North Koreans Looking For Profit Can Produce Public Goods

A commentary by Andrei Lankov
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North Korean students enjoy a swim in a pool at Kim Il Sung University in Pyongyang, April 11, 2012.
North Korean students enjoy a swim in a pool at Kim Il Sung University in Pyongyang, April 11, 2012.

According to recent reports, the North Korean city of Sunch’on (located in South Pyongan province) recently acquired two quite remarkable modern facilities: a heated swimming pool and a public bath.

This is, needless to say, good news. What makes this news especially good is the story behind this posh swimming pool and bath.

Of course, North Korean people are supposed to believe that such facilities are provided for them by officials who, inspired by the Kims, spend their days and nights caring about public well-being. However, the sorry state of public facilities in North Korea clearly indicates the fact that officials are not that encouraged by what their superiors allegedly want them to do.

In this case, however, the bathing and swimming facilities were built by local entrepreneurs, known in North Korea as "donju" (lit. "money masters"). The last twenty-odd years have been a time of steady, if uneven, growth in the market economy in North Korea.

Thus, some independently wealthy people have emerged, with wealth to be counted in the hundreds of thousands of dollars and readiness to look for a good investment opportunities.

In Sunch'on, a number of wealthy local residents noticed that a large thermal power station was wasting a significant part of its fuel stocks while releasing hot steam into the atmosphere. Their capitalist hearts could not allow such a potentially useful resource to be wasted, so they approached power station managers and suggested that bathing and swimming facilities be built.

So, the project has been completed. As always, the state takes the credit officially, but the investors get their cut, while the local state power facility managers take their portion of revenues.

A blurred line

The story is fascinating in several regards. First, it shows the increasingly blurred line between state and private sector in the North Korean economy. The official banking system is basically nonoperative, so state managers who want to expand production usually have to borrow money privately.

State managers take on private loans to repair equipment and restart production, and in many instances, rich private investors are repaid in kind—in the product produced as a result of repairs (for instance, fertilizer).

The story is just another reminder that factory managers in a state socialist economy have few incentives to start new projects, or to care excessively about saving money and resources. Managers at the power plant probably knew too well how hot steam was being wasted.

Even if they had ideas about how to use the steam, such ideas would probably not have been attempted--the state does not reward people for trying and failing, it punishes them for doing so.

Success brings little reward, while failure carries real risk. State managers act rationally when it comes to state business: they keep their mouths shut and their heads down, while making sure that their superiors are well aware of just how zealous their workers are in their studies of the works of the leaders Kim.

Private entrepreneurs, on the other hand, smelled the possibility of profit, and acted accordingly. The same prospect of making money out of seemingly useless steam obviously had some impact on officials as well, but officials only had the chance of enriching themselves so long as private capital took all the risks.

Private gain, public goods

Of course, there are instances where people can be motivated to work through ideology—religious beliefs or nationalism, to name but two. However, the history of such ideas teaches us that such ideas cannot be the motor of economic development indefinitely. Such ideas and such an economic model usually only works during a war or during an initial period of revolutionary enthusiasm.

North Korean policy planners sort of understood this. For decades they did their best to create a battle-like atmosphere at state-run factories and farms. In North Korea, people do not harvest, they "engage a battle for harvest." They do not build, they "fight in a battle for building." Propaganda extols workers as if they were great warriors fighting for the nation’s survival.

However, such tricks no longer work: such ideological frenzy can be maintained for a time. But soon, people lose interest in hard work if they are not rewarded accordingly.

Thus, no increase in warlike rhetoric could make a scratch on the economic situation in North Korea from the 1970s to 1990s. Things began to improve, however, in the 2000s, when the North Korean government began to accept the logic of the market, and began to tolerate people who, while looking for private gain, also produced public goods.

The group of rich investors from Sunch’on consists of such people. They are motivated by the desire for profit (or greed, should we say?), but the results are enjoyed by others too. Maybe such a cynical, marketized approach is not the best way to run a modern economy, but no better ways have been discovered thus far.

Andrei Lankov, a professor at Kookmin University in Seoul, is a Russian historian, North Korea expert, and regular RFA contributor.





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