Newly entrepreneurial North Korean economy turns inward

An increasingly flexible North Korean economy, propelled by astute entrepreneurs, is upgrading products for local consumers at a time when ambitious national projects are stalled – due not just to sanctions, but also long-standing Chinese disinterest.

Despite being the most heavily sanctioned nation on earth, most experts believe that North Korea’s economy – about which no local data is made available – is in fact growing. While leader Kim Jong Un has repeatedly stressed economic self-sufficiency, new efficiencies driving growth are bottom up rather than top down.

With marketization firmly established as a distribution system, profit-seeking investors are now bringing competencies into manufacturing, once a moribund local sector, as it responds to rising local demand.

Still, there are tensions. In what remains – at least, on paper – a socialist economy, there is rising conflict between state agencies and the entrepreneurs who operate their assets but are necessarily beholden to them.

Externally, while China trades with North Korea, it is not investing, leaving Pyongyang’s hoped-for Special Economic Zones (SEZs) frozen.

From sales to production

Joung Eun-lee, a research fellow at the Korea Institute of National Unification, noted that the economy is diversifying and focusing on consumer items.

“We are seeing a lot of domestic production – such as in food, liquor and tobacco – with many factories making products for domestic consumption,” she said during the “Urban North Korea: Changes and Exchanges” conference, held on June 19 at the Institute for Far Eastern Studies in Seoul.

The economy is in a process of flux. Marketization took hold as a survival tactic during the famines of the 1990s, when the state distribution system imploded. Survival markets, selling foods and medicines from China in the 1990s, transitioned to consumer markets selling a full spectrum of goods in the new millennium.

The markets introduced new products, practices and efficiencies into what had been a fractured socialist economy. Formerly black markets now operate in plain sight, nationwide. Joung said there are some 500 marketplaces in the capital Pyongyang, and department stores and supermarkets are increasingly common, complete with card-based payment solutions.

Now, products in the markets are changing. In the past, they sold and traded almost exclusively Chinese imports. Now, locally-manufactured goods are increasing.

Meanwhile, the profile of North Korea’s donju (literally, “money masters;” widely defined as those with capital to invest) has also shifted, Joung said. In the 1980s and 1990s, they were those who had relatives in fast-expanding China. In the 2000s, they were ex-officials with connections and assets to leverage. More recently, donju are entrepreneurs and manufacturers.

“I was surprised by the change of the donju,” said Joung. “In the past they simply bought from China and resold, but now they are interested in production. They have great capital power.”

Efficiencies and expertise

While markets bought efficiencies to retail and distribution, donju are upgrading manufacturing.

“In the past many factories’ operating rates were less than 30%, so donju are leasing or acquiring factories,” she said. There is increasing pressure on factories to perform, and due to North Korea’s cheap labor, competently operated plants can generate investment returns in as little as two years.

Officially, donju are not allowed to own productive assets – all officially belong to state agencies, Jeong noted. But these individuals, once they invest, have de facto full control. In a country without an official tax system, the donju operate factories by offering state operators return ratios of 20-30%.

These donju have more power in operating factories than state-appointed managers, but also have to take more responsibility, which includes paying off the state agencies that own the plants.  Across the country, there appears to be rising conflict between officials and donju over the appropriate ratios, Joung said.

This shift to local production for local consumption took place around 2012, soon after Kim Jong Un had taken power following his father’s death, said Joung. It was known at the time that Kim was loosening rules, granting managers flexibility and allowing businesses to retain a share of profits, but only now is a clearer picture emerging of this process.

National hubs are emerging where specific products can best be produced, thanks to local conditions and expertise.

“You can see in North Korea there are areas that are gaining a competitive edge, and you can see a division of labor,” she said. “When North Koreans think of Sunchon, they think shoes; if you name another city, they name another product.”

In the heavily sanctioned economy, ingenuity is building necessary expertise, from the ground up.

“People told me that in the past they did not have skills to make boats, but now they make their own,” she said, citing research conducted in China. “I asked someone how this was possible, and this person said they deconstructed an imported part from China and then rebuilt it.”

Domestic labor is aided by new, pragmatic systems. “They go through a process of continuous feedback from the boat owners,” Joung said. “They improve what they make and have highly skilled workers who share knowledge and expertise.”

Synergies are also being leveraged – such as donju opening a commercial sauna close to a power plant, where there is cheap energy. And a service sector is emerging far beyond Pyongyang – the national showcase city, and home of the top elites, where upscale shops, foreign restaurants and coffee shops have appeared.

Supermarkets and gas stations are rising on the edges of factory districts, and cities and province are seeking to transform themselves into tourism locations to benefit from the newly wealthy.

A major side-effect is increasing financial stability as reliance upon black-market foreign currencies drops.

“We believe [economic developments are] boosting domestic demand and promoting the flow of North Korean currency,” Jeong said; “de-dollarization” is an emerging trend.

Chinese disinterest

Another issue driving local manufacturing upgrades is not simply local demand. It is Chinese disinterest in investing.

Following the North Korean famines of the 1990s, “China started an ambitious economic engagement strategy,” marked by rising trade flows, said Theo Clement, a research associate at Kings College, London, at the same conference.

However, the focus on trade rather than investment “resulted in a crushing dependence on China,” he said. “The current [North Korean] leadership is clearly ill at ease with this.”

Additionally, North Korea “has no alternative partner to China, and that gives [Chinese] extreme leverage to ask for lower prices on North Korean supply,” Clement said.

It is commonly understood that China extends an economic lifeline to North Korea to to stave off a collapse and obviate chaos – or, according to some analyses, to shore up an ally against the United States while maintaining a useful buffer state against democratic South Korea.

However,  China, a permanent member of the UN Security Council, is limited in how far it can go in allowing goods to cross its border. Moreover,  Beijing has also been incensed by North Korea’s nuclear tests.

Chinese are “not investing, or are just adding low value in mining and textiles – there is no technical transfer, no infrastructure development,” Clement said. “This is not what the North Koreans are looking for. They don’t want to be a colony of China. They don’t want to be Shenzen, they want to become Hong Kong.”

Big plans, empty zones

Chinese disinterest is particularly glaring when it comes to the 28 Special Economic Zones, or SEZs, established countrywide.

One, in the town of Sinuiju, the main gateway from the northeast of the peninsula into China, would appear to be ideally located, on the Yalu River. In fact, despite grandiose North Korean plans, such as a new canal to obviate flooding, Chinese investment is non-existent, Clement said.

“China has shown zero interest in the Sinuiju Economic Development Corporation, they think it is delusional,” he said. “While North Koreans have a very ambitious strategy, China is only interested in small trade.”

Only one SEZ, Rajin in the country’s northeast, has seen Russian investment in port facilities, and some smaller-scale Chinese downstream development. Wonsan, in the country’s southeast, is being prioritized as a tourist resort by the regime in Pyongyang, but has won no foreign investment.  And Nampo, the port serving Pyongyang, has three SEZs – all of which are competing.

The most promising SEZs, Clement suggested, with the South Korean-invested factory complex at Kaesong, and the tourism zone in Mount Kumgang, both of which included infrastructure development and skills transfer.

But both are currently shuttered. Kaesong was closed down after a Southern tourist was shot dead by a North Korean soldier in an apparent accident, so it deactivated amid inter-Korean political tensions.

And with global sanctions and ongoing geopolitical jitters, there seems little chance of foreign investment coming in.

“Nobody in the current context would invest in higher-value-added [goods or production] as there is no certainty,” Clement said. “I don’t see anything moving” in the near future, he added.