The Roots of Capitalism in North Korea

There is no doubt that North Koreans are now living in a capitalistic society. As of 2018, there were at least 435 officially sanctioned markets located across the country (Cha et al., 2020). The millennials of North Korea who were born during the 1980s to early 2000s are now often called the “Jangmadang Generation” (Liberty in North Korea, 2020). They were born into a changed society where they learn to run their own business and make their own profits through markets. These new aspects of North Korea are quite different compared to the past, when the entire economy was under state control and it was impossible for civilians to seek private profit rather than the allocated distribution. What has caused in this coexistence of capitalism in North Korea?

The start of capitalism in North Korea began in the 1990s when North Korea underwent a devastating economic hardship and severe famine throughout the state. Internationally, the Soviet Union collapsed with the waning power of communism at the end of the Cold War. In addition to the death of their great leader Kim Il Sung, domestic circumstances of North Korea such as severe droughts and dropping agricultural productivity exacerbated the already existing vulnerability (Fahy, 2015). The economic hardship and shortage of food inevitably resulted in the collapse of the Public Distribution System (PDS). This nation-wide food insecurity led to a tragic famine, causing large-scale starvation and death.

For survival, people sought any means to access the food which the government could not provide. During this desperate time, the spread of black markets rapidly increased. To acquire resources to survive, people used these black markets to sell goods they produced or exchange goods with each other. Inevitably, the room for opportunities to engage in the private market systems grew (Sang, 2015), and ‘Jangmadang’ black markets became the means to overcome the failure of the old PDS. They were not simply a supplement to the state distribution system, but rather provided a replacement that sustained the North Korean economy. The exceptional aspect of these markets was that they were fully driven by the people in the society. It was clear that any kind of market was detrimental to the socialist society and the spread of it could not be tolerated officially (Chan, 2016). However, the government was aware of the fact that these markets could not be banned when the government’s PDS was unable to sufficiently allocate a food supply to the people. As the number of markets and users heightened to the uncontrollable extent, the state intentionally allowed the proliferation of the Jangmadang (Yeon, 1997).

Similar to the expansion of markets, North Korea’s dollarization occurred throughout all classes. As the economic benefits accrued from socialist allies decreased, so did their influence; and the state struggled to find the foreign currency to support domestic firms and farms (Sung, Mun, & Seung, 2017). Therefore, the state tried to increase the supply of foreign currency by decentralizing trade authority or allocating foreign currency earning business to more organizations (Lee & Lee, 2020). Moreover, the marketization of the informal sector also pulled in foreign currency (Lee & Lee, 2020). The border region of North Korea and China was rife with people trading goods and food during the famine, and this informal foreign trade reinforced the use of the Chinese yuan. In order to meet the rising demand of economic actors, foreign currency exchange notes were printed to the extent it further aggravated the devaluation of domestic currency. Under these circumstances, “the social preference for foreign currency cash was solidified” (Lee & Lee, 2020, 11) . People had come to realize that it is much more profitable to possess foreign currency than North Korean won. The break down of the centrally planned economy in the 1990s eventually led to the great devaluation of the North Korean won and the rise in the usage of foreign currency .

The impact of famine significantly changed the social economy of North Korea. To address the severe marketization and dollarization that threatened the stability of the state economy, North Korea carried out economic reform in 2002, called the July 1st Measure. This reform mainly focused on narrowing the price gap between the national price and the market price (Lee & Lee, 2020). By raising the official pricing, they attempted to control those who produced any economic surplus resulting from the price gap from the black markets. The inflation of wages in the public sector was implemented as well to ensure the consumer’s buying power. The government also permitted trading companies “to directly sell imports to the ordinary people, institutions and enterprises were permitted to possess foreign currencies, and business-to-business transactions in cash were legalized” (Lee & Lee, 2020, 11). This implied that the state tried to make more room for “self-sufficiency” and the autonomy of the people due to the lack of state economic resources to support them.

The economic reform made in 2002 was the first attempt to properly control the unprecedented capitalization of North Korea. While in the past, the policies and plans were made by the government through a “top-down process,” this major reform was more of a “bottom-up” adaptation of the government to the changing society. Nevertheless, these economic changes were not an entirely new turn by the government to a more open economy. Rather, it was the means the central state used to get a hold of the informal sector of which they had lost control. Unfortunately, the July 1st Measure could not halt the continuous inflation. This reform stimulated the further expansion of marketization, and the price gap and the reduction of real income remained unsolved.

Official ideology plays a pivotal role in the stability of the North Korean state and its regime. The state, the party, and most importantly, its regime are at the core of the nation. As mentioned above, the reform made in 2002 was one of the most drastic changes North Korea underwent since the state recognized its limitations in its economic capacity. Since the “systemic stability is seriously threatened [with] changes in economic policy, and the subsequent social and political ramifications this entails” (Ruediger, 2005, 284), the North Korean government had to take a different approach on ideology that could legitimize the adaptation to a more capitalistic economy which the people at the bottom had created. They had to embrace the presence of markets while regulating it within the state’s control, relieve the state’s burden of expending state resources on the society, and give more autonomy to the economic activities to increase government revenue, all without deviating from their socialist ideology.

To do so, North Korea began to suggest a different socialist idea. The state argued that “[n]ation is over the class and stratum, and the fatherland is over idea and ideology” (Rodong Shinmun, April 2003). Since this contradicted the pre-existing Marxist socialist values, they explained that Marxist socialism was no longer applicable to their reality. The party propagated their new slogan advocating “running their economy by firming up their socialist principles while pursuing pragmatism” (Rodong Shinmun, May 2003). Hinting at the significance of increasing profit, North Korea started to promote an active participation of the people, but limited their economic activities into the socialist principles. The Ju-che ideology was especially reinforced. Nationalism and self-reliance were accentuated through their Ju-che mindset. The rise of nationalism called for all North Korean people to bear the responsibility of devoting themselves to regenerate the national economy (Hazel, 2015). Also, the ‘self-reliance’ aspect of Ju-che was applied so that people had to make their own living and not rely on the state in order to contribute to the nation. Through these ideas, the state tried to conceal the harsh reality that the government could not support the people with the distribution system any longer. In the same manner, the detachment of the state from the people’s economic activities indicated that the market economy among the people was not legal but tolerated. Since markets were deeply connected to capitalism, North Korea attempted to claim the market was a characteristic of neither a capitalist society nor a socialist society but rather something that had existed since feudalism ("Common Sense", 2002). This argument was in line with the state’s tolerance of capitalistic values while avoiding any violation of socialist core values. North Korea covered their adaptation of capitalism through a complex mixture of economic reform and ideology to regain state control.

The economic hardship followed by the famine greatly impacted North Korean society. The PDS collapsed and people suffered from food insecurity. As people found their own ways to survive, governmental control diminished, and marketization and dollarization prevailed throughout the nation. When this spread got out of hand, the state initiated the July 1st measure to handle the fast-growing capitalism. Their intention was not to repress the existing markets’ capitalism. In fact, not only was the North Korean government already aware of the reality that they could not reanimate the economy without these private businesses and markets, but also the elites and government officials managed to take advantage of this new structure of their economy for profit. Nevertheless, North Korea could not concede to the necessity of change of its socialist economy. If it did so, it would lead to the distrust of their own government and the destabilization of the Kim regime. Hence, they initiated a new socialism discourse claiming the necessity of adapting to a changed reality. While strengthening the Ju-che ideology, North Korea stressed pursuing profit and pragmatic economic behavior. After all, the measurement was part of the effort to embrace the prevalent capitalistic values. The state tried to narrate their drastic economic reform as the central government’s taking the lead on the innovative transformation of the society for the people. However, it was evident they are reframing their endeavor to manage the unintentional advent of capitalism of the North Korean economy.

***The views expressed herein do not necessarily represent the opinions of NKR or the Yonsei Institute for North Korean Studies.

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