A new breed of conglomerates is helping to prop up North Korea
“A UNIQUE and sweet taste,” says a poster describing a
new brand of soju, a local firewater, made by Naegohyang. The North
Korean company started out making cigarettes (reportedly puffed on by Kim Jong
Un, the country’s dictator). It has branched out into a thicket of unrelated
items, including playing cards, sanitary towels, sports kit and electronics. It
advertises them in the stadium of the women’s football team it sponsors.
Naegohyang, which means “My Homeland”, is one of what
appears to be a growing number of large and diversified businesses in North
Korea. In Kwangbok Area Shopping Centre in Pyongyang, the capital, Naegohyang’s
“7.27” cigarettes compete with “Hanggong” (meaning “airline”) brand, produced
by Air Koryo, the national carrier. The latter, too, appears to be expanding
into several industries, from making potted pheasant and canned mackerel to
operating taxis and petrol stations.
Such conglomerates are often compared to the chaebol of
South Korea, but are best understood as “a private-public partnership” says
Chris Green of International Crisis Group, a think-tank. Under North Korean law
the government is the sole economic operator and private business is banned.
Although these companies are nominally owned by the state, they are run mainly
privately and rely, at least in part, on private funding.
After a famine caused the state rationing system to
collapse in the 1990s, Kim Jong Il, Mr Kim’s father and predecessor, turned a
blind eye to small markets called jangmadang, where ordinary North
Koreans bought and sold goods. Ministries were later given rights to trade in
certain goods, creating opportunities for entrepreneurs down the supply chain.
The government requires some state-owned companies and agricultural workers to
provide fixed quotas of goods, but allows them to use the rest of their output
as they see fit.
Not all the conglomerates grew out of ministries: some
started as private companies but became big enough to require state patronage.
North Korea’s monied elite provide them with cash and cream off most of the
profits. The overseeing ministry provides protection in return for a cut—a tax,
in effect. It is usually a fixed sum based on expected profits.
Sanctions, ramped up in recent years, have further
encouraged the development of conglomerates, says Andray Abrahamian of the
Honolulu branch of the Center for Strategic and International Studies, a
think-tank. He points to the example of Myanmar. Sanctions that blocked access
to foreign goods and investment led, he argues, to the domination of the
economy by the well-connected. In North Korea, for example, it is often
relatives of powerful ministers and bureaucrats who own trading companies. Jang
Song Thaek, Mr Kim’s uncle, who was executed in 2013 for treason, controlled
fisheries, coal mines and exports of other minerals.
Unlike his father, Kim Jong Un has not tried to roll
back the development of a private economy or large, sprawling companies.
Indeed, since 2013 he has stressed the parallel development of nuclear weapons
and the economy. He has talked about making more domestically and giving choice
to local “consumers”. In 2014 the law was changed to allow managers of
state-owned firms to trade and create joint ventures with foreigners, and to
accept financing from private investors at home.
The growth of conglomerates initially increased
competition: in addition to Air Koryo, for example, a riding club, a ski resort
and a phone company also set up taxi services. But the big firms are starting
to gobble up or squeeze out the small businesses through which poorer North
Koreans make a living. Seafood companies connected to the army are putting
fishing co-operatives out of business.
Analysts reckon the big companies are a prop to the
regime, too. They not only pay taxes, but can manufacture things that are hard
for it to obtain because of international sanctions. The wealthy are presumably
happy to have increased opportunities, even if they can be withdrawn at the
regime’s whim (one of the reasons for Jang’s execution is said to have been his
economic power). The Bank of Korea, in Seoul, reckons the GDP of the North
increased by 3.9% in 2016.
But in the long run, a more “aspirational society” and
a healthy middle class may lead to the country opening up, says Simon
Cockerell, who runs Koryo Tours, a travel agency based in Beijing, and has
visited North Korea 168 times. These companies have been able to grow thanks in
part to a growing consumer class, albeit mainly confined to Pyongyang. Sokeel
Park of Liberty In North Korea, a Seoul-based organisation, reckons the
development of new centres of power, which follow economic incentives, will
ultimately increase pressure on the regime.
