Streets of Pyongyang, north Korea (Cyrus Kirkpatrick)
North Korea is routinely portrayed as an economic and political basket case, soon ready to collapse from poverty. The reality is somewhat different, as indicated by this interview with Mitsuhiro Mimura, senior researcher at Japan’s Economic Research Institute for Northeast Asia (ERINA) and an specialist in North Korea.
This post has been updated for inclusion in New Cold War’s Dossier on the world economy.
By Jeoff Baron, Sep 7, 2017
First published at 38North
Introduction by interviewer Jeff Baron:
Fluent in Korean and a specialist in North Korea’s economy, Mitsuhiro Mimura has visited North Korea 45 times since 1996, spending about a year on the ground there. After his most recent trip in August 2017, the senior researcher at Japan’s Economic Research Institute for Northeast Asia (ERINA) told me about the changes he’s seen in North Korea’s economy and society.
The level of detail in his explanations surprised me. “When I ask North Koreans colleagues I’ve gotten to know over the last 20 years about how their economy works, they talk openly about policy and practice,” Dr. Mimura said. “And when I travel around the country, the production innovations I see at farms and factories are in line with what they’ve told me. I don’t ask what they think of their political system and I wouldn’t expect an answer if I did.”
Jeff Baron: How do you add up North Korea after your 45 trips there?
Dr. Mitsuhiro Mimura: North Korea is the poorest advanced economy in the world—but what’s important to understand is that, while it may be poor, it is still an advanced economy. In that respect alone it is unique in the world. And that is an important source for the pride the North Korean people take in what they see as their country’s achievements.
JB: The poorest advanced economy? Can you explain that a little?
MM: By standard economic measurements, given that the North continues to emerge from its past as a feudal society and then Japanese colonial rule between 1910 and 1945, North Korea is a developing economy.
That said, they have built a comprehensive production structure including both labor-intensive and capital-intensive industries. They are able not only to produce capital goods to run their society, like railroad locomotives and carriages, cargo vessels, turbines and generators for power plants, numerically controlled lathes, but they also make most of the things needed for military use, from small arms to ballistic missiles and nuclear weapons, trucks, jeeps, destroyers, and diesel engines.
JB: What’s the trajectory you’ve seen in the North Korean economy since you started going there in 1996?
MM: The first years I was there, the mid-1990s, was a time of great hunger. The people who waited for the government to help them, as it had for the previous 40 years, suffered greatly—and many perished. Those who believed in the government but decided to act independently, to survive through their own efforts—they survived. And some of them are becoming rich now.
‘They Call it Socialist Cooperation; We’d Call it Entrepreneurship’
JB: How do the North Korean people navigate the changes in the economy and society?
MM: Let’s start with how people who’ve never been there understand the place—and that’s mostly through the regime’s propaganda. Outsiders find it chilling and comical at the same time. North Koreans themselves are inundated with propaganda in school and at the workplace, in the newspaper and on TV.
The goals and themes of the propaganda haven’t changed in 50 years. But the people on the receiving end—even the people who write the propaganda and send it out—they have changed a great deal. The people who make the country run—the officials, managers, teachers and workers—there’s a big difference between what they say in the morning and do in the afternoon.
JB: A big difference between what people say in the morning and do in the afternoon? Can you explain that a little?
MM: Sure. Families need income independent of what they get from the government. The people understand it. The government understands it, too.
Ten different families have ten different ways of making money.
For example, a wife has a talent for making clothes. Or cookies. Or cakes. She starts providing those services and products to people in her neighborhood. That household business starts at a very small scale, just selling to her neighbors individually. But through word of mouth she gets more customers. So her business grows. She needs help. Officially, she can’t hire the help she needs. Officially, that’s forbidden.
But…if she works together with a group of wives in her building…that’s acceptable. If one wife hires nine others, that’s illegal exploitation. But if ten wives work together, that’s socialist cooperation. And in the North Korea of today that socialist cooperation is held up as an example for others.
JB: Do customers pay money for the clothes and the cookies, or is it mostly barter?
MM: There is some barter, but mostly, this new economic activity at the individual level is based on payment in currency, either North Korean won or foreign currency. This monetization of economic activity, as economists call it, is also something new for North Korea.
You have to understand this to understand the continuing resilience of North Korea. You can’t see it from the outside. You have to be there and talk to people to understand it. Outsiders wonder why the place doesn’t just collapse, why the place is so resilient.
JB: What is the leadership’s attitude toward this new kind of economic activity at the individual level?
MM: At this moment, the leadership has no other choice but to pretend not to see it.
The official position remains: A socialist future for the DPRK! Restore the Public Distribution System to distribute food to the people! Suppress illegal economic activities! But at this moment—because the leaders can’t deliver—they have no choice but to close their eyes to what the people are actually doing.
An important takeaway from that is that in North Korea, even for the leadership, reality prevails over ideology. The North Koreans are a practical people, adept at survival, adapting to reality–and that includes the leaders.
‘Creeping capitalism? No, it’s socialist competition!’
JB: Okay, so you’ve talked about changes at the individual level. What are you seeing at the enterprise level?
MM: At the enterprise level, as well, I see new practices to get through difficult times. For example, for a factory manager, one of the main obligations is to feed their employees. A factory or an enterprise is a community bound together by a common destiny. Even though a factory manager does something formally against a law, he or she is not punished if that is to help employees to survive.
At the enterprise level, the party and government are doing two things at the same time, one we’d regard as a step forward and the other as a step back. I’ll start with the step forward. The leadership is giving state-owned enterprises—and in North Korea, all business units, except those operated by a very small number of people at the household level, are state-owned enterprises or collective farms—new freedoms to operate. Managers have new authorities to make decisions on importing and exporting, human resources, worker training. Importantly, those new authorities also include finding foreign and domestic sources for investment for business expansion and operation. Traditionally, state planners made all those decisions. Now, to an important degree, they’re being passed down to enterprise managers.
JB: How about production? Is production still determined by the State production plan?
MM: Farms and factories also have new freedoms in production as well. Previously, enterprises simply tried to meet state production quotas, and in these difficult times they almost always fell short, often far short.
Now, production units negotiate with planners on what and how much will be produced. Importantly, a factory or collective farm can propose producing something that wasn’t in the plan at all; that’s really almost revolutionary for the North Korean system. And once producers meet the targets of the revised plan, they are free to keep the extra production themselves, sell it on the market, or trade it with other state-owned enterprises for what they need to increase their own future production possibilities.
The state plan is still the basis for production. But—and this is new—now the plan is the product of a negotiation, is more realistic, and leaves room for excess production—which is a powerful incentive to managers and workers alike to produce above and beyond the requirements of the plan.
JB: I suppose if the State owns the means of production we’d call that a socialist system. But if the production managers are free to find their own sources of investment, and to motivate the workers using production incentives, those sound like capitalist practices to me, anyway.
MM: The crucial point is the leadership now recognizes that if they motivate the workers and farmers to produce more, the workers and farmers will produce more.
And there’s a new phrase for that, and no, it’s not called capitalism. Instead, it’s called “Socialist Competition.” The competition isn’t at the individual level, but at the production entity level—and that production entity level can be really, really small.
Let’s take rice production as an example. A particular collective farm is responsible for working a large number of rice paddies. Let’s look at production on only one of them—we’ll plan like a manager engaged in Socialist Competition.
Now, this rice paddy requires 200 laborer days of work in a year. Fifty of those days are group days, in which a big group of farmers in the collective work together to get the land ready for production, do road repair work, repair the irrigation channels, transplant the rice seedlings. The remaining 150 work days are done by a small work unit assigned to that land only. And the work unit could be very small—a single individual for a normal sized paddy, three or four farmers for a really huge paddy.
JB: So you’re saying the North Koreans are giving individual workers and farmers incentives to produce more, and that that’s a new thing. How does that work in practice? Is there really any noticeable impact, changes in the way the workers do their work?
MM: Absolutely. Let’s go back to the collective farm, which is now letting workers keep what they grow beyond their quota. There’s no change in the fact that the State owns the rice paddy land, not the farmer. But now, the collective gives a particular paddy to a particular farmer, not just to work for this year, but year after year. In effect, as long as the farmer is managing the land well, he or she can count on getting the same land to work for the next production year too.
And yes, you can see the impact of that. Traditionally—and traditional farm methods are still used in North Korea, because of the shortages of agricultural chemicals and machinery—farmers in Japan and Korea went to the mountains after harvest to bring back leaves, to spread on the fields as fertilizer. But that’s a lot of work. Up until a few years ago, I never saw farmers on collectives in the North make that effort. They might or might not be working the same land the next year. They didn’t get any benefit from extra production from the collective. Now, they know they’ll be working the same land. And that they’ll benefit from the extra production.
In the last few years, when I’m in North Korea after harvest time, it’s common to see those collective farmers going off to the mountains to bring back leaves for their fields.
‘Loosening up on the economy, but tightening up on political control.’
JB: You said the party and government have two policy lines on enterprise management, one we’d regard as a step forward and one as a step back. You’ve just talked about the step forward, to increase production?
MM: Yes.
JB: And the step back?
MM: Ah, the second track, the step back, the step that enables the state to maintain control over the people at the same time it relaxes control over production decisions. A quick lesson on the DPRK political system, its institutions.
For about 30 years, after its founding in 1948, the leadership held regular Congresses of the Korean Workers Party to infuse the people with the “correct” ideology and political understanding. But between 1980 and 2016, there wasn’t a single Workers’ Party Congress. That coincided with the breakup of the Soviet Union and the end of the East Bloc, the development of capitalism in China. And especially in the terrible food shortages in North Korea in the 1990s and early 2000s, as the people stopped looking to the State for what they needed to survive and instead relied on their own efforts, we saw some erosion of the formal institutions of control.
What we’ve seen from the Seventh Congress of the Korean Workers Party, held in May 2016, is a re-invigoration of the tools of control, to reinforce the importance of the group over the individual, to drill in what’s expected, demanded, of a North Korean citizen, through groups such as the Youth League and women’s groups.
Those groups are the means for the leadership to hammer home propaganda and the continuing education of youth and adults. The leadership wants citizens to identify as members of a group, ultimately, to form a national polity—and not as individuals.
JB: Now that we’ve moved to politics, how confident is the leadership that it can maintain control in the face of the changes it is putting into place?
MM: Not 100 per cent confident, but I would say more than 80 per cent. Given what we see in the politics of a lot of countries, yours and mine included, I’d say 80 per cent is pretty confident.
JB: I know your expertise is in economics and not security, but what kinds of conversations have you had with North Koreans about security issues?
MM: North Koreans tell me their country is safe because they have nuclear weapons. They point to Libya, Iraq and Ukraine as countries that had nuclear programs, gave them up, and were then attacked by either the U.S. or Russia [sic]. They say the DPRK made the right decision to stick with developing nukes. And now they have them. And now that their country is demonstrating the means to deliver those weapons wherever they want, including Washington, they believe the DPRK will be safe from American attack.
JB: Is that by any chance your view as well?
MM: Since I started studying North Korea, in the 1980s and made my first visit there in 1996, my conclusion is the U.S. has played an important role in helping the Kim family stay in power. When the outside world threatens the North, it makes the DPRK stronger. The people rally and come together to find a way to confront the threat—including the threat of sanctions.
JB: Speaking of sanctions, what if the international sanctions aimed at forcing the regime to give up nuclear weapons and missiles really squeezed North Korea, cutting off fuel and trade, depriving it of the minimum it needed to survive?
MM: Well, in 1941…
JB: 1941? Sanctions and Pearl Harbor?
MM: Yes. What started Tokyo’s countdown to Pearl Harbor was the U.S. cutoff of oil to Japan, in August 1941. Washington meant for the oil embargo to pressure Japan against continued Japanese expansion into Asia. But the result of that pressure was World War II. As fuel supplies fell to the minimum needed for what it saw as self-defense, Tokyo decided it had to strike first, and it did, on December 7, 1941.
JB: Where are we now with North Korea?
MM: The U.S. is going down that same road again now, against a political system that in many respects is similar to Japan’s own in 1941. Washington now is pushing for a complete shutoff of fuel shipments in North Korea. The U.S. hope is that North Korea will react to that pressure by ending its nuclear and missile programs.
But if North Korea sees those programs as vital to its own national security—and I believe it does—the North might choose that other path, the path Japan chose in 1941, and strike first. That is, launch a war, even though they know they can’t win it, before they reach the point where they don’t have enough fuel to defend itself against outside attack.
UN Security Council Resolution 2375: What just happened here?
By Joseph DeThomas, published on 38 North, Sept 15, 2017
On Monday evening [Sept 11], the United Nations Security Council quickly and unanimously passed another sanctions resolution against North Korea in a rapid response to its sixth—and strongest—nuclear weapons test just days earlier. In the context of past international sanctions and diplomatic actions in dealing with the North Korean nuclear and missile programs one could have applauded the rapid and unanimous action that will increase the economic price North Korea pays for its actions. After all, the resolution did not have to suffer the usual lengthy US-PRC and P-5 negotiations that have frequently delayed or even halted past UNSC responses. But, because the U.S. released a much tougher draft and appeared to be headed towards a show down with Russia and China in the Council, outside observers are scratching their heads a bit over what was achieved and whether the U.S. “won” or “lost” on the resolution. It looks like the U.S. backed down, but it is possible there is more going on behind the scenes. Certainly the resolution itself is unlikely to be decisive.
For those who had hoped the U.S. had finally gotten fed up with Chinese and Russian efforts to shield Pyongyang from regime-threatening pressure and would present them with a choice of accepting a tough resolution in New York or dealing with draconian secondary sanctions aimed at Beijing and Moscow, this resolution is bad news. For those who feared a rupture of P-5 unity, the eruption of a U.S.-China trade war to overshadow the North Korea crisis and an end to any reasonable path to a diplomatic solution to the crisis, the resolution puts those bad outcomes off for another day. From a technical point of view, the resolution marginally ratchets up pressure on Pyongyang—although far less than the resolution’s authors would have us think.
The most interesting question—one this author is in no position to answer—is what happened between Washington and Beijing that shifted the resolution from one of confrontation to one of minor evolution in sanctions. As we look now to crafting a response to North Korea’s latest provocation—a second test flight of the Hwasong-12 over Japanese territory—it is important to know if UNSCR 2375 reflected some new understanding of a way forward shared by Washington and Beijing. If not, it is unclear what just happened here.
The press has already reported on the key components of the resolution. These include:
- New language on interdiction of North Korean ships (Operative Paragraphs 7-12);
- A cap on petroleum and refined product imports to North Korea and a ban on natural gas imports (Operative Paragraphs 13-15);
- A sun setting of all North Korean labor export arrangements and a reduction of most joint ventures (Operative Paragraphs 17-18); and
- A ban on North Korean textile exports (Operative Paragraph 16).
It is unlikely that anything in these provisions will break the back of the North Korean regime. Indeed, while the provisions on petroleum and refined product may build a base for future action, the remaining sanctions are unlikely to do very much at all, in and of themselves, to increase pain on the DPRK.
Take, for example, the interdiction language. While the language may increase psychological pressure on that floating crap game that is the international system of providing flags of convenience to questionable shipping operators, it gives no new authority to those interested in halting illegal North Korean shipments of conventional arms, missiles, missile production equipment, or chemical weapons precursors to clients in the Middle East and Africa. The U.S. has long believed it already had authority under international law to board and inspect vessels on the high seas if it had sound reasons to suspect they were carrying material prohibited by UN Security Council Resolutions, so long as the state flagging the vessel gave its permission. This new resolution simply restates what already exists under international law. It is a far cry from what the U.S. proposed in its draft, which would have given member states the right to use force to board and inspect vessels suspected of carrying prohibited cargo under authority of the UN Charter. While that draft provision gave many of us pause, given the current level of tensions, it would have had the virtue of giving the U.S. and others authority to deal with North Korea’s use of long-distance cargo ships delivering prohibited goods to a number of African and Middle Eastern clients who currently refuse to shut down their prohibited arms, missile and chemical weapons deals with Pyongyang. This resolution will not.
Similarly, the ban on textile exports looks like it will hit the DPRK hard. Trade statistics indicate North Korea earns hundreds of millions of dollars on textile exports. This, unfortunately, is likely an economic mirage. In fact, the North Korean textile trade is largely a labor export without moving the laborers. Garment manufacture is driven by one central factor: labor costs. Chinese manufacturers send production machinery, cloth and even zippers and buttons to North Korea and allow cheap, abused North Korean workers to assemble garments that are then re-exported to China. So while statistics may show hundreds of millions of dollars of textile exports, they should also show machinery and textile imports of significant value. The only real foreign exchange earnings involved for North Korea, therefore, will be the wages of the North Korean workers and the payments to their employers—far less than the hundreds of millions of dollars of paper earnings. If enforced, it is likely the textile trade with China will end as Chinese garment manufacturers find another Asian country with cheap labor to use, but the net economic impact on North Korea will be not very great.
The sun setting of true labor exports could—if it were enforceable—have a significant impact on North Korea’s foreign exchange earnings. However, it—like all foreign labor arrangements—is quite hard to enforce. One need only ask oneself how many foreign workers are harvesting crops or doing home construction in the U.S. or working in low level service jobs in Europe to know how hard it will be to enforce this ban. (Estimates vary by millions of workers in both cases.) Moreover, the U.S. and Europe have competent and honest customs and immigration services; the same cannot necessarily be said for Russia, China or the Middle East where most North Korean workers operate. Sadly, while this provision in the resolution may slow down the North’s earnings from the uncompensated labor of its people, it is more likely to force the business underground so that the workers may be subject to even greater abuse. At least the cost of abusing these workers will rise as their employers will likely have to make significant payoffs to various inspectors to have them look the other way when it comes to paperwork like work authorizations.
Much the same could be written about joint ventures. However, it may well be that this is one area where increased sanctions scrutiny will persuade reputable firms to look to less risky markets for investment opportunities. This is especially the case if the US is serious about ramping up its use of secondary sanctions against Chinese investors.
The headline sanction in the resolution, of course, involved oil and refined petroleum products. The provisions in the resolution fall far short of a ban on oil supply. They seek to impose a cap on petroleum and perhaps a cut in refined product imports. But the convoluted language of Operative Paragraph 14 indicates that the drafters and those they were trying to persuade had to sacrifice clarity for comity in order to get consensus language. Since no one really knows how much petroleum or refined product the DPRK is importing (estimates vary by over 20 per cent between U.S. and IEA statistics for instance), the most important result of this provision will be to require suppliers to report on their exports of refined product. (Sadly, crude shipments have no such reporting requirement so the cap on shipments of crude is really on the honor system.) It will be interesting to see who is willing to step up and state they are in the refined product business with North Korea. Suppliers have an incentive to do so since future exports will be based on past exports. (Of course, they also have a disincentive since some oil is possibly being used as compensation for illegal North Korean exports of missiles, chemical weapons precursors or conventional arms.)
At a minimum, the sanction will thus give us greater clarity on the refined product issue. Will the caps in the resolution pinch the DPRK? It is unclear. There are some reports that the DPRK is already having difficulty importing refined product, perhaps because it cannot find financial channels with which to pay for the imports. Other experts insist the DPRK has sufficient stockpiles to ride out sanctions for the short and medium term and that it could substitute coal (of which it will have large amounts now that exports are banned) for some of its oil needs. The DPRK has shown vulnerability to heavy fuel oil shortages in the past. But, it also has shown a hard hearted willingness to let much of its population freeze in the dark if that is what it takes to keep gas in the fuel tanks of the leadership’s Mercedes. The best way to look at this provision is as a marker for possible future bans on oil supply.
Bigger picture
The bigger question is why the U.S. went into this round of sanctions looking like it was ready to call China’s bluff by publicly putting forward a resolution that Beijing would have to veto. It appeared that Washington may have chosen to use the draft resolution as a way to justify applying secondary sanctions widely once the Chinese and/or Russians vetoed the draft. Instead, the U.S. opted (wisely in this author’s view) to maintain Council and P-5 unity. But in terms of public perception, it now it appears to have blinked in the face of Chinese obstruction. It would be interesting to know what arrangements were made between the two capitals and whether this is an indicator of quiet Chinese action that will increase pressure on Pyongyang out of public view. There are reports, which this author cannot confirm, that several large state owned Chinese banks are winding up their North Korean operations. If it is not the case that more U.S.-Chinese cooperation is going on behind the scenes, this author is left to wonder why the U.S put so much on the table publicly only to walk away with so little.
Observers of this long-running crisis should take some heart that by maintaining Council—particularly P5—unity that there are still possibilities for U.S.-Chinese cooperation to end this crisis diplomatically. They should be less impressed by UNSCR 2375’s potential for immediate impact.
Additional related news:
Opposition in China to U.S. THAAD missile deployment in Korea sees Hyundai-KIA auto sales plummet, Bloomberg News, Sept 11, 2017
Why would 58 per cent of Americans polled favor U.S. bombing of North Korea?, by Gary Leupp, Counterpunch, Sept 18, 2017
A new Gallup poll indicates the 58% of U.S. residents polled say they favor U.S. military action against North Korea if the U.S. “cannot accomplish its goals by more peaceful means first.” Like most polls it is tendentiously worded…
