Gray Market to Force Economic Reforms in North Korea

On July 27, 1953 the Korean Armistice Agreement was signed bringing about the cessation of hostilities in Korea and establishing the Korean Demilitarized Zone at the 38th parallel. While this agreement did not formally end the Korean War, indeed a formal peace settlement has yet to be achieved, it did implement a cease-fire and effectively divided the country into what is now known as the Democratic Peoples Republic of Korea (North Korea), and the Republic of Korea (South Korea). The two countries have since taken drastically different approaches to economic development, with South Korea embracing the capitalist ideologies of the West and North Korea employing Soviet-era communism.

Arguably the most important ideological facet of the newly created North was the concept of Juche (self-reliance). Paramount in this ideology is the eradication of any dependence on foreign sources and the ability to provide for the North Korean population relying only on domestic means. As such, the North Korean regime under Kim Il Sung created the Public Distribution System (PDS) which, for decades, effectively collectivized food production and distributed it to the populous. The PDS worked relatively well and North Korea was successful in employing this strategy of self-reliance. In fact, North Korea outperformed the South in GDP per-capita terms until the early 1970’s.

In the mid-1990’s, however, the PDS would collapse.

The Advent of Market Activity 

Beginning around 1994, North Korea experienced a catastrophic famine. The famine, which was caused by economic mismanagement, numerous floods and droughts, and the collapse of the Soviet Union, are alleged to have killed, at highest estimates, around 3 million people. The PDS was only able to support about 6 percent of the population during this time, and even this 6 percent was only allocated 128 grams per person per day.

The complete failure of the regime to provide for the populous led to a drastic change within the North Korean economy, namely the adoption of private trade.

In order to survive, the majority of the North Korean population began trading with each other; effectively creating an unofficial free-market within the communist country. The regime allowed this market activity to persist as to shut it down would compound the already wide-spread starvation and death.

These markets have continued to exist and even flourish in present day North Korea, leading to a duality in the North Korean economy. There is now the official state run economy in which workers are employed in state jobs and receive a state issued income, and the unofficial “gray markets”.

The term “gray market” alludes to the fact that private trade is illegal, but tolerated within North Korea. Indeed, many individuals engaged in gray market activity simply pay a bribe to state officials when caught, or pay taxes to ensure their goods are not confiscated.

The activities of free trade can be witnessed in almost every corner of the reclusive country and are most apparent in the numerous jangmadong’s (marketplaces). Jangmadong’s are composed of a multitude of individual stalls that sell smuggled goods, such as Chinese and Russian cigarettes, Chinese beer, USB sticks containing foreign media (South Korean soap operas are especially popular), chocolate bars, coffee, cocoa-cola, and the list goes on.

Pothonggang department store
North Korea’s Pothonggang department store

Gray market activities have enriched the lives of countless North Korean’s and the benefits are evident in the new department stores, such as the Pothonggang department store, popping up around the country and an increase in luxury goods consumption. According to Egypt’s Orascom Telecom, one of North Korea’s few cellular providers, around 3 million North Korean’s now subscribe to their service. North Korean’s would almost certainly not have access to cellular phones and other consumer electronics without the influence and benefits of the gray market.

In fact, the gray market has become such an integral component of the North Korean economy that many analysts estimate it accounts for around 30-50 percent of economic activity and has significantly contributed to North Korea’s increasing GDP. Andrei Lankov, an expert on North Korean affairs at Kookmin University in Seoul, has stated that the gray market is a source of income for around three fourths of the North Korean population.

With such a pronounced reliance on the gray market, the regime has little choice but to implement pro-market reforms and embrace the gray market, or risk losing its grip on power.

In 2005-2009 the North Korean government attempted to undermine the private markets; an attempt that proved disastrous. In addition to cracking down on market activity, the government re-denominated its currency by removing the last two zeroes on every bank note. The re-denomination was intended to target the individuals and private enterprises who had accumulated wealth by partaking in gray market activity. Instead, it angered members of the elite along with a vast number of private citizens without meaningfully impacting private trade. Indeed, this re-denomination has led to an even further schism in the economy as there is now the official exchange rate denominated in won (North Korea’s national currency) and the gray market exchange rate utilizing foreign currencies, the US dollar being the most predominant.

In response, the government reverted back to its successful employ of “benign neglect”.

If the government attempted any additional anti-market reforms, it is more than likely that the response to such reforms would reflect what was seen in 2009. Thus, the regime must continue to allow and adapt to the private markets.

The Inevitable Adoption of a Market Based Economy 

Given the importance of the gray market on economic health, it is only a matter of time before North Korea turns to a predominantly market-oriented economy. This will potentially bring North Korea further in line with international standards and regulations, and may provide an opportunity to further integrate the reclusive country into the international community.

The symbiotic relationship between market reforms and international integration is best evidenced by the reforms implemented by Deng Xiaoping in China beginning in 1979. As Deng slowly transitioned China to a market-oriented economy, it became an integral part of the international community. Today, China boasts the second largest economy in the world, has been successful in lifting hundreds of millions out of poverty and relations between China and the other major players in the international economy have, for the most part, never been better.

China’s integration owes much to market reforms. Subsequent to the progressive economic liberalization of China, Chinese economic interests began to align with the international community’s as any fluctuations in the global economy would have repercussion’s for China’s domestic economy. Additionally, economic liberalization began to expose China to the culture of its trading partners, which has cultivated shared cultural interests.

The gray market has already started this process in North Korea.

The smuggled goods, as mentioned above, contain information regarding the outside world which has undermined the regime’s rhetoric concerning the evils of the West and it’s allies. Given the popularity of South Korean and American media, which are smuggled via USB sticks and are ubiquitous in the jangmadongs, much of the North Korean population have an increasingly positive view of the outside world. Thus, an unintended consequence of the gray market has been to educate the North Korean population of the realities of the international sphere.

North Korean’s have especially taken to South Korean soap operas, much like the rest of Asia. They find a commonality in the immensely dramatic nature of these shows and praise South Korean media for its “realism”; even North Korean fashion trends have started to take cues from foreign media¹.

As Andrei Lankov posits, it is probable that the information gained via the gray market will have implications on the political trajectory of the regime. Therefore, perhaps rather than imposing more sanctions on North Korea, strategies should be implemented that focus on facilitating gray market activity and increasing international trade vis-a-vis the gray market.

The gray market may indeed present the most effective way to bring North Korea in-line with international norms and regulations and international powers would do well to recognize the inherent benefits of facilitating gray market activity.

¹ For a detailed look into North Korea’s gray market and consumption habits, refer to North Korea Confidential: Private Markets, Fashion Trends, Prison Camps, Dissenters and Defectors by Daniel Tudor & James Pearson.

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Jonathan Wade, CD

Jonathan Wade is the director of the ‘The Sentinel Analytical Group’ and a decorated veteran of the Canadian Forces. Specialized in tactical, strategic, intelligence and geopolitics analysis, Jonathan has a fondness for technical details. His military experience brought him valuable insight on the realities of conflicts and war. A combat veteran of Afghanistan, Jonathan brings in in-theatre experience. Jonathan writes about Russia, Canada and Arctic.