The Koreas

Will Marketization Bring Down the North Korean Regime?

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The Koreas

Will Marketization Bring Down the North Korean Regime?

The Kim regime has turned its new economic elites into an increasingly important source of revenue.

Will Marketization Bring Down the North Korean Regime?
Credit: Flickr/ (stephan)

Does marketization in North Korea reduce the government’s sphere of influence and threaten Kim Jong-un’s hold on power? Or does it provide the regime with another tool to oppress the people? The evidence is mixed. Because North Korea’s new rich class, known as the donju, both assist and hinder Kim’s application of power, analysts have struggled to characterize whether the donju’s rise is a net-positive or net-negative development for the regime.

For example, the government is cracking down on private gasoline sales and building gas stations to sell directly to consumers, according to inside sources cited by Daily NK, a Seoul-based periodical. On the other hand, Kyungnam University Professor Lim Eul-chul argues that “big merchants have the power to move the market and control prices,” despite the authorities’ attempts to intervene. The conventions that guide relations between market actors and political elites are evolving quickly behind an opaque curtain in the isolated country. The donju’s accumulation of power over the past two decades has ushered in a profound set of social and economic changes. But the regime, in response, has maneuvered to retain the upper hand. By extracting bribes and licensing fees, the cash-hungry, heavily-sanctioned Kim regime has turned the donju into an increasingly important source of revenue.

Over the past 20 years, the regime has moved toward a bureaucracy that acknowledges market principles in decision making, resulting in complex and dynamic relationships between officials and market actors. Understanding these links is essential to comprehending how the government has maintained control while also permitting limited marketization.

Korean cuisine offers a metaphor for the relationship. Koreans on both sides of the demilitarized zone enjoy eating grilled meat wrapped in lettuce or sesame leaves, stuffed with a combination of ingredients like garlic, kimchi, and savory ssamjang paste. When assembled, the bite seized bundles are known as all-ssam. Each ingredient supports and adds nuance to its neighbor. Worker’s Party cadres – members of North Korea’s ruling elite – have started forming all-ssam relationships with members of the business class in order to advance their agendas. By tapping into the power of the donju, officials have been able to revive defunct industries and open up new revenue streams.

For example, the donju are taking over abandoned mines all around the country, according to inside sources cited by Daily NK. To do so, they buy mining rights from the Ministry of People’s Armed Forces and mineral rights from the Ministry of Mining Industries. In addition to paying rents to department officials, the donju gain protection by bribing their way into all-ssam relationships with local party cadres and officials at the local Prosecutor’s Office. But this change has come with consequences.

The success of the donju, coupled with the collapse of the public distribution system, may be changing people’s attitudes toward the regime. Surveys of North Korean defectors carried out by the Washington, D.C.-based Peterson Institute for International Economics found that those who earn more through the marketplace tend to joke more with peers about the government. According to a recent survey carried out inside North Korea by the Center for Strategic and International Studies’ Korea Chair, over 80 percent of respondents indicated that outside goods and information had a bigger impact on their lives than the North Korean government. A defector quoted in NK News explained that North Korean people “know that Kim Jong-un is the ultimate obstacle to a true free market.”

Despite the risks, thus far the regime has been willing to cede its role as “provider” in exchange for new and growing sources of revenue. Bigger markets equal more cash for the regime, and the donju are the engines of the marketplace. According to a 2015 report issued by the U.S.-Korea Institute at the Johns Hopkins School for Advanced and International Studies (SAIS), market space has consistently grown in the last few years. Additionally, the stall fee that vendors must pay the Ministry of People’s Safety (MPS) in order to operate in the marketplace has also increased, according to inside informants cited by Daily NK. The Korea Institute for National Unification (KINU) used satellite imagery and defector testimony to determine that North Korea currently boasts 404 official markets that together rake in approximately $15 million a day in usage fees from merchants. In addition to stall fees, the regime earns money from multiple layers of regulatory agencies all engaged in crackdowns, extortion, and “loyalty funds,” payments demanded by the regime during national holidays, natural disasters, and Party events.

Importantly, the regime has the power to clamp down on business ventures at any time, even when the businesses become quite powerful. For example, the Namgang Sales Office reportedly amassed great clout as an importer at Chongjin Port dealing in products such as fertilizer and food. Although the company had connections to the Worker’s Party, the regime dissolved the sales office in order to check its growing influence, according to a defector cited by NK News. Short of complete dissolution of a business, cadres can also dismiss business leaders at the helm of foreign currency-earning operations and trading companies, leaving them free to install Party confidants and family members in their place.

After serious famine and flooding triggered economic disaster in the mid 1990s, the regime internalized the need to allow, adapt to, and benefit from marketization. One of the regime’s fundamental survival tactics was to decentralize control over market actors and harness the power of the donju. Without explicit laws to guide them, the donju and the North Korean authorities built a network of awkward yet semi-functional relationships. But through it all, the authorities have retained control.

In 2009, the regime orchestrated a currency redenomination to control inflation and re-circulate idle currency. The effects were devastating. Because the regime set limits on the amount of old money that could be exchanged for new, the redenomination essentially wiped out the donju’s cash savings. A high-ranking party cadre behind the disastrous policy, Park Nam-gi, was ultimately executed for the crime of attempting “to destroy the national economy.” Most analysts believe that Park was a scapegoat, and that the original intention of the policy was to check the donju’s growing power. This episode hints that – even from the Kim family’s perspective – the regime’s legitimacy is increasingly tied to economic performance. In this context, it shouldn’t be a surprise that Kim Jong-un has generally taken a more hands-off approach to the markets than his father.

In light of this dynamic, regarding the donju as pure threat or pure asset to the regime is reductive and unhelpful. To characterize North Korea’s social changes as a series of action-reaction interchanges is to disregard the key dynamic, namely that they are engaged in a nationwide, high-stakes negotiation. The main locus of change is not in the crime or the punishment, but in the interaction between market vendor and Ministry of People’s Safety agent, the mutual adaptation between state-owned enterprises and donju enterprises, and the accommodation between black market innovations and policy reform.

North Korea’s state-owned “foreign currency earning companies” sometimes sell their trading permits to donju in return for bribes and a 30 percent stake in the profits. In addition to turning over 30 percent of profits, the companies also pay substantial loyalty funds to the regime, according to defectors and inside informants interviewed by media. This means that the authorities can secure a bigger payout if they create conditions that help the donju flourish. But that doesn’t mean that advertising the relationship is helpful to the regime. The words “donju,” “jangmadang,” (the Korean word for marketplace) and “loyalty fund” are totally absent from North Korean state media.

In the 1980s, North Korean authorities allowed factories and farms to sell excess consumer goods in limited markets, a policy known as the August Third Movement. After Kim Jong-un came to power in 2011, the concept of August Third became even more radically market-oriented. Workers can now pay the party a de facto tax to be excused from their state employment and allowed to engage in small business, according to inside sources cited by Radio Free Asia and Daily NK. August Third payments come in three tiers. The highest payment not only exempts a citizen from work, but also enables the citizen to skip out on mandatory meetings, criticism sessions, and mobilizations. These fundamental building blocks of North Korea’s oppressive organizational life are now quite literally up for sale.

Kim needs the donju for economic and political reasons. While Kim uses fearpolitik and gift politics to maintain order in Pyongyang, he looks to win the affection of ordinary people through propaganda and gradual market relaxations, according to a former high-level defector Choi Song Min (pseudonym) and Peterson Institute expert Marcus Noland. Since all-ssam culture has become an integral part of the economy, it would be hard to keep the core class loyal and well-fed without the collaboration of the donju.

Embracing the donju is also consistent with the authorities’ interest in using self-sufficiency to protect against the sting of sanctions and reduce the country’s dependence on China. Kim’s 2017 New Year’s Speech emphasized the importance of light industry and production of consumer products. Some observers believe that by permitting state enterprises to conduct business at market-determined prices, Kim is essentially inviting more donju participation.

As the negotiation continues, the stakes will get even higher. Thus far, the result has been an awkward yet semi-functional partnership, with the regime growing its economic prowess by conceding economic controls. As international pressure increases, the role of the donju may become even more indispensable for the regime. More collisions and adjustments can be expected as the two groups continue to jockey for power in the pursuit of profit.

Jonathan Corrado is a reporter/translator for Daily NK, an intern at the Congressional Research Service, and a second year MA student at Georgetown’s School of Foreign Service Asian Studies Program.