North Korean leader Kim Jong Un presented a new five-year economic plan and conceded that the country’s economy is struggling at a Workers’ Party Congress earlier this month. On close examination, North Korea’s economy is showing deeply troubling signs, including a dysfunctional foreign exchange market, a steep drop-off in trade and increasing food costs. International sanctions and coronavirus lockdowns have resulted in an unprecedented level of isolation that is quickly becoming an existential issue for Kim.
Since last year, Pyongyang has replaced lost export earnings by tapping new revenue streams at home. The new five-year plan continues this theme, increasing self-sufficiency and consolidating centralized control; it’s more or less a continuation of policies announced at last year’s Fifth Plenary Meeting of the 7th Central Committee. But any hopes that these policies will precipitate growth are mistaken. Far from addressing contradictions between the state’s ambitious economic goals and the constraints of a parasitic political system, this plan aggravates them. A wide chasm between the economy on paper for central planners and the one in reality has gone unaddressed. The message between the lines is that security imperatives will once again undermine economic priorities and the people will be asked to compensate for the government’s lost revenue streams abroad.
We saw hints earlier this year that North Korea may have abandoned its previous five-year plan, the economic blueprint laid out in 2016. Now we have confirmation that this plan is being labelled a failure. The new Party Congress report on the activities of the 7th Central Committee (a summary of Kim’s guidance) concedes that growth targets were not met, “serious mistakes” were made in managing the economy and the standard of living was not improved. This might seem like a startling burst of candor from Chairman Kim.
However, when we proceed to the next section of the report and read the reasons for this failure, it’s clear that the “admission” is a pretext to pass the buck. The lack of progress was blamed chiefly on sanctions and natural disasters. While true that United Nations Security Council sanctions have deprived the North’s government of foreign exchange revenue needed to develop nuclear weapons, it’s also worth noting that food prices and exchange rates remained largely stable during the sanctions campaign, and were only sizably affected later by coronavirus-induced border closures. When it comes to natural disasters, flooding and droughts are predictable, annual problems that have afflicted the country’s agricultural sector for decades without adequate government response.
The report also mentions a host of internal management problems, citing the need to introduce technological solutions, improve discipline and better utilize labor. What’s missing from this “admission?” Kim neglected to address the governance problems that create a business environment that is poorly regulated, rife with rent-seeking and opaque. Although this environment blunts growth and deters foreign investment, fixing it would require the deployment of political capital and an appetite for reform that we haven’t seen from Kim Jong Un, especially of late.
Indeed, while many analysts debated whether the young leader might be the one to finally take North Korea on the path to opening and reform, in the past five years, more and more observers have lost hope. Economic goals have been increasingly traded away in support of isolationist security policies. For example, in last year’s plenary address, Kim said that he was unwilling to swap nuclear weapons for “brilliant transformation,” rejecting the diplomatic offer from the United States and its allies to denuclearize in exchange for sanctions reduction and economic inducements.
Now, this year’s report shows us how the North’s government plans to conduct “self-supporting” economic management to compensate for these self-inflicted siege conditions.
In pursuit of self-sufficiency, Kim reported at the Party Congress that the government needs to further increase guidance and control over the economy. This builds on previous momentum. Last year, Kim also underscored a problematic lack of centralized control. He noted some developments on that front this year, saying that the Party Central Committee has made progress “strengthening the unified guidance and strategic management of the state over economic work.”
The Cabinet, a collection of bureaus and ministries acting under direction of the State Affairs Commission, is responsible for the day-to-day management of the economy. Ever the whipping boy for the North’s economic woes, the Cabinet has nonetheless been empowered with additional responsibility and authority of late. Kim said the new five-year plan presupposes that the Cabinet will: improve economic management, normalize production and increase self-sufficiency and “local provision of raw and other materials” (read: Do more with less). He said “the state economic guidance organs should readjust and reinforce the economy substantially” and “underscored the need to tighten discipline in ensuring unified guidance of the state in the economic work.”
To understand why further centralization could damage North Korea’s economy, it’s important to look at how economic guidance is (and isn’t) administered.
Since a famine struck in the mid 1990s, guidance from the National Planning Commission (NPC) has loosened up for many firms that are not “strategic” in nature. This means that state enterprises outside the defense and infrastructure industries have been able to fulfill production quotas using values rather than quantities of state-determined goods. This has made it possible for them to drift away from their state-mandated economic activity to engage in different (and profitable) market activities in which they retain a comparative advantage. In return for this flexibility, the state receives a kind of tax. It is unknown just how large this gray area is (North Korea’s government probably doesn’t know either), but researchers believe it is significant.
Although ratcheting up control could enable the central government to bring in sorely needed funds in the short term, it will also destroy the incentives propping up sectors that rely on private investment, such as construction. The Cabinet has proven inept at detailed guidance. Supply waste and inefficiency have plagued the economy since the country’s founding. Smart money won’t flow to enterprises that have lost their ability to adapt to the market. If rent-seeking becomes too aggressive (a growing possibility), North Korea’s private investors will choose to sit on their cash.
In some senses the report is extremely specific, describing what kind of ore will be used to produce what kind of iron. In other senses, it’s extraordinarily vague, saying that more electricity will be generated and technology will be used to increase output in sectors X, Y and Z without a hint about where this new electricity will come from or how this technology will be developed. Here’s the central conundrum. As it covers industries ranging from chemical production to machine-building, the emphasis never strays far from the central theme of increasing production while also increasing self-sufficiency. This begs the question: Where is all this capital investment going to come from? If it’s true that the government’s foreign exchange holdings have shrunk in the past few years, it appears that the Cabinet is once again being set up to fail.
The North’s “extraordinarily narrow ruling coalition” and resulting numbness to internal and external pressures have once again led it to continue more of the same policies (self-sufficiency and consolidation of control) rather than embracing the opportunity to embark on a process of reform and opening. With the new five-year plan in place, the rift between the North’s “planned economy” that exists on paper and the actual one that exists on the ground is set to grow even wider, opening up the door to more severe rent seeking and asset seizure. The real victims of this plan are the North Korean people, who will find it even harder to make a living.
Jonathan Corrado is director of policy at The Korea Society and a Pacific Forum CSIS Young Leader. The views expressed in this article are the author’s alone and do not necessarily reflect the views of The Korea Society. ©2021 The Diplomat
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