REALISTIC EXPECTATIONS OF ECONOMIC DECISION-MAKING
IN NORTH KOREA
Bradley O. Babson
February 22, 2007
Now that there is an agreement on a game plan for nuclear disarmament of North
Korea, two key questions are whether the North Korean government will move ahead
with efforts to pursue further economic reforms, and whether the energy and economic
assistance package that is designed by the new working group under the Six Party Talks
will help or hinder North Korean’s process of economic restructuring. In dealings with
North Korea, political thinking has a habit of trumping economic rationality, so
expectations of developments on the economic side of the equation over the coming
months need to be tempered by a realistic understanding of the way North Koreans make
decisions about their economic system.
To help put these questions in perspective, I would like to focus my presentation
on factors that will affect the quality of economic decision-making inside North Korea,
using a “bad news,” “good news” format, and then draw some implications for policies of
engaging with the North Koreans on economic issues in the coming months.
Bad News
First, the bad news.
Point one. The North Korean leadership has a habit of trying to micromanage the
economy. Too many decisions have needed to go all the way to the top and this has the
effect of both slowing down and log jamming the decision-making process. A
longstanding practice has been giving on the spot economic guidance at farms or
factories which then become gospel, even when local conditions or good science dictate
otherwise. The culture of infallibility of the pronouncements of the dear leader has led to
quirky and ineffective economic policies in the past. The latest example is this week’s
announcement that Kim Jong Il has decided to ban Japanese cars after seeing a broken
down vehicle blocking a road.
Point two. Ignorance of basic market economic concepts is widespread, thus making it
very difficult to convince especially older generation senior decision-makers of the
economic rationality of what is in North Korea’s own self-interest. This reality was
driven home to me in a visit to Pyongyang in 1998 when a director of the central bank
asked me to explain to him the difference between macro economics and micro
economics. And when a director in the ministry of finance explained to me that the
reason that the exchange rate of the North Korean won to the dollar was pegged at 2.16
was because February 16 was Kim Jong Il’s birthday. Even though there have been
efforts by Europe, Australia, China, the UN and some NGOs to provide opportunities for
education and training in basic economics for mainly younger North Korean officials in
recent years, this effort has been quite limited and not directed at the decision-maker
level. It is hard to negotiate rational economic assistance or design sensible economic
reforms if you don’t understand the logic.
Point three. Economic thinking in North Korea has historically been driven in part by the
juche ideology of self-reliance and in part by typical socialist focus on physical product,
science and technology, and control over factors of production. This means that there has
been an ideological obstacle to the idea of deepening economic interdependence with
other countries, and little attention to improving incentives for independent producers and
consumers, or to institution building needed for an economic system that supports
expanded market mechanisms. This thinking aligns with Party interests in maintaining
state control and legitimacy through a system that retains elements of command and
retention of the public distribution system. It also aligns with military interests in
ensuring allocations of resources come their way at the expense of the civilian economy.
I will leave to others later in the program to illuminate how the internal political
dynamics influence the decision-making processes in North Korea, but this is certainly a
factor affecting the quality of economic policy debates at the highest levels. The 2007
New Year’s editorial suggests that the Party is strengthening its control over the Cabinet,
which does not bode well for progressive economic decision-making.
Point four. Related to the domestic political factors is the fragmentation of the North
Korean economic system and cylindrical decision-making processes. This system fosters
a culture of secrecy and competition among different groups seeking to protect their own
interests and influence the final decisions of the top leadership, which impedes
integrative information sharing and policy making. This tendency is reflected as well in
the fragmentation of North Korean counterparts for humanitarian and development aid
donors, especially since the decision last year to disband the Flood Damage
Rehabilitation Committee, which had been a coordinating body for food aid since the mid
1990’s.
Point five. The extreme scarcity of foreign exchange resources coupled with high
domestic inflation in North Korea also reinforces internal competition both among
different parts of the government and between the state and the newly emerging informal
market economy. So often the focus is how to get a hold of and protect holdings of
foreign currency by whatever means possible. This further complicates the ability to
agree on and implement sensible economic and financial system policies.
Point six. A North Korean defector told me some years ago that the most heavily
guarded building in Pyongyang is the National Statistical Office. That is not good news
for economic researchers or policy analysts, nor for the quality of decisions made at the
top. Lack of good statistics and imperfections in those that exist are major problems that
will constrain rational dialogue on economic reforms and assistance. The UN has worked
with the government since the late 1990’s to improve the quality of information available
on agricultural production and nutritional status of children, but much more needs to be
done
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Point seven. Finally, corruption and acquiescence in illegal activities, together with lack
of understanding of how incentives work in the marketplace, undermine the ability of the
government to design and implement economic policies that succeed in meeting their
objectives. For example, the decision in October 2005 to require that all rice be
distributed through the public distribution system rather than through the markets, at
prices far below the prevailing market price, was in fact an invitation for cheating by
farmers and rent seeking by government bureaucrats, and seems already to be a failed
initiative.
Good News
Let me turn now to the good news side of the picture. In general, the abysmal
state of the economy is a good motivator to find ways to improve decision-making.
Point one. Kim Jong Il has shown he is interested in economic system change and his
support for reforms is a critical factor in motivating others throughout the government to
make further moves in this direction. This was certainly the case in the decisions to move
ahead with economic reforms in 2002 and 2003. Also, his recent trips China have been
interpreted by some analysts as intended to send a pro-economic reform message both to
government bureaucrats and to the general population.
Point two. Since 1998, the organizational development of the cabinet has been
important for improvements in economic decision-making and management. At that time,
policy making and policy implementation responsibilities were combined in line
ministries with abolition of separate policy commissions, and younger people started
moving into key positions. Since then the cabinet structure has been further rationalized,
the Premier Pak Pong Ju given formal responsibility for economic policy and
management for the civilian economy, and an economic research institute of the cabinet
has been established to provide systemic policy analysis and advice to the cabinet
leadership. The institute also acts as a bridge to the universities and outside economic
training activities such as those being provided by the European Commission. If properly
supported, this institute could play a key role in future economic policy dialogue and
coordination of internal and external viewpoints on important issues.
Point three. The economic reforms of 2002 significantly decentralized economic
decision-making for enterprises, agricultural cooperatives and local governments, and
given them more independence from the party. This together with the legal recognition of
commodities markets in May 2003 have given the informal market economy that existed
earlier as farmers markets a big boost, with enterprises as well as households permitted to
purchase intermediate and consumer goods through the markets. The expansion of
market-based decision making is still at an infancy in North Korea, but its legalization is
an important part of the present landscape that must be taken into consideration.
Point four. Old style command economy planning now seems overshadowed by more
strategic and directional thinking about economic changes and how to manage them.
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Command plans are probably still considered important for critical industries and
segments of the economy that are especially important for the military and party. Clearly
a tension exists between the emerging market processes for decision-making and the
formal plan system that has not been resolved, and this conundrum for the leadership
represents both opportunity and risk in the discussions as to best to use future economic
assistance from the international community.
Point five. Experimentation and use of foreign joint ventures to introduce innovative
practices is having a positive impact. We will hear more about his from other speakers,
but I want to mention here that experimentation with, for example, new forms of land use
rights has been an important feature of both Chinese and Vietnamese economic reform
processes to build confidence at the higher levels. Also the use of joint banks to
introduce commercial banking practices such as debit cards and deposit accounts in
domestic and foreign currencies, may be the leading edge of movement towards a twotier banking system.
Implications for Engagement
So what does this mixed picture of some of the major factors affecting the quality
of economic decision-making imply about strategies for economic engagement with
North Korea?
First, it is important for the success of the next phase of Six Party Talks
negotiations, that a platform be created for dialogue on issues that affect the quality of the
design and implementation of whatever economic assistance package is to be negotiated.
This platform must incorporate a realistic understanding of the challenges that the North
Koreans face among themselves in determining what in fact will be most helpful to them
in an ongoing process of economic system transformation that in fact is already well
underway. North Korea not only has to figure out how to make best use of the external
resources that will become available to them, but also to find a way to design an
economic reform process that works. That is, one that puts the economy on a sustainable
growth track and produces real welfare gains for a broad segment of the North Korean
people. There is also a need to make adjustments to the domestic political economic
implications of a new opening to the outside world, reduction in military tensions, and
efforts to revitalize the economy. Future economic engagement must take these realties
into account and not assume that domestic economic and political change is somehow
independent of the Six Party negotiations process focusing primarily on the nuclear issue.
These challenges are also very difficult and we should be modest in expectations about
how much can be achieved quickly.
What this implies to me, is that in addition to efforts to get the working group on
economic and energy assistance functioning in a way that meaningfully relates to these
internal realities, it will also be important to re-thinking the UN role inside the country if
there is going to be a shift from humanitarian aid to development assistance and a
growing focus on governance issues. This is critical so that the platform that is built for a
future expanded role for international development assistance beyond the Six Party Talks
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package and that eventually will be funded by the UN, IFIs, and bilateral aid agencies, is
one that can be broadly supported by the international community as meeting commonly
accepted standards. Moreover, now is the time to expose North Koreans to international
best practice in development assistance and aid coordination and to build these principles
into the platform from the beginning. This will make everyone’s life much easier over the
next 10 years if attended to right now. Not attending to these issues is to risk contributing
to potential failure of the Six Party Talks process.
All of this will require an intensive early effort in education. Track 2 dialogue and
educational efforts sponsored by NGOs and governments not part of the Six Party
process can play a major role in helping the North Koreans improve their ability to make
more informed and better decisions about their economic future and to negotiate
economic assistance with more confidence of the benefits that they will actually receive
in the end.
My overall conclusion then is that we need to take quality of economic decisionmaking in North Korea as a major challenge and make every effort to find ways to help
them improve their capacities in this area. While political horse trading may be
unavoidable in the negotiations now underway, it is not an excuse for either side to ignore
economic rationality as an anchor for the sustainability of any political achievement that
the negotiations may produce.
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