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«fake State eNteRpRiSeS iN poSt-CRiSiS NoRth koRea ANDREI LANKOV College of Social Studies, Kookmin University in Seoul The last twenty years of North ...»

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New Zealand Journal of Asian Studies 15, 1 (June 2013):33-42

fake State eNteRpRiSeS iN poSt-CRiSiS NoRth koRea


College of Social Studies, Kookmin University in Seoul

The last twenty years of North Korean history has been marked by a dramatic

social transformation. Ostensibly, the country has retained a number of important

features usually associated with a Leninist (or to be more precise: Stalinist) society.

Its institutional structure, political rhetoric and propaganda are characterized by a remarkable continuity from the 1960s onwards. But this continuity actually masks radical changes in the economy of the country.

Prior to the early 1990s, North Korea could be seen as the perfect example of a Stalinist society – in some regards it was even more Stalinist than Joseph Stalin’s Soviet Union. Daily surveillance and control reached heights that would have been impossible in the Soviet Union of the 1930s – where short-term trips to other areas did not require permits, and where tunable short-wave radios were legal. In economic management, central command and control were taken to truly unprecedented extremes. From the 1960s to the 1990s, almost all foodstuffs and consumption goods were actually distributed through a complex distribution system. Money could not buy much in North Korea of the 1970s, since cash was all but meaningless if not accompanied by government-issued ration coupons. Private enterprise was unthinkable.

This system suffered a mortal blow in the early 1990s when the Stalinist economy nose-dived, being suddenly deprived of Soviet and Chinese subsidies. Virtually no economic statistics have been published by the North Korean state since the early 1960s, and therefore the scale of the economic crisis is not precisely known. However, according to the estimates of the Bank of Korea, widely believed to be the most reliable estimates of the North Korean economy, North Korea’s GDP in 1991-1999 decreased by 37.6%.1 By the early 2000s non-military industrial output was estimated to be barely 50% of the 1990 level.2 The collapse of industry had a dramatic impact on the average North Korean, who for a long time had relied largely or almost exclusively on the rationing system. From 1993-94 rations ceased to be delivered regularly and around 1995 the rationing system came to a complete standstill. From then on a massive famine ensued, leaving some 600,000 to 900,000 people dead.

Bank of Korea, Pukhan chuyo kyǒngje chipyo pigyo (North Korea, a comparison of the main economic indicators), can be found on: www.bok.or.kr Im Kang-taek, Pukhan kyǒngje kaebal kyehwoek surip pangan yǒn’gu: Paet’ǔnam saryerǔl [Taking the example of Vietnam: Research on North Korea’s economic development planning] (Chungsimǔ

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North Koreans themselves found their own way to cope with crisis by rediscovering and reestablishing a market economy. From the early 1990s, all kinds of private economic activities resurfaced and began to grow with surprising speed. Many North Koreans now till their own private fields on mountains, are employed in private restaurants and workshops, and do all kinds of trade, smuggling and money lending, and engage in countless activities that are firmly associated with a market economy. It was recently estimated that in 1998-2008 the share of income from informal economic activities reached 78% of the total income of North Korean households.3 The state’s attitude towards these private activities has remained quite negative, even though the degree of this official hostility has fluctuated over time. It was relatively strong in the mid-1990s, but with the advent of the disastrous famine of 1996the government, or at least its lower functionaries, significantly eased its pressure on private economic activities, which remained illegal nonetheless. In 2002, some of these activities were formally decriminalized. This decision has often been presented as North Korea’s ‘attempt at market-orientated reforms’, but such oft-repeated descriptions are an exaggeration. The 2002 reforms meant in most cases a belated admission of activities that the government knew it could not control.

Soon after, the tide was reversed. From 2005, the North Korean government began to implement measures that were aimed at curtailing the influence and the scale of the unofficial market economy. These attempts to roll back the limits of the market reached their apex in the currency reform of 2009. The 2009 currency reform proved to be a disaster, though, leading to a major disruption of economic life in the country.

As a result, in subsequent years, the North Korean authorities have chosen to turn a (renewed) blind eye to most of the activities that go on in the market place.

However, throughout all these oscillations, the official line (and associated rhetoric) has essentially remained unchanged. The official media kept silence about the economic changes and studiously ignored the growth of markets, while through confidential channels the North Korean propaganda apparatus has constantly reminded the North Korean people that private economic activities are not compatible with the lofty socio-economic ideals of North Korean society, even though some toleration of such activities may be unavoidable and necessary in times of crisis.

Due to official hostility, North Korea’s entrepreneurs have devised a number of strategies to create large, successful businesses that do not challenge the regime’s official ideals or attract too much unwelcome attention from the authorities.

One commonly employed strategy is to develop a private enterprise under the official cover of a state-owned firm – replacing the contents while keeping the outer shell unchanged. A significant number of ostensibly state-owned enterprises in North Korea are nowadays actually operated by private entrepreneurs who invest their money 3 Kim Byung-Yeon and Song, Dongho. “The Participation of North Korean Households in the Informal Economy: Size, Determinants, and Effect,” Seoul Journal of Economics, Vol. 21 (2008), No. 2, p. 373.

Fake State Enterprises in Post-Crisis North Korea in the operations and for all practical purposes run the enterprises as if they are the actual owners. These pseudo-state companies are expected to make contributions to the state budget, as well as to pay bribes to their bosses’ patrons in the state bureaucracy.

There are different types of such enterprises of course, perhaps the largest being what is known in North Korea as the ‘Foreign Currency Earning Company’(FCEC).

Such companies are a peculiar feature of the North Korean economy, with few analogues in other communist states. Major factories, as well as large government agencies, are allowed (and indeed encouraged) by the central government to establish their own foreign currency earning companies. Theoretically such companies exist to sell the goods manufactured by a particular factory, or goods that are under the control of the founding agency. For instance, the steel products of a large steel mill can be sold by the FCEC of the mill itself. But in real life, most FCECs use their power and connections to get hold of everything that is sellable on the international market and then sell it for a large profit.

On paper, the FCECs are government-owned. On the ground though, FCECs are routinely taken over by private entrepreneurs who cooperate with the FCECs headquarters. In many cases, FCEC’s make deals with rich business people (known as ‘tonju’ in Korean) who then use their own money to buy equipment and/or raw materials and hire workers. It is also the business person’s responsibility to establish and maintain the networks necessary to acquire and sell merchandise, often overseas (in nearly all cases, in China). Such arrangements make perfect sense for both sides. The government FCEC acquires capital and expertise that would not be available otherwise, while private entrepreneurs receive a quasi-legal status and access to lucrative government monopolies.

In this regard the case of interviewee A1 is fairly typical.4 In the late 1990s and early 2000s, he made a lot of money in cross-border trade with China by selling scrap metal, seafood and occasionally even Koryŏ-era antiques. In 2002, he was approached by a military FCEC that operated under the auspices of North Korea’s secret police.

Through some high-level lobbying, this KPA-founded company had acquired the exclusive rights to collect pine mushrooms in some border areas. A1 was put in charge of these operations and was even given the rank of a military officer.

From the company’s point of view, the involvement of A1 was necessary because he had enough money to pay local people who collected mushrooms. In earlier times, government officials could press local farmers into collecting mushrooms for small fees and access to some privileged rations of quality goods. Now, however, this is impossible, so farmers have to be paid a price not much below the market price for the mushrooms – and such an arrangement means that large initial investments have become necessary.

–  –  –

Table 1 Interviews of seven North Korean refugees (anonymous). All interviews were conducted in 2010-2012 in Seoul as a part of a project supported by a grant from the National Research Foundation of Korea (NRF-2010-330-B00187).

To make sure that no significant competition would emerge the company also employed sentries on roads in the area in order to find and intercept people who attempted to move mushrooms without proper permits. Apart from buying the mushrooms, A1 also used his connections in China to arrange good wholesale prices for them. He believed they were eventually shipped to Japan.

During the interview, A1 was somewhat vague when asked about the amount of money he had to pay to his superiors (insisting that he could not remember exact figures).

Nonetheless he said that he kept well over half of the revenues from the operation, which allowed him to double his private fortune within two to three years. A1 says that these officially endorsed operations were somewhat less profitable than smuggling/ trade activities were, but the fact that he had a modicum of protection compensated for the smaller profit margin.

Interviewee A2 provides us with an even more interesting case. He, together with a few other investors, contacted a party-controlled FCEC and received the right to restart a long mothballed goldmine. Technically the goldmine was, when its operations were restarted, operated by a party FCEC, but for all intents and purposes it was the private operation of A2 and his companion. They bought the necessary equipment – albeit quite primitive – and hired the necessary workers; all this was financed by A2 and another investor.

Workers were usually hired from nearby cooperative farms, so an agreement with the farm managers was struck as well. A2 claims that the agreement was beneficial for all participants: the workers (young males) earned much more at the mine than would be conceivable at the farm, while farm managers received not only kickbacks but also some practical help.

Fake State Enterprises in Post-Crisis North Korea In an interesting twist, A2 provided his workers not just with monetary compensation for their work, but also with standard food rations. In practice this meant that A2 and his fellow investor used some of their own money to buy rice and other cereals at the market and then distribute the foodstuffs to their workers for free.

The rations were given in accordance with the norms that were used for decades by the Public Distribution System (PDS). This meant that every worker at the mine, in addition to their wages, received 700-900 grams of cereals per day (800 or 900 grams for a worker doing hard labour, 700 grams for a clerical worker).

This arrangement reflects an ingrained North Korean perception of the benevolence and normality of the PDS and the related idea that every good employer should provide its workers with food rations. In my interviews with North Korean entrepreneurs this kind of arrangement has been mentioned often. It seems that until recently, many North Korean quasi-private enterprises provided their workers with both nutritional and monetary compensation. However, recent interviews with refugees seem to indicate that this practice has become significantly less common in the last few years as the North Korea public has become more acquainted with the workings of the market economy.

The gold extracted from A2’s mine was sold to Chinese merchants in North Korean borderland cities. The money raised was in part used to make contributions to the party budget, as if the money itself were the profits of the FCEC itself, not that of private investors running their own business. Nonetheless, monies remaining after said contributions, estimated to be around $2000 per month in 2007, were more than enough to pay for A2’s extremely agreeable lifestyle.

Like A1, A2 was also classified as a state employee by virtue of his operations.

The Central Committee of the Korean Workers Party was officially considered to be his employer, even though he seldom went near their offices.

Both the case of A1 and A2 have much in common; the state essentially entering into a licensing arrangement with individual entrepreneurs. The state in effect is selling the right to undertake particular economic activities to entrepreneurs, who bring with them their money-earning abilities, capital, and connections that are used to maximize profits. In turn, the state provides monopoly rights, protection therefore from competition and, perhaps more importantly, legal cover to effectively undertake what would otherwise be illegal market activities. Taking into account the extremely corrupt nature of the North Korean bureaucracy, as well as the singular lack of transparency in such operations, it is very difficult to ascertain whether these operations are really beneficial for the state, or whether the profits are largely pocketed by the entrepreneurs themselves and their patrons in the bureaucracy. What is nonetheless clear is that without the involvement and expertise of private entrepreneurs, many FCECs would be non-functional.

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