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Analysis: N.Korea edges toward free market

By JONG-HEON LEE, UPI Business Correspondent   |   July 25, 2002 at 10:21 AM   |   Comments

SEOUL, July 25 (UPI) -- Is North Korea seeking a capitalist therapy to heal its economy ruined by decades-long mismanagement and rigid central planning?

The communist state's propaganda machines are still touting triumphs of socialism despite "all sorts of tempests of history," but signs are growing that the Stalinist leadership is pursuing a capitalist solution to resuscitate its crippled economy.

In what analysts here hail as "significant steps" toward overhauling the crumbling economy, North Korea has recently scrapped its system of distributing rations, a main pillar of the country's centrally planned economy.

Under the new system, citizens will no longer depend on the state-issued coupons they have used to procure food and other necessities since the communist regime was founded in 1948, officials and visitors said Wednesday.

Instead, North Koreans will be allowed to use cash to buy staple food and other utilities in the marketplaces in which an "invisible hand" determines the prices of goods and services.

Workers' wages will be increased by between 10 and 17 times the previous level based on their performance to give them purchasing power. "The new wage system will be introduced beginning Aug. 1, following a one-month experimental period," a senior government official told United Press International on condition of anonymity.

Analysts interpret the wage hike as part of measures taken to meet the high market prices of commodities, a result of the communist regime's failure to provide its 22 million people with basic necessities.

The large factories are allowed to establish "capitalist-style" business practice by introducing the concept of profit-making. Enterprises will collect revenue from customers without government subsidies.

"The measures are aimed at narrowing price differences between North Korea's official distribution system and the country's growing black market," said Kwak Seung-ji, a North Korea specialist at Seokyeong University. In the black markets, food costs are 10 times higher than the prices the state pays to farmers, he said.

The reform programs also include introduction of the "family farming production system," reminiscent of the system implemented by China in the initial stage of its agricultural reforms. Under the new measures, the volume of state purchases of food grain will decrease drastically, while individual disposal will increase sharply.

The new measures appeared designed to encourage competition and productivity by providing greater incentives for farmers. North Korea, plagued by food shortages, has been dependent on foreign handouts since disastrous floods and droughts in 1995-96 compounded weaknesses in its rigid collective farming system.

North Korea is also moving to depreciate its currency to 150 won to 200 won per U.S. dollar from the current 2.2 won, in a bid to narrow the gap between the local won currency and the convertible notes issued to foreigners and which are worth much more.

"The U.S dollar is rampant in the black markets across North Korea while the value of the local won is falling," said a South Korean businessman, one of a few investors with access to North Korea's government. "The depreciation measure will help defend the local currency whose value has dropped and draw the dollars from the black market," he said.

Government officials and North Korea watchers here praised the North's measures as "significant." "We believe North Korea has begun to move in a market direction. We have been closely watching the North's moves," said a senior official at the Unification Ministry, which handles inter-Korean affairs.

"Economic ruin as a result of decades-long Stalinist policies has forced the communist regime to launch the campaign as part of efforts for economic construction," said Ryu Ho-yol, a Korea University professor.

North Korea's economy grew 3.7 percent last year, according to estimates by Seoul's central Bank of Korea. North Korea achieved growth of 6.2 percent in 1999 and 1.3 percent in 2000 after its economy shrank between 1990 and 1998. The North Korean economy is still heavily dependent on outside aid to remain viable, the central bank said.

"The new policies would overhaul North Korea's economic system and have far-reaching impact on all sectors of the reclusive nation in the future," said Oh Seung-ryol of the Korea Institute of National Unification, a government-run think tank.

Seoul-based Korea Institute for International Economic Policy (KIEP) said Pyongyang's new polices were aimed at introducing a mechanism of market economy. "Whether North Korea succeeds in its capitalist bids or not depends on how to address rising inflationary pressure in the wake of the policy changes," the government think tank said in a report released Wednesday.

Many analysts expect North Korea to follow in China's footsteps by gradually introducing market forces into its shattered economy. The North's new polices came two years after North Korean leader Kim Jong Il made a fact-finding tour of Shanghai, the symbol of China's economic reform. Kim reportedly praised China's two decades of free-market reforms after getting a firsthand look at the stock exchange and high-tech industries there.

The seeds of capitalism in North Korea began to grow in the mid-1990s when illegal farmers' markets were emerging across the country. As the state system of distributing rations had broken down completely due to chronic economic troubles, North Koreans began buying and selling goods in makeshift farmers' markets.

Farmers' markets thrived in the North as food shortages deepened in the late 1990s, according to defectors and visitors. Seoul's Unification Ministry estimated the North Korean farmers' markets numbered more than 350. Admitting the market economy's efficiency, the North's government itself recently set up open-air free markets in major cities along the border with China.

To learn the ways of market economy, many North Korean economists and officials have traveled to the United States, Australia, Singapore and other capitalist countries since 1997. Pyongyang's Kim Il Sung University, which admits only staunchly dedicated communists, has offered a course on free market mechanism.

But analysts say more drastic measures are necessary to North Korea's economic survival, downplaying the new policy package. Hong Ik-pyo, a KIEP economist, said North Korea needs to lift shackles placed on its economy, while moving toward wholesale reform and opening up policies.

North Korea cannot reap the benefits of capitalism while maintaining the power and privileges of a communist dictatorship bent on the destruction of capitalism, he said.

© 2002 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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