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Markets in North Korea I : Development, Structure, and Changes

In today’s Dialogue, we will discuss one of the most compelling elements of the North Korean economy–its markets.. Prior to the 1990s, the North Korean economy was a clear example of a centrally planned system, with a rigid command structure in full operation within government. While North Korea argues that it has officially maintained this economic system, it is apparent to experts worldwide that the regime has failed to maintain the characteristics of a planned system as a whole. The inconsistencies between the government position and functioning of the economy are clearly demonstrated by the fact that the majority of North Korean people are supporting themselves not via the centrally planned system; instead depending on the informal market system, with the authorities increasingly adopting the same dependence. Consequently, understanding the markets has become a major topic for researchers investigating the North Korean economy.

In this article, Professor Moon-Soo Yang of the University of North Korean Studies joins us as the pre-eminent expert on North Korean markets. Our discussion will take place in two parts–first, the development, basic structure and existing knowledge on the current functioning of North Korean markets will be discussed. In the second part, attention will be devoted to more specific characteristics, such as the size, composition and value of the market. Together, these discussions will provide an overview of the creation and development of North Korea’s markets, from its basic structure and functions to its effects on the overall North Korean economy.

Lee, Suk Q.

We will begin with a discussion of the development of the markets in North Korea prior to the 1990s. In the international community today, it is generally believed that North Korean markets have undergone a significant period of development since the 1990s. Informal economic sectors appear to have thrived in other socialist countries before the 1990s while in North Korea, it appears to have had almost no informal economic sector during this time, with the exception of farmers markets. To your knowledge was this the case? And if yes, can you elaborate on why this situation occurred. Are you aware of any form of “informal economic activity” in North Korea before the 1990s?

Yang, Moon-Soo

Before diving into the topic, I would like to make clear the concept of the “market,” as it is used in economics, political science and sociology. The definition of the market varies not only across disciplines but also across different fields of research within the same discipline. Such variety is fine. For the purposes of this discussion, however, it should be made clear that the market exists as a physical place in one sense, while in another sense, it is a system, and the latter is significantly more important. From the perspective of the market as a system, marketization means the introduction and expansion of the market mechanism. As a researcher who studies the North Korean economy, it is useful to define the market or market economy in terms of how it differs from the planned economy.

Consequently, the most useful definition of marketization comes from classical economics. The mechanism of marketization is one in which price is determined by supply and demand, and price influences the manner in which households, businesses, and other economic units make decisions on activities such as spending and investment. This process subsequently controls the distribution of resources on the macroeconomic level. At the center of this mechanism is the price, with market price being of particular importance.

The term marketization is often used to explain what has occurred in the North Korean economy from the 1990s. In contrast, it is not generally used when discussing the economies of other socialist countries. When discussing shifts from classical socialism to reformist socialism and then to regime transformation within other socialist economies, other terms are used, such as reform and opening, regime transformation, or regime transition. In addition, the term marketization is sometimes used to describe what is essentially reform or regime transition either fully or in part. Yet, when it comes to North Korea, marketization and economic reform are treated as if they are two separate concepts.

  Why would they be treated so? One plausible answer is that the term marketization conjures an image of a bottom-up process that is unrelated or opposed to government policy, while the term reform is usually taken as a policy implemented by the government itself. Another explanation is that when the phenomenon of marketization began in North Korea, it mostly referred to the real-world changes driven by the behaviors of individual economic players, irrespective of policy.
  Regardless of these definitions, I believe government policy has played a critical role in the expansion of marketization following the initial stage, especially the introduction of the July 1st Economic Management Improvement Measures in the Kim Jong-Il era and the Our Style Economic Management System in the Kim Jong-Un era. In other words, marketization in North Korea has been driven from the bottom up and the top down in parallel. This is why the two phenomena, marketization and economic reform, increasingly share more features in the Kim Jong-Un era. A key element of the reform was the introduction of the market mechanism and as such, marketization and reform are two sides of the same coin. From a broader perspective, therefore, marketization in North Korea constitutes a North Korean style economic reform.

Based on this premise, marketization in North Korea before the 1990s was mostly the unofficial or illegal exchange of goods at prices that deviated from state-set prices. For example, when travelling in North Korea, ethnic Koreans living in Japan or China would sell goods to North Korean people. Transactions of this kind were not part of the official economic system, and thus, were conducted at effective market prices rather than state-set prices.

One main exception exists; North Korea has officially maintained farmers markets since the late 1950s. These markets were created for farmers to sell produce grown in kitchen gardens allowing them to supplement their income. The markets are operational every ten days, and trade is conducted using market prices. Farmers markets are a government-authorized legal market.

In addition to government authorized market activities, unofficial economic activities were conducted in North Korea by enterprises before the 1990s. Despite the lack of necessary resources due to the economic difficulties from the late 1970s, enterprises were obliged to meet goals set by the planning authorities. Thus began a period in which enterprises would secure necessary resources through unofficial methods, such as the exchange of goods with other enterprises. These informal activities conducted by individuals and enterprises demonstrate that marketization was indeed a practice in North Korea prior to the economic crisis of the 1990s. It was, however, minor in scale, and its share and status in the total economy was limited.

  A policy related to marketization was introduced in 1984. The policy, named the “August 3rd People’s Consumer Goods Production Campaign,” was arguably the first reform policy in North Korea related to the market. The policy was intended to allow factories to sell goods they produced at market prices, under the condition that no raw materials and labor intended for use in the planned system were used in the production of these goods.

Although the term market was not used anywhere in this policy, the creation of a market system was effectively authorized with some limitations. Interestingly, the term “market price,” was replaced with “agreed” or “negotiated” price, while the concept of “market transaction” was referred to as “out-of-plan production and distribution.” Out-ofplan production refers to the production of goods with resources and labor not intended for use in state-planned activities and out-of-plan distribution describes the distribution of these goods via channels external to those used for goods produced within the state plan. Resources and labor external to the state plan thus refer to those obtained at market prices, and channels external to the state plan are those subject to market prices. With the introduction of this policy, North Korea essentially used a primitive measure of reform to legalize entrepreneurial activities based on market principles, albeit with limitations. For more, please refer to the attached file.