“Red Hat Entrepreneurs” in North Korea
After a third nuclear test in February 2013, North Korea became even more inscrutable. The world believed that North Korea was propped up by China, prompting the U.S. to try to disrupt the China-North Korea connection. To pull China away from North Korea, the U.S. adopted a more receptive stance towards China’s “New Type of Great Power Relationship,” which emphasized cooperation rather than conflict.
When Xi Jinping defined the “New Type of Great Power Relations” in his meeting with Obama at Sunnylands last year, he described it in three points: 1) no conflict or confrontation, through emphasizing dialogue and treating each other’s strategic intentions objectively; 2) mutual respect, including for each other’s core interests and major concerns; and 3) mutually beneficial cooperation, by abandoning the zero-sum game mentality and advancing areas of mutual interest [1].
In exchange, China reduced its economic support of North Korea and joined the sanctions movement led by the U.S. Although North Korea was expected to face greater economic difficulties, according to the bank of Korea, North Korea’s GDP grew by 1.2% and 1.1% in 2012 and 2013, respectively.
How is this possible? Is there another financial backer besides China? Many speculate that Russia may be supporting North Korea, but the two countries have not yet established strong trade and economic relations. Who, then, is responsible?
Commercial trade has been allowed since the mid-1990s in North Korea. This picture shows the interior of Tongil Street Market in Pyongyang in September 2004. (source: Korean Central News Agency of North Korea).
Surprisingly, the financial benefactors are actually within North Korea. It is the emerging capitalist class, or donju, who have been a part of North Korean society since the 1990s, when commerce was first allowed. In recent years, the academic world of North Korean Studies in Korea has interpreted the influence of donju in varying ways, from loan sharks to "executives in private companies”. The one thing no one denies, however, is their existence.
On July 15th, the Federation of Korean Industries (FKI) announced the amended “five principles of economic cooperation” in a seminar on economic cooperation between North and South Korea. The previous principles of economic cooperation, in place since 1995, were "unilateral support and pressure from South to North”. In contrast, the new principles focus on “self-directed economic development based on a market economy in North Korea” and “complement and develop the advantages of North and South industries.” Choi Soo-Young, a researcher from the Korea Economic Research Institute, explained the changes by saying, “Marketization and private economy has been expanding since the Kim Jeong-Eun administration took office”. Recent reports by the U.S. Congressional Research Service(CRS) pointed out that “the North Korean economy showed slight growth early this year” and that “Kim Jeong-Eun administration allows underground economies such as unofficial small businesses and street vendors”. It was at this time that FKI and CRS also started to notice private companies and the donju in North Korea.
Cell phones have become widespread, with an estimated three millions using them in North Korea.(Source: Medical Aid for Children)
Red Hat Entrepreneurs and Red Capitalism
I encountered one of the first major signs of change in a meeting with a high-level official from Hunchun, China at the Korea-China exchange program hosted by Peace Research Institute last October. He said that he could see many “red hat entrepreneurs” popping up in North Korea.
In China, the term “red hat entrepreneurs” refers to the executives of Hyangjin Companies, which were small businesses (under seven employees) that expanded in rural areas in the 1980s when economic reform and the open-door policy had just begun in China. At the time, due to socialist principles, only the state (through state-owned enterprise) and village residents (as collective companies) could own and run companies. However, regular Chinese villagers had no money to invest. Certain Chinese who had accumulated capital found a loophole by founding and running companies with their own money, hiring villagers, then registering those companies as collectives, making it appear that the villagers ran them through joint investment; in reality, however, they operated as private companies. By referencing “red hat entrepreneurs” in North Korea, the high-level official were referring to the expansion of private companies there.
His words reminded me of one of my own works about “red capitalists in North Korea” twenty years ago. In June 1996, Kim Jeong-Woo, the North Korean Chief of the Committee on Economic Cooperation with Foreign Countries, held a press release in Tokyo about investment in an exclusive industrial zone in Najin and Seonbong. It was then that I first realized that North Korea had significant interest in the market economy.
Overseas Chinese in North Korea usually live Sinuiju, the border area, through which they can come and go between North Korea and China (though only with the right river-crossing license). The picture is of the Sino-Korea Friendship Bridge, which connects Dandung in China to Sinuiju. (Source: SisaIN, Sin Seon-Young)
Upon returning to Seoul I conducted additional research on North Korea and learned that North Korea had plans to foster a thousand “red capitalists” to adapt to the market economy. The “red capitalists” were certain North Korean elites who would be deployed abroad, learn about the market economy, and come back. In his work, Lee Jong-Gyeom, a researcher on North Korean studies who conducts interviews with North Korean defectors, noted that “in the past, Baekdu mountain families (people who fought in the anti-Japanese struggle with Kim Il-Sung and their ancestors) lived well; however, since 1995 people with money have lived well.” What kind of social and economic changes have occurred in the mid-1990s?
Originally, it was impossible for the donju to exist under the principles of socialist system, where the state decides what and how much of food and basic necessities to produce, and orders state-owned enterprises and collective farms to produce them. Raw materials and energy are also provided by the state. Producers send products to state-owned stores, and the stores sell the products at a set price. In the production and distribution system of a socialist country, there is no room for people who have money to invest and gain profit.
Yet the socialist system stopped working in the 1990s. State-owned enterprises stopped producing since they were not provided with raw materials and energy. Workers didn’t have any work to do. Rations stopped and people could not buy things at the state-owned stores. As the role of the state started to decline, the donju have emerged as a powerful economic group. Below are the three stages to the development of the donju.
Cheonrima steel manufacturing factory in Nampo. Cheonrima area is also known for the production of apparel and tobacco. (Source: Korean Central News Agency of North Korea)
The First Stage (End of 1980s)
The basic condition of the donju is the possession of large amounts of North Korean currency. Who then could accumulate it? The answer is Ethnic Koreans in Japan, repatriated to North Korea after the Korean War.
North Korea nationalized its industries and distribution systems in 1949 and 1958, respectively. In the same year, a labor vacuum occurred as the Chinese People’s Liberation Army, who had helped rebuild the North Korean economy after the Korean War, withdrew. The North Korean government began to bring Korean-Japanese back to fill the gap - a decision that ironically played a big role in opening up the country to the market economy. When the Korean-Japanese arrived, they brought clothes, watches, and electronics made in Japan - and soon enough, a black market was established to trade them. They could also exchange Japanese currency (from relatives in Japan) at favorable rates given their high demand since people could only buy luxury goods with foreign currency at the imported goods store founded by the government. Korean Japanese possessed a great amount of North Korean currency aside from the wages they were gaining from official labor. However, there was no room for them to use it under the socialist system, and had no choice but to store it away, accumulating wealth as they did so.
The second group of donju emerged as North Korea and China reopened relations in 1982 after a cold period caused by the Cultural Revolution in China. This time, the group was overseas Chinese in North Korea; they were especially active in trade between the two countries after the Chinese State Council allowed the visiting of relatives in 1984. Overseas Chinese in North Korea usually lived in Sinuiju, the border area, and could come and go between North Korea and China with a river-crossing license. They made large profits by taking products made in Japan from Korean Japanese repatriated to North Korea to sell back home in China. Thus, the Korean Japanese and overseas Chinese that had connections with people in Japan and China were able to accumulate money by using their unique connections.
A ship with Korean Japanese returning to North Korea leaving the port of Niigata in December 1959. (Source: Mainichi Newspaper)
Lastly, domestic North Koreans could also become donju. Free markets have always existed in some form or another in North Korea - from farmers markets in rural areas to jangmadang (marketplace) in cities - for customers to buy products not provided by ration or sold in state-owned stores, and for farmers to sell their produce unofficially. The government has alternated between overlooking or cracking down on such activity. As the government was unable to properly provide daily necessities starting the end of 1980 to early 1990s, it became less and less able to control the markets’ activities. At this time, people who were successful merchants also became donju.
The Second Stage (1990s ~ early 2000s)At first, donju simply meant people in North Korea with money; in order to become “red capitalists,” they had to first invest their money and make a profit. But there was nowhere to invest in socialist North Korea in the 1980s.
Then, in the mid-1990s North Korea experienced a famine; unable to provide rations, the government permitted market activity instead. In March 1993, farmers markets were allowed to operate year-round.
Yet, without raw materials and energy, state-owned facilities and equipment went unused; and since there was no work to do in state-owned enterprises, workers couldn’t go to work. In order to combine “freed” facilities with workers, money was needed - and this was where the donju came into play. The government looked the other way while the donju utilized its facilities and workers. Meanwhile, the donju found their opportunity to invest their money to make even more money.
Generally, there are two paths toward market reform. One is top-down marketization promoted by the government, like in China. The other occurs through bottom-up changes by people utilizing the market in their daily lives, accepted by the government, such as in North Korea, as market activity gradually began to unfold.
After the mid-1990s, countless small private companies appeared selling basic necessities in the market. Workers paired up with a few other workers and made products in the form of handicraft manufacturing. They were able to do so because the donju give out loans for procuring raw materials.
Street view in Pyongsung (a distribution hub with a well-developed rail network). (Source: Flickr)
Much like early financial capital, the donju not only lent money, but also organized production. For example, a donju would place orders with textile and apparel producers and sell the products to retailers with vehicles borrowed from state-owned enterprises. Nowadays, it’s said that the donju have entered the a manufacturing stage: the donju gathered producers in the factories borrowed from state-owned enterprises and produce goods through a fixed process. Moreover, the donju lend operating funds to state-owned enterprises and receive or produce goods under the name of that state-owned enterprise.
Donju also show their presence in earning foreign currencies. When faced with financial difficulties, the North Korean government decentralized trade authority, previously monopolized by the International Economy Committee, to each office and committee within the North Korean cabinet, and even to local governments in provinces. Through this process, trade companies were created, which needed to purchase goods to export, but they lacked the money to do so. They therefore borrowed funds from the donju to run their trading business.
Donju have not limited their role to just lending seed money to others. They have advanced to direct trading by borrowing wak, or a trading certificate, from national trading companies, by paying a rental fee to the state-owned company. In this way, donju have also been able to earn foreign currency.
Like entrepreneurs in capitalist society, donju also directly take on financial risk. Under the current laws of North Korea, they technically commit illegal acts on a daily basis - which is why they need help from the Ministry of the People’s Armed Forces. Foreign currency earning activity is highly speculative and dangerous, but among North Korea’s total foreign currency earning business, 80% of investment comes from the donju.
Donju have a strong influence on the distribution industry as well. When foreign currency-earning donju bring goods to North Korea, there are merchants, also donju, that take on domestic distribution. Under one big merchant, there are about 20 middlemen and under them, there are 20 retailers. Through this process, the imported goods are spread throughout markets nationwide. According to Jeong Eun-Lee, a professor at Gyeongsang National University, there are an estimated more than 250 North Korean markets, with 22 in Pyongyang, 48 in other cities, and 138 in districts. Im Eul-Chul, a professor at University of North Korean Studies, says that there are more than 400 markets that have been identified through Google imaging.
Nowadays, products beyond basic necessities are traded in the markets; from food and clothes to furniture, electronics, and even cars and houses. There is now a class with a rising income due to their market activity and a market demand for such items. Due to a recent drought, a food shortage is expected; however, unlike in the past, because there is enough alternate food such as meat circulating on the market, there are no concerns that people will starve from food deprivation.
The Third Stage(Early 2000s ~ )
The position of the donju seems to have strengthened after the 7/1 Improved Economic Management Measures in 2002.
7/1 Improved Economic Management Measures was announced in July 1st, 2002. It is about actualizing price and wage, expanding management autonomy for factories and companies, strengthening material incentive for workers, etc. This measure is interpreted as introducing part of a market economy within a planned economy. [2]
Due to general market reform in 2003, farmers markets were legalized and became permanent establishments where all consumer products, including industrial products, could be traded. Products from state-owned enterprises and imported goods were also allowed in the general market. Taking advantage of this opportunity, the donju took operational control of over 80% of companies, with the state’s control in name only. Because of this, state-owned trading companies - where donju have great influence through loans or management - have emerged as the biggest supplier for imported goods instead of overseas Chinese. This is a big change as previously, overseas Chinese in North Korea led trade between the two countries thanks to their ability to cross the border. However, the latter are limited by the amount of goods they can bring and the burden and costs of personally transporting goods from Chinese wholesale markets as well as paying bribes along the way. State-owned trading enterprises, meanwhile, can purchase large quantities of goods from local factories in China, cross the border easily, and store them in warehouses in large cities with good traffic network.
The trading leadership originally formed in Sinjuiju formed by overseas Chinese and Korean Chinese has therefore moved to big cities such as Pyongsong, in South Pyongan Province, and Chungjin, in South Hamgyong Province. Recently, these big cities have emerged as new manufacturing areas by integrating traditional science technology infrastructure and importing raw materials from China. After the 7/1 Measure, manufacturing factories in local areas went through big changes. From that point on, funds from the donju began to flow into local factories as investment loans, in return for renting out their name. After mid-2000s, donju's funds have begun flowing into big factories as the marketization progresses.
Since the donju have played the role of financial backers for North Korea’s economic growth during times of global economic sanction, the Kim Jeong-Eun administration has developed a symbiotic relationship with them: the state as "official owner," the donju as "red hat entrepreneurs.”
Written by Mun Hee Nam, ISC Advisor and a special writer for the magazine SisaIN.