1 . Economic Management
C. Public Finance and Foreign Exchange: Raising the Exchange Rate to a Realistic Level and Preparing for Financial Reforms and O pening of the Economy
As mentioned above, in the aftermath of the July 2002 reforms, North Korea adopted a single fixed foreign exchange rate by raising the currency rate to a realistic level. In August 2002, North Korea abolished the state-set exchange rate (US$1 = 1 won) and unified the exchange rate for trade (presently the official exchange rate), and raised the exchange rate by a multiple of 70, from 2.2 won per US$1 to 153 won.
Meanwhile, when disparities between the official exchange rate and the black market exchange rate resurfaced again in 2003, North Korea established the “Foreign Currency Exchange Center” in the general markets and has since been operating a double-tiered exchange rates, exchanging dollars at the black market rate to North Koreans. In the second half of 2003, it liberalized the operation of pawnbroker’s shops, to accommodate the residents’ short-term loans for living necessities while also helping increase state revenues.
Along with these aforementioned measures, North Korea appears to be making preparations for financial reforms through manpower improvements by acquiring advanced financial techniques from overseas, learning from foreign countries’ experiences in financial reforms, and revising the educational curriculum on economic theories. Since the launching of the economic reforms, North Korea has sent
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a large number of trainees overseas to such destinations as China, Vietnam and EU member countries to acquire knowledge of market economic theories, finance, insurance and commerce. In this context, the fact that the economic textbooks of Kim Il-sung University included theories on the market economy, such as “price determination through supply and demand” and “finances and banking in the monetized economy” is drawing keen interest.
3. Reforms by Sector
The reforms in the industrial sector implemented by North Korea can be divided into reforms in the agriculture, enterprise and commerce sectors.
A . A griculture
In March 1996, North Korea introduced a new sub-unit work system on a trial basis in some regions.
North Korea changed the composition of the work units from the previous combination of the elderly, the middle-aged, and the young (10 to 15 persons) to one comprised of family units (7 to 8 persons).
Under the new sub-unit work management system, production plans are adjusted to a lower level in line with reality and work units were entrusted with authority to freely dispose of products that exceeded the production quota. Under the sub-unit work management system, work sub-units, which is the smallest farming unit in the cooperative farm, are allocated plots of agricultural land and farming tools, and receive shares of distribution sometime during November or December according to the level of fulfilling the quotas set by the plan.
In January 1999, North Korea expanded the range of its crop cultivation, which had previously been focused on rice and corn, and granted farms the right to choose crops while authorizing the cultivation of potatoes and medicinal herbs according to the circumstances in each cooperative farm. In July 2002, in an effort to increase agricultural output, it reduced the size of the work subunits once again to 4 to 5 family member units, and reduced the volume of the government’s purchase of grains. In January 2004, North Korea implemented the Family Farming System on a trial basis as part of its program to expand agricultural reforms.
North Korea, while maintaining the general framework of collective farming, reduced the responsibility of the State regarding grain production and distribution, reinforced the autonomous authority of cooperative farms and expanded incentives for farming. The reforms undertaken in the agricultural sector can be further subdivided into the production and distribution areas.
(1) Production: focus on improving efficiency in collective farming to increase agricultural output With regard to agricultural production method, North Korea expanded the discretionary powers of individual farms by revising the “Agricultural Act” (June, 2002). It reduced the size of the work units and granted cooperative farms the authority to establish detailed production plans. Also, to increase farm production, it abolished preferential treatment for the unit-based system and shifted towards management and operations based on sub-units (Article 72, Agricultural Act).
More specifically, North Korea reduced the number of persons in work sub-units, which is the basic production unit of the cooperative farms (from the existing 10 to 25 persons to 7~8 persons in the sub-unit
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work management system, and ultimately down to 4~5 persons in the pilot family-based farming unit), to mitigate collectivism while inducing a sense of responsibility among farming units. The North also expanded the rights of farmers to choose the crops they could cultivate. Kathi Zellwegger of the Hong Kong branch of the Catholic relief agency Caritas International, said in September 2003, “Unlike in the past, some farms in North Korea choose the crops they grow rather than planting only corn as instructed by the authorities.”
The second change in the production method in some cooperative farms is the pilot implementation of the family-based farming program. In January 2004, North Korea decided to mitigate the collectivism of the farming system and implement a pilot family-based farming unit. Cooperative farms in Suan, North Hwanghae Province and Hoiryeong, North Hamgyeong Province were designated for the reorganization of the work sub-unit system into the family farming system (2 to 5 households). The family was allocated plots of land. In this regard, Vice Trade Minister Kim Yong-sool noted in December of 2004 that
“cooperative farms were entrusted with the authority to reduce the size of the work sub-units or organize family-based farming units.”
Third, North Korea took measures to restructure the agricultural land system, including the expansion of private farming land as well as the introduction of land usage fees. The permissible size of plots of private land was expanded (July 2002) from 30 to 50 pyong (100m2 to 165m2) to 400 pyong (1320m2), and the farming land belonging to institutions and enterprises were distributed to households.
Furthermore, to make use of idle manpower in plants which have been shut down, workers were allocated land for tilling. Agricultural land in North Korea can be categorized into cooperative farms, farming land of institutions and enterprises and private land. A land usage fee or rent is levied at differential levels (minimum 53 jeon/pyong ~ maximum 60 won/pyong). The rent per pyong for category 1 (cooperative farms) is 54 jeon to 36 won, 88 jeon to 60 won for category 2 (institutions and enterprises), and 12 won for category 3 (private land).
(2) Distribution: no equal distribution
The highlight of the reforms in terms of distribution is the abolition of both free food rationing system and the dual pricing system for grains, which was designed to reduce financial burden of the State.
In the past, the North Korean government purchased grains at high prices (82 jeon per kilogram of rice) and supplied them at a low cost (8 jeon). However, since July 2002, the transportation expenses were added to the government’s purchase price (40 won) and rice is supplied at a significantly increased price (44 won). Thus, in the aftermath of the July reforms the purchase price of rice soared 50-fold (from 82 jeon to 40 won) and the price charged to the people skyrocketed 550-fold (from 8 jeon to 44 won).
In addition, North Korea is making efforts to motivate farmers to increase production by reducing the government’s purchase of crops in order to increase the income for farming households. In the past, 70 to 80% of the harvest was remitted to the State, but today, only 50 to 60% is collected by the State as the usage fee for the land, water and electricity, and the remainder is freely disposed by the cooperative farms. Choi Young-ho, Vice Chairman of Cheongsan Cooperative Farm said in January 2004, “As to the settlement and distribution in 2003, land usage fee and production costs accounted for approximately 50% of the total revenue.”
Another noteworthy fact is that during the year-end distribution at cooperative farms, the basis for performance evaluation was shifted from the work units (80 to 120 persons) to sub-units in order
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to stimulate the spirit of competition among farmers. Fatherland, which is the monthly periodical of the General Association of Korean Residents in Japan, better known as Jochongryeon, reported in February 2004, “Prior to the economic reform measures, shares were distributed equally to work units and shares of the sub-units were equal. But now, shares are distributed for each sub-unit and disparities exist among the sub-units as well. In the case of Cheongsan Cooperative Farm in 2003, some received as much as 120,000 won, while the average worker received 60,000 won.”
In other areas, North Korea reinforced the responsibility of institutions and enterprises to procure food for their workers so that the State could reduce its financial burden. The State still provides food on a priority basis to the military, senior members of the Workers' Party and the government, citizens of Pyeongyang and other special classes, while the general public is supplied below half (300g/day) of the standard amount (700g/day). The people are to resolve the shortage of food on their own through the marketplace. Also, institutions and companies with foreign currency income or those that can procure food from overseas are to supply food for their own employees.