My Breakfast with Andrei: Lankov on Reform in North Korea
Andrei Lankov—one of my favorite scholars on North Korea—has written an interesting piece for al Jazeera on reform in North Korea; as is typical, it is already receiving echo chamber treatment (from the WSJ), in this case justifiably. His main point: the reforms that were tried earlier by Kim Jong-un are finally being pursued with greater seriousness. While in Seoul, we had a chance to discuss changes in the North and what—if anything—might be going on; the discussion follows directly on Marc Noland's post yesterday on economic developments.
Lankov’s observations are based on several trips to the border area with China over the last year as well as a handful of scholars in the South—notably Kim Kwang Jin—who are now talking about the so-called “May 30  measures”; these follow on the pilot—or more likely aborted--“June 28  measures” that we analyzed in depth here and here based on the work of Park Hyeong-jung at the Korea Institute on National Unification (KINU). The point of those posts was that the pilot reform efforts may have run up against residual inflation from the currency conversion that has only now been brought under control; Marc Noland presents data to this effect in the post from yesterday.
In the agricultural sector, work teams are finally being reduced in size to 5 or 6 adult workers. Although Lankov initially stated that was small enough to incentivize individual families, he noted in our breakfast that the intention is probably still to keep more than one family unit engaged. We argued in our posts on the failure of the reforms that they might have been undone by ongoing inflation from the currency reform; this year, however, a relatively strong harvest—if it in fact materializes despite the drought—could provide the conditions for sticking to the plan. In the SOE sector, less is required from the state. Although Lankov mentioned some reforms that would permit managers to experiment with pay, the real issue is simply to acknowledging the de facto trading that is going on among SOEs and, in some cases, even effective privatization; managerial responsibility simply entails requiring firms to operate largely—if not wholly—outside plan commitments.
As always, the issue in question is not only government announcements but their credibility. In the agricultural sector, for example, a component of the reform is to shift the share of the state’s take of the harvest from 70% to 40%, leaving either cooperatives or individual work units—it remains unclear—to dispose of the rest as they see fit. But the DailyNK is already reporting that if the harvest does not come in as expected, the government will be tempted to adjust these commitments on an ad hoc basis in order to maintain its commitments to the erratic PDS and—more importantly—to those households who continue to receive ration commitments through favored work units.
The larger question is how much gain there is from agricultural reform given North Korea's comparative disadvantage in agriculture. Go Myong-Hyun of the Asan Institute pointed out to me that the benefits of these reforms were only likely to materialize in the relatively small land-rich zones where they could generate productivity gains; it is not clear this would be true on the East Coast. In the end, reform requires doing something--and something dramatic-with respect to the external sector.
However, we are seeing similar credibility problems on the foreign investment front. Lankov agrees with our position that the only hope for the North Korean economy over the longer-run is a serious opening to foreign investment (our posts on this issue can be found here). But three recent stories encapsulate what are likely to remain enduring dilemmas moving forward.
- The Chosun Ilbo has a story on Orascom’s earnings in North Korea, which points out that its problems repatriating earnings persist; for more detail on the problems, our coverage is here. If North Korea is unable to allow large investors to repatriate profits, then such investment is unlikely to enter. We have speculated that one reason that Chinese and Russian investors have been willing to enter is because mining and transshipment arrangements pay for themselves through the resulting trade transactions; this is not true for service or infrastructure investments in the domestic market.
- A fascinating story by Radio Free Asia suggests that Chinese investment and trade with processing-on-commission partners in North Korea is being undermined by skimming. North Korean factories producing relatively expensive items such as winter coats will not return the full consignment. Chinese firms may still be able to make money paying an effective 10 percent tax on such transactions, in effect, a private bribe. But the willingness of investors from other countries to put up with such theft is probably less, and in any case even if it were not the returns from such arrangements have to be correspondingly discounted.
- Finally, DailyNK reports that operations at the country's largest producer of iron ore, the Musan Mine, have slowed and ultimately come to a virtual stop. The primary reason is a slowdown and ultimately blackout in the delivery of power. We can sympathize with problems caused by the effects of the drought on the output of power from hydroelectric plants. But as we have always argued, North Korea’s problems are rarely the result of nature alone; South Korea is a virtual natural experiment in this regard. The problems reside in the failure of the government to invest adequately in infrastructure—as opposed to the military—and ongoing disputes with Chinese as world commodity prices and iron ore in particular come under pressure; my colleague Marc Noland called these problems in an important post on North Korea’s vulnerability to in this regard.
In sum, Lankov’s observations need to be taken seriously; it is entirely plausible to us that changed conditions might have led Kim Jong-un to take a second run at reforms following the failed effort in 2012-3. But in all of the three areas of interest here, particularly in agriculture and foreign investment, credibility issues loom large. Can the regime let farmers and foreign investors make money nor not?