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Interview: Stephan Haggard on Marketization in North Korea and a Lot More

August 3, 2011

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“I think these are some of the most interesting findings in the book. …we found that people who are involved in the market have more negative perceptions of the regime. So more negative views. More likely to be arrested than people who don’t participate in the market. More likely to share their negative views with other people.”

The following is nearly the full interview with Stephan Haggard that NK Vision did for the August 2011 issue. Transcription courtesy of NKnet volunteer Morgan Easter.

About your book, Witness to Transformation, you have been a North Korea watcher for many years and based on your observation, what is the most significant change occurring right now in the North Korean market and also society?

The most significant change, well I think going back this is a long term trend, but the most significant thing that’s going on in the society is this process of marketization, which began after the famine. But I think most analysts now understand that process, that that’s been going on, but I would say that, one of the more interesting developments we’re picking up is the expansion of corruption and predation in the economy. And associated with that also is an increase in inequality.

North Korea used to be an economy that was unequal because of political connections – that’s, you know, you had insiders that supported the regime and outsiders. But now you also have another dimension of inequality which is the effect of the market. And so the society is becoming more unequal and access to the market and political connections in the market are an increasing source of inequality. So, I think the long term trend is marketization but then this development of an unequal society based on corruption and bribery is I think an important development that is somewhat more recent.

Do you think the North Korean regime can handle this growing inequality and corruption because these kinds of symptoms are threatening to most of the regime.

The regime is very deeply implicated. The regime is part of this process, right? So, just think for a second of the way the market is structured in a place like North Korea. So, everyone thinks of market as farmers market. That’s the common image of sort of small scale markets. But that’s not the reality anymore. We now have a hierarchy of markets in North Korea that include wholesale markets like Pyongsong. And so this is becoming a much more structured kind of set of markets, where you have wholesale level, intermediary wholesale level, down to retail level. And how did these goods get moved within the country? Who has logistics in North Korea? Military. No one else has – who has gasoline? Who has trucks? So when you say the regime is threatened by this, it is kind of tricky because the regime is part of this new kind of marketization phenomenon. It’s integral to the emerging structure of the market economy in the North.

Then do you think the North Korean regime is more trying to co-opt the market or more trying to oppress it?

Well certainly they have been trying to restrict it. And one of the points we make in the book is that they’re trying to restrict it in part because there are bribe opportunities from having controls on the market. Because if what you do is illegal, then I can ask for a bribe to do it. So, if you look at the criminal code, the changes in the criminal code in 2004, 2007 what you see is you see an increase in economic crimes. If it’s listed as a crime, it means it’s happening. So they’re writing down crimes because these crimes are taking place but the people who are engaged in these crimes, some of them are part of the regime. And so the interesting issue seems to me who is allowed to engage in this kind of activity. And that, I’ll be honest with you, I think this is something we really don’t understand very well because you’ve got people who are in the regime who are involved in this business, you’ve got people outside the regime who are involved in this business and you’ve got people outside the regime who are involved in this business and then are suppressed. And so that’s part of why we think you’re getting this inequality – it is because political connections become critical to your ability to operate in the market. So when you say – it’s not completely accurate to just say, government is cracking down on the market. You have to ask, “Who are they cracking down on?” And it’s not everybody. We think this is a kind of connected market economy where access to power is connected to the market but is also connected to closing down your rivals. So that’s the kind of process that is probably going on.

Three weeks ago I met Dr. (Marcus) Noland and we also had an interview. And Dr. Noland analyzed that the market in North Korea is the most destabilizing factor because there is a side effect of information exchange. Because of that he analyzed that the markets in North Korea could be a real threat to the regime. What is your assessment on that factor – the side effect of the market as a place of information exchange?

This is something where I can speak directly off of survey results because we did ask questions like this and I think these are some of the most interesting findings in the book. So, for example, we found that people who are involved in the market have more negative perceptions of the regime. So more negative views. More likely to be arrested than people who don’t participate in the market. More likely to share their negative views with other people. So this is the basis of that comment. There are some things happening in the market where people may be communicating in new ways. And that is what the government of course wants to shut down. But I am just making this important point that not all market activity is the same people, because there are people who are part of the regime that are also engaged in these activities and you have to understand both of those types of market economies – those parts of the market economy that are outside the state and those parts of the market economy that are kind of controlled by people in the state.

What are some other interesting findings from your survey of North Korean defectors?

I think we were surprised even with this group about what share of market income is coming from the market. So we had 50% of the people we interviewed in the Korea survey – which was done in November 2008 – 50% got all of their income from the market. All. I mean, that’s – I thought maybe 25%, 30% but then they are still getting a paycheck from their work unit. But 50% all of their income is from the market? That is amazing. And that number, the share of people involved in the market is 75% across the sample. So that was a little bit of a surprise is how much was coming from this. And that’s the income side. And it’s the same on the food side. The share of food access on the market is very high. So I think those findings were a little bit surprising.

Another set of findings, this is kind of a different topic, but we were really surprised by what is going on within these labor training camps. This is shifting over to the chapter on the penal system. All the western analysts are focused on Aquariums of Pyongyang, Yoduk, the kwaliso (관리소), the big political prison camps. But we found that not very many people in our sample were in the political prison camps. Not surprisingly because they don’t get out. But we found a large number, I think it was about 25% – I will have to check that – a large percentage that were in these labor training camps and what they see in the labor training camps is as bad as what is happening in the kwaliso. Let me see if I can remember this. 90%-plus witnessed forced starvation, over 20% saw executions, 20% torture, beatings. So you are in these labor training camps for shorter periods of time but the nature of the experience is the same as in the kwaliso. And so the role that these labor training camps are playing in kind of terrorizing the population and extracting rents, that was a surprising finding for us.

You just mentioned the food situation. There is very intense discussion about the extent of the North Korean food crisis. There are different assessments, the South Korean government, NGOs… What is your assessment of the North Korean situation right now?

The WFP (World Food Program) has to use North Korean data. And we know North Korea is a member of the WFP so they have to do that. And we think that the North Koreans probably exaggerate the problem when they want help. And so they underestimate production and they over estimate consumption. So, this blue line is what the UN system has estimated (pointing to chart). Let me just explain, zero is basically when production imports and aid equals consumption. So above this means there is more food than needed, absolute minimum need, and below it there is not enough food. This is impossible. If you look at the UN numbers it’s always below minimum need, this can’t be true, and so we made several adjustments to the data, and what we did was – basically, we didn’t use North Korean sources, we used U.S. and South Korean sources on production, which are a little different from the North Korean sources, and we also adjusted this consumption-need line because we think they over-estimate the role of cereals because people are also getting meat, fish, and vegetables and so forth. This is our estimate. This is the famine. And then you see it goes up and there is enough food during this period ’96, ’97 through – this is 2008, and here we are back in 2010-11. So our sense is that things that are aggregate are bad now, but the other thing that is going on is prices. Because when you look at quantities you are looking at the PDS (Public Distribution System) and what the PDS can deliver, but we know people are not getting food in the PDS, so then the crucial question is what’s happening in the market. Incredible volatility in prices in the market. And what we know from Sen, Amartya Sen, is that people can starve when you have enough food but they can’t afford it. So you’ve got people who are poor, there’s food in the market, but they can’t afford it. And so the food picture, you can’t just look at – the aggregates look bad to us – but you also have to ask yourself who can afford this? And that is why this inequality is so important. Because you’ve got people who can go out and buy all the food they need. But then you’ve got people who are in institutions or who don’t have market income, they’ve got nothing. They can’t afford it. In the surveys, we’ve seen other surveys, you have household spending 60%, 70%, 80% of their income on food. You can’t live like that. All your income is going for food. And the higher the share of income that’s going for food the more likely the household is hungry or you have malnutrition. So the dynamics of understanding food is not just a question of aggregate supply it is also this question of what is happening in the market. So we think both of these things right now are very adverse and that something should probably be done.

A month ago I met someone from the US embassy in Seoul and they were also discussing about whether and how to provide food aid to North Korea and the person told me that even if the U.S. government decided to provide food aid, they would provide aid in a smart way so that the aid could be delivered to the most disadvantaged groups. What could this kind of smart aid be that could reach the most needed groups?

There are basically two strategies. One is to improve the monitoring arrangements, and I don’t know if you know my blog with Marc (Marcus Noland), but there is a post on monitoring and so if you go to that post on monitoring, we really go through and detail exactly what was done before, what the new monitoring agreements are that the WFP had done, and so forth. And so part of the smart is to improve the quality of the monitoring. And by the way I think looking forward one of the things we need to look at more closely is technological solutions because now with technology we can tag every single bag (of aid). There is no reason you can’t tag bags. It’s cheap. It’s not expensive. You can monitor every single bag if you wanted to. Now the North Koreans may not let you do that, but those are the kind of things we need to be looking at, and if you go back to 2003, 2002 there were discussions between the WFP and NK over the introduction of electronic mechanisms. So this can be done.

There is the monitoring side, and then the other side is just simply the nature of the food you provide. Obviously, you don’t want to provide white rice; you want to provide inferior foods, like biscuits and other kinds of things that would only be of interest to people who are facing difficulty. The other thing is if you look at the European program, it’s got – and this is another sign that things are bad – the European program has two components to it: there is a food aid component, but there also is a feeding component, and that says to me that the Europeans saw pretty extreme distress including increasing malnutrition, because if someone is malnourished, you can’t just give them food, you have to feed them. It’s a medical process. You have to feed them carefully. They could die in the process of… The fact that the Europeans had a feeding component says to me that they saw some pretty bad things in the institutions they visited, probably schools, orphanages, maybe hospitals, there’s an uptick in malnutrition.

There’s a rumor or report that North Korea might be accumulating food, grains for next year’s big events. What is your opinion on this?

I think they would like to, I don’t have any doubts about that. If they could accumulate inventories they will. And that’s why the monitoring is important. I don’t trust the North Koreans. No one should trust the North Koreans. So, if they can do that… But I am a little bit doubtful that they are doing that now because when you start hearing about military units that are not being fed, it seems unlikely to me that you are accumulating much inventory under those circumstances. Is it possible? Yes, it is possible but I would doubt you could do much accumulation if you’re have difficulty feeding the military. Why would you do that? The military is going hungry now so you can accumulate resources to give away in 9 months or 10 months. It is not impossible, but I find it difficult to believe. Now I think what the regime would like to do is accumulate inventory. And one of the reasons it is seeking this food aid is so it can divert some of that into inventory. But that is a very different question than their ability to do that right now.

Your view on marketization is kind of complicated, it can have a complicated influence on the regime, not just a negative one. But some outside viewers see marketization in North Korea as beneficial to a growing democracy and civil society in North Korea. If so, what could the outside world do to promote marketization inside North Korea, which is very difficult because North Korea is very isolated. If there are methods what could you suggest?

It’s obviously a good question, and let me just pursue several lines on it. One of the things you have to distinguish is de jure from de facto marketization. De jure means the law – how do you encourage reform. So my rule number one is get North Koreans out and get foreigners in. You want to get North Koreans out of the country, you want to teach them about market economy, you want to educate them, you want to take officials, take students – long run that’s a very important part of the process because I don’t think that North Koreans understand completely how to move towards a market economy. Our perception is that the understanding of what’s required is actually low. And so just training people, educating people, but that’s not the question you are asking, but that’s important and should not be forgotten.

Then the question is, is there some more direct means to do this. And I think that the problem with sanctions is you cut off these kinds of ties. And I think we have to start thinking about a process of commercial-style engagement. And the problem the South Korean policy has had is not engagement per se, not that the strategy of engagement is a stupid idea. Kim Dae-Jung is a very smart guy, he knew that this was a long-term process, it wouldn’t have short-run effects. This would take years to do. He knew that. In fact, he had doubts about the ability of a democracy to do this, because this was such a long run strategy. But if you look at what the Chinese are doing, they are doing the Sunshine Policy. They’re in this for the long run. They don’t expect much from North Korea in the short run. What they are doing is, they are looking at North Korea and saying this is a 10-year, 15-year, 20-year project and its for the economy. And what they are trying to do I think is trying to shift China’s relations with North Korea from an aid-giving, political channel into a market channel. So the firms that are doing business in North Korea, and we have done surveys of Chinese firms doing business in North Korea, they don’t get any support from the government. There’s no support from the government. We interviewed over 250 firms, 90%-95% no support from the government. So they’re making money in North Korea, and I think what we have to encourage is we have to encourage a kind of commercial penetration and this is why the May 21st measures – there is a cost there – because Kaesong is in place, which is highly political, but then all of the other commercial relations which were taking place between South Korean firms and North Korea has been cut. I think long run we have to go back to rethinking that. I understand the purpose of the sanctions, I understand the reason, perfectly legitimate, but it’s an issue about how you commercially engage if you don’t allow that kind of private market transaction to take place.

The type of engagement that is desirable is one in which the South Korean government and the external sector says – and this is the other meaning of Kim Dae Jung separating economics and politics – he is a very deep thinker. When he said separating economy from politics, he meant in part – he didn’t do it – but he meant we need to get government out and let private actors transact. Because if you get in a situation like Kaesong (Industrial Complex) and Kumkang (Mt. Kumkang Tourist Resort), political projects under Roh Moo Hyun, then the North Koreans think that this is politicized transaction and then the whole thing becomes political. So Kumkang is political, Kaesung is political. The summit is political. The cooperation projects under Roh Moo Hyun are political. The government is there. And the type of engagement you want is one in which the government is out. So then South Korean firms have to decide, “Can I make money?” Then the North Koreans have to make that transaction profitable. And then it becomes the North Korean problem to figure out how to do commercial transactions. So this relationship, the government role, is very problematic. When the government gets involved, then the North Koreans are going to use that for their own purpose. They are going to manipulate the transaction to try to get some political benefit or to impose some cost like Kumkang. I am not saying this is easy to do, but I think for a new administration – because now it’s too late, I think everything is over for the LMB (Lee Myung Bak) government, it’s finished – if either DP (Democratic Party) government or GNP (Grand National Party) government – one thing to think about is a new principle of engagement would be, if South Korean firms want to do business in North Korea, fine, but don’t come to the government for support. That is business. If you want to do business, do business. And then see who goes.

I have read some conflicting reports about Chinese investment in North Korea. …based on your interviews with Chinese merchants, they say they are not receiving subsidies. If that is so, then that is completely following market principles on the Chinese side. However, for South Korean firms there are political risks in investing in North Korea and that’s why the Kim Dae Jung administration tried to provide government assistance, not actually subsidies, but some kind of assistance. For example the Mt. Kumkang Tourism (Resort), a lot of school children, they visited Kumkang Mountain, and they received something from the government… South Korean firms are fearing the political risk is too great to invest in North Korea. If they strictly follow the market principle with the government out and it’s only private enterprise doing private business, then is it difficult to motivate South Korean firms to invest in North Korea?

S: Sure, but that’s what you want. You want to put the onus back on North Korea. That’s not the government’s problem. That’s your problem. See now it’s your problem – it’s the government of South Korea’s problem and now you are in a bad position, if you do that. You want the problem to be their problem. They have to figure out how to make market relations profitable, not me. Why should the South Korean government be worried about how to make North Korean business profitable, they have to figure that out. And that’s why Kim Dae Jung saw this as a long-term learning thing because the North Koreans have to learn the way to interact with the world economy and as long as we are giving them gifts, they will continue to receive gifts. There has to be a kind of switch in mentality and I think the Chinese are doing this, because – the reason you get contradictory reports, I think, has to do largely with infrastructure. Because the one thing that the Chinese are doing is they are investing in infrastructure. They’re investing in infrastructure in Rason (Rajin-Sonbong Economic Special Zone), they are investing in the bridge, they are putting a little money, though not nearly as much as the North Koreans say, into the Islands, and so forth. But if you really look at that, that’s infrastructure. And the companies themselves will then go in and take advantage of that but the North Koreans have to make it work. And Kaesung was not really like that because it involved a whole set of implicit subsidies to the firms, it wasn’t just infrastructure, it wasn’t just, “We’ll build Kaesung and then the firms go,” it was, “We build Kaesung, we provide power, we provide finance, we provide insurance, we provide…,” and so this is a no-lose proposition for the North Koreans. So I think this is very hard policy, it’s not easy, but I think there has to be a certain amount of patience that turns the way of doing business on part of the North Koreans into looking at the commercial side. And the reason we know that this works is because of what we see in China. We know that this is largely, this is becoming largely commercial.

One other source, there’s a blog post on (our blog) about (Nathaniel) Aden, and he’s done this very interesting report on prices that the North Koreans are getting and receiving from the Chinese. It’s moving in a market direction. (If you go to the tags, if you go down the right-hand side, it says “Tags,” you open that up – food, investment – you can find the different topics.) But there is a study by Aden and he goes through prices. And the prices that the Chinese are paying for imports of raw materials from North Korea are lower than they’re paying from the rest of the world. And the prices that the North Koreans are paying the Chinese are higher than they are paying from the rest of the world.

So you mean the Chinese government is not providing (subsidies)…?

Not to the same extent. Maybe some fuel, maybe. There may be other forms of support, but we suspect it’s probably going down.

…You said it was the Kim Dae Jung administration’s expectation that North Korea would change in a long-term process…Should we expect the new leadership of North Korea to be more serious about reform…?

I think everyone understands that during a period of a kind of succession and uncertainty it is very difficult to take policy initiatives, and so I think there is too much short term emphasis here. Can the government do this now, six months to a year? Let’s be serious. Can you imagine this regime now taking a initiative on Six-Party Talks, or on market reform, or something like that? It’s not going to happen. The real question is, “How long is this transition phase?” So I would say the earliest that we would expect to see something new come out of this government would be after April 15th. The earliest, and even then you are probably talking another 4-5-6 months after that before you could even think about a real change in direction. People are looking for something that is going to happen – this is the U.S. as well as South Korea – is something going to happen next week or two months, something like that, who are we kidding? It’s not the circumstance where that is likely to happen.

The successor, Kim Jong Un, his fate is the subject of heated discussion in Seoul and Washington, too. There are growing expectations that the North Korean regime is not likely to survive this succession or after this succession. Kim Jong Un is young and inexperienced compared to Kim Jung Il when he succeeded his father….

I think the succession is very complicated. And I am not just talking about the internal power struggles which no one sees. But I think people are not paying enough attention to the rebuilding of political institutions in North Korea. Let me just rattle off a couple of things. They’ve had a new constitution. The new constitution has fundamentally changed the power of the National Defense Commission, the National Defense Commission is larger, the Central Committee (of the Party) has now got new appointees on it. You’ve got the appointment of new generals. On and on and on and on. The SPA (Supreme People’s Assembly) has appointed new, younger people to the SPA. There have been a dozen major political changes in North Korea. And no one pays any attention to this because they’re focused on this internal power struggle. But if you look at those institutional changes it’s very clear what’s happening is there is a whole structure being put in place that could either support Kim Jong Un or could provide the basis for collective leadership if he doesn’t work out. So everyone is portraying this as a personal battle, but someone in that regime is thinking very hard about reviving political institutions. This became an extremely personal system under Kim Jong Il but if you look at this changes, its moving back towards something that looks like more classical communism. You’ve got a real Central Committee. The Central Committee didn’t meet for 20 years, now you have a Central Committee. You had a party conference. You have got these changes that are taking place. And I think that those institutional changes are designed as a kind of hedge against the possibility that Kim Jong Un doesn’t work out. Because if he doesn’t work out, it’s not true that the regime collapses, because then you have institutions that can step in. And you’ve got people who are appointed to high level positions in the military and in the secretariat who can handle the transition. I think there is too much leadership watching and not enough institution watching. And someone in that regime is thinking about how to put structures in places that will support a sudden death scenario, a slow death scenario, a pre-death transition. There’s a set of changes taking place that are going to make it easier to handle a lot of different eventualities that might take place.

Kim Jong Il is preparing a lot for his son…

But he’s has got a problem. He is still alive. If you give everything to the son, then where are you? So that’s why I am saying that there are a lot of things going on that can work both to assist Kim Jong Il as long as he is alive but at the same time can be used to support a new order if he were to die.

This is another point. The South Korean government, the Lee Myung Bak government, it seems like they are changing their direction to North Korea. The government has recently announced that they will not stick to the Cheonan and Yeonpyeong incidents anymore. There are also growing rumors that the South Korean government will try to have a summit before the year ends. You said that it is too late for this government to do something to produce serious change in inter-Korean policy but if the South Korean government can do the summit with the North Korean government in this year, what would you suggest them to do?

I guess I just interpret events a little differently. I think the North Koreans basically said they weren’t interested in the summit idea. But that wasn’t the real story, because Kim Jong Il was never going to come to Seoul. No one believed that. So the whole summit story was really about the conversation, or the opportunity, that the LMB government was offering the North Koreans, and the North Koreans rejected it. They were given an opportunity to talk.

The summit proposal was not serious in the sense that the LMB government or Hyun In Taek (South Korea’s Minister of Unification) expected Kim Jong Il to actually come to Seoul. That’s never going to happen. But it was an opportunity for – essentially what the LMB government was saying was, “Ok, we’re willing to have a channel.” The North Koreans insulted him, they embarrassed him.

So the North Korean government is expecting a new government.

Yeah, that’s what I think. They are just waiting for elections now. They’ve decided that there’s not much hope and they have just decided to wait. And by the way, I should say that the time frame in which Americans and South Koreans think is very different from the time frame of the North Koreans. Because they did this before. They did this with Clinton, they did it at the end of the first Bush administration, they did it at the end of the second Bush administration, they reached a certain point where they said, “We’ll just wait, wait for the elections.” Wait for Kerry, wait for Bush, wait for Obama, wait – just push off – and you see at the end of every American administration there’s a period when they just shut off and say, “We’re done.” And they stop. And I think that is what they are doing with LMB. They have just basically turned off. And that they can use it for domestic purposes, and they can rally people against LMB. They can use the anti-LMB stuff as a kind of a card….

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