One consequence of the partial reform process we have just described has been a large underemployed industrial proletariat facing sharply falling real wages, no social safety net, and inadequate access to food. Before the standoff over humanitarian assistance in 2005/6, the WFP had begun to conduct household surveys and canvass government officials, both central and local, about these phenomena. They discovered that many factories were running well under capacity and that as a consequence as much as 30 percent of the workforce outside of agriculture was unemployed.
Among those who remained employed in the industrial sector, there was considerable underemployment, and some workers who continued to receive salaries saw their wages cut by 50–80 percent. Women appeared to be among the most seriously affected, with an unemployment rate double that of men.
Many of the male redundant workers are redeployed to sanctioned market activities run by their work units or to public works projects. Women were given preferential treatment in obtaining permission to sell in official markets and roadside kiosks. Outside visitors and refugee interviews report a margin- ally relaxed environment with a bustling small-scale entrepreneurship: wood delivery services, bicycle repair, tailoring, shoe repair, hair cutting, and small vendors, with women represented prominently in these activities (see, e.g., Caritas—Hong Kong 2005b, J. H. Kwon 2006). The prominence of women in these activities could reflect a higher rate of dismissal from formal sector employment or a household division of labor in which men retain formal- sector positions to access remaining benefits, including social services and rations. Writing in 2004, Gey estimated that 6–8 percent of the work force was engaged in such activities, and subsequent refugee interviews suggest it could be much higher.
Prices in North Korea increasingly reflect underlying market scarcities, sub- ject to the proviso that markets remain fragmented and considerable price dis- persion across geographic regions persists. Visitors in the immediate postreform period (2003–6) reported an emerging pattern in which the prices for foreign exchange and consumer goods were lower in towns on the Chinese border than in Pyongyang and other inland regions and in which living standards near the border may now exceed those in the capital. In contrast, compared to Pyong-
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yang, prices appeared to be much higher in the hard-hit northeastern industrial port town of Ch’o˘ngjin (table 7.5). The exception was foreign exchange: the euro was considerably weaker in Ch’o˘ngjin, perhaps reflecting that city’s port status and easier access to foreign exchange. This, however, only reinforces the price disparity point: the prices of local goods are even higher in Ch’oo˘ngjin in comparison to Pyongyang in foreign exchange terms than they are in local currency terms.
Grain prices have always displayed a seasonal pattern, tending to fall in the autumn after the harvest and peak in the spring. The open marketization of grain, however, made these trends even more apparent. Prices also appeared to respond to supply-side shocks. To cite several examples, rice prices fell in June 2003 following the arrival of 400,000 MT of rice donated by South Korea.
Indeed, according to the WFP, the mere announcement of a large South Korean aid donation sent prices tumbling in 2005 (Fairclough 2005). In July 2003, the prices of both rice and corn spiked following the closure of the border with China during the SARS scare. Yet another aspect of this phenomenon can be seen from differences in provincial prices that emerged during periods in which the government was collecting local production for the military and banning export to other provinces.
The effect of the marketization of the economy under weak institutions has been to increase the degree of social differentiation within North Korea and contribute to the creation of a new class of mostly urban food-insecure house- holds. The inflation that began in August 2002 was particularly pernicious in this regard, because the market price of food in real terms had been trending downward from the extraordinarily high peaks of the famine years.
TABLE 7.5. Regional price differences (North Korean won)
Item Pyongyang Northern Hamkyeong
August 2004 Chongjin August 26, 2004
Rice (1 kg) 420 (imported)* 900
Corn (1 kg) 200 450–80
Cooking oil (bean oil 1 kg) 1,500 2,000
Egg (hen), 1 45 100
Pork (1 kg) 1,000 2,700
Sugar (1 kg) 470 900
Exchange rate 1 euro: 2,000 1,300 (unofficial)
*The actual price of North Korean rice in Tongilgeori General Market was 680 won per kg.
Source: Nam n.d.
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In principle, the maintenance of the PDS as a mechanism for distributing food could be interpreted as an attempt to maintain the social contract under which everyone is guaranteed a minimum ration. Residents are still issued monthly ration cards; if they do not have sufficient funds to purchase the monthly allot- ment, it is automatically carried over to the next month. Before the attempt to revive the PDS, declared rations delivered only about half the minimum daily caloric needs and at much higher costs than in the past. According to WFP household surveys in 2004/5, PDS-dependent (in effect, urban) households spent roughly one-third of their income on PDS-supplied food alone, and a typical family of four with one income would spend 40 percent of its budget on PDS-supplied food. Some households surveyed by the WFP reported spending 50–60 percent of their household incomes on PDS food. By 2005, however, the PDS was only supplying households with approximately one-half of an abso- lute minimum caloric need. If these households are spending one-third of their incomes on PDS food, and we estimate they are spending another third on nonfood essentials, this leaves only one-third of their budgets to cover half their caloric needs through other sources. Market prices are conventionally thought to be three or more times expensive than the PDS. As a result, WFP surveys are finding that households are spending up to 80 percent of total expenditures on food, inclusive of non-PDS sources (WFP 2003b).
How do households cope? What is striking is the continuity in coping behaviors between the high famine period and the current setting, despite a massive increase in food aid. According to the WFP, 40 percent of interviewed households reported receiving food from relatives in rural areas. Between 60 and 80 percent of PDS-dependent (i.e., urban) households and 65 percent of cooperative farm households reported gathering wild foods. Many households and workplaces maintain kitchen gardens, and, as in other cases of economic stress around the world, there are extensive anecdotal reports of households selling or bartering personal belongings for food. According to the WFP, house- holds with a single earner and dependents and PDS-dependent households without access to kitchen gardens are the most vulnerable.
The reality may be even worse, however. One interpretation of the price increases is that they were simply bringing PDS food prices in line with the market. Yet we also have anecdotal evidence that we return to in the conclu- sion that even the pretense of universalism has been breached and the authori- ties have significantly reduced the number of households being issued PDS ration cards at all. These reports are fully consistent with refugee surveys from early 2005 (Chang 2005) that document the continuing decline in the share of the population that depends on the PDS as its major source of food. Less
194 DEALING WITH A NEW NORTH KOREA
than 4 percent of the refugees in China interviewed by Chang “agreed” or
“strongly agreed” with the statement that there had been an improvement in food availability since the July 2002 changes were enacted, and 85 percent of these refugees, who admittedly may not be representative of the country as a whole, “agreed” or “strongly agreed” with the statement that North Koreans are voicing their opinions about the chronic food shortage.
What is striking about this emerging picture of contemporary North Korea is just how random or idiosyncratic individual life chances have become. As shown in table 7.4, the initial increase in wages in August 2002 was highly uneven, and for most employees subsequent increases (or decreases) have pre- sumably depended on factors such as the cleverness, deviousness, and gen- eral competency of individual enterprise managers under a relatively anarchic process of marketization, the ability of individual enterprise managers to con- tinue to wheedle implicit or explicit subsidies out of the state, and proximity to China; as well as underlying economic efficiency. The actual life chances of workers therefore probably depend substantially on idiosyncratic features of their work unit, such as the entrepreneurial capabilities of managers, the nature of the assets in place, and the product markets in which they operate.
Clearly, firms that are capable of generating foreign exchange—through what- ever means—fare better.
Under conditions of high inflation, access to foreign currency may act as insurance, preserving purchasing power in real terms. Indeed, a process of dol- larization appears to be well under way in North Korea, and in certain respects two parallel economies are emerging. In the first, high-quality local products and services (such as North Korean rice or luxury restaurants) and imported goods are bought and sold in foreign exchange. The second is a won-based economy of inferior local products and services. In addition to traditionally privileged senior party officials, those with access to foreign exchange and hence access to the dollarized luxury economy include households with familial or ethnic ties to China and Japan (Lankov 2006a). Subject to systematic discrimination in the past, members of these groups have exploited their transborder connections and surfaced as important beneficiaries of the emerging new order.
In sum, the July 2002 policy changes have created winners and losers.
Among the winners have been some enterprise managers, military officers, party officials, and bureaucrats who have used their power and privilege for asset stripping and other forms of entrepreneurial behavior. The more prosper- ous of the “August 3” workers have in effect successfully exited the state system as well. In the commercial sector, Choi and Koo (2006) describe a hierarchy of traders that exists virtually worldwide: an upper class of dealers in foreign
Coping, Marketization, and Reform 195
exchange and large-scale distributors, a middle class of wholesalers, and a lower class of market vendors and peddlers. Among the losers have been the industrial proletariat and those who played by the rules and did not engage in market- oriented activities.