A surprising market reform in North Korea

There have been some tantalizing reports of free market style reforms in North Korea. Business Insider reported in late February about agricultural and industrial reforms:

Under a plan referred to as the May 30th measures, those [agricultural] teams were shrunk again last year, to the size of a typical family, while their share of the quota was enlarged to 60%. Even the permitted size of families' kitchen gardens, which are far more productive patches than land tilled for the state, have been expanded dramatically, from 100 square metres to 3,300 square metres. For Andrei Lankov, a longtime watcher of North Korea at Kookmin University in Seoul, the new measures, a quasi-privatisation of state land, are nothing short of revolutionary.

A second area of experimentation, in state industry, is equally striking. Under the May measures, state factory managers may appoint their own employees, set workers' salaries, buy raw materials on the market and sell part of their production there too. Like farmers, managers will need to pay their dues to the state. Yet, says Mr Lankov, that is not so different from paying corporate taxes in a capitalist economy.

In a surprise announcement, Kim Jong-un announced that the DPRK would implement a further set of market oriented reforms to open North Korea to the capitalist economy. The most important of which is to begin a series of annual auctions of its nuclear warhead arsenal and the bidding would be open to any and all parties. The specific details of the first auction, which detail the number of warheads and their specifications, would be announced later, according to a report from the Korean Central News Agency:

"These auctions would serve two purposes," according to a statement by Supreme Leader Kim Jong-un, "First, they signal the DPRK`s peaceful intentions to our neighbors in Asia in our course of development. Second, they are in accordance with our new reform initiatives to allow the market to play a greater role in the economy."

The reaction was generally positive (via Reuters):

"We welcome this development in North Korea`s market-based initiatives," said Secretary of State John Kerry, "We expect that the United States will put every resource into the auction process to ensure that we will be the successful bidder as it would be of the utmost importance to the United States and in the interest of world peace."

JP Morgan stated that, "We believe that this is a positive step in North Korea`s ongoing A successful market process. In addition, auction win for the US will be a win-win for both North Korea and the US economy. Depending on the scale of the payments, it has the potential to be a form of much needed foreign exchange reserves."

There is also speculation that the move is a response to China's rejection of North Korean membership in AIIB. The proposed initiative would undoubtedly strengthen North Korea's finances:

Emerging Markets can reveal that North Korea was rebuffed by Beijing in its attempt to join the China-led Asian Infrastructure Investment Bank because it was unable to hand over a proper snapshot of the hermit state’s economy and finances

Bloomberg also reported that analysts believe that North Korea is ramping up production of its nukes and therefore it has sufficient warheads to offer to the market for some time:

North Korea may have as many as 100 nuclear arms in five years and become capable of mounting them on a range of road-mobile missiles, a U.S. researcher said.

Joel Wit, who researches North Korea at the U.S.-Korea Institute at Johns Hopkins University, made the projection Feb. 24 at a seminar in Washington. In an e-mailed analysis to Bloomberg News, he said his moderate projection for North Korea’s nuclear stockpile is for it to grow to 50 bombs by 2020 while the country develops a new generation of road-mobile medium- and long-range missiles tipped with nuclear warheads.

The assessment paints a more-advanced scenario of the isolated state’s ability to produce nuclear arms than other estimates. Siegfried Hecker, a Stanford University professor, said last month the Kim Jung Un regime probably has 12 nuclear bombs and may have eight more by the time U.S. President Barack Obama leaves office in 2017.

North Korea probably has 10 to 16 nuclear weapons at present, including six to eight devices made from plutonium and four to eight from weapons-grade uranium, according to Wit.

Chart via Business Insider

Still, some analysts have interpreted the motives for such a move as a desperate attempt to build up DPRK`s foreign exchange reserves, as well as the regime`s failure to build delivery systems for the warheads, which render them more or less useless in their current form (via Business Insider, emphasis added):

North Korea has conducted three fairly low-yield tests since 2006 and expert estimates put its stockpile size at 10-15 warheads. (Low-yield is relative here: the fireball form North Korea's last test in 2013 was the width of five Manhattan blocks.) Those bombs are widely considered too large to be practically deliverable using the North's currently available technology.

There is still some debate on that issue, however:

It also isn't known if North Korea has succeeded in miniaturizing a nuclear weapon to the point where it would be practically deliverable. Still, Albright thinks this last scenario is likely and that miniaturization is "not that big of a step to accomplish that when you've got two decades and three tests."

Whatever the reason, Bravo to North Korea for adopting such courageous market-oriented reforms!

As a variation of Richard Nixon's famous statement of "we are all Keynesians now", Kim Jong-un has demonstrated that we are all capitalists now.