“Communist” and “collectivized” are utterly outdated labels for a North Korean economy that now heavily relies on thriving, person-to-person market exchanges in which individuals buy and sell private property for the purpose of generating profit.
Private trade has become so prevalent in recent years that it permeates all levels of society, from the poorest through to the Communist Party and military elites. But as with sex in Victorian Britain, there is a double standard with capitalism in North Korea: everybody does it, but few publicly admit to its existence.
Though markets in some form have always existed in North Korea, the declining official role of the state in economic activity means that private trade has never been as widespread — or necessary — as it is today. The reason for this is simple: the state can no longer provide for the people in the way it once could, and it was the horrific famine of the mid-1990s that was the turning point.
Regular, government-supplied food rations all but disappeared during this period, and never fully returned. The lesson that survivors took from this experience was one of self-reliance — not the self-reliance of North Korea’s official Juche ideology, but rather self-reliance through by-hook-or-by-crook capitalism.
Private property and private trade remain illegal, but for post-famine North Korea, there is but one real economic rule: don’t follow the rules. Sixty-two percent of defectors surveyed in 2010 stated that they had engaged in work other than their official jobs before leaving North Korea, and a thriving gray market that uses unofficial currency exchange rates is now the de facto way of setting prices, even for the elite.
The breakdown of the system
From the foundation of North Korea in the 1940s, North Korea was almost food self-sufficient for many years. Under the Public Distribution System, farmers turned over a majority of their harvest to the government, which then redistributed it to the wider population. During the earlier and middle years of Kim Il Sung ’s rule North Koreans were not wealthy, but they at least did not starve en masse.
There was one other crucial factor in that initial success: Soviet and Chinese aid. Throughout the Cold War era, North Korea was able to exploit the rift between China and the Soviet Union by cleverly playing the two against each other. In this “love triangle” relationship, North Korea would carefully seek benefits from both Beijing and Moscow, turning its weakness as a “shrimp between whales” into an asset.
The public system came under unprecedented pressure: between 1994 and 1997, the basic ration was cut from 450 grams of food per day to a meager 128 grams. In the same period, the official rations went from being the main food source for a majority of the people, to a resource that only 6 percent of the population could receive. The result was a serious famine between 1994 and 1998 that claimed the lives of between 200,000 and three million North Koreans.
The government had failed the people, and crucially, everyone had to fend for themselves. Even professors at Pyongyang’s prestigious universities had to turn to low-level market activities, simply to survive. Some would join their wives outside busy train stations or colleges, selling cheap broth made from flour and water. Other members of Pyongyang’s lesser elite circles took to selling their household possessions at knockdown prices in makeshift market stalls. Thus, the famine sowed the seeds of marketization in North Korea.
Won (and yuan) for the money
The government has a complex and difficult relationship with this new economic order. The eradication of North Korean capitalism would greatly increase the possibility of another famine, given the failure of the command economy and the public food distribution system. Furthermore, many government insiders are now using trade as a means of generating personal wealth. If full market reform were pursued though, it would result in huge social and economic changes that could threaten the government’s position.
There are, indeed, reform-minded public officials in North Korea, but there is also a natural fear of change at the top. For a member of the elite, full economic liberalization may eventually lead to exchanging a privileged existence for prison, death, or more prosaically, the life of a taxi driver in Seoul.
The government has gone to great lengths to control the rise of private market activity. There are occasional crackdowns on marketplaces, for instance, and in 2009 came the bluntest move of all when the national currency, the North Korean won, was redenominated via the cancellation of the last two zeroes on every banknote. A 1,000 won note needed to be exchanged for a new 10 won note, and so on. Citizens were given one week to trade in their old zero heavy notes for new ones.
The measure essentially functioned as a cash grab, transferring wealth from private traders to the state. Why? Because each person was only allowed to convert a maximum of 100,000 won (around U.S. $30–40 at the time, according to black market rates). Anyone holding a sum greater than that — as someone engaged in business naturally would — saw their savings wiped out.
The long-term result has been to push North Koreans even further beyond the orbit of state economic control. Ordinary people now increasingly seek out the yuan and other currencies as stores of wealth. They have learned not to trust the government and its currency, the won. At the same time, they have learned that trading and saving in Chinese yuan can shield them from the consequences of future government depredations and incompetence. As a result, a majority of market transactions in North Korea are now estimated to be conducted in foreign currencies, with the yuan being the most favored.
It is hardly surprising, then, that the unofficial, gray market value of the North Korean won has been sinking. Though there is an official government-set exchange rate of 96 won per$1, the “real” rate is around 8,000 at the time of writing — and that number has increased dramatically over recent years, with the declining trust in the won.
Black market pricing of the won is even becoming common in ordinary shops and restaurants. For example, a toy shop in Pyongyang prices basketballs at 46,000 won each; clearly nobody believes a humble basketball is really worth over $400.
The dual valuation of the North Korean won does result in some interesting bargains, though. Public transport is still provided at a price reflecting the official rate, which means journeys are sold for much less than they are really worth. A trip on the Pyongyang Metro, for instance, costs 5 won. That is a mere five US cents even at the official exchange rate — and at the real rate, it is as good as free.
Inside the markets
Just as North Korea has two exchange rates, it effectively has two economies: the “official” economy (where people work in state jobs and are paid a state salary) and a “gray market” economy, where people earn money in ways that are not strictly legal, but widely tolerated. The latter is the one that really counts in today’s North Korea.
The term used for the often illegal, yet tolerated, markets in North Korea is jangmadang , an old-fashioned Korean word that literally translates as “marketplace” and has its roots in old-fashioned Korean farmers’ markets.
Jangmadang can often be seen at the busy intersections of narrow, muddy residential streets in rural North Korean towns or, on occasion, in specially-constructed buildings designed for market activity.
People setting up stalls in the jangmadang are required to pay a stall tax to Party cadres in order to keep their slots — thus making the state complicit in marketization. In some large markets, there are even electronic registration systems in effect, to keep track of who has paid their stall tax.
The typical jangmadang stall-holder is a lower or middle class ajumma (a middle-aged, married woman). Though Korean culture has been male-dominated since neo-Confucianism stamped its imprint on the Joseon dynasty (1392–1910) — with the ideal woman considered the one who lived as a hyonmoyangcho (“good wife, wise mother”) — it was often the case among the peasant population that the women were the market traders, not the men.
But what do jangmadang traders sell? As may be expected, there is a focus on the basics. North Korean cigarettes go fairly cheaply, but more sought-after Chinese and Russian cigarettes can cost anything from 2,000 won ($0.25) to 20,000 won ($2.50) depending on the brand. A bar of chocolate costs around 3,000 won ($0.38), and a kilogram of rice costs around 5,000 won ($0.63).
Imperialist American Coca-Cola is very much available, and goes for 6,000 won per can — about $0.75, not far from what it would cost in a supermarket anywhere else. Cans of Chinese beer, such as Tsingtao or Harbin, cost 4,000 won ($0.50), pots of instant noodles are 7,000 won ($0.88), and a tin of instant coffee from China would set you back around 10,000 won ($1.25). But due to the extreme volatility of the North Korean currency, all these prices may be wide of the mark by the time you read this book.
The image of the middle-aged lady peddling cigarettes and noodles from a little stall is hardly a sophisticated one. But the economic understanding of the wholesalers they buy from should not be underestimated. Rice traders, for instance, (illegally) monitor foreign radio in order to find out in advance about aid shipments into North Korea. If a shipment is on its way, the market price of rice will fall due to the expectation of increased supply — and the race is then on to sell up before everyone else finds out.
A big incoming supply of fertilizer will have a similar impact on the market, as it will have the effect of increasing rice production. Rice is as crucial to North Korean life as it always has been, and thus its price is the subject of great attention. The state still does not produce enough rice and has to depend on aid or imports to make up the deficit.
It can even be dangerous to not be a trader. Middle and high-income families that are not known to be actively engaged in business are at risk of being investigated by the authorities. Such a family would be assumed to have a less “tolerable” source of income, such as cash transfers from defector relatives living in South Korea. This has led to the ironic situation of some North Koreans being observed pretending to be engaged in capitalism in order to avoid suspicion.
Even in Pyongyang, where state control and loyalty to the government are strongest, virtually every family will have members involved in such activity. Even if one is not selling goods, one may be involved in transporting them, sourcing them, or greasing the palms of officials to allow everything to continue. While one ajumma may be the public face of the business, her relatives and friends will likely be helping out behind the scenes.
Much of the attention given to the “new capitalism” of North Korea centers on the ordinary people who are now able to make a living through jangmadang trading, but bottom-up business in North Korea is outstripped in size and scale by what might be cynically referred to as “public-private partnerships.”
Since the mid-1990s, the North Korean government has been in a state of almost complete economic failure. It maintains strong political control of course, particularly in Pyongyang. But the central government cannot generate enough direct revenue or tax income to fund its myriad departments, ministries, commissions, and committees.
Due to this lack of central funding, government organizations have, essentially, been left to their own devices. And though their provision of services to the people has decreased dramatically in recent years, they still need to function at a basic level. They also need to pay their staff — or rather, find ways for their staff, who receive pitiful official salaries (of a few dollars a month, at black market rates), to get paid. The ad-hoc solution has been for officials to start quasi-private businesses under the umbrella of their organization.
There is certainly no formalized system for how such businesses are started and operated, and no “typical” example, but a successful case might run as follows: A member of a government entity with good political connections and permission to travel abroad will seek out joint ventures or import–export opportunities in China, or even further afield. Food, agricultural supplies, medicine, and consumer luxuries are considered particularly important areas. Once a plan is formed, an officially state-owned firm will begin to pursue the opportunity, as privately-owned companies are still considered illegal.
Only some of the proceeds go to the state, though. North Korea has no proper banking system, so firms tend to hold a lot of cash — and also keep financial records in old-style hand-written ledgers. A highly profitable firm can, therefore, very easily be turned into a modestly profitable one, allowing those who run the business to pocket around 60 to 70 percent of the earnings, with the rest going up the department, and higher-ups who need bribing.
And because North Korea’s economic system is not properly rule-governed, nobody is going to stop a protected insider from engaging in shady accounting. In this way, the organization can make a little money to help make up its budget, founders can become wealthy, and managers and executives (also typically employees of the same department) can respectively earn around $300 and $500 per month in successful cases, according to one knowledgeable source.
This is nowhere near what a manager in South Korea can make, but in North Korea, it can provide a very impressive standard of living.
Edited extract from North Korea Confidential: Private Markets, Fashion Trends, Prison Camps, Dissenters and Defectors, by Daniel Tudor and James Pearson, out April 14, 2015.
Daniel Tudor is a former Seoul correspondent for The Economist and co-founder of Byline, a platform to crowd-fund journalism, and James Pearson is a Reuters correspondent in Seoul, where he covers politics and general news in North and South Korea.