasons that observers might wish to see economic reform in the DPRK: advocates of the "sunshine" policy could claim vindication for their strategy; international-security types could start thinking about genuine tension reductions on the Korean peninsula; humanitarians could envision a mitigation of North Korea's desperate poverty. But in the final analysis we must be prepared to see what actually exists in North Korea--not what we would prefer to find. And by the criterion of facts on the ground, unfortunately, optimistic inklings about reform cannot sustain serious scrutiny. The weight of evidence today does not support the proposition that North Korea has entered into a process of serious economic reform--as it likewise did not 20 years ago, when I first began hearing such wishful thinking as a then young student of North Korean affairs.

It may be cheering, of course, to see anything self-described as "reform" emanating from the organs of power in North Korea. And by comparison to Pyongyang's economic policy adjustments since, say, the late 1960s, these measures may be indeed described as bold, experimental steps. Yet in a sense this only attests to how impoverished our expectations for North Korean policy have become over the decades. Viewed for what they are--rather than for what we might hope they will prefigure--the 2002 package of economic changes can best be described as rather modest: either by comparison to "economic reforms" undertaken in other troubled economies or by comparison to the job that needs doing in North Korea.

In practical terms, the 2002 package accomplished one important function: it re-monetized a limited portion of North Korea's domestic economy. By the late 1980s, North Korea was already a shockingly demonetized operation: back of the envelope calculations for the year 1987 suggest that the wage bill in that year would have amounted to at most a third of North Korea's official net material product-and still less in relation to the country's GDP. Yet over the following decade and a half, the role of the national in domestic economic activity was progressively diminished. By the turn of the century, North Korea was perhaps the modern world's most completely demonetized economy--excepting only Khmer Rouge Cambodia, where for a time, by decree, money was abolished altogether.

The re-emergence of money in North Korean economic life--and with it, the re-emergence of a limited measure of open market activity--marks an incontestable and important improvement for the country's tiny consumer sector. But it is important also to recognize just what this July 2002 package does not signify. It does not, to begin, represent an unambiguous move toward market principles in the North Korean economy. To the contrary, re-monetization of the domestic economy is an essential condition for the resurrection of North Korea's badly broken central-planning mechanism--which has not managed to launch another multiyear national plan since the last one was ignominiously concluded in 1993. For the past decade, North Korea has stumbled haplessly along as a "planned economy without planning," in economist Kimura Mitsuhiko's apt phrase. Re-establishing socialist planning requires graduation from the primitive barter practices that have characterized the North Korean economy in recent years.

Limited re-monetization of the domestic economy does not signify any transformation of North Korea's badly distorted production structure. To the contrary, the manifestly limited supply-response of the country's economy to the 2002 measures is indicated on the one hand by the subsequent steep drop in the black-market exchange rate for the North Korean won, and on the other by Pyongyang's hurried introduction, barely 10 months later, of new "people's life bonds"-- worthless, utterly illiquid and involuntarily assigned in lieu of wages to workers or as payment to enterprises.

To be sure, the limited reintroduction of money in North Korea's domestic economy may elicit some supply response: a Leibenstein-style increase in "x-efficiency," or improvements in output without any corresponding improvement in technology, investment or resource allocation. The advent, or more properly, the return, of domestic currency to North Korea's consumer sector has facilitated the recent emergence of some "farmers' markets" and even some larger, more general, "markets," both within Pyongyang and outside the capital.

But without the possibility of a reallocation of state resources in accordance with new demand conditions--and that possibility currently does not exist in North Korea--the supply response must be tepid and superficial. So long as goods sold in these much-discussed "markets" come from isolated households, rather than official enterprises--and must be transported individually, by bicycle, on back or foot, rather than en masse by official rail or motorized freight--it's unrealistic to expect an upsurge in production.

Thus, it should come as no surprise that the World Food Program recently warned prospective donors that North Korea faces an imminent return to mass hunger barring an influx of new food aid into the relief pipeline--heartening signs of newly sprouted "people's markets" notwithstanding. The contrast is not a contradiction, but rather a faithful--if painful-- reflection of the scope and limits of the 2002 reforms.

Those reforms do not in themselves stave off the specter of North Korean economic collapse. Nor do they have any obvious or direct bearing on the prospects for a shift to China- or Vietnam-style export-led growth. One need only contrast North Korea's patterns of trade performance over the past generation with those of China and Vietnam to appreciate this. Vietnam began its push for an export-orientated economy when its Soviet subsidies abruptly ended--whereas North Korea's reaction to the withdrawal of those subsidies was a marked worsening in its export performance and an increase in aid dependence.

Though still predominantly agrarian societies, Vietnam and China both manage to export far more merchandise on a per capita basis today than does the ostensibly industrialized North Korea because they have embraced the linkages and supply-response mechanisms that Pyongyang has assiduously prevented from taking root.

North Korea has not even begun to tinker with the macro policies, or promote the micro institutions, that would permit a China- or Vietnam-style export response. Thus for the time being, sustained economic revival based on pragmatic economic reform and exports is simply not on the cards for North Korea.

For better or ill, Pyongyang watchers--and more importantly, North Korea's abused and long-suffering subjects--are still waiting for Godot.

Nicholas Eberstadt holds the Henry Wendt Chair in political economy at the American Enterprise Institute.

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