Economic Growth in the DPRK: What Private Sector?

Pyongyang, North Korea’s capital city, is quickly becoming the playground of the world’s most isolated country. Despite sanctions banning imports and financial transactions into North Korea, third-party companies and Chinese middle-men ensure that shop fronts are kept stocked with a variety of foreign and luxury goods. The city itself has been restructured as well, with paid-entry green spaces and amusement parks where there used to be military barracks or shanty towns. While the price for an hour of basketball on one of Pyongyang’s public courts is roughly equal to the estimated monthly wage for employees of state-run enterprises, the renovations still likely provide more joy to the people than did the dilapidated buildings they replaced. New high-rise buildings provide free accommodation to families, and new shopping centres and restaurants have plenty to offer to North Korea’s growing unofficial middle class.

It is difficult to obtain accurate data on North Korea’s economy, but estimates show that it has strengthened over the past two years, even during times when the country was under sanction. According to a South Korean report, North Korea’s GDP per capita increased by 4.8% in 2013, the year that international sanctions were put in place to stop the growth of Pyongyang’s nuclear sector.

Though North Korea does not officially admit any class distinctions, there are increasingly clear disparities between the relatively affluent urbanites in privileged areas like Pyongyang and certain areas near the Chinese border, and the rest of the country, where approximately two-thirds of people face chronic food insecurity, according to a recent UNICEF report. In order to support the meager wages provided by the state in the formal, state-controlled sector of the economy, many workers seek additional income from North Korea’s massive informal sector, which provides the average citizen with 80-90% of their daily necessities. Privately-owned businesses, a category that includes secret hair salons, passenger bus empires, and backyard farmers’ markets, are technically illegal, though without the support of the informal system, the nation’s economy would likely face a complete collapse.

The “underground” economy, as it is sometimes known, has always existed in North Korea, but after the state-controlled rationing system began to persistently fail to meet the population’s basic needs, more and more citizens began to rely on illegal private enterprises for food, imports, and jobs. The sector has been flourishing since the late 1990s, when a major famine killed half a million North Koreans and made starvation a clear and present danger to the rest of the country. Since then, the market-based economy and the state-controlled economy have operated simultaneously, persevering despite occasional attempts by the government to restore full state control. By the time Kim Jong-un came to power, North Korea began to grudgingly tolerate the hybrid economy as a necessary concession to keep the country running.

From this concession sprouted North Korea’s new wealthy classes, as well as an emerging entrepreneurially-minded middle class. These classes, though better off than the average citizen, are at perpetual risk of arrest and execution. Many have amassed sizeable fortunes from their illegal enterprises, and are the cause of North Korea’s increased demand for luxury goods. New private boutiques and luxury vehicles hardly go unnoticed on the streets of Pyongyang, and the state has begun to take notice, though instead of detaining members of the banned elite, state companies have begun to see them as a source of investment. Private companies offer the state cash for worker’s wages in exchange for a share of the profits and, of course, avoiding detention. The recent relaxation on Northern border restrictions has facilitated the exchange of goods with China, and turned North Korea’s northernmost province into an oasis of imported goods and freer travel, and offering a safer place for wealthy illegals to operate, far from the carefully observed capital.

This is the North Korean economic dance. On one hand, the state needs the private sector in order to provide the things the state has long since ceased to be capable of offering. On the other hand, the state wants to prevent the leaders of private enterprises from gaining too much power and challenging the status quo. This “balance” is one of the reasons why a North Korean explosion in economic growth is impossible despite a flourishing private sector. By reducing the country’s grinding poverty to a more livable level, the North Korean government may avoid collapse in the short term, but as the private sector expands and the middle class flourishes, the state may find its grip on the country increasingly shaky.