By Yonho Kim

North Korean leader Kim Jong-un committed to complete denuclearization of the Korean Peninsula at the June 12 summit with U.S. President Donald Trump. Whether Kim has made a shift in his strategic calculus will become clearer depending on the sequence of concrete steps he takes. One of the critical factors in his calculus should be his strong desire to develop the North Korean economy. It is notable that his public commitment to and policy focus on domestic economic development have been consistent, especially since he declared completion of the state nuclear force at his 2018 New Year’s address. In this sense, Kim may have made calculated remarks when he admitted to the embarrassing condition of the roads and railways in his country at his first summit with South Korean President Moon Jae-in.

Since Kim Jong-un took power in late 2011, unprecedented market activities are emerging thanks to the expansion of state-run mobile telecommunications and spontaneously formed private transport services. North Korea’s cell phone subscribers are now estimated to count around 4 million, close to 20% of its entire population, facilitating timely communication of market trends. This allows the merchants to determine quantities and prices of products to trade, as well as shipping and delivery methods over the phone. Merchants can no longer compete in the markets without a cell phone. In addition, Kim Jong-un’s tolerance of private enterprise within North Korea, and the creation of a de facto public-private collaborative operation have helped to foster private transport service enterprises, also known as “servi-cha.” Beset by economic difficulties and poor electricity supply, the railway system has become unreliable, leaving a fleet of vehicles imported mainly from China to rise as the main mode of commercial transport.

The combination of servi-cha and cell phone during the Kim Jong-un era have given birth to a North Korean style innovation in logistics. Assisted by the rapid exchange of information, the system is evolving to create close ties between servi-cha owners and drivers, wholesale and retail merchants, brokers, fuel traders, checkpoints, and other associated actors in the chain. Bringing in new servi-cha customers, pricing freight charges, transferring money, trading fuel, and situations at checkpoints are all being managed efficiently through communications via cell phones. The combination of servi-cha and cell phones has even made possible North Korean style parcel delivery services. Gradually disappearing “door-to-door” merchants who used to travel long distance to make profitable trade, the ability to operate a supply chain through a phone call, connecting traders, drivers, and even checkpoints, has opened up a new business era of “stay-at-home merchants.”

Considering the great increase in the mobility of the North Korean people and products off the regime’s radar, and rapid expansion of market information dissemination through mobile telecommunications, the aforementioned “combination” is a core element in determining the changing direction of North Korean marketization. First of all, the new system in logistics has brought specialization to the process of distribution. Moving away from the previous method of the merchants self-delivering, the actors have divided each step of distribution by roles such as shipping, transporting, receiving and selling. As a result, it has created cost reduction, risk distribution, and the enlargement of cargo transfers, which made possible the quick response of product supply to changes in market conditions. While these structural changes benefit consumers through the stable price of goods, since a sales strategy aimed at regional prices differences has lost its competitiveness, a new sales strategy has emerged where sellers attempt to quickly turnover goods but profit margins are squeezed. In such circumstances, the influence of donju known as the ‘red capitalists’ continues to grow, widening the gap between the rich and poor among merchants.

The combination of servi-cha and cell phones has facilitated long-term and stable trade relationships, and developed a credit-based logistics system. The enlargement in the scale of trade has also increased the risk of business failure, and as a result, it is difficult to guarantee the operation of the new logistics system without credibility. In fact, in order for the market to develop, fulfillment of a contract must be ensured, and the predictability of trade relationship secured through legal and institutional arrangements. However, as evidenced by people’s deep-rooted distrust in the parcel delivery system of Ministry of Post and Telecommunications and the official banking system, the state is unable to properly support its markets with law and the necessary institutions. Instead, ironically enough, declining functions and corruption of the state, such as state institution’s involvement in smuggling and trafficking fuel, and bribery at checkpoints are promoting marketization. The predictability of trade relations in the North Korean market has been made possible through the awakening of the self-interested market participants who realized the importance of credibility in the trade relationship cycle and pressured prevention of fraud using rapid informational exchange via cell phones.

The new logistics system has also greatly improved the mobility of people, products, and information, and unlike in the past, has made possible the sharing of information on the movement of people and products in real-time between average citizens. At least in this respect, North Korea can no longer be seen as an underdeveloped and closed country where freedom of movement and expression is completely suppressed. Certainly, corruption is rampant in North Korea to the extent that there is a running joke, “you have to bribe to move around.” However, ironically, the disadvantages of a failed state are fostering the circulation of people, products, and information. A defector’s statement that ‘to the one who has the ability to purchase freedom,’ North Korea guarantees freedom is full of suggestions.

The specialization in the distribution chains and proliferation of bulk sales will inevitably require the maintenance and development of road infrastructure in North Korea. The private fuel supply system, which is heavily dependent on smuggling and trafficking from state institutions, will eventually have to be replaced by a legal supply system. As time passes, fuel demand will continue to rise, and as a result, the increase in vulnerability of North Korea to oil sanctions is highly probable. On the other hand, it would be reasonable to assume that increased mobility of people, products, and information has already reached an irreversible level. Kim Jong-un’s regime may be able to take measures against the market in the short-run. However, it is probably aware of the truth that doing so is not sustainable.

The dramatic shift in the geopolitics in Northeast Asia sparked by the PyeongChang Winter Olympics thaw earlier this year has created a new context for economic engagement with North Korea. The international community will have to start considering new economic strategies to facilitate progress on the denuclearization negotiations. In doing so, rather than stereotyped views of the North Korean economy, careful observations of the changes of North Korean marketization on the micro level will have to be adopted.

This article is based on an excerpt from “North Korea’s Mobile Telecommunications and Private Transport Services in Kim Jong-un Era” by Yonho Kim (US-Korea Institute, Johns Hopkins SAIS, May 2018).

Yonho Kim is a Non-Resident Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Lawrence Wang’s photostream on flickr Creative Commons.