When compared to the other modernized societies in East Asia, North Korea, or the Democratic People's Republic of Korea (DPRK), seems frozen in time. From their Stalinist cult of personality, Cold War-era technology, and hermit society, at first appearances, there are little signs of change in the country. However, since the collapse of the DPRK’s centrally planned economy in the 1990s during a large-scale famine, the informal economy has grown exponentially. This process of economic marketization has been transforming the country by creating avenues for non-state actors to garner influence separate from the totalitarian Kim regime while leading to the institutionalization of corruption throughout the state. These factors threaten the stability of the current regime and emphasize the contradicting interests of political stability and economic development in the DPRK.
History of Marketization in the DPRK
Throughout the Cold War, the DPRK relied heavily on foreign aid from the Soviet Union and China for food shipments, subsidized oil, and military equipment as the DPRK was seen as an important buffer against the US presence in Northeast Asia. However, this aid dried up after the fall of the Soviet Union in 1991; the newly founded Russian Federation and liberalizing China were no longer willing to continue propping up DPRK’s economy. As a result, there was a sudden vacuum of resources in the Public Distribution System (PDS), which was charged with providing food rations and allowances to all North Koreans. Paired with poor agricultural management this led to a famine between 1995-2000 which killed as many as a million people and led to a 37% decline in GDP between 1991 and 1999, according to Andrei Lankov a leading scholar on North Korea.
To meet the growing demand for basic necessities after the collapse of the PDS, makeshift markets called Jangmadangs were selling produce grown illegally on small plots of land owned independently from state farms. Hand-crafted goods and smuggled products also began appearing across the country. Although private property and entrepreneurship are illegal under the DPRK’s command control economy, the regime mostly turned a blind eye to the development of these markets as it helped alleviate the food and fuel shortage. Furthermore, the fiscal collapse caused by the famine paralyzed most government institutions, preempting any large-scale response against illegal Jangmadang activities.
Despite the decentralizing threat these markets posed to Kim Jong Il, the DPRK leader at the time, the utter collapse of the PDS and the DPRK’s subsequent reliance on the informal economy forced him to legalize certain general markets with the 2002 ‘July Reforms.’ Continuing his father’s legacy, Kim Jong Un, the current leader, embraced the idea of decentralizing authority to smaller work units in agriculture and industries. The Socialist Enterprise Management Methods (SERMs) were introduced to provide greater autonomy to enterprises where creative management strategies—code for free market practices—were encouraged. As a result, the number of official general markets across North Korea rose to 436 as of 2017, with an estimated 72% of households receiving most of their income from the informal economy.
The Rise of the Donju
The informal economy’s rapid expansion gave rise to an entrepreneurial middle class called the Donju, which translates to ‘masters of money.’ The Donju are a group of millennial financiers and entrepreneurs known as the Jangmadang generation. Growing up in the 1990s during the famine when the PDS was ineffective, these individuals were forced to provide for themselves through illicit activities, making them more defiant of state authority than previous generations. They started as loan sharks and smugglers, but over time they diversified their roles to encompass the entire economy. By taking advantage of the cross-border trade boom with China, the relaxation of internal migration controls during the famine, and the market reforms initiated under SERMs, the Donju quickly became the drivers of market activities across the country and a major threat to the regime.
The Donju has developed a symbiotic relationship with state-owned enterprises (SOEs). Based on surveys of North Korean defectors conducted by Professor Byung Yeon Kim of Seoul University, it is estimated that 27% to 67% of North Korean SOEs purchase inputs from the Donju in addition to receiving investments and loans from them. Furthermore, many SOEs are no longer directly managed by state agencies but are increasingly owned and operated by the Donju. In North Korea, private property is technically illegal, and all businesses require a trade license known as a Wakku. Donju financiers would rent a Wakku from the state to open up a business under the guise of an official SOE. In what is known as ‘wearing the red hat’, these de facto private enterprises include retail, construction, real estate, restaurants, banks, and manufacturing, to name a few. Professor Kim estimates that 80% of SOEs are owned by non-state actors via this unofficial form of privatization.
The Donju are also an important source of foreign currency for the cash-strapped DPRK government. A multitude of international and unilateral sanctions on the DPRK for its nuclear weapons development and human rights abuses have denied them access to the global economy. As a result, the regime relies on non-state actors to skirt these restrictions. The regime co-opts North Korean companies with overseas business connections to facilitate the importing of sanctioned goods such as oil. Moreover, the Donju have set up a network of remittance houses in China to smuggle goods, money, and people across the border more seamlessly. Through these forms of trade, the Donju provides a steady flow of foreign currency into the domestic economy, with 60% of the state's budget in 2020 raised through bonds sold to the Donju.
The success of the Donju is delegitimizing the Songbun caste system, which divides North Koreans into three tiers ranked by their loyalty to the Kim family. At the top sits a small group of elites who receive favorable treatment from the regime in the form of high-ranking political positions, access to state resources, and greater personal freedoms. By making social progress based on loyalty to the regime, the Songbun system prevents the development of large-scale political opposition groups. However, the Donju have become an influential merchant class that has gained power through wealth and entrepreneurship instead of loyalty. These individuals are forming patronage networks through their assortment of business ventures and have accumulated large amounts of personal wealth. According to University of London Professor Tat Yan Kong, members of the Donju have an average annual salary of US$1 million per individual—a massive amount by North Korean standards. The Donju’s informal networks represent a foundation for future opposition political groupings and are diluting the state’s dominance of society by providing avenues to succeed separate from the regime.
As the Donju gain more influence in a society that is increasingly reliant on the informal economy, they will become more resistant to the state's authority, which has been preventing the full extent of their success. Due to the Regime’s provocative international actions and its commitment to nuclear arms development, stable foreign investments are hard to come by as long-term risks are too high for investors. For example, South Korea withdrew from the Kaesong Joint Economic Development Zone—a free-trade zone with the DPRK that facilitated joint ventures with foreign companies—in 2016 due to a DPRK ballistic missile test, which severed the limited official sources of investment and international partnership the Donju had access to. As such, the DPRK regime is denying the Donju the possibility to diversify and expand their commerce. When combined with their semi-legal status, these factors contribute to a possibly negative perception of the regime by this merchant class. Kim Jong Un’s security interests contradict the desires of entrepreneurs, who may seek changes in leadership if not provided with greater access to foreign investment.
Institutionalization of Corruption
As non-state actors like the Donju became more prominent in the economy, so did corruption. During the famine of the 1990s and subsequent fiscal collapse, the government forced state officials to maintain their positions with little to no compensation. To make up for their limited pay, these individuals were compelled to accept bribes from the rapidly growing informal economy. Over time, this led to the institutionalization of bribery throughout all facets of government, weakening the legitimacy of its institutions. In response, Kim Jong Un implemented anti-corruption campaigns, most notably executing his uncle Jang Song-thaek. However, these crackdowns typically target high-ranking officials with ulterior political motives, ignoring most cases of graft—preferring to have a corrupt government than none at all—while siphoning off a share of the economic growth for himself.
According to Professor Kim’s surveys, the average monthly wage for a government official is 3000 won and the average household monthly income is 400,000 won, indicating that these officials have a large secondary revenue stream. This disparity makes clear that the inherent value of their positions is not in their pay but in the access to state resources and authority that can be sold in the informal economy. State officials are demanding kickback fees to overlook illegal market activities or to grant access to resources and titles. Bribes range from paying off border guards when smuggling goods to renting a Wakku from a high-level official for a manufacturing enterprise.
CSIS’s Beyond the Parallel initiative estimates that the DPRK government collects $56.8 million per year from taxes and rents, in the form of bribes, imposed on official general markets. When including bribes made to bureaucrats in unofficial markets and considering that 9% of North Korean household income is spent paying bribes, the above dollar figure rises dramatically. Furthermore, the normalization of corruption has alleviated the pressure on the regime to pay full wages.
The institutionalization of corruption throughout the internal security services has threatened to dismantle the tightly controlled society these agencies are supposed to monitor and suppress. For instance, travel permits are required for all citizens leaving their permanent residential areas and typically take a few months to be issued through legal channels. The increasing rate of bribery amongst state officials charged with migration control, like Neighborhood Watch Leaders and State Security Officers, has expedited this process. Now, with a sizable bribe, it can take just under a day to receive a travel permit. By making movements between residences easier, it has become more difficult for the state to monitor citizens, increasing transmission risks of undesirable information between regions. As a result, social networks are formed beyond the boundaries of a single residence, allowing for the coordination of strikes, protests, and political causes to reach a national audience, increasing the threat of uprisings against the regime.
The DPRK’s high level of corruption is an indicator of the displacement of its traditional loyalty-based incentive structure with one based on profits. Before the famine, the regime secured its power base by providing special privileges to the first tier of the Songbun caste system. These elites helped maintain the Kim regime’s rule, preferring to live lavishly under the domination of a dictator instead of facing the uncertainty of a meritocracy. This shifted after the famine, with the state’s incentives decreasing in the same proportion as the enticing opportunities for profit from the informal economy increased from marketization.
In sum, Kim Jong Un is now faced with the ominous choice of either embracing the destabilizing effects of marketization to reap the fruits of a capitalist economy or sustaining the totalitarian society inherited by his forbears indefinitely.
Tin Pak is a second-year undergraduate student at the University of Washington Department of Political Science.