By: Hyung-deok Kim

The most noticeable difference in the economic environment between the era of Kim Jong Un and that of his father Kim Jong-il is the Jangmadang economy, North Korea’s form of a private marketplace where the upper class, consisting of high- and middle-ranking party members and military officials as well as rich merchants, makes money or procures commodities via informal commercial activities.

Since the 2000s, North Korea’s economy has transformed from ration-based to a de facto market economy. It now seems to be a transition period between economic systems. Yet the transition has not been legally institutionalized. For example, say there’s a company building houses. Individuals invest to finance their house-building projects. Investors earn the right to own or sell the houses according to their investment.

Anyone who wants can do business in the market, the Jangmadang. They need only pay taxes similar to a street tax or rent. The state is expanding these markets in large numbers. About 480 Jangmadangs are active as of February 2018 across North Korea, officially approved and supervised by the state.

“Grasshopper markets” also exist. These come and go, hiding from regulation squads in areas with dense populations or highly fluid populations. Counting all these markets, there are now more than a thousand markets all over North Korea. These unauthorized markets are not disappearing, despite efforts by officials to crack down on them. Commercial transactions between individuals outside the state’s reach are widespread. Most financial activities occur outside the state’s control.

North Korean money holders, the financiers, are absolutely necessary to those who are starting new businesses in the Jangmadang or who need additional funds to expand their businesses. They even lend money to state-owned corporations and earn interest, while the state, clearly aware of this, looks the other way. Before the 2000s, money holders in North Korea were “rotten propagators of capitalism,” whom the government cracked down on and punished.

Since the 2010s, however, money holders in North Korea are the guardians of the Jangmadang economy. They resolve public welfare issues and act as necessary entities for a stable North Korean regime. North Korea’s economy is suffering because international sanctions have slowed its economy down and it cannot export, import, or earn foreign currency. If the state cracks down on Jangmadang on top of this, the North Korean economy will suffer greatly.

In an extreme case, it could regress to the starvation economy that existed between 1996 and 2000. This would indisputably lead to regime collapse. Thus, the North Korean government thinks it is beneficial to allow the Jangmadang economy to exist and even to invigorate it and expand government revenue through it, the private part. The government even awards the privilege of residing in Pyongyang or the honor of “labor hero,” to practitioners of it. Things that were impossible under a socialist regime are now happening.

This is based on my view of the North Korean economy. The socialist regime persisted until 2000. The quickening period of the Jangmadang economy started from 2002, with the July 1 economic improvement plan, until Kim Jong-il’s death. Since 2011, North Korea has effectively become a Jangmadang economy.

During the socialist era, markets were only allowed to make up between 5 and 10 percent of the total economy as a means of assisting the planned economy. Other parts of the economy were restricted by the state. Between 2000 and 2010, the North Korean government turned toward the path of allowing market autonomy because the government could not improve people’s lives on its own, although it occasionally strengthened restrictions when markets seemed to threaten the system.

It is now building markets in large numbers and encouraging market activities. Self-financing business accountability has already been adopted in agriculture as well. Agricultural cooperation allows each region to retain autonomy over 70 percent of its products while returning 30 percent to the state. This 70 percent includes production costs and personal shares. Previously, this three-to-seven system was adopted in 1953, right after the Korean War, to increase productivity in the face of food shortages. But, only a limited number of farms were allowed to experiment with this system until 2002.

The July 1st economic improvement plan expanded it to every farm in North Korea. North Korea is now an economy in transition, where a planned economy and a market economy coexist. The Kim Jong-il era was the initial stage in transitioning from a planned economy to a market economy. The Kim Jong Un era is one that pursues a North Korean style market economy that is de facto based on the Jangmadang economy.

Internal Pressures

Expansion of the Jangmadang economy has increased private property and worsened national finances. The North Korean government, as it always has, introduced a new currency on November 30, 2009. It changed only a limited amount of money to the new currency and made the rest of the old currency worthless.

North Korea has a history of legalizing underground finance, capital held by the people, through currency changes from time to time. It aimed for redemption of fraudulently accumulated private property on condition that the government provides rations. However, the currency change in 2009 was a huge failure, resulting in colossal losses in national finances.

The thinking of the North Korean people changed as they underwent economic crisis in the late 1990s, when the ration-based economy collapsed. They no longer deposit their financial assets obtained through the Jangmadang economy in official financial institutions. The North Korean currency itself is avoided as a means of saving. In North Korea’s major cities, the US dollar, the Chinese yuan, the euro, or the Japanese yen have long been accepted methods of payment, along with North Korean currency. It is widely understood that people should hold wealth over a certain amount in foreign currency.

During this period, the government’s pretext for forcing people to follow its orders or demands also decreased. It can no longer provide sufficient rations as it did during the era of a planned economy, and people are surviving on their own through the market. The Jangmadang economy of the Kim Jong Un era has shifted people’s minds, in a way, towards capitalism. As a result, future North Korean policies should be friendly toward this Jangmadang economy. If they return to policies that shrink this market, it may result in serious challenges to the regime.

Kim Jong Un’s Agreement to Denuclearize

Considering this, North Korea cannot regress to a planned economy, because selecting such a path could result in serious challenges to the regime. The Jangmadang economy, which has continued for almost 20 years, cannot guarantee sufficient economic wellbeing for North Koreans. Yet, it has at least helped them escape from hunger. According to North Korean defectors, most North Koreans previously thought that Chinese-style economic reform and opening was necessary, and it is impossible to return to a planned economy. The Jangmadang economy has thus changed the perceptions of a lot of North Koreans.

With its national financial income limited, North Korea has depended on labor-intensive technology growth to achieve economic development. In addition to this, the necessary capital was procured from toll-processed OEM products ordered from foreign companies, exporting resources, dispatching North Korean workers abroad, and attracting foreign tourists. However, most financial transactions have recently been halted due to various economic sanctions imposed by the United Nations, the EU and the US.

China has ended China-North Korea smuggling, previously a means of trade outside of normal trade. What is left now is attracting foreign tourists. But with the risk of conflict, even nuclear war, between the US and North Korea, who would want to tour a country under such risks? The possibility of attracting foreign currency through foreign tourists therefore seems low.

Without improving relations with the US, the challenges that North Korea faces cannot be fundamentally solved. There is no reason for North Korea to choose to harm regime security by possessing nuclear technology, where the justification for change and reform stems from the inter-Korean summits and US-North Korea summit. As a result, North Korea’s will to dismantle its nuclear program is clear.

Challenges During Dismantlement and Reform and Opening

As Kim Jong Un announced on the global stage, there will be difficult challenges in the process of promoting denuclearization and economic reform and opening in the future. Foremost, internally, it is important to try to convince and overcome chauvinists supporting the current North Korea socialist system (which effectively means those most privileged within the existing system). Next is how to effectively explain the cause of the failures of the North Korean regime up to now to the North Koreans.

If reform and opening become serious, the country will be compared with others, especially South Korea, and North Koreans will yearn for the South Korean system. This is the so-called South Korea magnetic effect. However, this can be overcome if it is argued convincingly that North Korea will become a typical country like South Korea if a new North Korea-US relationship is established. Lastly, it will not be an easy challenge to cope with external intervention in North Korea’s internal affairs.

Regarding human rights and freedom, diplomatic relations with the US, the EU, Japan and South Korea should be normalized, and these should be gradually improved through international norms, institutions and procedures. But a safety mechanism should be provided that can prevent catastrophic situations that bring sudden shocks.

During this process, China’s political support will be very important. The sanctions and pressure faced if North Korea possesses nuclear technology are more dangerous than dismantling the nuclear program and moving towards opening. If appropriate justification is articulated, I am certain that North Korea will take the road of reform and opening and dismantle its nuclear program.

Future Prospects for US-North Korea Relations

Is it possible for North Korea to reform and open, and move toward becoming a normal country? I believe so. I believe it is Kim Jong Un who removed his uncle, Jang Song-thaek, and half-brother, Kim Jong-nam, whom he considered potential threats to his hold on power. This laid solid foundations for him domestically. Internationally, North Korea declared that it possesses nuclear weapons and succeeded in holding a summit with the US, but is on the verge of facing a big decision.

This will be a difficult challenge. The US and China do not approve of North Korea possessing nuclear weapons and decided to continue to impose economic sanctions if North Korea insists on keeping them. If North Korea hesitates on complete denuclearization, there is still a possibility for the US to restart joint military exercises and re-pressure North Korea through military action.

If US and other international economic sanctions and military threats toward North Korea become long-term, it is evident that the Kim Jong Un regime will become more isolated and diminished politically and economically. Even its security would be at stake. Kim Jong Un is not foolish enough to engage in such irrational behavior. If the current regime’s stability is not threatened, North Korea will gladly follow the path of change and opening, and dismantle its nuclear weapons.

The first step has already been taken. From North Korea’s perspective, in the future process of denuclearization and opening, the conclusion of a peace agreement between the US and North Korea and normalization of diplomatic relations will become a necessary and sufficient condition. Normalization of diplomatic relations with Japan is expected after normalization of US-North Korea relations. Complete establishment of relations with South Korea may be the last step in the journey towards North Korea becoming a normal state.

Hyung-deok Kim, the President, Corea Peace & Prosperity Center, left North Korea in 1993 through China and entered South Korea on September 8, 1994. He graduated from Yonsei University, majoring in business, on August 25, 2001, and was the first North Korean defector to work as the policy secretary for a National Assembly member in 2001, submitting revised bills and policy reports on inter-Korean relations and North Korean defectors. Since January 2005, he has put great effort into developing inter-Korean relations as the President of the Corea Peace and Prosperity Center. This is reprinted with permission from the East Asia Foundation, a Seoul-based think tank