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North Korea’s ‘New Economic Management System’: Main Features and Problems


Park Hyeong-jung

Senior Research Fellow
Korea Institute for National Unification

I. Introduction

 

Since the installation of Kim Jong-un as its supreme leader two years ago, North Korea (Democratic People`s Republic of Korea) has been rearranging its state and party systems. One important change is the way its economy is handled. Officially called the “Economic Management System in Our Style,” the new approach is often called the “June 28 Measures” among South Korean observers in reference to the policy adoption in June 2012.

 

This study describes the basic concept of the New Economic Management System and looks into how it is being implemented. Chapter II identifies the new system from the viewpoint of socialist economic reform. Chapter III introduces the core practices of the new system as explained in North Korea`s official documents. Chapter IV observes how the new system has been applied as suggested by Radio Free Asia reports. Chapter V summarizes the above contents and offers an assessment of the situation.

 

II. Change in Socialist Paradigm

 

The first question is how the New Economic Management System fits a socialist economy. A simple breakdown of a socialist economic system has four categories: 1) communist rule + central planning + state ownership of production means; 2) communist rule + decentralized reform + state ownership of production means; 3) communist rule + coexistence of market and planned economies + state ownership of production means; and 4) communist rule + market economy + privatization of production means.

 

In China, the years between 1984 and 1992 are associated with Category 3. It was called a socialist commodity economy. And the period from 1992 to the present falls into Category 4, as a socialist market economy. In North Korea, the economic management system up to the end of the 1980s was in Category 1. Its economy under the July 1, 2002 measures may be identified with Category 2. The New Economic Management System brings the North to Category 3.

 

A “socialist commodity economy” reduces or abolishes control of state-owned enterprises and eventually develops into the coexistence of state plans and markets, or a market economy. This requires an overhaul of a nation`s entire economic management system. As state directives are reduced, the bureaucracy needs to shrink and the state`s role in the national economy has to change. The role of markets needs to be expanded with official recognition. This change should be accompanied by political and economic opening up.

 

The four categories can be compared with the four stages of human development ― infancy, childhood, youthhood and adulthood. Individuals share certain characteristics at each stage of development but have a life of their own. Likewise, socialist economies experience common stages of reform in different forms; some succeed in achieving economic development and improvement of people`s lives while others fail. Reform does not necessarily bring about economic advancement.

 

III. Main Features

 

The core concept of the New Economic Management System is, according to the Choson Sinbo, the North Korean-edited newspaper published for pro-Pyongyang Korean residents in Japan, relinquishing the power of management from the state to factory enterprises and farms. “Whereas in the past enterprises had just to carry out the production plans handed down from the state, the new measure has allowed enterprises to make production contracts with various clients based on their own decisions while implementing state plans as well,” an article in the newspaper`s May 10, 2012 edition said.

 

In practice, the state continues to own the means of production and appoints the heads of state-owned enterprises but the enterprises are allowed to decide how they fulfill the state`s production targets and meet market needs, taking responsibility for the results of management.

 

This constitutes a major change from “socialist planned economy” to “unplanned socialist economy,” or the beginning of an unplanned economy. North Korea gives the impression that it is trying to ease the impact of the change by using ideological expressions. The Choson Sinbo article said, for example: “Since last year, some factories, enterprises and collective farms have been engaged in independent and creative management as a pilot program under the guidance of the Cabinet.” It also said: “The appropriate (economic) units are studying ways to produce personnel to fulfill their responsibilities and perform their missions as the master of production and management.”

 

IV. Implementation

 

We have limited information about the New Economic Management System, on how it was conceived and implemented, and what it has achieved so far. We have to rely mainly on media reports from various outlets, the Radio Free Asia being the most quoted. There is the possibility that inaccurate and insufficient information is used in reaching conclusions, as this study assembled and analyzed reports from diverse sources. Even with inconsistencies among individual reports, however, we can still grasp an overview of North Korea`s current economic management system.

 

1. Main Features in the Initial Period

 

On the day of Kim Jong-il`s funeral, Kim Jong-un reportedly asked high-ranking officials to prepare a “new economic management method.” The Cabinet was ordered to form a group “to prepare an improved method of economic management.” The small group headed by Deputy Premier Ro Du-chol considered three ways of agricultural reform, in particular. One was to allow collective farms to make independent decisions on production and distribution without changing the structure of farms. The second was to divide each collective farm into five to six sub-units and give them management autonomy. The third was to fully liberalize individual farming as China did. Through these preparations, North Korea issued a directive, titled “On establishing a new economic management system in our own style” on June 28, 2012. Implementation of the new system was to start on October 1.

 

Lectures to explain the New Economic Management System to workers and farmers were held across the country in early July and again in early August. The lectures revealed that:

 

- The state will not hand down items for production or other details to factory enterprises.
- Factory enterprises will make their own production plans, including prices, sales procedures and distribution of profits.
- Production facilities, raw materials, fuel and power will be secured through transactions with other enterprises, mines and power stations, without state intervention.
- Individuals cannot establish factory enterprises; their officials will be appointed and dismissed by the Workers` Party as before.
- Enterprises should feed their own workers by adequately making and selling products in accordance with their respective capabilities. Officials who are unable to do so are to be fired.

 

Each province was to operate “direct supply centers” where enterprises would freely purchase raw materials and other necessities. This was to ensure North Korean authorities have at least limited control over production activities. Even coal and electric power should be procured directly with cash or checks. Food also will be sold freely at the supply centers. Enterprises were obliged to pay 30 percent of their profits to the state to share the cost for the operation of such public facilities as schools and hospitals.

 

The state rationing system was targeted for closure but the state planned to strengthen its control of markets to stabilize prices. Teachers, healthcare personnel, party cadres and bureaucrats were obliged to buy food at “food supply centers.” These food outlets, which mean rice markets, will serve as places where state food management agencies, collective farms and individual producers can freely sell their products to consumers. Wounded veterans, social security beneficiaries and pensioners can buy food at discount prices.

 

As of November 1, 2012, food rationing for military personnel, members of law enforcement organizations and general administration officials was to end but they were to receive salary to help them pay for meals. Prices were set by the state ― 4,000 won for 1 kg of rice and 2,000 won for 1 kg of corn ― and markets can sell items designated by the state. Sale of foreign goods and the use of vending trucks were prohibited.

 

For members of independent accounting enterprises, wages were to be paid in cash and there will be no partial payment in food. But units that remained under state control were allowed food rations. Salaries were raised sharply but the increase was not enough to completely cover high prices of commodities ― from 2,000 won to 12,000 won, for example, in the case of a factory in Onsong, North Hamgyong Province, which was barely enough to buy 2 kilos of rice as rice price there rose to 5,000 won per kilo. About 10 percent of all enterprises in terms of production, which employ some 20 percent of total workers, are operated in the independent accounting system.

 

In the agricultural sector, the New Economic Management System was introduced in October 2012. First, the distribution formula was changed to 70 percent of the total harvest to the state and 30 percent to farmers. Previously, the state collected a set amount regardless of the year`s harvest; under the new system, farmers are to get more when the harvest is bountiful and less when it falls short, as distribution will be based on the five-year average harvest from each farm. Second, “sub-units” were recognized at collective farms with each having two to six members. This means that family-based farm operation is possible. In a two-family sub-unit, they can divide their allotted land for separate cultivation.

 

In healthcare, hospital pharmacies were to be closed, which meant an end to free medicine. Patients would have to buy drugs at regular pharmacies. Only in cases involving serious diseases, hospitals will give free treatment. In education, the end of free schooling was scheduled.

 

There were reports that a new agency would start supervising and controlling the implementation of the New Economic Management System in early November 2012. According to the reports, this agency were to be composed of economic, financial and law enforcement experts to work independently without interference from any powerful organizations, reporting directly to the National Defense Commission. The central party secretariat recruited able people aged around 40, who would be trained in Pyongyang before being assigned to areas where they have no regional connection.

 

Two additional measures were taken for the new system. One was the farmland rearrangement project, which in essence was removing farmhouses scattered in twos and threes near collective farms. Farmhouses were relocated to a new housing compound away from farms and the sites of the old houses were turned into farmland. The other was firmer discipline of collective farm members. Directives were delivered to collective farms to subject absent farmers to “labor punishment.” Security personnel moved about in farms to check those who were not working.

 

After the New Economic Management System was announced, measures were taken for the renewal of control in the areas of public security, education and healthcare. New directives on “protection of secrets” and “more effective visual surveillance” were delivered through governing networks for stronger internal discipline. In Ryanggang Province, DVDs, computers and mobile phones were inspected and residents were forced to write confessions about their transgressions. Officials were specially instructed to crack down on bribes to get work disability excuses and surveys were made to provide incentives for families with three or more children.

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