If
by some miracle, North Korea suddenly decided that it wanted to embrace a
thorough and sustainable reform package, what kinds of policies could actually
work? Although this kind of hypothetical experiment can seem like wishful
thinking, it’s an important early step of preparation when you consider that we
have no way to predict when one of the world’s last vestiges of Cold War socialism will stall,
collapse, or transition. When it comes to dealing with North Korea,
Washington’s current modus operandi – strategic patience – has quieted things
down enough to avoid all out hostilities. However, it has also failed to
improve the situation. In the road ahead, we need to brace for a rocky transition.
With that in mind, the Cato
Institute’s Doug Bandow insists that “proposing talks and suggesting
rewards would be the best response to an uncertain situation.” Since grassroots
economic innovation has been the major driver for change in North Korea over
the past 20 years, reinvigorating the marketplace might be the most efficient
way to provoke lasting and meaningful change.
Clinical economics is a systematic
methodology for diagnosing and revamping defunct economies. The author, Jeffrey
Sachs, is a Harvard trained economist and has served as an advisor for a number
of post-communist countries and military dictatorships such as Poland, Russia, Bolivia, and more. I
reached out to him and inquired about the difficult case of North Korea. He
responded that he has not looked into it personally, but encouraged me to try
my hand at applying clinical economics to North Korea.
What follows is my
(admittedly humble) attempt to peg down core problems and propose solutions
using the tools of clinical economics. As a starting base, I looked at the
challenges that liberalization posed for Poland, Vietnam, Spain, China, and
Russia. Then I modified the most successful policies to fit North Korea’s specific socio-political
climate. In the end, I determined that the optimal reform package would consist
of: currency convertibility, a rollback on sanctions, an end to isolationism,
compromise between reform-minded and conservative officials, and the extinction
of Fearpolitik and gift politics.
 Poland GDP per capita 1990-2010. Image: www.TradingEconomics.com |
Currency
Convertibility is one of the most important features of a modern economy. In
1991, Jeffrey Sachs was asked by Poland’s Solidarity (non-Communist) Party to
help put the country back up on its feet. At the time, Poland’s economy looked
a lot like North Korea’s does now, suffering from collapsed central planning,
extensive food shortages, inflation, black markets, smuggling, and tax evasion.
Sachs decided that a stable currency would help unite the disparate actors of
Poland’s economy. It would also decrease the need for smuggling, help Poland
re-enter the thriving markets of Western Europe, and reduce the gap between the
zloty’s black market value and its official value. To keep the zloty at a
stable rate, Sachs asked the USA and other governments to contribute to a
stabilization fund to the tune of $1 billion.
The ample foreign exchange
reserves would contribute to the international community’s faith in the zloty’s
value. In a single day, Poland ended price controls and announced it would back
up the zloty’s new rate with reserves received through the stabilization fund.
Between 1991 and 2012, Poland’s per capita GDP nearly tripled. Looking back,
it’s easy to see that the currency reform was instrumental in launching Poland
back into the bosom of Europe.
After helping Poland, Sachs unsuccessfully
campaigned to get Russia a ruble stabilization fund in 1992. Western distrust
and political unrest prevented this from happening. In short order, Russia was
“utterly drained of foreign exchange reserves,” and the economy faltered. The
absence of foreign assistance resulted in “gray apparatchiks and corrupt wealth
seekers” taking the place of able reformers in the federal assembly. Black
markets abounded, the mafia flourished, and oligarchies took hold. This delayed
Russia’s reform measures and stalled the economy for years.
The goal for North
Korea should be to shoot for a Poland style conversion and avoid a Russian one
at all costs. The badly disconnected and unequal nature of the North Korean
economy has produced inflation and instability. A strong currency could help
unite the disparate actors and bolster confidence. Furthermore, North Korea is
located at the crux of some of the world’s most robust economies: China,
Russia, Hong Kong, South Korea, and Japan are all within a stone’s throw. A
stable North Korean won will help facilitate North Korea’s return to Asia just
as the stable zloty brought Poland back into Europe. Until that point, the
international community will have a hard time developing faith in a currency
that even North Korean citizens prefer not to use.
 A 5000 North Korean won note. Due to its instability, residents prefer to use US dollars and Chinese yuan. April 22nd, 2015. Image: Yonhap News |
With the prospect of increased revenues
made more real by suddenly accessible markets, market-focused reformers like
Premier Park Pong Ju will be able to accomplish good from the inside. Liberal
policies and their champions will only gain credence when the system’s current
stakeholders start to see revenue streams pouring out of the free market. The Korean People’s won (KPW) increased role in international markets will also make it more difficult
for the regime to manipulate the currency, such as when they bankrupted the
emerging merchant class by devaluing the KPW in 2009. Dramatic currency
manipulation is often a regime’s attempt to out-muscle the free markets and
shore up royal purchasing power.
In ancient Rome, the emperor Nero diluted the
silver denarius with non-precious metals, which he believed would boost the
royal coffers. Nero’s predecessors followed suit, and eventually the denarius’
composition was diluted from nearly pure silver in 64 A.D. to about 5% silver
in 260 A.D. But Rome’s merchants kept a close eye on the coins’ falling value
and inflation skyrocketed as a result. The cost of wheat increased two hundred
fold over the course of a single century. (This is especially extreme when you
consider that commodity monies have a much lower average inflation rate than
fiat monies).
Economic strife causes political turmoil and vice versa. But
international pressure could prevent Kim Jong Un from pursuing the kind of
shortsighted fiscal policies that Kim Jong Il was so fond of. From the
international community’s point of view, the stabilization fund could be a
bargaining chip to induce North Korea to: disarm, open up its borders, liberalize, or
beef up humanitarian cooperation.
Gradualism
and Compromise: The stabilization fund was a resounding success in Poland. But
Russia’s setback teaches us that economic improvements can only be made when
the political apparatus creates a sufficiently conducive framework for change.
On June 4th, 1898, Poland held their first partially free elections in 50 years.
The Solidarity Party won in a landslide, collecting more than 90% of the senate
seats. But much of Poland remained deeply divided. The only ideology uniting
the country was a strong patriotism mixed with socialist leanings.
Much like
today’s Korean Workers’ Party, the elites that comprised Poland’s Workers’
Party were highly suspicious of anything that smacked like coercion or outside
influence. Without the Communist Party’s backing, the new government had little
hope of holding the country together for long. Sensing thin ice, a top
Solidarity strategist named Adam Michnik suggested a clever arrangement in
order to produce an atmosphere of compromise and cooperation. Poland decided to
split the government. The Communists got the President, along with the defense,
interior, and police departments. Solidarity kept the Sejim, or parliament.
This power sharing arrangement built off the elite’s patriotism reached across
the aisles to the Communists and appeased Poland’s volatile neighbors. Through
sheer political wizardry, Michnik’s plan simultaneously held the country
together and allowed market forces to infuse the country with fresh capital.
Poland was not the only country unwilling
or unable to shake off all their communist affiliations as they pursued
reforms. Unlike Poland, however, many other countries tried to pull off market
reforms while maintaining one party rule. China and Vietnam were quite
successful in purely economic turns, making them something of an outlier. Hungary’s
gradual reform measures, called “Goulash Socialism,” were a resounding failure.
Russia’s attempts were also met with frustration and disappointment. What
accounts for this difference? Why did China and Vietnam succeed while the
others failed?
The transition from an oil and gas dependent economy to a
diversified workforce is too complex to be handled by top down fiat, especially
when central leadership is reluctant to relinquish power. Slow cooked organic
growth, from the ground up, is preferable. It is true that decentralized
financial models re-emerged in China after The Great Leap Forward nearly broke
the economy. But the Chinese agricultural system was originally less
centralized than its Soviet Union counterparts, a fact that caused ideological
clashes between Mao and Stalin.
Vietnam was able to jump back into a
thriving Asian marketplace once they demilitarized and installed the Đổi Mớ reform
measures, which opened up inroads to trade while retaining a firm political
grip. Ho Chi Minh City served as the country’s capitalist experiment as Hanoi
continued on as the conservative capital. Decentralization, then, will be the
key for North Korea. People from border regions like North Pyongan Province are
already renowned for liberal attitudes, flashy fashions, and early tech
adoption. Pyongyang has had its eye on Vietnam’s model since they began
attending ASEAN conferences in 2010. The conservative capital/ liberal economic
wheelhouse strategy might be a good path forward. But is North Korea’s existing
structure prepared for such a transition?
When we compared countries that
successfully transitioned with those that didn’t, trends began to emerge. One
of the most salient trends is that market receptivity is created when the peasants
are accustomed to working off incentives and being independent of the
state. Ever since a drought reared its ugly head during the Spring of 2015,
ordinary North Koreans from all walks of life have been mobilized in droves in
order to help collective farms meet their quotas. Though the regime promises
disbursements of the autumn harvest in state media announcements, the residents
do not realistically expect to receive any rations. They’ve been hoodwinked too
many times to remain innocent.
What’s worse, as long as they’re called to the
state fields, they aren’t able to tend to their personal plots. In the past,
untold millions of North Koreans suffered from malnutrition and starvation when
they didn’t get a good yield on the family crops. In this light, we can see
that most North Koreans simply wish to be left alone to do their work. This
makes them more like Mao-era Chinese peasants than Soviet era Russian peasants,
who were given rations regardless of their output. In North Korea, the inminban, or people’s unit, leaders appointed to carry out the mobilization orders are giving people
unofficial breaks so that they can tend to their own plots and contribute in
shifts to get the project done as a team.
This shows a less centralized, more
flexible, local, and adaptable financial model than what we might have found in
Soviet Russia. In fact, when we sort through some of the other criteria as
well, there are reasons to believe that post-famine North Korea shares more
attributes with China than with post-Soviet Russia. This is an auspicious sign
in terms of receptivity to market reform. See the chart below for specifics.
 Market Receptivity Comparison – China, NK, Soviet Union. Image: Jonathan Corrado |
*Views expressed in Guest Columns do not necessarily reflect those of Daily NK.
