[Tobin Harshaw] North Korean economy growing more capitalist

By Bloomberg
  • Published : Mar 4, 2019 - 17:09
  • Updated : Mar 4, 2019 - 17:09

What won the Cold War? Stipulating that the West did indeed “win,” there are a lot of answers to that question: Ronald Reagan’s “Tear down this wall”; Mikhail Gorbachev’s Glasnost; George F. Kennan’s containment; the Helsinki Accords; Pershing missiles; the slow rot of a corrupt leadership; etc. To that list I’d like to add … blue jeans.

There was a long history of smuggling American jeans, particularly Levi 501s, in the Soviet Union, but by the last decade of its existence it became a mania. And the only way to get them was the underground market; as Niall Ferguson once wrote: “Why could the Soviets not replicate Levi 501’s the way they had replicated the atomic bomb?”

There was obvious symbolism here. Russia’s Generation X wore them to look cool in a sort of silent rebellion. It’s said that the East German government viewed them as an embodiment of “Anglo-Saxon cultural imperialism.” But at heart, it was really capitalist imperialism, and the fact that they were traded for rubles or caviar or fur hats or that water of life called vodka was the most anti-Soviet thing about it.

Fast forward a couple of decades, and there was no shortage of predictions that China would follow a similar route. As Tom Friedman put it, “Liberty is also an essential ingredient for any society that wants to thrive in the 21st century.” Xi Jinping begs to disagree, and it’s pretty much up to him these days.

Which, in a roundabout way, brings us to North Korea, the very model of a modern police state. Yet the Hermit Kingdom is up to something unexpected: capitalism. Though officially illegal, a black market of sorts has sprung up. According to the Foundation for Economic Education, 5 million people -- 20 percent of the population -- are “directly or indirectly dependent on the markets.” You can find jeans there, although black is apparently the best color if you want to avoid hard labor.

Will (sort of) free markets bring human liberty and democracy, as kinda sorta happened in Russia? Or, as in most things, will Kim Jong-un take his lead from China’s state capitalist surveillance state?

To get some answers, I talked with Stephan Haggard shortly after the Trump-Kim summit in Hanoi collapsed. Haggard directs the Korea-Pacific Program at the School of Global Policy and Strategy at the University of California San Diego; is a visiting fellow at the Peterson Institute for International Economics in Washington; and in 2017 co-wrote, with Marcus Noland, “Hard Target: Sanctions, Inducements and the Case of North Korea.” Here’s a lightly edited transcript of our conversation:

Tobin Harshaw: Most people, I think, assume that there really is no such a thing as a North Korean economy -- just a black hole and bread lines. Yet the Wall Street Journal had a headline the other day that “It’s All Capitalism Now.” Who’s right?

Stephan Haggard: The days of outright famine are long over, even if some of the rural areas and smaller cities probably don’t eat as well as they should; remember, North Korea is a poor country, so that should not be surprising. But at the same time, what I call “marketization from below” has gained ground in the last decade, and particularly under Kim Jong-un. Markets are functioning, the state is taxing them, and semi-private economic activity now encompasses not only small-scale retail operations -- cosmetics, Tupperware, DVDs and brand knockoffs from China -- but even activities involving fixed capital: real estate, intercity transport, restaurants.

TH: What economic reforms has Kim Jong-un taken, and was this a radical change from his father?

SH: The reforms are not legal or de facto; rather, they take the form of acquiescing to a market economy that has emerged in the interstices of the floundering state-owned enterprise sector. It is fed in small measure by trade with China.

TH: Many tyrants, Fidel Castro for one, used the US as a boogeyman to explain his nation’s poverty, thus strengthening political rule. If Kim did let things ease up further for his people, could that actually weaken his control?

SH: Americans like to think that all good things go together; to sustain growth will ultimately require political liberalization or even democracy. But China and Vietnam have pretty clearly put the lie to that hope. And both are communist parties to boot and thus show the way for North Korea. I don’t see any reason why more rapid economic growth would weaken Kim’s grip; to the contrary -- as President Trump has himself suggested -- it could strengthen it.

TH: No matter how promising the North Korean economy might become, will it ever loosen its near-total dependence on China? Would China want that?

SH: Trade is powerfully determined by proximity, or what economists call gravity. China will always be an important trading partner. But South Korea has a border with North Korea too, and the complementarities are obvious. And when the nuclear crisis broke, Japan accounted for 20 percent of North Korea’s trade.

TH: Trump made the case that Vietnam might be a good model for North Korea’s re-entering the world. Vietnam seemed to agree. Do you think the example holds?

SH: There is a simple answer and a more complex one. At one level, yes: Vietnam shows that a communist country and even an enemy of the US can both reform and reconcile. But Kim does face a legitimacy dilemma. North Vietnam won its civil war; Korea is still divided. If Kim undertakes reforms that make North Korea look like the South, then what is the point? Why be a second- or third-rate South Korea when you can be the real thing by unifying? Also, North Korea does not have advantages in agriculture as Vietnam did and has a larger industrial sector to reform. Opening will be key for North Korea’s transformation.

Tobin Harshaw
Tobin Harshaw writes editorials on national security and the military for Bloomberg Opinion. -- Ed.