The North Korean Economy Is Growing More Capitalist

(Bloomberg Opinion) -- What won the Cold War? Stipulating that the West did indeed “win,” there are a lot of answers to that question: Ronald Reagan’s “Tear down this wall”; Mikhail Gorbachev’s Glasnost; George F. Kennan’s containment; the Helsinki Accords; Pershing missiles; the slow rot of a corrupt leadership; etc. To that list I’d like to add … blue jeans.

There was a long history of smuggling American jeans, particularly Levi 501s, in the Soviet Union, but by the last decade of its existence it became a mania. And the only way to get them was the underground market; as Niall Ferguson once wrote: “Why could the Soviets not replicate Levi 501’s the way they had replicated the atomic bomb?”

There was obvious symbolism here. Russia’s Generation X wore them to look cool in a sort of silent rebellion. It’s said that the East German government viewed them as an embodiment of “Anglo-Saxon cultural imperialism.” But at heart, it was really capitalist imperialism, and the fact that they were traded for rubles or caviar or fur hats or that water of life called vodka was the most anti-Soviet thing about it.

Fast forward a couple decades, and there was no shortage of predictions that China would follow a similar route. As Tom Friedman put it: “Liberty is also an essential ingredient for any society that wants to thrive in the 21st century.” Xi Jinping begs to disagree, and it’s pretty much up to him these days.

Which, in a roundabout way, brings us to North Korea, the very model of a modern police state. Yet the Hermit Kingdom is up to something unexpected: capitalism. Though officially illegal, a black market of sorts has sprung up. According to the Foundation for Economic Education, 5 million people - 20 percent of the population – are “directly or indirectly dependent on the markets.” You can find jeans there, although black is apparently the best color if you want to avoid hard labor.

Will (sort of) free markets bring human liberty and democracy, as kinda sorta happened in Russia? Or, as in most things, will Kim Jong Un take his lead from China’s state capitalist surveillance state?

To get some answers, I talked with Stephan Haggard shortly after the Trump-Kim summit in Hanoi collapsed. Haggard directs the Korea-Pacific Program at the School of Global Policy and Strategy at the University of California San Diego; is a visiting fellow at the Peterson Institute for International Economics in Washington; and in 2017 co-wrote, with Marcus Noland, “Hard Target: Sanctions, Inducements and the Case of North Korea.” Here’s a lightly edited transcript of our conversation:

Tobin Harshaw: Before we dive into North Korea’s economy and the like, let’s do a quick autopsy on the now-collapsed Hanoi summit. The consensus is that there was little to show for the time and effort. Is the consensus wrong in any way? Is just going through the motions in any way helpful?

Stephan Haggard: I think it is wrong to see the Hanoi summit as a complete failure. To be sure, it is costly for the president to travel halfway around the world and not to reach any agreement. But the most that could have come out of the summit at best were largely symbolic things — like an “end of war” declaration — and the initiation of a more prolonged negotiation process. The U.S. and the DPRK were meeting intensely in the run-up to the summit, and it is clear that at least some possible avenues proved fruitful. There would have been subsequent negotiations in any case, so now we will see if talks continue; I suspect they will.

TH: Most people, I think, assume that there really is no such a thing as a North Korean economy – just a black hole and bread lines. Yet the Wall Street Journal had a headline the other day that “It’s All Capitalism Now.” Who’s right?

SH: The days of outright famine are long over, even if some of the rural areas and smaller cities probably don’t eat as well as they should; remember, North Korea is a poor country, so that should not be surprising. But at the same time, what I call “marketization from below” has gained ground in the last decade, and particularly under Kim Jong Un. Markets are functioning, the state is taxing them, and semi-private economic activity now encompasses not only small-scale retail operations - cosmetics, Tupperware, DVDs and brand knock-offs from China - but even activities involving fixed capital: real estate, inter-city transport, restaurants. 

TH: What economic reforms has Kim Jong Un taken, and was this a radical change from his father?

SH: The reforms are not legal or de facto; rather, they take the form of acquiescing to a market economy that has emerged in the interstices of the floundering state-owned enterprise sector. It is fed in small measure by trade with China.

TH: Is there a way to measure economic growth in what is still such a closed state? How about standard of living for average citizens?

SH: The short answer is that the data on North Korea is highly unreliable, and no one really believes it. The best data on welfare — but highly sporadic — has come from surveys administered by the NGO community or by the multilateral aid agencies. But anecdotal evidence should be taken seriously, such as the construction boom in Pyongyang and even the way people dress. To be sure, such evidence suffers from what might be called the “Pyongyang illusion”; the capital city is not the countryside. But reforms have to start somewhere, and it is plausible that they will spread.

TH: Many tyrants, Fidel Castro for one, used the U.S. as a boogeyman to explain his nation’s poverty, thus strengthening political rule. If Kim did let things ease up further for his people, could that actually weaken his control?

SH: Americans like to think that all good things went together; to sustain growth will ultimately require political liberalization or even democracy. But China and Vietnam have pretty clearly put the lie to that hope. And both are Communist parties to boot and thus show the way for North Korea. I don’t see any reason why more rapid economic growth would weaken Kim’s grip; to the contrary — as President Trump has himself suggested — it could strengthen it.

TH: The Hanoi summit blew up, ostensibly, over easing sanctions. If Trump is to be believed that Kim wanted them all removed, why do you think he would lead off with such a big ask? Does he feel under new pressure to keep economic gains going?  

SH: It is highly doubtful that the North Koreans asked for all sanctions to be removed, and no less than the foreign minister called a press conference to rebut that claim. But it is possible that Kim Jong Un miscalculated in asking for too much nonetheless. It was important for the U.S. to underline that shutting down the Yongbyon nuclear complex is not enough, particularly if there is a second uranium enrichment site that is generating fissile material. And remember that Yongbyon almost certainly does not house the regime’s stockpiles of either fissile material or bombs. It would have been an important first step to close it, but only a first step.

TH: How effective are the international community’s punishments, and if they are, do they punish the state or the people?

SH: I am of the school that the sanctions mattered. Why else would Kim Jong Un be at the table, and why else would he be making sanctions relief so central? But this does not mean that the sanctions are likely to lead to regime collapse, for the simple reason that Xi Jinping will not allow that to happen. In short, Kim appears to understand that sanctions relief is valuable for his long-run economic strategy, but he has the power to hold out and impose costs on his people that many other countries don’t have.

TH: No matter how promising the North Korean economy might become, will it ever loosen its near-total dependence on China? Would China want that?

SH: Trade is powerfully determined by proximity, or what economists call gravity. China will always be an important trading partner. But South Korea has a border with North Korea too, and the complementarities are obvious. And when the nuclear crisis broke, Japan accounted for 20 percent of North Korea’s trade.

TH: Trump made the case that Vietnam might be a good model for North Korea’s re-entering the world. Vietnam seemed to agree. Do you think the example holds?

SH: There is a simple answer and a more complex one. At one level, yes: Vietnam shows that a communist country and even an enemy of the U.S. can both reform and reconcile. But Kim does face a legitimacy dilemma. North Vietnam won its civil war; Korea is still divided. If Kim undertakes reforms that make North Korea look like the South, then what is the point? Why be a second- or third-rate South Korea when you can be the real thing by unifying? Also, North Korea does not have advantages in agriculture as Vietnam did and has a larger industrial sector to reform. Opening will be key for North Korea’s transformation.

TH: Finally, Korean reunification is the elephant in the room in all this. If the Kim regime toppled overnight, how worrisome would that be for South Korea economically? Compared, say, to East Germany?

SH: Engagement with North Korea is a way of forestalling regime collapse and unification; this is the dirty little secret on the peninsula. With per capita incomes in the North that are one-twentieth of the South, it is easy to see that the problems are much more profound than those that faced West Germany. Every time I see the word “unification,” I think you can simply replace it with “détente.” That is really what we are looking for: the space for some economic and political relaxation within the North.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tobin Harshaw writes editorials on national security and the military for Bloomberg Opinion. He was an editor with the op-ed page of the New York Times and the paper’s letters editor.

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