NORTH KOREA

Shop Till You Drop

It's got shopping, advertising, trading companies and new incentives to make profits. Despite North Korea's many problems, the small changes seen in Pyongyang now could be the first steps towards a market-oriented economy.

By Bertil Lintner/PYONGYANG

It's the day before a major holiday, so the market's salespeople are unusually busy. Hundreds of shoppers throng the narrow aisles between rows of tightly packed stalls stocked with snacks, foreign liquor, and a variety of fruit from locally grown apples and peaches to imported pineapples. Some customers are shopping for inexpensive clothes from China, beer from Singapore or dishwashing liquid from Thailand; the wealthier ones are looking at Chinese-made TV sets and washing machines. Those in the market for a new watch or an electric shaver will likely be choosing a Chinese-made import. Nothing remarkable in any other Asian city--but this is the Tongil Street market in a suburb of Pyongyang, the capital of North Korea, and the holiday is the birthday of late leader Kim Il Sung.

NEW CONSUMERS, NEW BUSINESSES

• Two years ago North Korea allowed wages and prices to rise, and created incentives for factories to turn a profit
• Signs of consumerism include street-side kiosks and billboards advertising a North Korean-made car that sells for 8,000 euros
• Prices are determined by the market, customers pay with cash, not coupons, and salespeople appear determined to make a profit

Nearly two years after the government announced a slate of reforms that loosened rigid economic controls in place since 1945, a visit to the secretive country reveals how North Koreans--or, at least, the 2.2 million who live in Pyongyang, and that is seen as a privilege in this country of 22 million people--are getting their first taste of consumerism.

The nation, nevertheless, is still teetering on the brink of disaster. Food shortages, chronic malnutrition and decaying infrastructure prevail. It continues to face an international stand-off over its controversial nuclear programme. And much depends on what decisions will be taken by its secretive and unpredictable government headed by Kim's son, Kim Jong Il. Even with the soundest policies in place, economic development is bound to be a long, slow process.

But small signs of change are evident. Individual enterprises are appearing along the city streets--an elderly woman selling farm goods from a bicycle or an elderly man repairing shoes. Simple cardboard kiosks have popped up throughout the city, selling drinks, cigarettes and sweets. The kiosks, like the stalls at the Tongil market, are run by small trading companies, workers' and farmers' organizations and cooperatives, which are subordinate to the state. But prices are determined by the market, not the state; customers pay with cash, not coupons; and salespeople appear determined to make a profit.

With consumerism has come the first hints of consumer culture. Mobile phones are a rare sight, but those who have got them are proud to show off their new status symbols on street corners and in hotel lobbies. Thai-owned telecommunications company Loxley Pacific is developing a mobile-phone network in a joint venture with the North Korean government.

And last December Pyongyang got its first advertisement: billboards with pictures of a new car called Huiparam, or "the Whistle." Made with Italian Fiat components imported to South Korea and then to the North, it is assembled at a plant in the port city of Nampo as part of an inter-Korean joint venture with South Korea's Pyeonghwa Motor Company. The car costs 8,000 euros ($9,520), clearly beyond the means of most North Koreans. (The euro is North Korea's official currency for foreign transactions.) Second-hand Japanese and Chinese cars still dominate Pyongyang traffic.

"There is a growing consumer market in this country that seems to provide a broad range of goods," says Richard Ragan, country director of the World Food Programme, which has had a presence in North Korea since 1995.

Since changes were introduced in July, 2002, an increasing number of cars and bicycles are filling the streets. People now seem to prefer to wear more colourful clothes imported from China rather than the old grey and brown Mao suits and peaked caps made from vinalon, North Korea's own "fibre of self-reliance," which long contributed to the chilling conformity of society as a whole. Some young people even wear baseball caps and the sight of children in Mickey Mouse T-shirts is not uncommon.

Is the unthinkable really happening? Is North Korea really moving towards a system like that of China or Vietnam, in which the ruling Communist Party retains political control while permitting the economy to operate relatively freely?

There are at least three possible answers: The changes are insubstantial; they are substantial but not irreversible; or the reforms are for real and there's no turning back.

Those who hold the first view, including some influential voices within United States President George W. Bush's administration, tend to dismiss the new initiatives, arguing that they have brought no substantial changes. North Korea is, and will remain, a rogue state, an obstacle to peace in the region that must be dealt with firmly, they say. Most advocate sanctions to pressure the government to end the development and proliferation of weapons of mass destruction.

The second view is summed up by Don Oberdorfer, journalist-in-residence at Johns Hopkins University's prestigious Nitze School of Advanced International Studies in Washington, and author of The Two Koreas: A Contemporary History: "As I see it, the domestic economic changes in North Korea are among the only moving parts in a diplomatic situation which has seemed unyielding and unchanging for many months." But, he says, there is no guarantee that the changes are irreversible, and it is too early to say whether the opening of markets will push North Korea to develop economic ties with the outside world and get support from international financial institutions. "That can only take place in a climate of reduced nuclear tension," Oberdorfer says.

This is not the first time outside observers have predicted economic change in North Korea and then seen the government backtrack on its pledges. So-called "farmers' markets," where peasants are allowed to sell some of their produce to whoever wants to buy the goods, have been permitted off and on for several decades. And in 1991, North Korea set up a free economic and trade zone in the Rajin-Sonbong area in the northeast to link the country with emerging markets in China and Russia. But apart from a casino run by a Hong Kong entrepreneur and a few small factories run by pro-Pyongyang ethnic Koreans from Japan, there is precious little economic activity to be seen there today.

Also faring poorly are plans, announced in September 2002, for a Hong Kong-style capitalist paradise in Sinuiju, on the Yalu River that forms North Korea's border with China.

The third way of looking at recent developments in North Korea is shared by most foreign residents interviewed in Pyongyang--diplomats, aid workers and others, who seem to believe that the changes are real and that it would be extremely hard to turn the clock back to a decade ago. Tongil market is not on the periphery, they note, but in a Pyongyang suburb and accessible to all. North Korean officials say a second open market is being built in the centre of the city, and more are planned.

Further, the old "farmers' markets" are now called "consumers' markets," indicating that they will be allowed to sell other daily necessities in addition to food. No foreigners are allowed to visit those markets, but from a distance some have observed that they are becoming more permanent. Roofed market stalls are being erected where people previously squatted with their wares on the ground in an open field.

North Korea took its first tentative steps away from old-style central planning in July, 2002, with what it called "economic adjustments"--calling them "reforms" would be tantamount to admitting that there was something wrong with the old system.

The key decision was allowing prices and wages to rise. Wages used to be almost the same for all and goods were acquired from state-run centres in exchange for coupons. The old coupon-based Public Distribution System (PDS) still exists, but now consumers have to pay cash. Wages increased depending on occupational categories and individual output.

The prices of rice and other commodities purchased through the PDS jumped to levels approaching those prevailing in the informal markets, says Bradley Babson, a former World Bank staffer who has been studying the North Korean economy.

Factories getting machinery and subsidies from the state were told that they would now have to buy equipment they needed. They would be expected to make a profit and make quality products, not just meet quotas set by the government.

Then, in August 2002, the exchange rate for the North Korean won was also adjusted to a more realistic level. Until then, it had been fixed at 2.16 won to $1 (cynics noted that Kim Jong Il was born on February 16).

In December 2002, North Korea decided to use the euro for all foreign-currency transactions, perhaps to show its displeasure with U.S. policies. The euro now fetches 172 won officially and up to 1,500 won in the open market. It is that rate that is being used to price imported beer and dishwashing liquid in the Tongil market.

As a result of the reforms, wages and prices have skyrocketed. It is impossible to know what impact this has had on inflation and general living standards as the government does not release any statistics, and the World Bank and the International Monetary Fund have not made any recent studies of the North Korean economy. It is also impossible to determine how far the authorities are prepared to go, or even if there is a consensus among the decision-makers about the direction the country should take. Some Pyongyang residents suggest there is a tug-of-war between conservative old-timers and more reform-minded younger officials. But, like almost everything else in North Korea, that remains unproven.

In private conversations, North Korean officials toe the party line, saying they will "remain faithful to the socialist system" and rejecting the Chinese model, which is seen as being far too liberal.

Change may be outrunning rhetoric. A directory published recently by the North Korean government lists nearly 200 new trading companies that appear to be small versions of South Korea's chaebols, conglomerates that export and import a variety of goods. Although state-owned, they are autonomous and make their own deals with foreign business partners. In the directory, one "corporation" exports marine products and embroidery and imports printing material and fishing tackle. Another exports seafood, instant noodles and sanitary ware and imports medicines, fertilizer and construction material.

Foreign residents in Pyongyang say that these trading companies represent the future, if North Korea is ever going to develop economically. The country's old, heavy industry--steel and iron works, which were built after Soviet models in the 1950s and 1960s--has more or less collapsed. Recent visitors to North Korea's "rust belt" in the northeastern provinces tell of huge, abandoned, crumbling factory buildings. What remains of the machinery is being dismantled and sold as scrap metal to China.

The new light-industry enterprises now rising will still have to face the same problems as those that caused heavy industry to collapse: An acute shortage of electricity and a rapidly crumbling infrastructure outside Pyongyang.

There was no shortage of power with which to flood Pyongyang's central square with light on the night of April 15, when tens of thousands of people marched and danced to commemorate Kim Il Sung's birthday. Trams and buses also seem to have enough electricity and fuel to run on time.

That is not the case outside the capital, where energy is scarce and infrastructure is falling apart. A study of the North Korean economy published by banking giant HSBC in February 2003 describes the situation as a "vicious circle." One example cited in the study is coal, the main source of energy in the country: Without an increase in coal supply, sufficient energy cannot be generated to run the coal mines or the factories that make mining equipment.

Only foreign assistance can help, the study concludes. That is not likely to be forthcoming as long as the nuclear stand-off with the U.S. continues. Trade is improving, however. In 2002, North Korea's five top trading partners were China, South Korea, Japan, the European Union and Thailand.

Two-way trade with Thailand increased to $216.5 million in 2002, up from $129 million the previous year, according to South Korean figures, and is still rising: The Thai Customs Department reports trade at $214 million in the first 10 months of 2003. For some North Koreans, that means more Thai rice, fish products, fuel oil, textiles and machinery. Then there's the new Thai-invested mobile-phone network. It's not exactly Bangkok, but before long, visitors will be nostalgic for the old Pyongyang.

This article first appeared in the Far Eastern Economic Review, May 13, 2003

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