January 19, 2014: North Korean leaders are very worried about losing control of the economy and that those who are creating the new market economy might eventually overthrow the traditional (since 1945) ruling class. While described as a communist police state that is only half true. North Korea is definitely a police state, but it stopped being communist in the traditional sense during the early 1970s. At that point North Korea declared that it had developed its own unique form of communism called juche. This development was partly to extricate itself from the ideological battles going on between its two conventionally communist neighbors (China and the Soviet Union). Juche was described as a nationalistic form of communism (which in its pure form is very international). Juche stresses making North Korea economically self-sufficient and strong enough to defend itself from anyone. Juche still depends on a command economy, where the state owns all commercial enterprises, but uses all this for the benefit of Korea (north and, eventually, the south), not anyone else. Communist purists in China and Russia (the Soviet Union) protested but were overruled by their political bosses who saw this as a clever way for North Korea to disengage itself from the growing political tensions between China and the Soviet Union.

Juche came along at the same time that China and the Soviets were actually fighting skirmishes along their common border and some in the Soviet leadership were calling for a nuclear war against the Chinese to settle the matter once and for all. North Korea depended on its two huge neighbors for economic aid (mainly from the Soviet Union) and trade (mainly with China). Both of these nations tolerated juche and North Korea’s unwillingness to take sides. After a decade of political and military tension China and the Soviet Union made peace. Shortly thereafter (1991) the Soviet Union collapsed and the aid from Russia stopped. China made up some of it, but not enough to avoid an economic catastrophe that cost North Korea ten percent of its population (most to starvation and the rest to those who managed to get out of the country and into China and, to a lesser extent, Russia).

Juche in a communist style command economy did not work very well. But then a curious thing happened. Despite North Korean hostility towards a market economy, the country developed one that has become more important to more people than the usual government handouts. While the government still owns all the major industries and commercial firms these are declining in their effectiveness and productivity. The market economy developed when the government run farms could not produce enough food to feed the population after 1991. Aid from Russia used to make up the shortfall, but after 1991 that was no longer available and the Chinese would not step in. There had always been a small black market underground economy and it became larger as desperate North Koreans sought food and other goods they could no longer get from the state. The government did not crack down as hard as it could have because it was obvious that the growing black market was keeping people alive and, more importantly, not desperate enough to turn on the state. Moreover, most North Koreans saw this growing market economy as very juche (self reliant and obviously in the best interest of many desperate North Koreans). After the 1990s North Korea become more and more dependent on what had become a semi-legal market economy coexisting with the less efficient state controlled one. Surveys of refugees in China and South Korea indicate that now over 80 percent of North Koreans buy or sell (or do both) in the free markets and most North Koreans now conduct half their economic activity via the markets.

Normally this sort of thing would terrify communist bureaucrats. It’s been noted that over the last few years the market economy has grown larger (as a proportion of economic activity) than it ever did in the East European communist nations. There, local governments continued to assure their Soviet overlords that communism still ruled in economic matters while tolerating market economy activity because it was more productive and helped keep the population quiet and under control.

These East European communist government all collapsed in 1989 when the populations simply refused to let communist rule continue. This terrified the North Korean leadership, which has since then concentrated on keeping their security forces loyal and willing to do whatever it takes to keep the government in power. The government believes juche has helped because juche is intensely nationalistic and so are all Koreans. But the growth of the market economy has the rulers scared. China advises North Korea not to worry because it was a market economy that saved the communist rulers of China. The Chinese advice is to encourage the market economy while using the police state powers to maintain control of it. That worked in China. Many North Korea leaders point out that North Korea is not China, not least because next door is capitalist South Korea, with twice as many Koreans as North Korea and an economy that is 40 times larger. That is true, but in the meantime the North Korean market economy has grown despite occasional government efforts to rein it in.

The growth of the market economy (mainly in the form of legal markets) in the last decade has made more goods available to those who could afford them. Thousands of new "middle class" entrepreneurs have been created in North Korea. This was the first time, since 1945, you had non-criminal North Koreans with wealth who did not work for the government. For example, foreign smart phone manufacturers indicate that over two million relatively low end (under $200 each) smart phones have been sold inside North Korea in the last year. Someone up there has money and is willing to spend it. For South Korea the bright side of this is that if South Korea eventually is able to merge with North Korea, as the two Germanys did in 1990, South Korea will have a lot more people in North Korea familiar and comfortable with a market economy than West Germany did with East Germany in the 1990s.

With all the market economy wealth in North Korea you also have more corruption. There are always government officials willing to get things done (including things they were supposed to get done) for an additional fee. Now there were more people with more money willing to pay larger bribes to officials willing to take greater risks. While many North Korea officials saw these new entrepreneurs as a threat to the power of the police state, the real threat came from the growing corruption and unreliability of the security services. Leader Kim Jong Un sees this corruption as a threat to his rule and he is right. But getting rid of the corruption risks harming the markets and the wealth they bring to an economy that desperately needs it. Surveys also indicate that the state controlled rationing system in the north is collapsing and that about half the people up there no longer get any food or other handouts from the government. These people are on their own and survive only because of the growing market economy.

As North Korea allows more market economy opportunities, local officials are abusing the concept by charging people for things that the government had long paid for. This is particularly the case for newly built housing. It’s supposed to be free, but people getting the new apartments are told that they must pay some of the maintenance costs and that there is no guarantee that these costs won’t keep going. An added annoyance is that many of the officials who collect these fees pocket a portion (or all) of the money. Local party officials are also demanding that families make special payments to finance public works or industrial projects that are loudly described as “aiding the people.” Most of these projects have failed in the past and being asked to pay large sums of cash to finance new ones is particularly demoralizing for families that have a hard time getting enough to eat.

In the north the more money you have the more you are expected to contribute to bail out the bankrupt government. The new entrepreneurial class is being hit hard by this and free market entrepreneurs are learning how to hide their success. What the government doesn’t know about they cannot try and steal. Entrepreneurs are also being asked to round up foreign investors, or else. Party officials admit to their bosses that all this pressure is causing unrest and falling morale. This love-hate relationship with the new entrepreneurs is causing rifts within the government, between the pro-market and anti-market factions. All this is not expected to end well.