Capitalism Thrives in North Korea

Kim Jong Il has done whatever he could for the last four years to rein in market activity in communist North Korea. Its feared gulags, once reserved for political dissidents, are now filling to the brim with "economic criminals." Private markets are being pushed out of the city centers or limited in operation to just a few hours a day. In 1999, only eight economic crimes were listed in the penal code. By 2004, there were 75. In 2007, a new law stated that "those who gain especially large profits" operating a private restaurant, motel, or store could receive 10 years of hard labor or more.

Yet a remarkable thing is happening: Kim's apparent attempts to halt an experiment with capitalism are failing. A family-run regime that has managed to control its borders and people more tightly than any state in history is losing control over what its people do and think to survive. According to a new study by political economists Marcus Noland and Stephan Haggard, the percentage of North Koreans who believe that engaging in business is "the best way to get ahead" has remained surprisingly steady at around 68 percent even as Kim's attacks on the free market have gotten worse. A steadily growing share of North Koreans say it has "become easier over time to engage in private trading." Most striking, the researchers say, is the extent to which households rely on market income. Almost half of North Koreans now receive all of their income from the embattled private sector—up from 43 percent a decade ago. In addition, Noland says, North Korean elites are conducting an ever-larger amount of private business outside the formal economy, often through substantial business dealings with neighboring China, where hundreds of cross-border firms have cropped up since 2002. "It's a rapidly growing number who work in the private sector," says Noland, deputy director of the Peterson Institute for International Economics in Washington, D.C. "Some of them are educated and well-off. Some are farmers. It's all sorts."

Kim began experimenting with market reform in the late 1990s as a survival measure. At the time the North Korean economy was shrinking, and the population was racked by droughts and famine. Kim visited China three times to learn more about the way Beijing was marrying a top-down communist political system with free-market economic reform. In 2001, he stood above the trading floor of the Shanghai Stock Exchange and explained the idea of trading stocks to his top generals. By 2002 he signaled a possible transition toward a market economy, with reductions in price controls and the institution of profit-sharing incentives. He also tacitly condoned the growth of private markets into consumer goods beyond foodstuff. The idea was to create a limited space for free-market forces at home, with a much more carefully controlled opening to the international market forces that had so radically changed China.

It worked, but only in part. Pyongyang hosts no swarms of Western businessmen and has only one fast-food joint— where the mention of burgers is forbidden for its American connotations—but the scale of foreign trade has outrun Pyongyang's ability to micromanage it. The collapsing command economy of the 1990s and early 2000s forced a wide cross-section of the middle class to survive by trading with foreigners. Managers of state-run companies signed joint ventures with foreign businesses—and pocketed the profits instead of relinquishing them to the state. Border traders imported foreign goods, including bootleg DVDs and illegal radios. Peddlers and merchants in turn bribed officials to be allowed to sell these smuggled products on the streets of Pyongyang and the outskirts of provincial capitals, in defiance of the official ban on private markets and the strict censorship of any form of foreign entertainment that might lead North Koreans to question the official party line that they live in a socialist paradise.

This fiction grows more difficult to maintain as trade rises. Between 2000 and 2007, official foreign trade increased by 61 percent to $5.1 billion, mainly in exports of mineral resources. The money generated by legal trade, often by managers skimming profits from joint ventures, stoked demand for goods traded on the unofficial market, including MP3 players and laptops. Though it's impossible to measure such things in a closed Stalinist state, it seems certain that this trade is bringing greater awareness of the degree to which Pyongyang has mismanaged the economy. One European, who requested anonymity because he does not want to jeopardize his business in North Korea, says his local partners all relish South Korean soap operas, which they watch on bootleg DVDs smuggled over the border and sold for what is now the going rate of $3.75. More and more North Koreans have to be at least dimly aware that chronic food shortages and a worthless national currency are far from the norm in rival South Korea, where per capita incomes are 18 times higher. North Korea's economy contracted even during the height of the global economic boom in 2006 and 2007.

By 2005, the regime was sufficiently alarmed by the pace of spontaneous privatization that it rolled back the reforms by restoring the public distribution system for food, cracking down on markets more recently, and, at least on paper, reimposing price controls and ending profit sharing. In 2006 it purged a leadership faction thought by outside analysts to harbor reformist sympathies. But with so many people dependent on the private sector (in the Noland-Haggard study, 40 percent of urban residents say they rely solely on private markets for food), Pyongyang has enforced the new rules erratically. Authorities have not cracked down on one of the largest markets in the country, a Pyongyang operation where hundreds of women sell $4 Chinese-made dresses, large chunks of meat, and household goods out of private stalls in an indoor warehouse, displaying prices in North Korean won but preferring U.S. or Chinese currency. But in March 2008, police in the port city Chongjin attempted to shut down several markets, prompting protests by local women warning the police, "We won't die alone. We will take you with us," according to Good Friends, a Buddhist human-rights group that has a network of dissident sources in North Korea. In October, Good Friends reported that defiant stall owners in Chongjin were once again selling banned goods, including cigarettes, U.N. food rations, and medical supplies.

Indeed the array of free-market activity that thrives under the radar suggests that the 2006 purge did not close the fissures in Kim's regime. Experts say the ruling elite is divided between a hardline military faction and a younger, more reform-oriented group of technocrats who oversee the ministries of foreign trade, commerce, and mining. In September a new finance minister, Pak Su Gil, took office, and he, too, is seen by some as amenable to further opening the economy to foreign investors. "There is a split within the Pyongyang elite of those who want to reform and those who want to take advantage of everybody else," says Brad Babson, a former World Bank official.

It is the technocrats who are still quietly approving some business with the outside world. In a striking deal last year, Egyptian telecom Orascom became the first widely used mobile-phone operator in North Korea. In the first nine months of 2009, it managed to sign up 69,000 customers who pay an average of $22 a month for voice and text-message services. The inconsistencies in the crackdown are likely due mainly to the ambivalence of Kim Jong Il, who is seen as both fearful of any erosion in communist control and eager for a share of the trade pie.

The pro-reform faction may prove significant to the inevitable power struggle that will emerge after the death of the frail 68-year-old Kim. One possible successor is his brother-in-law, Chang Sung Taek, who could become a caretaker leader until one of Kim Jong Il's young sons is ready to take over. Two South Koreans who have met the 63-year-old Chang, a young politician by North Korean standards and already considered the second-most-powerful man in the country, believe he is a reformist, based on his frequent trips across Asia to inspect private firms.

In many ways, the wrangling over the top spot resembles North Korea's big neighbor, China, where beginning in 1978 a new generation of party apparatchiks began to liberalize the economy. That country's experience suggests that once pro-market reforms get underway, it is virtually impossible to turn them back. So while North Korea's reformists need to lay low for now, they are likely to have firm support from the growing private sector when they emerge.