After Kim Jong Il: Will There Be Change or Continuity In North Korean Economic Policy?

At the moment of his accession to power, Kim Jong Il inherited the devastating impact of the collapse of the Soviet Union, the subsequent trade shock to North Korea’s economic output, the onset of the worst famine in modern history, and a humanitarian crisis that required a direct appeal to the outside world for help. By the late 1990’s, he was forced to accept the realities of dependence on international aid, the rise of farmers markets as a grassroots response to the famine, and the introduction of capitalist notions such as “profits” in the Constitution itself. Kim even briefly entertained the notion of establishing relationships with the International Monetary Fund, World Bank, and Asian Development Bank, attracted by the prospects for international finance, but balking at requirements for transparency, conditionality, and rules-based relations. Throughout his leadership tenure he only half-heartedly and grudgingly accepted the growing role for markets in the North’s economy and maintained a deep ambivalence to the prospect of economic empowerment of the North Korean people. His desire to maintain highly centralized control over all aspects of North Korean society was sharply at odds with the decentralization of information and decision-making needed for a market economy to replace a failed socialist economic management system. As a result, economic policy in the Kim Jong Il era was more shaped by events and forces for change than used as a tool to guide a managed process for national development.  Experiments in economic reforms were not accompanied by policies or the institution building that would have been needed for recreating the economic success stories of China and Vietnam.

Rather, the guiding light of economic policy for Kim Jong Il was mobilizing resources for his purse from both domestic and foreign sources.  He was quite creative in devising ways to achieve this, such as demands for “loyalty” payments, structuring of foreign exchange earning activities to send the cash to the top, negotiating with foreigners to get goodies for concessions, and pursuing illegal and internationally sanctioned revenue raising ventures.  At the end of the day, the North Korean economy under Kim Jong Il remains highly vulnerable to shortages of food, energy, and foreign exchange, with pressures for transformation of the economic system coming from both internal and external dynamics of change at work in North Korea.

Looking ahead, the key question is not whether there will be changes in economic policy but whether changes will be in the direction of building a market economy or governed by a new dynamic of competition for resources among contending parties for power.  The more the new regime leans towards the Worker’s Party, the more likely it will follow Chinese supported policies of developing a market economy under the guidance of the Party and gradually shift to funding defense needs from a centralized budget rather than the military having its own economic organs such as trading companies and banks that service them. The more the regime tilts towards the military, the more likely that competition for resources will trump incentives for pursuing systemic change.

While there may be an inclination to perpetuate the patronage practices of the elites by the Kim family, it is not likely that loyalties will transfer simply to the new leadership through such patronage alone. New incentives for supporting the regime will need to be pursued.  Key metrics of such changes will be in: 1) the ownership and transferability rights of assets; 2) the restructuring of the financial system including banking supervision, monetary management policies, and development of the tax system and public expenditure policies to accommodate a market economy; 3) the support for decentralization of economic decision-making and empowerment of traders and entrepreneurs; 4) the willingness to follow rules-based international practices in commerce and finance; and 5) the legal reforms to protect rights of parties in a market economy. This is a tall order, but one that might lead to a new dawn for North Korea.