Similar Policies, Different Outcomes: Two Decades of Economic Reforms in North Korea and Cuba, by Dr. José Luis León-Manríquez

8/2/2019 Similar Policies, Different Outcomes: Two Decades of Economic Reforms in North Korea and Cuba, by Dr. Jos Luis

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Korea Economic Institute

Volume 5

Academic Paper Series

Contents:

Foreign and Domestic Economies of North andSouth Korea

The Markets of Pyongyang

Similar Policies, Di erent Outcomes: Two Dof Economic Reforms in North Korea and Cu

KORUS FTA Compared with KOREA-EU FWhy The Di erences?

Developing an International Financial CenteModernize the Korean Service Sector

Security Factors and Regional Impact on theKorean Peninsula

Preparing for Change in North Korea:Shifting Out of Neutral

Reviving the Korean Armistice: Building FuPeace on Historical Precedents

Proactive Deterrence: The Challenge of Esca

Control on the Korean Peninsula

Human and Nuclear Security Concerns on theKorean Peninsula

Engaging North Korea on Mutual Interests iTuberculosis Control

2012 Nuclear Security Summit: The Korean


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ON KOREA 2012: ACADEMIC PAPER SERIES

Volume 5


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Foreign and Domestic Economies of

North and South Korea


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Similar Policies, Different Outcomes:Two Decades of Economic Reforms

in North Korea and Cuba Dr. Jos Luis Len-Manrquez, Professor of Interna onal & East Asian

Studies, Metropolitan Autonomous University in Mexico

Abstract

This work analyzes economic reforms in North Korea (DPRK) and Cuba. These

countries, ruled by single par es, have tried to maintain economic systemsthat advocate central planning and state property. In order to survive theSoviet collapse, Cuba and the DPRK started sparse economic reforms in 1990-1991. With di erent rhythms and scopes, they undertook liberaliza ons of agricultural markets, gradual reforms of state enterprises management, andpolicies aimed at a rac ng foreign direct investment (FDI). While survivingpolicies have been similar, their outcomes have been di erent. The DPRKhas had plenty of di cul es to revamp its ta ered economy and underwent

massive de-industrializa on and famine in the mid-1990s. By contrast, Cubamanaged to cra new engines of growth based on tourism and the export of professional services, thus achieving two-digit growth rates in the mid-2000s.The ar cle proves that both countries have been very reluctant to implementfull- edged marke za on policies, but Cuba has been more coherent thanthe DPRK with regards to FDI policies. This di erence accounts for much of the diverging performances of both countries.

$5,000

$4,000

$3,000

$2,000

$1,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Cuba

DPRK

Figure 1: Gross Domes c Product per Capita in the DPRKand Cuba, 1990-2009

Source: Bank of Korea, various years; Economic Commission for La n America andthe Caribbean, various years


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IntroductionThis ar cle is aimed at analyzing, in a compara ve perspec ve, the economicreforms undertaken by Democra c Peoples Republic of Korea (DPRK, or

North Korea) and Cuba since the demise of the Soviet bloc in the late 1980sand the early 1990s. The comparison seems per nent inasmuch as both theDPRK and Cuba are rela vely small countries that managed to survive thecollapse of real socialism. Although the geographic areas of both countriesare roughly the same, the North Korean popula on is more than doubleCubas; by contrast, the Cuban GDP per capita is four mes bigger than theDPRKs individual income (Figure 1) . Both countries have been ruled bysingle par es and have undertaken successful dynas c successions, andboth countries have tried to maintain, with increasing tribula ons, economicsystems that advocate central planning and state property.

With di erent intensi es and styles, in the early 1990s the DPRK and Cubalaunched par al liberaliza ons of agricultural markets, gradual reformsof the management of state enterprises, and policies aimed at a rac ngincreasing amounts of foreign direct investment (FDI). Both Cuba and theDPRK started their respec ve reforms in 199091: the former implemented

changes that allowed joint ventures in tourism, while the la er allowedthe establishment of a special economic zone (SEZ) in Rajin-Sonbong (alsoknown as Rason). Cuba undertook addi onal changes to allow larger, buts ll small, por ons of markets in 1993 and 2008. North Korea, in turn,announced a package of economic changes in 2002; since the late 1990s,though, Pyongyang has been cour ng major South Korean investments intourism and the industrial sector. In both cases, the pa erns of economicchange have zigzagged, with the inten on of carrying out the bare minimumof reforms for ensuring regimes survival.

In spite of the above similari es, economic reforms have had di erentoutcomes in the DPRK and Cuba. Although both countries feature a stop-go pa ern, the Cuban economy has achieved a swi er recovery. Cubamanaged to overcome the e ects of the crisis caused by the end of supportby the former Soviet Union and began growing in the mid-1990s, achievingdouble-digit rates of growth in the second half of the 2000s. In contrast,by the end of 2009 the North Korean economy was s ll smaller than twodecades before. My hypothesis is that the main di erence in how theDPRK and Cuba handled the demise of their socialist systems of supportdwells in the greater constancy of Havanas policies to acquire foreigncurrencies. Cuba engaged in, for example, the promo on of FDI, tourism,


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9Len-Manrquez: Similiar Policies, Different Outcomes

remi ances, and selling of professional services to Venezuela. Althoughthe North Korean government tried to a ract East Asian investment intourism projects and SEZs, geopoli cal tensions in Northeast Asia havelimited the poten al scope of these and other ambi ous projects.

This ar cle is divided into three parts. The rst sec on posits that thecentrally planned economy and the autarkic strategies in the DPRK andCuba are experiencing a protracted crisis that has lasted for severalyears; in sec on one I o er various indicators of growth, performanceby economic sectors, social welfare, and foreign economic rela ons inboth countries. The second part describes and analyzes, in a compara vefashion, the market reforms implemented by the two countries since theearly 1990s; it also reviews the cons tu onal changes in the economicrealm and addresses the changes in o cial discourse about reforms. Thethird sec on evaluates the results of these processes of economic change,sketches some scenarios for both economies, and delves into the reasonswhy Cubas recovery has been less di cult than the DPRKs despite Havanasini al reluctance to radically deepen the reforms started in the 1990s.

Goodbye, Utopias: Origins and Evolution ofthe Economic Crises in North Korea and Cuba

Rather than an accumula on of short-term shocks, the steep crises inCuba and North Korea were the result of slow-mo on economic declines ,which in turn derived from the limita ons and contradic ons of theirstyle of economic development. As a result of the crises, both countriesexperienced a sharp deindustrializa on, which meant a dras c reduc on

or even the disappearance of en re industrial sectors. The growinginterna onal isola on of the DPRK and Cuba, expressed in a variety of economic sanc ons (such as the Cuban Democracy Act of 1992 and theCuban Liberty and Democra c Solidarity [Libertad] Act of 1996 [alsoknown as the Helms-Burton Act] passed by the U.S. Congress regardingCuba in the 1990s, and the sanc ons decreed by the Japanese governmentand the UN Security Council against the DPRK in the 2000s), exacerbatedthe scope of the crises.

Since the early 1990s, North Korea has undergone a deep crisis of the so-called juche idea. The North Korean government o en argues that theDPRKs economic woes stem from the demise of the Soviet Union (its mainally and trading partner un l the late 1980s), the oods of 1995 and 1996,and the droughts of 1997 and 2001. It should not be ignored that Moscow


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provided generous aid and loans to the DPRK; it also supplied arms, oil, gas,and manufactured goods on concessional terms. Thus, the Soviet implosiondeprived Pyongyang of all these bene ts while ooding caused severeproblems in North Koreas agriculture. Its plausibility notwithstanding, thisline of argument hardly stands a fairly cri cal analysis.

I contend that, rather than a short-term accumula on of economic mis-fortunes, the North Korean crisis means the failure of the developmentstrategy that the DPRK has followed for more than six decades. Such astrategy was successful at mee ng the ini al stages of import subs tu-

on industrializa on. In the 1960s the DPRK was the object of praise of VIPs such as Cambridge economist Joan Robinson and Ernesto Ch Gue-varawho recommended the North Korean model not only for Cuba butalso for other developing countries. The DPRK was seen by many analystsas an outstanding experience of economic development. The country wascompared favorably with its southern neighbor, which at that me had notachieved an impressive economic performance.

Over me, North Koreas centrally planned economy became a model of economic decline, almost impossible to sustain under changing interna onal

condi ons. In fact, the involu on of the North Korean economy had alreadybegun in the 1980s, long before the fall of the Berlin Wall and the end of real socialism. For instance, in 1984 the DPRK stopped paying interest onits foreign debt to Western creditors, and three years later Pyongyang ine ect declared bankruptcy and never paid. 2 Moreover, the seven-yeardevelopment plan for 197884 failed to comply fully with its objec ves.The same happened with plans for 198586 and 198793. On 8 December1993, during the evalua on of the countrys 198793 plan, Prime MinisterKang Song-san appeared chagrined:

Due to the collapse of socialist countries and the socialistmarket, our countrys economic coopera on and tradehave faced setbacks. This has brought serious damageto our economic construc on and, therefore, our thirdSeven Year Plan has had di cult mes achieving its goals. 3

As shown in Figure 2 , the North Korean economy experienced a sustainedregression in the 1990s, with a cumula ve fall in GDP of 38 percent between1990 and 1998, with every year showing nega ve growth. In 19992005the North Korean economy underwent a modest recovery, but a er 2006


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nega ve growth rates resumed. This performance has been mostly causedby the di cul es that the DPRK has had in reshaping its economic strategyand nding new engines of growth a er the crisis of the 1990s.

Structural problems have a ected the en re North Korean economy:agriculture, industry, services, infrastructure, and the external sectorhave been put under serious stress. As shown in Figure 3 , between 1992

and 1997, agricultural GDP fell by 30 percent. Although it recovered later,between 2006 and 2009 there were three years of nega ve growth.Because of the agricultural crisis in the 1990s, the North Korean statelost its ability to provide for popula on survival, which should be the rstmandate of any government.

Between 1995 and 1998 a famine lashed the DPRK. Between one and two millionpeople (that is, 510 percent of the total popula on at that me) are thought tohave died. 4 The age of the famine was named Arduous March or March of Tribula on by the government. 5 Its most adverse e ects were overcome onlyby large amounts of aid from mul lateral agencies such as the UN World FoodProgram; a great number of nongovernmental organiza ons (NGOs); and thegovernments of China, Japan, South Korea, and the United States.

15%

12%

9%

6%

3%

0%

-3%

-6%

-9%

-12%

-15%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Cuba

DPRK

Figure 2: Growth of Gross Domes c Product in theDPRK and Cuba, 1990-2009

Source: Bank of Korea, various years; Economic Commission for La nAmerica Wand the Caribbean, various years

Len-Manrquez: Similiar Policies, Different Outcomes


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5%

0%

-5%

-10%

-15%

-20%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Services

Mining andManufacturing

Agriculture, Forestry,and Fisheries

GDP

Figure 3: Change in Growth in Selected EconomicSectors, in the DPRK, 1990-2009

Source: Bank of Korea,various years.

Since the early 2000s no new outbreaks of famine have been reported, butfood shortages are s ll a problem. The DPRK is es mated to have a 20 percentgap between produc on and consump on of cereals. The North Koreanpopula on consumes ve million metric tons of grain a year, and the DPRKmust import about one million tons. The de cit must be covered througheither imports or foreign aid. The cereal de cit has become chronic: morethan a decade a er the most cri cal phase of the North Korean famine, a joint report published in 2010 by the Food and Agriculture Organiza on (FAO)of the United Na ons and the World Food Program portrayed North Koreaas one of the 22 countries in the world that is undergoing a protracted foodcrisis. According to the report, the number of malnourished North Koreansincreased from 6.7 million in 1997 to 7.8 million in 2007almost one-thirdof the total popula on. Given the shortcomings of North Korean agricultureand the rise of food prices in the world markets, this human con ngent isthreatened by the not-so-remote possibility of a new famine. 6

The situa on is not much be er for industries in North Korea. In fact, themanufacturing sector experienced a more serious drop than other economicac vi es, a fact that brings into ques on the o cial thesis that the primarysector was the almost exclusive locus of the crisis. According to data in Figure3, by 1998 the manufacturing output in North Korea was only one-quarterof its level in 1989. Like agriculture, industry began its recovery in 1998, butthe extent of the recovery was much more limited than in the agricultural


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sector. By 2009, the size of manufacturing sector was half of its level of thelate 1980s; this is a genuine collapse of the industrializa on process. It is nosecret that a signi cant bo leneck has been in the areas of electricity, gas, andwater, where GDP fell by 50 percent in the reference years. Despite its unevenrecovery, in 2009 this sector was s ll 16.5 percent smaller than in 1989.

Infrastructure, meanwhile, underwent a noteworthy decline: the electricitynetwork is plagued by a sharp obsolescence, while less than 10 percent of roads are paved and many of them have a single. 7 Empirical observa onsfrom the authors visit to North Korea in September 2010 con rm thesedata. For instance, the road connec ng Pyongyang with the strategic portof Wonsan on the East Sea was do ed with large potholes. The highwaybetween Wonsan and Hamhung Province was virtually destroyed and underreconstruc on. Pyongyang and other ci es, meanwhile, ra oned electricityat night. While the slender towers of apartments have a few lights on, muchof the public ligh ng is o . Regarding the performance of the services sector,Figure 3 shows clearly the stagna on since 1990; these data may be re ec ngthe obsolescence of many public services in the DPRK.

The structural crisis of the juche experience is also re ected in a weak

external sector. Since the mid-1980s, North Korea has failed to pay theprincipal and interest on external debt, which totals approximately$12 billion. Moreover, given the nature of the distor ons in thecountrys economic model, acquiring foreign currencies through tradeis extremely di cult: North Korean exports total only $1 billion a year,but imports exceed $1.8 billion. North Korea faces, therefore, an annualgap of $800 million.

There is a strand of mystery about the mechanisms that North Koreaemploys to nance its current account de cit, but observers can makesome educated guesses on this subject. One funding mechanism hasto do with arms trade; although it is not reported on current accounttransac ons, this ac vity might be a great contributor to North Koreasexternal sector. Some analysts posit that the foreign trade imbalanceis o set by illegal ac vi es such as drug tra cking (mostly opium andmethamphetamines), counterfei ng, smuggling, and piracy. 8 Remi ances

from North Koreans living in Japan, China, and other Asian countries ares ll another mechanism for mi ga ng the external de cit. Finally, aid frommul lateral agencies, NGOs, and nearly 50 countries help to bu er NorthKoreas poor interna onal performance. Under these condi ons, it is clearthat the long-term viability of juche is not assured.



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As in the North Korean case, in the 1990s the economic problems of Cubawere on both the interna onal and domes c fronts. Interna onally, theeconomic collapse of the Soviet Union brought an end to the subsidies thatruled the exchange between the USSR and Cuba. Under the Council forMutual Economic Assistance (COMECON), Moscow bought Cuban sugar athigher prices than those prevailing in the interna onal market, while it soldoil and gas to Havana below those prices. The Soviet Union also providedcredits with preferen al interest rates for the development of industrialprojects, provided free technical educa on to many Cubans, and senteither low-cost or free arms to the military. This pa ern of a subsidizedeconomy, largely explained by the geopoli cal signi cance of Cuba to the

Soviet Union, would crash in the nal years of Mikhail Gorbachev (198591). Concerned for its own economic adversi es, the USSR began cu ngfunds for coopera on with Cuba; Gorbachevs successors canceled almostall programs of assistance to the Caribbean island. 9

Cuban leaders, like their North Korean peers, have insisted on blamingexternal variables for the economic regression. Havana not onlycomplained about the collapse of real socialism but also addressed theexacerba on of the U.S. blockade put in place by such measures as theHelms-Burton Act of 1996. Although it is true that both variables haddeleterious e ects, the Cuban economy had been experiencing seriousstructural problems since the rst half of the 1980s. Excessive centraliza onand bureaucracy, matched with low produc vity, had slowed the pace of economic growth. Between 1976 and 1985 Cubas GDP grew at an annualrate of 5.3 percent. This gure was below the 7.1 percent recordedbetween 1971 and 1975, but was s ll higher than the 4.2 percent from

1964 to 1970.10

In 1982 Havana gradually stopped paying its foreign debtobliga ons; a er that decision Fidel Castro advocated that Third Worlddebtors create a common front to cancel their foreign debt. Castro wasnot successful in that e ort.

The severe economic downturn a er 1990 was o cially labeled periodoespecial en empos de paz (special period in peace me; also calledthe special period). The worst phase of this crisis occurred between1991 and 1993, when GDP fell 37.2 percent (see Figure 2). Thanks to theminor but mely reforms undertaken by the Castro regime, the economystarted to recover piecemeal a er 1994. By the early 2000s and despitevarious hurricanes that struck the country, the decline in remi ancesfrom Cubans in the United States, the belligerence of George W. Bush,the unexpected a ack on the World Trade Center in New York, and the


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25%

20%

15%

10%5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

1992 199 4 1996 1998 2000 2002 2004 2006 2008

ManufacturingIndustries

Agriculture

Trade, Restaurants,and Hotels

GDP

consequent reduc on in touris c ows to Cuba, GDP rebounded morequickly. Some analysts even feared that these problems could mean theextension ad in nitum of the special period. 11

The opposite happened, though. By 2004 Cuban GDP had returned toits 1989 level. Between 2004 and 2008, Cuban GDP reached an averagegrowth rate of 8.1 percent per year, with double digits in 2005 and 2006. Inthe second half of the 2000s, this performance placed Cuba as one of themost dynamic countries in the La n American context. Cubas economicimprovement can be largely explained by high pro tability in the servicesector. The change at the beginning of the decade of the 2000s in themethodology for calcula ng GDP also created a bias toward high gures. 12

As shown in Figure 4, the primary sector in Cuba has become a majorbo leneck, thus reducing its produc vity levels and its rela ve share of Cubas GDP. The reforms implemented in the 1990s led to the crea onof the so-called basic units of coopera ve produc on (UBPCs). Thesecoopera ves complemented (but did not replace altogether) the ossi edstate agricultural enterprises. The centraliza on and bureaucra za onof the sector has remained, however, because the UBPCs must sell their

products to a state monopsony, which o en purchases agricultural goodsbelow the costs of produc on. 13

Figure 4: Change in Growth in Selected Economic Sectors in Cuba,1990-2009

Source: Economic Commission for La n America and the Caribbean, various years.



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Low produc vity levels explain the fact that the primary sector employsone- h of Cubas economically ac ve popula on, but agriculturalac vi es account for less than 5 percent of GDP. While produc on of items such as pork, eggs, and certain vegetables has increased since thespecial period, the sharp drop in produc on and exports of sugar has ledthe decline of primary ac vi es. The demand for maize, milk, and manyother basic products cannot be met by domes c produc on. 14

Regarding secondary ac vi es, a er the special period the Cubaneconomy experienced a swi deindustrializa on despite good results intradi onal ac vi es such as the produc on of liqueurs and beverages.Industrial ac vity as a whole has been hit hard by the decline of the sugarindustry, the jewel of the Cuban economic crown before and during thegolden era of central planning. Currently, the sugar harvests ( zafras ) totalone million tons per annum. If we compare this gure with the ambi ousa empt to achieve a 10-million-ton zafra in 1970 (in actuality, Cubagathered 8.5 million tons), the collapse of the sugar industry is clearlyunderstood. Deple on of the mills, the erra c evolu on of interna onalprices, and the lack of incen ves available to sugar cane producers ledto the decision in 2002 to close nearly half of Cubas sugar mills.

Since the sugar industry has declined, the exploita on of nickel hasemerged as Cubas main industry. Nickel is a strategic metal whoseinterna onal prices rose steadily during the boom in commodity pricesbetween 2000 and 2008. Cuba has also promoted the extrac on of oil, which has reduced marginally the countrys high dependence onenergy imports. Given the scarcity of capital as well as the technologicalbackwardness of Cuba in these elds, nickel and oil exploita on has beenmade possible by joint ventures with Canadian and Chinese rms. In anycase, the rela ve contribu on of industrial ac vi es to GDP has declined.Moreover, as Figure 4 shows, in the 2000s manufacturing has consistentlyperformed below the average for GDP.

Undoubtedly, the bulk of Cuban growth in the postCold War era hastaken place in the services sector. In 2007, services already represented76 percent of the economy, compared with 19.3 percent for industry and

4.7 percent for agriculture and mining. This growth of services not onlyre ects the impact of social spending as a percentage of GDP (with heavyexpenditures on educa on, health, pensions, and social assistance) butalso the growing importance of ac vi es such as tourism. In contrast, therevival of the Cuban economy has not yet occurred, or has been slow


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to do so, in three sectors: transport, housing, and electricity genera on.The persistence of these bo lenecks has had adverse implica ons for thedaily life of most Cubans. 15

Despite the dynamism of the services sector, Cuba has usually recorded agrowing de cit in its current account balance. This trend, repeated duringthe countrys revolu onary period, has been rooted in several structuralproblems. In line with the crisis in the sugar industry, exports of raw sugardecreased from 3.4 to 0.77 million metric tons between 2000 and 2005. 16 In 2005, raw sugar accounted for 8 percent of total exports, against 85percent in the mid-1980s. Other tradi onal products, like tobacco and sh,also lost compe veness in the world markets. By contrast, the exportof goods such as pharmaceu cal products and medical equipment hasincreased. These problems notwithstanding, in 200305 Cuba managedto achieve posi ve economic numbers.

The high coe cient of imports adversely a ects the balance of goods aslong as Cuba is a large importer of energy, industrial inputs, householdappliances, and foodstu s. For foodstu s, Cuba must pay a price for itsine cient agricultural policy, since many imported agricultural products could

be produced internally. This de cit is balanced, if some mes only par ally,with a chronic surplus in the export of services. Prominent among servicesis tourism, which amounted to between $1.5 and $2 billion per year during200103 and climbed to $2.4 billion in 2006. Unfortunately, in recent years thenumber of foreign visitors has stagnated, largely related to the dual exchangerate, which has increased the cost of visi ng Cuba for interna onal travelers.By contrast, exports of professional services in educa on, health, and sportsto Venezuela have had a posi ve impact on the current account balance. 17

The de cit in the current account is not easy to compensate via foreigndebt because of the reluctance of private banks to lend fresh resourcesto a country that stopped paying its debts in the early 1980s. Thisreluctance, though, may recede in the future. A er the hardships of thespecial period, Cuba has recovered its payment capacity by increasingits foreign earnings from its export of services. In addi on, Havana hassought to clean up its act in interna onal capital markets; among the

reforms included in Proyecto de Lineamientos de la pol ca econmica y social (Guidelines for economic and social policy), Cuba explicitly statedthat it aims to work with the utmost rigor to increase the countryscredibility in interna onal economic rela ons through strict compliancewith its commitments. 18



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A posi ve feature of the Cuban case was that, even in the midst of thespecial period, the government sustained a very ac ve social policy.Educa onal enrollment in basic and secondary educa on kept increasing,and Cuba recorded one of the highest educa onal levels in La n America. 19 One study among many, a compara ve study by UNESCO about languageand math skills in the third and fourth grades, shows the broad andconsistent advantage of Cuban students over their counterparts in the restof La n America. Cuba has virtually eliminated illiteracy, and infant mortalityhas been substan ally reduced. In contrast, there has been a deteriora on inthe provision of public services and backlogs in housing and infrastructure.Food shortages were a major problem in the special period and brought

malnutri on to certain social sectors. In 2002, 57 percent of the working agepopula on (14 to 64 years) had a lower caloric intake than the interna onalaverage. 20 Unlike in the DPRK, however, this problem did not worsen intoepisodes of famine. Malnutri on, in fact, has been shrinking as the economyrecovers and Cuba can devote more resources to impor ng food.

Market Reforms in North Korea and Cuba:

Same Intentions, Different OutcomesGiven these problems, it has not been surprising that North Korea andCuba, faced with undertaking market reforms in their economies, haveconsidered following the successful examples of China and Vietnam,their socialist peers. Notwithstanding the allure of the reforms in thosecountries, both Pyongyang and Havana have shown great concern thatthe implementa on of a comprehensive economic transforma on could

bring into ques on the poli cal control of the Korean Workers Party(KWP) and the Communist Party of Cuba (CPC). Hence, rather thansystema c policies of marke za on, it seems more correct to characterizethe changes in North Korea and Cuba as schemes that combine modestsurvival reforms with either interna onal aid ows (North Korea) or FDItargeted at tourism projects (Cuba). These policies have sought to obtainthe necessary material resources for preserving the poli cal hegemonyof the KWP and the CPC while avoiding the poli cal risks and social

imbalances that could stem from full- edged economic reforms.In the case of North Korea, the reforms have moved very slowly, usuallydepic ng a stop-and-go trajectory. At the empirical level of trial and errorthere is some evidence of change, but reforms s ll seem too parsimoniousand incomplete. The areas where changes have occurred are in the


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promo on of FDI, the crea on of SEZs, and the half-hearted toleranceof some small businesses. In the area of FDI, South Korean companieshave made some progress into North Korea. The single most ambi ousproject was the development of the Mount Kumgang resort, launched in1998 by the South Korean chaebol Hyundai Asan. Hyundai later startedone-day trips to the border city of Kaesong and sought authoriza onfrom the DPRK to invest in a tourist project at Mount Paektu, on theborder with China. Some high-tech companies such as Ntrack, HanaroTelecom, and Computer BIT started joint ventures in the DPRK. Theirini al expecta on was to create a sort of a Silicon Valley in North Korea,taking advantage of highly skilled human resources and low costs of

labor.21

Firms from Europe and Hong Kong also invested in North Korea.Asea Brown Boveri, a Swedish-Swiss corpora on, has been involved inmodernizing the electricity network.

Another area in which reforms have made some inroads is the crea onof SEZs, similar to those established by China since 1978. The rstNorth Korean SEZ was Rajin-Sonbong. Founded in 1991, when NorthKorea was s ll under the chairmanship of Kim Il-sung, Rajin-Sonbongis located on the border with China and Russia. Another project wasthe establishment of an SEZ for South Korean companies in the city of Kaesong, near the Demilitarized Zone. Established in 2004, KaesongsSEZ is the clearest success of this policy insofar as it has a ractedhundreds of South Korean rms to invest resources and create jobs inNorth Korea. Seoul even managed to include in its various free tradeagreements the clause Kaesong, which extends tari preferencesprovided by their partners for products made in Kaesong. Following the

good performance of this SEZ, the two Koreas began nego a ons tostart similar projects in Sinuiju, Nampo, and Wonson.

The North Korean government has also tolerated the emergence of some informal markets. By the early 1990s, the North Korean leadershippublished a new civil code, designed to regulate property rights, anda commerce law that permi ed some trade among private ci zens.Rather than these spare laws, reality itself was the best promoter of these small markets. The public distribu on system virtually collapseda er the Arduous March and even more so since the 2002 reforms. 22 Inspite of governmental distrust, private informal businesses ( changsha )have bloomed. The Pyongson market, located near Pyongyang, has beenthriving, while nearly all over the country it is easy to nd old carts that sellagricultural products and small stalls where consumers can nd sweets



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and cigare es imported from China. There are also small restaurants andgarment factories as well as traders engaged in selling clothes, lendingmoney, and selling foreign currencies. By the late 1990s it was es matedthat market rela ons in the North Korean economy reached 20 percent of GDP;23 a decade later, this ra o must be much higher.

Beyond spontaneous entrepreneurship and changes to the legalframework, perhaps the event that most embodies the desire for changein a sector of the North Korean elite is the economic reform launchedin July 2002. The government announced a bold set of measures of economic policy. Salient among them were the steep increases in pricesof agricultural products, par cularly rice; a 6,888 percent devalua onof the won against the dollar, which seemed to indicate an interest inpromo ng foreign trade; the instruc on to state enterprises to covertheir own expenses, which in prac ce meant the end of subsidies; anda general rise in prices and wages, especially in sectors linked to theinterna onal economy.

In the legal and ins tu onal realms, the cons tu ons of 1998 and 2009incorporated the possibility that private property could exist in North

Korea. Thus, Ar cle 24 of the cons tu on of 2009 states:Private property is property owned and consumed byindividual ci zens. Private property is derived fromsocialist distribu on according to work done and fromsupplementary bene ts granted by the state and society.The products of individual sideline ac vi es includingthose from kitchen gardens, as well as income from other

legal economic ac vi es shall also be private property.The state shall protect private property and guarantee bylaw the right to inherit it. 24

In addi on, Ar cle 32 refers to the need to combine the uni ed guidance of the State with the crea veness of each unit, unitary direc on with democracy,and poli cal and moral incen ve with material incen ve in the guidance andmanagement of the socialist economy. Ar cle 33, in turn, underlines that thestate is responsible for direc ng the economy, but at the same me shall makeproper use of such economic levers as cost, price and pro t. An example of cons tu onal irta ons with market mechanisms is Ar cle 37, which advises:The state shall encourage ins tu ons, enterprises and organiza ons in thecountry to conduct equity or contractual joint ventures with foreign corpora onsand individuals, and to establish and operate enterprises of various kinds in


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special economic zones. 25 To support cons tu onal changes, in the 1990s thegovernment introduced speci c laws to regulate FDI, foreign businesses, and joint ventures. During that period, 57 other laws and regula ons on foreigneconomic rela ons were issued by the North Korean government. 26

Regardless of the actual scope of market reforms, the North Koreangovernment carries on quite an ambiguous discourse about them. Ini ally,when the North Korean leaders made reference to Chinas economicreforms, they called marke za on a sweet poison and used to arguethat any opening would be a Trojan horse for the North Korean economy.The possibility of further economic reforms was so stressful for Pyongyangthat in 1999 Rodong Sinmun , the o cial newspaper, stated with alarm:the corrupt ideas spread by the imperialists are more dangerous thanA-bombs for those countries in the process of socialism construc on. . . .It is important to sternly smash capitalist and non-socialist factors in thebud. All catastrophic consequences originate in small things. 27

But o cial discourse is not always the same and has undergone radicalshi s from me to me. Kim Jong-il himself o en advocates changes inthe economic system. On 4 January 2001 the Dear Leader published

in Rodong Sinmun an ar cle en tled The XXI Century Is a Century of Enormous Change and Crea on, in which the North Korean leader wrote:

Things are not what they used to be in the 1960s. So noone should follow the way people used to do things in thepast. . . . We should make constant e orts to renew thelandscape to replace the one which was formed in thepast, to meet the requirements of a new era. 28

In a visit to Beijing a few months later, Kim said he supported the greatachievements of Chinas economic opening, and then he issued thefollowing statement: All outworn and dogma c Soviet-type pa ernsshould be renounced . . . foreign trade should be conducted in accordancewith the mechanism and principles of capitalism. 29 In May 2010, as partof his h visit to China, Kim Jong-il visited the Chinese port of Dalian,which is regarded as a major logis cs center where economic reforms havehad a posi ve impact. The example of the city, some thought, could bereplicated in North Korea.

To what extent should the combina on of trial and error, the explicitdecisions about economic policy, and the changes of the legal frameworkin the DPRK be interpreted as a victory for the reformist tendencies? Amoderately realis c analysis of North Korean economic transforma ons



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casts many doubts not only on the economic e ciency of such changesbut also on the regimes poli cal will to move decisively through this path.While several foreign rms have ventured to invest in the DPRK, the balancehas been nothing short of devasta ng. An important group of rms thatentered the country in the 1990s have already suspended their ac vi es.For example, a Belgian company dedicated to cu ng diamonds withdrew in1996, the Dutch bank ING operated there for only four years, the consul ng

rm Euro-Asian Business Consultancy (EABC) for six, and Shell suspendedopera ons very quickly as well. A number of joint ventures have been agreedupon, but very few have managed to stand the test of me. Foreign rmsface many day-to-day problems such as di cul es of ge ng work visas for

their sta s, sudden changes in the rules of the game by the North Koreangovernment, delay of payments agreed with state enterprises, and largedi erences in terms of industrial and organiza onal cultures. 30

Such problems have also a ected the Mount Kumgang resort, whichwas the jewel in the crown of FDI projects in the DPRK. A er the rstyears of opera on, the results of this project were favorable, albeit notspectacular. Between 1998 and 2008, Hyundai had paid Pyongyang about$1.5 billion for the right to operate the resort. Visitors had reached atotal of two million, but Hyundai needed to receive at least a half milliontourists per year if its investment was to be fully pro table. Just whenMount Kumgang was reaching its equilibrium point, the renewed wave of tensions on the Korean Peninsula began to a ect the permanence of theproject. In July 2008, a South Korean tourist was shot to death by membersof the DPRK army. According to Pyongyang, the woman had entered anunauthorized military zone on a beach near Kumgang. As a result of the

incident, the South Korean government ordered Hyundai to stop toursto Mount Kumgang and Kaesong. Given the reluctance of South Korea toresume the visits, the DPRK froze the proper es of Hyundai Asan, valued at$325 million. To add fuel to the re, in April 2010, Pyongyang announcedthat, except for 16 people, all South Korean personnel working in Kumgangwould have to leave the complex within two weeks. These incidentsillustrate the adverse condi ons that FDI s ll faces in North Korea.

The limita ons of the SEZs are also clear in the design and implementa onof Rajin-Sonbong. To avoid possible contagion from outside and to putphysical distance between the SEZ and the rest of the economy, the NorthKorean government decided to locate this complex on the borders withRussia and China, in one of the countrys most remote areas. Despiteits loca on near the two giants, Rason has not received the expected


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23

FDI ows. Investors have had to play against cumbersome red tape, therela vely high wages set by the North Korean government, and the lack of basic infrastructure. For example, there is no airport, and no bridges reachRussia; the 17-kilometer route between Rajin and Sonbong takes half anhour by car, and the trip to Pyongyang by train takes 19 hours. No wonder,then, that Rason has performed poorly. Although the original goal in 1991was to get $4.7 billion in FDI in 10 years, by 2001 Rason had a racted only$80 million. The most dynamic business in the zone is not a factory but theOrakjang Casino, established by Hong Kong entrepreneurs. 31

The SEZ at Kaesong has fared much be er, but it is not without problems.The poor infrastructure in the DPRK has led South Korean companies togenerate electricity on their own. Furthermore, poli cal tensions betweenthe two Koreas, which resumed in 2008, have cast doubt on the viabilityof the project. The DPRK has imposed some restric ons on entry to theSEZ and even threatened to close it. In turn, some South Korean rmshave closed their opera ons because of geopoli cal uncertainty and inter-Korean acrimony. In sum, FDI management by North Korea has lackedconsistency and con nuity. Foreign investors also face some problems inCuba, but it seems that Havana has had a more uid administra on of foreign investment. Irrelevant as it might seem, this di erence can be acentral explana on for the di ering performances of the two countriessince the 1990s.

An important example of the hesitancy to deepen North Korean economicreforms is the controversial currency reform (or, rather, counterreform),issued on 30 November 2009. Beyond any technical ra onality, it seemsthat this measures main goal was controlling the spread of capitalismfrom below. The main countermeasure was the revalua on of the won .The government stopped the circula on of old banknotes and decreed thatthey should be changed to new currency at a rate of 100 to 1, which inprac ce meant a revalua on of 100 percent. The main controversial ma erwas that only 100,000 won could be exchanged for the new banknotes. Inthe o cial discourse, the reform was said to be aiming at gh ng in a on,inhibi ng black market transac ons, and, last but not least, stopping theCIA and its machinery, that were producing fake won and trying to introducethem over the border with China to destroy the economy. 32

In fact, this was a con scatory reform aimed at expropria ng, or at leastnullifying, the savings of pe y entrepreneurs who emerged a er the

mid reforms of the 1990s. Pro ng from the trade of imported products,



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these merchants had managed to accumulate money in the form of hardcurrenciesU.S. dollars, euros, or Chinese yuan. In blatant contradic onto the o cial discourse, this measure provoked dras c price increasesand worsened food shortages. Not surprisingly, the currency reform wasmet with anger by those a ected, who would carry out various protestac ons including the burning of old notes. Some traders might evenhave commi ed suicide. To alleviate social unrest, in December 2009 thegovernment increased the amounts of money that could be exchanged:150,000 won in banknotes and 300,000 won in bank deposits but onlya er the source of those funds had been inves gated. In February 2010the chief nancial o cer of the KWP, Park Nam-gi, was red. Blamed for

the failure of the monetary reform, Park was executed in March, a erreceiving a sentence of having ruined the economy in a planned way. 33

This situa on is symptoma c of the lack of government commitmentto thorough and systema c reforms of the economy. Despite fruitlessChinese pressure for more radical changes, the zigzag pa ern of reformsshows that the North Korean regime is willing to undertake only thosetransforma ons that are necessary to create a bare minimum materialbase to ensure the regimes survival. The government implementsstrategies to get hard currency while gradual and focused economicreforms are sterilized from any poli cal contagion. In this sense, theenclave economies in industry and tourism and the search for greaterinterna onal aid ows would be the highest priority for Kim Jong-il andhis successor. The implementa on of comprehensive market reformswould be postponed as long as possible, as Havana did in the mid-1990s.

Cuba reacted quickly to the collapse of the socialist bloc and the end of Soviet aid. Cubas response to these problems resulted in various policymeasures, of which two will be examined here in some detail: the a rac onof FDI and the endorsement of small business and agriculture coopera ves.Regarding FDI, on 23 June 1990 during a mee ng with the Poli cal Bureauof the CPC, Fidel Castro announced the ini a on of a policy to invite foreigninvestment into Cuba as joint ventures with Cuban state enterprises. Toallay fears about a radical change of the economic model, Castro was quickto clarify that the proposal does not clash with our Socialist system; ratherit means a speedier use of poten al resources. 34

Cuba implemented legal and ins tu onal changes a er star ng the reforms.The major legal change was the addi on of clauses to allow property rightsunder certain circumstances and for speci c economic ac vi es. In July


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1992, the cons tu on of 1976 was the subject of reforms designed to dealwith the gloomy economic reality that Cuba was facing in the midst of thespecial period. Ar cle 15 maintained the concept of Socialist en re stateproperty of the people but stated that property could be transferred tonatural or legal persons in excep onal cases in which the total or par altransfer of an economic objec ve is carried out for the development of thecountry and does not a ect the poli cal, economic and social founda onsof the state. To complete the cons tu onal FDI regula ons, Ar cle 15s pulated that the transfer of ownership was subject to approval by theCouncil of Ministers or its Execu ve Commi ee. 35

In 1995, the enactment of the so-called Act 77 (Ley 77) rea rmed thesechanges. The new law regulated FDI, provided mechanisms for these lement of disputes, and de ned more speci c condi ons for stateenterprises to start joint ventures with foreign companies. Judging by theiroutcomes, the cons tu onal changes and the promulga on of Ley 77 haveboosted FDI ows. These resources became a key ingredient of economicreforms in Cuba. FDI increased from $5 million in 1995, to $207 millionin 1998, and to $448 million in 2000. The bulk of this investment waschanneled to the tourism sector through the construc on of large hotels bySpanish companies. In the industrial sector other important projects wereimplemented. In 1994 the Canadian company Sherri and the GeneralNickel Company of Cuba (Compaa General de Nquel de Cuba) beganto exploit the vast reserves of that metal. Meanwhile, Chinese companieshave revamped nickel-processing plants and have explored new oil elds.

From a poli cal viewpoint, FDI has been a great advantage to Havana: itallows the government to nego ate the working condi ons from above,strengthens state tourism companies such as Cubanacn and Gran Caribe,generates substan al foreign exchange earnings, and does not produce ana ve entrepreneurial class that could eventually demand its share of economic or poli cal power. Nevertheless, the Cuban commitment to FDIhas not been without problems: foreign companies have been hamperedas they tried to set market prices for their products or services, are notgranted complete freedom for incen vizing worker produc vity, and havefaced bureaucra c ine ciencies to get visas for their execu ves. Theyhave also had to pay taxes that were not in the original agreements andhave had to accept expensive imports using the Cuban conver ble peso. 36

These and other problems have also arisen in the four Cuban SEZs, whichwere authorized to open in 1996. Despite the nearly free access to the



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Cuban market that the government o ers for products of rms basedin these areas, the many di cul es encountered in their opera onhave discouraged their growth. There is erce compe on from theDominican Republic and other Caribbean countries. Other obstacleshave to do with the complexity of impor ng inputs; this is due to theU.S. economic blockade, the compara vely high wages set by the Cubangovernment, and the reluctance of companies to hire foreign workers viastate agencies. Not all of the foreign rms have managed to survive theseconstraints on investment in Cuba; in fact, fewer than half of the jointventures launched between 1990 and 1993 s ll remained in opera onat the beginning of the next decade. 37 In spite of those shortcomings,

foreign enterprises have found be er condi ons and more reliability inCuba than in North Korea. This explains why FDI has been one of the keypieces of the Cuban economy in the last two decades.

The second pillar of the Cuban economic reforms was marke za on. As inthe case of North Korea, Cubas a tude toward the emergence of smallprivate businesses and the resul ng markets has uctuated betweencau on, respect, and repression. Let us recall that one of the mostcontroversial measures of Fidel Castro was the na onaliza on, in 1968,of 60,000 small- and medium-size enterprises (SMEs) that had surviveda er the success of the Cuban revolu on in 1959. This act eliminated anyves ges of private enterprise. In 1993, the Cuban government hesitantlyaccepted a meager liberaliza on, legalizing self-employment in a feweconomic ac vi es and allowing individuals to use foreign currencies,including U.S. dollars. As a result of this policy, many small privatebusinesses ourished rapidly. Perhaps the most representa ve were

small restaurants, known as paladares , and householders who rentedrooms to foreign tourists. The opera on of these businesses requiredthat employees were members of the owners family. 38

Afraid to proceed with a repriva za on of economic ac vi es, thegovernment tried to promote coopera ves, a property form halfwaybetween public and private. In 1993 Cuba decreed the crea on of the aforemen oned UBPCs. To guarantee state control of the UBPCs,the state leased out land to members of coopera ves but maintainedstate ownership of land. The government also issued a great number of regula ons designed to prevent too much autonomy of coopera ves.Many UBPCs were able to ourish nonetheless. Generally speaking,they fared be er than the remaining state enterprises in agriculture.Small businesses and coopera ves that emerged in the 1990s helped to


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raise Cuban produc vity; their growth certainly made an impact on theemployment structure. In 1981, the state provided jobs to 92 percent of the labor force; by 2002 this propor on had fallen to less than 77 percent.Meanwhile, as a percentage of the labor force, private farmers increasedfrom 7 to 11 percent, the coopera ves from 1 to 8 percent, and the urbanself-employed from 1.6 to 3.8 percent. 39

These changes also brought adverse distribu onal e ects and unexpectede ects to the economy. University enrollment halved in 199495 as manyyoungsters preferred to make their money in the private markets ratherthan embark on university studies whose economic returns were uncertainin the long run. 40 The reforms soon spawned a rapid social division,which clashed with Fidel Castros project of social equality. Beyond thissitua on, the Cuban establishment feared that new entrepreneurs couldbecome increasingly alienated from the exis ng poli cal structure. Theconjunc on of these factors explains the reversal of the market promo onmeasures that the government began to implement in the mid-1990s.

In August 1995, President Castro put on the brakes on reforms, declaring:The opening has brought risks. If more reforms are needed, we will

make them. For the moment, they are not necessary. 41 A er thatthe Cuban leadership embarked on a complex exercise of promo ngand hal ng reforms in di erent me periods and sectors. Shortlya er Castros speech, the government introduced new regula onsfor SMEs; they had a par cular impact on coopera ves, rooms forrent in private homes, and small restaurants. Regarding the UBPCs,the government carefully prevented their growth, trying to lessenincome dispari es between coopera ve members and the workersof state agricultural enterprises. In the case of the proto-hotels and

paladares , the government increased tax burdens and oversight. Forinstance, Cuban authori es informed paladares that they could operateonly if they had a maximum of 12 seats per establishment. Authoriza onfor opening new SMEs became almost impossible to get.

Restric ve measures were aimed at reducing the pro t margin of coopera ves, proto-hotels, and small restaurants as well as narrowing

the income gap between their workers and the state employees. Thecombina on of the policies to a ract FDI and to curb the development of SMEs brought mixed consequences: on the one hand, the income fromtourism helped to ensure the basic func oning of the economy; on theother, market repression inhibited a more dynamic performance of Cubasproduc ve apparatus. Because of restric ons on SMEs, the number of



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self-employed fell from 200,000 in December 1995 to about 160,000in 1998. 42 The unexpected emergence of a new sponsor of the Cubaneconomy facilitated the par al reverse of market reforms. Blessed withthe oil boom of the 2000s, Venezuelan president Hugo Chvez providedsubsidized energy to Cuba. At the same me, Venezuela imported fromCuba the services of well-paid doctors and nurses.

By the beginning of the 21st century, the Cuban government had ful lledFidel Castros promise of curtailing market reforms. There was con nuityin the changes that the government deemed strictly indispensable forits economic and poli cal survival. This situa on began changing in themid-2000s. Along with the problems of the economy itself, the poli calfactor paved the way for further reforms. The illness of Fidel Castro andhis brother Rals rise to power in 2006 provided the condi ons for thelaunch of a new wave of economic transforma ons. The new round of reforms began in July 2007, following a call by the new president todiscuss the necessary changes for improving the func oning of the Cubaneconomy. In February 2008, Ral Castro ordered measures with a dualra onale: freeing some poli cal constraints and providing new impetusto the economy. Thus, the government li ed restric ons on car rentalsand the purchase of mobile phones to Cuban ci zens. The following year,the government allowed Internet access at post o ces.

If the senior Cuban leadership had been tempted to retain the centralplanning scheme, a series of events in 2008 called into ques on theachievements of the postspecial period years, thus making evident thestructural problems of the Cuban economy. Between September andNovember 2008 the hurricanes Gustav, Ike, and Paloma hit Cuba, triggeringeconomic losses of $5 billion. At the same me, the global economic crisistrimmed the interna onal price of nickel. Tourist ows stagnated becauseof rising costs to visit the country. This problem arose from both the dualexchange rate regime and the global crisis itself; in 200809 half of Cubashotel rooms remained empty. To make ma ers worse, importsled bybasic productscon nued to increase; as much as half of Cuban landremains unproduc ve, and 80 percent of foodstu s must be imported. 43 The problems in the external sector and the slowdown of in growth of GDPin 200810, which is shown in Figure 2, should have been key factors inpersuading the Cuban government to undertake further reforms.

The boldest step in the new wave of economic changes has been thelaunch, in late 2010, of the guidelines for economic and social policy. 44


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This seminal document was cra ed by the Economic Policy Commi eeof the Sixth Congress of the CPC, headed by Ral Castro and coordinatedby Marino Murillo, minister of economy and planning. The aim was todiscuss the text and promote its adop on at the Sixth Congress of the CPC,to be held in April 2011. If they manage to nd a way through a jungle of entangled interests, the new reforms will remove the supplies booklet(libreta de abastecimiento ), by which the state provides modest ra onsof food and household items, similar to the fading public distribu onsystem in the DPRK. The Cuban government will con nue leasing idlelands to coopera ves and will permit many agricultural state-ownedSMEs to become UBPCs. These produc ve units will be managed by their

own employees; they will be allowed to own the means of produc onand will have to pay taxes. 45

To show that its reformist will is true, the Cuban government announcedin September 2010 that it would re 1.3 million public employees in thenext two or three years. On 1 April 2011, the rst 500,000 bureaucratswere made to quit their jobs and the rest of them will do so gradually.This measure is not a minor one as it will a ect one- h of Cubaseconomically ac ve popula on. To compensate for this massive loss inpublic employment, the Cuban government will con nue to provide freeeduca on and health services as well as subsidized transport for theen re popula on. Moreover, the government has authorized individualsto work on 178 private ac vi es previously prohibited. Unlike theprovisions of the 1990s reforms, SMEs will be able to employ nonrela vesand will be en tled to get bank loans; like coopera ves, they will have topay taxes. Proper es may be rented or sold, while the government will seek

to abolish the dual exchange rate of the Cuban currency.The design and launch of this new package of reforms have beenaccompanied by a meaningful change in the economic rhetoric of theCuban leadership. In an interview published by the Atlan c in September2010, Fidel Castro, who rst encouraged and then suspended the reformsof the 1990s, said: The Cuban model doesnt even work for us anymore.Later Fidel Castro argued that his words had been misread. He pointedout that his argument was that the U.S. economic model could no longerbe exported: My idea, as everyone knows, is that the capitalist system nolonger works for either the United States or the world; it is leading fromcrisis to crisis, which are becoming increasingly serious, comprehensive andrepeated. How such a system could serve for a socialist country like Cuba? 47



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A few months later, however, President Ral Castro, a leading advocatefor changes in the economic structure, returned to the charge and toldthe Na onal Assembly:

We can either rec fy the situa on, or we will run outof me walking on the edge of the abyss; we will sink,thus sinking the e ort of en re genera ons. We simplymust change misconcep ons about socialism, deeplyrooted for years in broad sectors of the popula on, as aconsequence of the excessive paternalis c, idealis c andegalitarian approach that the revolu on established forthe sake of social jus ce. 48

The discursive shi of the Cuban government is striking: the reforms wentfrom being a necessary evil (or sweet poison, to borrow North Koreanwords) in the 1990s, to a sine qua non for the survival of country andsocialism in the 2010s.

Following the Chinese Path? Prospects

of Further Economic Changes in NorthKorea and Cuba

Beyond their resilient vindica on of socialism and the structuring of thecentrally planned economy, in the 1990s North Korea and Cuba su eredthe implosion of real socialism worldwide, the loss of key economicpartners, and the need to implement reforms in order to survive.Despite each countrys similar responses to the crisis, their results havediverged in terms of the implementa on and outcomes of economic

changes in each country.

Let us put forward a compara ve balance of the reforms, star ng with theDPRK. Despite the winding pro-market discourse and the tenta ve signs of reform, it is clear that the North Korean government is fearful of followingthe path of economic change. Rather, Kim Jong-il seems to be designinga funding scheme (which does not necessarily mean a developmentstrategy) based on two pillars: (1) pursuing small developments of

industrial and tourist enclaves that may a ract foreign currencies but donot call into ques on the legi macy of the regime, and (2) maximizing thetensions on the Korean Peninsula to nego ate an agreement with EastAsian and world powers, thus exchanging security for foreign aid.


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Located at the crossroads of economic reform, the DPRK faces threeop ons. The rst but almost impossible op on is to keep intact the autarkicsystem, with the consequent risk of a deepening crisis, a new ArduousMarch, and the likely loss of the regimes legi macy. The second op onwould be to adopt a strategy of market socialism, following the familiarexperiences of China and Vietnam; this is a hard choice for the NorthKorean leadership as long as choosing it could erode the leaders poli calcontrol vis--vis new groups emerging from economic moderniza on. Thethird op on is to repress marke za on but transform North Korea into arecipient of massive amounts of foreign aid and overregulated FDI. In thethird scenario, the poli cal elite could stay in power while seeking to mend

fences with the United States, Europe, and Northeast Asian neighborsin exchange for economic aid. Insofar as this strategy would require adiploma c bargain and could relieve interna onal tensions, the DPRK couldalso reap a peace dividend from a par ally demilitarized economy.

In the case of Cuba, the swi adop on of reforms in the early 1990savoided a deeper fall than the one that was looming on the horizonas a result of the collapse of Soviet socialism. In subsequent years theCuban economy underwent hard mes, but its performance was lessunfavorable than Central Asias vanishing centrally planned economies.Certainly, as our gures have shown, Cubas crisis management wassharper than North Koreas. Nevertheless, the brake on reforms hinderedan even be er performance of the Cuban economy. In the mid-1990s thetension between two di erent objec vespreserving poli cal control orreviving the economy was solved in favor of maintaining poli cal control.This decision hindered an earlier recovery from the collapse of the socialist

bloc and kept alive the many structural constraints of the Cuban economy.Propelled by FDI and the services sector, during the rst decadeof the 21st century the economy managed to improve its growthrates within a framework of monetary stability and scal balance.However incremental and mid the Cuban reforms might have been,the outcome of this uneven process has been the construc on of new engines of economic accumula on. In just two decades, Cubaevolved from an economy based on agriculture and processing of primary products to an economy based on the exploita on of mineralresources and the export of professional services and tourism.In a sense, these changes have brought about a be er u liza on of someof the countrys most valuable resources: beau ful scenery and highlyskilled workers.



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Both North Korea and Cuba have been reluctant to implement full-edged market reforms and have followed a stop-go pa ern. Both

governments have been quite hesitant about allowing the growth of pe y entrepreneurship and have pursued restricted, encapsulatedchanges. Pyongyang and Havana have undergone diploma c con ictsand disagreements with big powers. Neither the DPRK nor Cuba has beenable to revamp its agriculture or industry to the levels of the late 1980s.Thus, the main di erences in economic performance have to do withthe con nuity of Cuban policy to a ract FDI in tourism and the abilityof Havana to build new sources of accumula on such as the provisionof medical services to Venezuela. By contrast, North Koreas strategy for

a rac ng FDI has been, at the very least, inconsistent. The SEZ in Rajin-Sonbong did not take o as expected, while Kaesong has been su eringthe nega ve e ects of roller-coaster changes in inter-Korean rela ons.Geopoli cal tensions led to the closure of the tourism-oriented MountKumgang project in 2008, thus depriving the DPRK of a vital source of foreign currency.

An addi onal variable in this diverging performance could be theevolu on of military expenditure. Neither Cuba nor the DPRK providesreliable informa on on its military costs. The limited data available onthe SIPRI database suggest that Cubas expenditures for arms remainedessen ally stable between 1988 and 2004 and then increased graduallybetween 2004 and 2008. Although SIPRI does not issue data for NorthKorea, it may be assumed that building medium- and long-range missilesand conduc ng nuclear tests in 2006 and 2009 must have required thatsigni cant resources be allocated to the military sector. In fact, some

authors es mate that DPRK military expenditures could represent up to28.6 percent of GDP. 50 Kim Myong-chol, an interna onal analyst closeto North Koreas top echelon, has reckoned that the DPRKs economicproblems have much to do with the excessive emphasis on militaryspending since the 1960s. 51 If this hypothesis is correct, the North Koreanmilitary buildup would have subtracted important resources for economicreconstruc on. Cuba, meanwhile, would have devoted fewer resources,at least in rela ve terms, to the maintenance of its military apparatus.

What is the future of market reforms in the DPRK and Cuba? The outlookdi ers for each country. The Cuban economy has outpaced the sharpdownturn of the special period and, indeed, achieved high growth ratesin the 2000s. Unlike North Koreas economy, Cubas economy is not likelyto collapse in the medium term, but the di culty of returning to a path


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of sustained growth in Cuba could head the country toward a scenarioof poli cal unrest. In contrast with North Korea, whose expatriates inJapan overwhelmingly support the Pyongyang regime, members of theCuban diaspora in the United States have been consistently an -Castro.In yet another di erence between the DPRK and Cuba, some poli calopposi on does exist within Cuba. In 201011, a er the hunger strikesof Orlando Zapata and Guillermo Farias, the government was backedinto a corner and gradually released 75 poli cal prisoners who had beenincarcerated in the Black Spring of 2003. Similarly, several intellectualsof Castros regime, such as singers Silvio Rodrguez and Pablo Milans,have openly cri cized the revolu on. The symbolic opposi on and the

appearance of public ssures (not fractures) within the regime mightpush in the direc on of economic change.

Clearly, the 291 points prescribed by the guidelines for economicand social policy are the most important a empt to transform Cubaneconomic rela ons since the 1976 cons tu on. It would be wrong tothink, however, that Ral Castro and his allies are seeking the restora onof capitalism; rather, they pursue incremental changes. If successful, thenew reforms will allow a dose of market growth, but important sectorswould remain under the aegis of the state. As a whole, the regime seeksto preserve the governments ability to plan the economy. Unavoidably,echoes from Beijing reverberate in this project of a mixed economyunder state leadership. If the economic changes proposed by the CPCsguidelines manage to overcome bureaucra c resistance and are nallyimplemented, Cuba could soon follow the path of China and Vietnam,building a Caribbean version of market socialism. It remains to be seen

whether unlike in Chinawhere the income distribu on has undergone aLa n Americaniza on process since 1978economic opening in Cuba willlead to a model that combines concern for social equality with high ratesof economic growth. S ll another scenario for Cuba would be su eringthe fate of the Soviet perestroika, in which the government lost controlover the pace of economic change.

Cuba might be moving forward, but North Korea is stuck in a hazardousstasis. Under current condi ons, this means nothing other than a frayedeconomic situa on. Although the DPRKs economic recovery has beenslower than Cubas, the bid by the North Korean regime appears to befor the reproduc on of the status quo in poli cs and economics. Thispossibility would of course be enhanced if the DPRK does nego ategreater ows of assistance in exchange for ensuring the security of the



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United States and the DPRKs Northeast Asian neighbors. If China doesnot succeed in pressuring Pyongyang to undergo substan al economicreforms, the more likely scenario is one of only muddling through, whichwould mean that the North Korean economy remains in a state of slowgrowth and marginal reforms. 52 The big ques on, of course, is how longthis situa on can be sustained without substan al changes in the poli caland social organiza on. If both op onsmuddling through and securityfor aidfail, the North Korean regime could be risking collapse.

In a con nuum of economic transi ons from centrally planned economies,we could place the DPRK in one extreme and Russia in the other. Inthe postCold War era, most of the centrally planned economies havedisappeared, but the unrestrained transi on to capitalism has not beenan op mal solu on for them. In fact, one case of economic regressionhas been even more spectacular than the DPRK and Cuba: Russia, whicha empted an abrupt, big-bang transi on from a centrally plannedeconomy to a capitalist system, underwent a 50 percent economic declinebetween 1992 and 1998. By contrast, countries like China and Vietnamthat implemented gradual market reforms have achieved considerableand sustained economic growth. In other words, North Korea and Cubas ll can avoid the high costs of either s cking to the old centralist modelor stampeding toward second-class capitalism. In this sense, Cuba seemsto be one or two steps beyond the DPRK. China and Vietnam should bethe model for both, but the failed reform of the USSR under Gorbachev isalso a bleak scenario that cannot be dismissed.

References1 At this early point, I have to make a key methodological observa on. As long as NorthKorea has not released systema c gures for more than three decades, the analysis of the DPRK economy requires work of almost an archaeological nature, whose conclu-sions may be unreliable. Anyway, this fascina ng subject jus es the e ort. Unless oth-erwise stated, the gures reported in this paper arise from the es mates of the Bank of Korea. I must reckon, however, that the informa on published by this ins tu on is notexempt from cri cisms. Some experts, for example, Anthony Michell, in The CurrentNorth Korean Economy, in Economic Integra on of the Korean Peninsula , ed. MarcusNoland (Washington, D.C.: Ins tute for Interna onal Economics, 1998), 139, es matethat the decline of the North Korean economy has been less pronounced than the

gures suggested the Bank of Korea. In the case of Cuba, things are slightly be er.Recent sta s cs are available at the O cina Nacional de Estads ca, but it is not easy todraw historic series because Cuban sta s cal methodologies have changed over me;see Carmelo Mesa-Lago, Contribucin a la polmica sobre el crecimiento del PIB enCuba, Vitral 15 , no. 86 (JulyAugust 2008). In this ar cle, data for earlier years havebeen taken from the comprehensive work of Ma as Holloway and Salvador Marconi,

Amrica La na y el Caribe: Series histricas de estads cas econmicas 19502008 (San ago: ECLAC, August 2009).


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2 Don Oberdorfer, The Two Koreas: A Contemporary History (New York: Basic Books,2001), 202.

3 Quoted in Marcus Noland, Avoiding the Apocalypse: The Future of the Two Koreas(Washington, D.C.: Ins tute for Interna onal Economics, 2000), 67.

4 Marcus Noland, Sherman Robinson, and Tao Wang, Famine in North Korea: Causesand Cures (working paper no. 99-2, Ins tute for Interna onal Economics, Washington,D.C., 1999), 1.

5 Ediciones en Lenguas Extranjeras, Kim Jong Il, Breve Biogra a (Pyongyang: Ediciones enLenguas Extranjeras, 1998), 133.

6 Food and Agriculture Organiza on of the United Na ons (FAO), The State of Food Inse-curity in the World, 2010: Addressing Food Insecurity in Protracted Crises (Rome: FAO,2010), 15, 50.

7 Noland, Avoiding the Apocalypse , 84.

8 Raphael Perl, North Korean Drug Tra cking: Allega ons and Issues for Congress(Washington, D.C.: Congressional Research Service, 9 March 1999); Noland, Avoidingthe Apocalypse , 11633.

9 Jorge E. Domnguez, Cubas Economic Transi on: Successes, De ciencies, and Chal-lenges, in The Cuban Economy at the Start of the Twenty-First Century , ed. Jorge I.Domnguez, Omar Everleny Prez Villanueva, and Lorena Barberia (Cambridge: HarvardUniversity Press, 2004).

10 Jess M. Garca Molina, La economa cubana desde el siglo XVI al XX. Del colonialismoal socialismo con mercado, Estudios y Perspec vas (ECLAC), no. 28 (February 2005):2526.

11 Jorge F. Prez-Lpez, El interminable periodo especial de la economa cubana, ForoInternacional 43, no. 3 (JulySeptember 2003).

12 Carmelo Mesa-Lago, Contribucin a la polmica sobre el crecimiento del PIB enCuba; Omar Everleny Prez Villanueva, La economa en Cuba: un balance necesario yalgunas propuestas de cambio, Nueva Sociedad , no. 216 (July-August 2008): 50.

13 Prez Villanueva, La economa en Cuba, 53.

14 Stephen Baranyi and Ann Weston, Economa cubana: retos y opciones, Espacio Laical (Havana) 4, no. 14 (AprilJune 2008): 28.

15 Prez Villanueva, La economa en Cuba, 5455.

16 Jennifer Nyberg, Sugar Interna onal Market Pro le : Background Paper for theCompe ve Commercial Agriculture in SubSaharan Africa (CCAA) Study (WashingtonD.C.: World Bank, 2009), 8, h p://siteresources.worldbank.org/INTAFRICA/Resourc-es/257994-1215457178567/Sugar_Pro le.pdf.

17 Jorge F. Prez-Lpez, Tiempo de cambios: tendencias del comercio exterior cubano,Nueva Sociedad , no. 216 (July-August 2008): 17778.

18 Communist Party of Cuba (CPC), Proyecto de Lineamientos de la pol ca econmica y social [Guidelines for economic and social policy] (Havana: CPC, 1 November 2010), 13,www.cubadebate.cu/wp-content/uploads/2010/11/proyecto-lineamientos-pcc.pdf.

19 Laboratorio La noamericano de Evaluacin de la Calidad de la Educacin (LLECE),Primer Estudio Internacional Compara vo sobre Lenguaje, Matem ca y Factores

Asociados en Tercero y Cuarto Grado (San ago, Chile: UNESCO, 1998).

20 Domnguez, Cubas Economic Transi on, 21.

21 Economist Intelligence Unit, IT in North KoreaSilicon Valley, Pyongyang? EIUBusiness Asia , 22 April 2001.

22 Andrei Lankov and Kim Seok-Hyang, North Korean Market Vendors: The Rise of Grass-roots Capitalists in a Post-Stalinist Society, Paci c A airs 81, no. 1 (Spring 2008): 71.



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23 Anthony Michell, The Current North Korean Economy, 143.

24 Government of the Democra c Peoples Republic of Korea, Cons tu on of the Demo-cra c Peoples of Korea, 2009, h p://175.45.176.14/en/great/cons tu on.php?3.

25 Ibid.

26 Mika Marumoto, North Korea and the China Model: The Switch from Hos lity toAcquiescence, Academic Paper Series: On Korea (Korea Economic Ins tute) 1 (2008):103.

27 Quoted in Noland, A voiding the Apocalypse, 87.

28 Quoted by Rdiger Frank, North Korea: Gigan c Change and a Gigan c Chance, Nau-lus Policy Forum Online, Nau lus Ins tute for Security and Sustainable Development,

9 May 2003.

29 Quoted in John Gi ngs, Brinkmanship on the 38th Parallel, Guardian , 20 February 2002.

30 Economist Intelligence Unit, North Korea a er the Summit: Open for Business? EIU

Business Asia , 2 April 2001.31 Noland, Avoiding the Apocalypse , 135; Marumoto, North Korea and the China Model,

103.

32 Alejandro Cao de Bens, Men ras sobre la reforma econmica, Kaosenlared , 7 April2010, www.kaosenlared.net/no cia/corea-men ras-sobre-reforma-economica.

33 Pyongyang ejecuta al responsable de su reforma monetaria. El Mundo (Madrid), 18March 2010, www.elmundo.es/elmundo/2010/03/18/internacional/1268882645.html.

34 Quoted in Domnguez, Cubas Economic Transi on, 17.

35 Cons tucin de la Repblica de Cuba, Republic of Cuba, 1992, www.cuba.cu/gobierno/

cuba.htm.36 Domnguez, Cubas Economic Transi on, 3536.

37 Ibid., 28; Andrew Zimbalist, Whither the Cuban Economy? in Cuba: The Contoursof Change , ed. Susan Kaufman Purcell and David Jochanan Rothkopf (Boulder: LynneRienner, 2000), 24.

38 Domnguez, Cubas Economic Transi on, 23.

39 Ibid., 27.

40 Carmelo Mesa-Lago and Pavel Vidal-Alejandro, The Impact of the Global Crisis on CubasEconomy and Social Welfare, Journal of La n American Studies 42, no. 4 (2010): 700.

41 Quoted in Marifeli Prez-Stable, Cuba: Sucesin o transicin? Foro Internacional 43,no. 3 (JulySeptember 2003): 555.

42 Zimbalist, Whither the Cuban Economy? 22.

43 Mesa-Lago, Contribucin a la polmica sobre el crecimiento del PIB en Cuba, 19;Reform in Cuba: Towards a Mixed Economy, Economist , 16 September 2010.

44 CPC, Proyecto de Lineamientos de la pol ca econmica y social .

45 Ibid.

46 Je rey Goldberg, Fidel: Cuban Model Doesnt Even Work for Us Anymore, Atlan c ,8 September 2010, www.theatlan c.com/interna onal/archive/2010/09/ del-cuban-model-doesnt-even-work-for-us-anymore/62602/.

47 Se malinterpret mi referencia al modelo cubano: Fidel Castro, La Jornada (MexicoCity), 11 September 2010, 1.

48 Ral Castro, O rec camos o nos hundimos, El Pas (Madrid), 18 December2010, www.elpais.com/ar culo/ul mo/Raul/Castro/rec camos/nos/hundimos/elpeputec/20101218elpepuult_1/Tes.


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49 Stockholm Interna onal Peace Research Ins tute (SIPRI), SIPRI Military ExpenditureDatabase, h p://milexdata.sipri.org/result.php4, accessed 10 March 2011.

50 Noland, Avoiding the Apocalypse , 72.

51 Kim Myong-chol, Kim Jong-Il: Day of Having Korea Reuni ed (Pyongyang: Foreign

Languages Publishing House, 2001), 12530.52 Noland, Avoiding the Apocalypse , chap. 9.



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Authors:

John Everard

Jos Luis Len-Manrquez

Yeongkwan Song

Yoon-shik Park

Michael J. Mazarr and the Study Groupon North Korean Futures

Balbina Y. Hwang

Abraham M. Denmark

Sharon Perry, Heidi Linton,Louise Gresham, and Gary Schoolnik

Duyeon Kim

On Koreabegan in December 2006 with the initiation of KEIsAcademic Paper Series, a year-long program that provides bothleading Korea scholars and new voices from around the worldto speak and write on current events and trends on theKorean peninsula.

Each year, KEI commissions approximately ten papers anddistributes them individually to over 5,000 government officials,

think tank experts, and scholars around the United States andthe world. Authors are invited to the Korea Economic Instituteto discuss their research before a Washington, DC policyaudience. At the conclusion of each series, the papers arecompiled and published together as theOn Koreavolume.

To learn more about how to contribute to future AcademicPapers Series forums and other programs at KEI, please visit:www.keia.org.

ark

e.

Documents

Similar Policies, Different Outcomes: Two Decades of Economic Reforms in North Korea and Cuba, by Dr. José Luis León-Manríquez