- The Washington Times - Friday, July 26, 2002

SEOUL A series of measures by the reclusive North Korean government has convinced some officials in South Korea that Pyongyang is moving toward capitalist-style reforms much as China did two decades ago.
The communist state's propaganda machines are still touting the triumphs of socialism, but the imminent end of a 54-year-old rationing system and a shift to a more realistic exchange rate suggest that the Stalinist leadership is ready to adopt market mechanisms to resuscitate its crippled economy.
"We believe North Korea has begun to move in a market direction. We have been closely watching the North's moves," said a senior official at South Korea's Unification Ministry, which handles inter-Korean affairs.
Oh Seung-ryol of the Korea Institute of National Unification, a government-run think tank, said the new policies "would overhaul North Korea's economic system and have far-reaching impact on all sectors of the reclusive nation in the future."
In Washington, a State Department official said the Bush administration had seen reports about the changes but was not yet convinced that Pyongyang was committed to fundamental reforms.
"We'll watch with interest to see whether there are signs of genuine economic reform and will continue to monitor the evolving food situation," said the official, who asked not to be identified.
North Korea has scrapped a rationing system under which citizens have used state-issued coupons to procure food and other necessities since the communist regime was founded in 1948, South Korean officials and recent visitors to the North said.
Instead, North Koreans will be allowed to use cash to buy basic food and other utilities in markets where the law of supply and demand will determine the prices.
Wages will be raised to between 10 and 17 times the current levels, based on each worker's performance, to give them purchasing power.
"The new wage system will be introduced beginning August 1," said a senior South Korean official who spoke on the condition of anonymity.
Large factories will also be allowed for the first time to establish "capitalist-style" business practices, collecting money from customers and even earning profits.
"The measures are aimed at narrowing price differences between North Korea's official distribution system and the country's growing black market," said Kwak Seung-ji, a North Korea specialist at South Korea's Seokyeong University.
On the black market, food costs are 10 times higher than the prices the state pays to farmers, he said.
The reforms also include the introduction of a "family farming production system," reminiscent of the system implemented by China in the initial stage of its agricultural reforms. Under the new system, farmers will be allowed to sell much of their produce to individuals rather than to the state.
The measures appear designed to encourage competition and productivity by providing greater incentives for farmers.
North Korea, plagued by food shortages, has been dependent on foreign handouts since disastrous floods and droughts in 1995 and 1996 compounded weaknesses in its rigid collective-farming system.
North Korea is also moving to revalue its currency at between 150 and 200 won to the dollar, compared to the current and highly artificial 2.2 won to the dollar.
"The U.S. dollar is rampant in black markets across North Korea while the value of the local won is falling," said a South Korean businessman, one of a few investors with access to North Korea's government.
"The depreciation measure will help defend the local currency, whose value has dropped, and draw the dollars from the black market," he said.
South Korean officials and analysts praised the measures as significant.
"Economic ruin as a result of decades-long Stalinist policies has forced the communist regime to launch the campaign as part of efforts for economic construction," said Ryu Ho-yol, a Korea University professor.
The new policies come two years after North Korean leader Kim Jong-il made a fact-finding tour of Shanghai, the symbol of China's economic reform. Mr. Kim reportedly praised China's free-market reforms after getting a firsthand look at the stock exchange and high-tech industries there.
The seeds of capitalism in North Korea began to grow in the mid-1990s when illegal farmers' markets emerged across the country as the system of distributing rations broke down under chronic economic troubles.
The markets thrived as food shortages deepened in the late 1990s, according to defectors and visitors. Seoul's Unification Ministry estimated that the number of farmers' markets reached more than 350.
In a tacit acknowledgment of the markets' efficiency, the government itself has set up open-air free markets in major cities along the border with China.
To learn the ways of a market economy, many North Korean economists and officials have traveled to the United States, Australia, Singapore and other capitalist countries since 1997. Pyongyang's Kim Il-sung University, which admits only staunchly dedicated communists, has offered a course on the free-market mechanism.
Staff writer Nicholas Kralev contributed to this report in Washington.

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