At an early April meeting of the Supreme People's Assembly, North Korea's version of a legislature, the leadership promoted Pak Pong Ju to the position of premier, once again stirring speculation that it is pondering much-needed economic reforms. Some pundits have speculated that Pak is the Korean face of reform; he was indeed premier during a period of modest economic policy changes in the early 2000s, before reform went into reverse and he was purged. And just like before, Pak heads the cabinet, the political body with the most immediate interest in economic policy.
But Pak's appointment raises a series of questions. Can a country issuing nuclear threats and aggressively pursuing a missile program hang out a shingle that says "open for business"? Can North Korea suspend access to Kaesong, an industrial park run jointly with South Korea, and still claim to seek foreign investment? Will either domestic or foreign firms find any new policy measures Pak might institute credible? For the answer to any of these questions to be yes, the world will be looking for deeds, not just speculation.
The domestic political challenges to reform are the most fundamental issue, and unfortunately the least understood by outsiders. North Korea remains desperately poor; its per capita income is roughly on par with Pakistan's or the Ivory Coast's. The World Food Program estimates that nearly a third of the country is vulnerable to malnutrition. There is a lot of work to do. To succeed, new economic policy measures must ultimately reallocate resources from the bloated military sector to more productive forms of investment, and increase household consumption.
This is no easy task, in part because the military is deeply intertwined with the party and state as a result of Kim Jong Il's "military first" policy. Kim Jong Un and his backers have purged high-ranking military officers. But since succeeding his father in December 2011, the younger Kim has also promoted hundreds of officers, and brought dozens into the Politburo, Party Secretariat, National Defense Commission, and other key institutions. It's unlikely Kim will be able to convince the military to launch reforms that weaken its influence. The military and security apparatus not only influence important policy decisions, but also run businesses that enrich high-ranking officers and their networks. In late March, Kim was shown visiting a military unit that made playground equipment and musical instruments. Are these units going to give up their businesses and operate in a more competitive environment?
For North Korea, the central economic questions center on the relationship between the government, state-owned enterprises, and the private sector. Reform means giving managers more discretion and allowing greater freedom for private actors to invest, hire, and make money. Is the regime OK with an emergent capitalist class? The Chinese lived with it, and if the reforms extend only to their cronies, the regime may be adequately comfortable. Half-baked reforms are better than nothing. But they are also difficult to fix later, as both Russia and China are now learning.
History suggests that North Korean leaders have little tolerance for unleashing market forces. The regime ultimately backpedaled from its 2002 reforms: It opened markets, only to harass and close them when it became uncomfortable with the emergence of potentially powerful private traders. In 2009, in the mother of all policy mistakes, the regime undertook a massive forced currency conversion that wiped out the working capital of major traders (or at least those without inside information). With markets closed, the country experienced hyperinflation as traders and households fled the domestic currency and hoarded commodities.
Surveys Marcus Noland of the Peterson Institute of International Economics and I conducted on Chinese firms doing business in North Korea reveal a pattern that almost certainly also pertains to the domestic market. Two types of Chinese firms succeed in North Korea: those that are large and protected by political connections, and those that are small and can fly under the radar. While this combination is better than having only a sclerotic public sector, the scope for growth is limited at the outset.