N. Koreans’ New Assignment: Fundamentals of Capitalism

If it sounds like Economics 101, that’s because North Korea is starting at the very beginning, introducing basic concepts such as supply and demand that have been unknown in the staunchly Communist country.

Within the last two months, the North has made changes in its economic system that are perhaps the most radical in the country’s history. It has phased out its obsolete public distribution system, which was hailed as creating a workers’ utopia by doling out basic goods but in reality had reduced the population to starvation.

In a nod to the market economy, it has increased prices of everything from rice to subway tickets to reflect actual costs. Salaries have been raised more than tenfold so that people can afford the higher prices.

North Korea also may be devaluing its currency, which had been fixed at such ludicrously high levels that foreign trade was virtually impossible.

Cho Myong Chol, a former economics professor at North Korea’s Kim Il Sung University who defected to the South, says the current reforms were under discussion from the time of the Berlin Wall’s collapse in 1989 but couldn’t be implemented because of opposition from the university’s namesake, the nation’s founder. In the early years after Kim’s death in 1994, his son and successor, Kim Jong Il, had to consolidate power before he could take dramatic action.

“Now Kim Jong Il is in full control of the [Communist] Party. He is in a position to go ahead with reform,” Cho said. “He has experimented with his father’s ways and realized that they do not work.”

In their characteristically secretive style, the North Koreans have offered scarce commentary to the outside world on the changes. And when they have, they’ve insisted that they are merely fine-tuning the system. “The adjustment of wages and prices has been made on the basis of socialist principles--within the boundary of a planned economy,” said a recent report in Chosun Shinbo, a Korean-language newspaper in Japan that is often used as a mouthpiece for North Korea.

But economists who follow North Korea say the reforms amount to far more than tinkering and are tantamount to a belated acknowledgment that the country’s system has failed.

“They can’t pretend anymore. They realize the world around them has changed,” said Bradley Babson, a senior advisor to the World Bank who follows North Korea. “They may or may not have their hands around the problem, but they are trying on an order of magnitude that we haven’t seen before.”

Under the old system, prices in North Korea were so low as to be meaningless--but that was a moot point because there was nothing to buy anyway. For example, rice was supposed to be sold to consumers for a pittance, but there has been virtually no rice available at public distribution centers for the last five years.

As a result, North Koreans had turned increasingly to black marketeers to avoid starvation, often paying in U.S. dollars or Japanese yen instead of their own currency.

With the reforms that took effect July 1, prices in the public distribution system are supposed to come in line with the prices charged by private marketeers. And at the same time that the North Korean government is increasing the prices it pays farmers and manufacturers for their wholesale goods, it is removing subsidies that for years propped up unprofitable businesses.

“We are reforming the economic system on the principle of profitability,” Kim Yong Nam, the president of the Supreme People’s Assembly, told Kenzo Oshima, the U.N. undersecretary-general for humanitarian affairs, who was visiting earlier this month.

There are reports as well that, in July, North Korea launched a pilot project in North Hamgyong province to allow farmers private plots on what used to be collective farms. If the agricultural project, which has not been officially announced, indeed exists, it would resemble one of the first reforms implemented by the late Chinese leader Deng Xiaoping in 1978 in overhauling China’s economy.

Also, a delegation of eight North Korean officials is believed to be in Beijing to study China’s banks. A banking system would be another critical step for North Korea to create a market economy.

Among North Korea watchers, there is a vigorous debate about the economic reforms. The World Bank’s Babson is an enthusiast, saying the changes resemble a highly successful package of reforms Vietnam undertook in the late 1980s and early 1990s.

“When you have a system as out of whack as theirs, you can’t do everything at once, but price reform is one of the earlier things you can do,” Babson said.

The naysayers assert that the biggest danger of the price and wage increases is that they will trigger runaway inflation without increasing product availability.

“You don’t need a PhD in economics to know that if you have too much money chasing too few goods, you will only end up with inflation,” said Marcus Noland of the Institute for International Economics in Washington.

Noland believes the package of reforms is far more radical than anything Kim has tried before, including diplomatic overtures to the outside world.

The North Koreans, he said, “are undertaking some fundamental changes that will affect everybody. This is not something that only affects the elite.... But it is unclear if they have thought through what they are doing. It is a big roll of the dice.”

If the reforms backfire, they could undermine a regime that many believe should have collapsed long ago.

North Korea experts say they expect the reforms will be accompanied by a bolstering of the powers of the secret police and military to nip in the bud any public displays of dissent.

South Koreans who have met the North Korean leader say he is a longtime admirer of Park Chung Hee, the dictator who engineered South Korea’s so-called economic miracle of the 1960s and 1970s while vigorously suppressing democratic opposition.

Given the extreme repression and secrecy of the North’s regime, it is anybody’s guess what North Koreans really think of the economic upheaval. The few public comments have been predictably upbeat.

“It is very practical, and it encourages us to work harder,” said Kim Chin Hee, a 28-year-old North Korean woman who was part of an official delegation visiting Seoul this month for Korean Independence Day celebrations.

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Chi Jung Nam in The Times’ Seoul Bureau contributed to this report.