Published by Korea Institute for National Unification (KINU), publisher and president of Korea Institute for National Unification. The analyses, commentary, and other opinions expressed in this article are those of the authors and do not necessarily represent the views of the Korea Institute for National Unification.
Introduction
Here the article focuses on the fact that the North Korean informal economy is similar to that of the other low-income developing countries. The fundamental drivers of the growth of the North Korean informal economy have been service-led growth and entrepreneurship. A persistent problem in the study of the North Korean economy is the shortage of substantive evidence.
Informal Economy: Concept and Trends
The Concept of Informal Economy
Secondly, the informal economy refers to the economy outside the formal legal and administrative framework. According to the definition used by international organizations such as the ILO or the OECD, enterprises that are part of the "informal sector". are usually those that are "unincorporated enterprises owned by families."2). This study adopts the broader definition of the informal economy, which also includes private agriculture.
Trends of the Informal Economy Worldwide
The Rise of the Informal Economy in North Korea
Development of Markets
Through these measures, North Korea's main markets have turned from black markets into white or gray markets. As private business operations took place in the market, employment relationships arose: ship owners and workers in the fishing industry; private mine operators and workers in the mining industry; shop and restaurant owners and clerks in the service industry; and illegal landowners and tenant farmers in the agricultural industry. Employment relationships are mostly informal in nature, and it is often difficult to determine whether they are legal or not.
Labor markets have developed spontaneously since many factories have closed, leaving a de facto large number of people unemployed. As markets grow and the private sector becomes more active, the need for credit and financing has naturally increased. The state required them to achieve the planned objectives without providing the right equipment or sufficient raw materials.
The Rise of the Private Sector
Driving Forces of the Informal Economy in North Korea
Service-Led Growth
In addition, many people switched from agriculture to the service sector because productivity (value added per worker) is lower in the agriculture sector than in the service sector; this led to improved average productivity across the economy - in other words, economic growth. The growth of the service sector indirectly promotes the growth of the entire economy, as it helps the development of the agricultural and industrial sectors. After the early 1990s, service-led growth emerged during the transition processes of the former Soviet Union and Eastern European countries as well.15).
In the classical socialist economy, the share of the service sector was relatively small due to the distorted industrial policy. Likewise, in North Korea, many people who actually became unemployed due to the collapse of the formal economy began to engage in private economic activities, starting in the service sector with wholesale and retail sales, food service, personnel and transport, which led the way to other sectors such as agriculture, fishing, mining, manufacturing and construction. Many previous studies on North Korea's informal economy show that it is most active in the service sector, especially in the distribution industry (wholesale and retail).
Although conventional wisdom suggests that the North Korean informal economy is unproductive as it is concentrated in distribution, this is a misunderstanding of the service sector. After the North Korean economic crisis in the 1990s, the formal sector partially collapsed and many urban workers became idle and began to engage in informal activities. As a result, the proportion of North Korean goods in terms of the whole market, including industrial products and food, is greater than that of Chinese.18).
In short, there are enough reasons to believe that the informal economy, which first developed in the service sector, triggered the emergence of the shadow economy in other industries.
Emerging Entrepreneurship
Some Sector Studies
Informal Food Sector
The informal food sector in low-income developing countries refers to food production, processing and distribution activities by informal economic entities such as unregistered enterprises and self-employed people. According to a study by the Food and Agriculture Organization, 30 percent of large cities in developing countries depend on the informal sector for 30-50 percent of their food supply and distribution, and more than 20 percent of cities in developing countries countries depend on the informal sector for 50-80 percent of their food supply and distribution.27). The informal food sector is where the poor people of developing countries, who do not have the ability to find decent work in the formal sector, can most easily obtain work and income.
It seems that after the famine, the economic activity that can be called the informal food sector has become more active in North Korean society. It is known that agricultural, livestock and marine products, as well as processed foods, are widely traded in the urban markets of the North. For example, according to Kwak In-ok's study of the urban markets of the three cities of Pyongyang, Haeju and Hoeryeong, there are more traders dealing in various foods than those dealing in industrial products.31).
Although the main components of the informal food sector are assumed to be marginal farming and small wholesale and retail trade, businesses, larger in scale and higher productivity, are said to have become more common over time. It is said that some of the staple grains produced within the formal sector, such as on collective farms, are purified to the market, where outside food aid is also commonly distributed.32). The most common form of the food service is the sale of simple dishes such as noodles at the Jangmadang.33) Restaurant businesses of a much larger scale and higher quality also began to appear, such as those that rent parts of state enterprises or government agency buildings. and operates de facto private restaurants there.
Many positive effects are likely to have occurred, such as reducing the proportion of various agricultural and marine goods that spoil or are lost during storage or distribution, stabilizing food prices and reducing regional disparities, and the improvement of the quality of foodstuffs. .
Foreign Trade and Informal Economy
One key factor was that North Korea was able to greatly increase its mineral exports to China as China's demand for foreign natural resources grew due to China's high growth; .. another important factor was that China was able to sufficiently supply North Korea with industrial products as China's industrial capacity increased significantly.34). It seems likely that foreign trade has contributed to the growth of the formal and informal economy in North Korea as well. First, since North Korea's foreign trade essentially falls under the jurisdiction of the formal sector, its growth is likely to lead to a strengthening of the formal economy.
For the institutional features of North Korea's foreign trade, see Yang Moon-Soo, The Marketization in North Korean Economy (in Korean), pp. 129-175; Joung Eun Lee, "A Study on North Korean Trading Companies," in 2012 Collection of New Studies Unification and North Korea ed. However, North Korea's foreign trade also promotes the growth of the informal economy, as it either has informal characteristics or ties to the informal economy.
The process by which trading companies collect goods for export is commonly called "resource mobilization" in North Korea; trading companies that do not have related enterprises that produce export goods entrust resource mobilization to private businessmen.36). Also, trading companies sell a part of the goods they import in the domestic market. A significant portion of foreign exchange earned from foreign trade is issued and distributed by the informal sector, rather than being concentrated in state coffers.
In addition, many people who legally travel back and forth between North Korea and China – such as Chinese merchants, Chinese residents in North Korea, North Korean business parties, and those visiting family and relatives – bring in and out many more goods than the permitted limit , parts of which are not included in the official statistics.40).
Development in Transportation and Communications and the
Conclusion
The informal economy refers to economic activity outside of North Korea's formal socialist system and ideology. In other words, the essential feature of the North Korean informal economy is private businesses. It can be said that North Korea's informal economy faces major limitations as it is not supported by laws and institutions that protect private property, the freedom of economic activity and the fulfillment of contracts.
In many low-income developing countries, transition countries and North Korea, service sector growth preceded and led to the growth of the entire economy. This has meant the growth of the informal economy, as informal activities are concentrated in the service sector. Furthermore, the growth of the informal services sector had a positive impact on other sectors of the economy, such as agriculture, fishing, mining, manufacturing and construction.
Entrepreneurship, widely recognized as an important driver of economic growth, became quite widespread in the informal economies of low-income developing countries, countries in transition and North Korea. As the socialist collective farming and food distribution systems began to malfunction, most farmers and a significant proportion of urban residents devoted themselves to private agriculture, cultivating informal private plots (such as kitchen gardens, other small plots, and sloping land) and raising their own livestock. Informal trade is an important component of the informal economy and appears to mutually boost the domestic informal economy.
Fifth, access to modern means of transportation and communications has increased in North Korea's informal economy.
