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Implications of the crackdown on cottage industries

Lee Sang Yong  |  2017-04-11 17:55
The North Korean authorities have begun warning residents of coming inspections as part of a crackdown on home-based shops. The announcement has come despite no official change in the countrys laws or regulations relating to market activities. Although there have not yet been any reports of the authorities imposing fines, they have vowed to inflict punishment on those who continue to operate cottage industries outside of the official government-sanctioned general markets.

There are many potential reasons for the sudden crackdown. It appears that the regime is unwilling to expand the official scope of market activity regulations for fear of backlash from its citizens. However, the authorities may also feel that with the increasing marketization of the economy on a national scale and the growing number of home-based shops, they may be losing control of the situation.

The home shop phenomenon represents a different issue to the pop-up street stalls and so-called grasshopper merchants (merchants with no permanent stall location and who often resort to selling in alleyways). Local police and market management officers continue to crack down on these sorts of street stalls and have for quite some time been solely responsible for enforcing regulations against them. More official street vendors have established themselves around some major apartment districts, a sign of the governments warming attitude - as long as the authorities remain in control.

The authorities may believe that if they do not step in and regulate home-based shops now, the practice will continue to spread. Although the preference would be to keep market activities under their watchful eye within the official markets, there may be concerns that customers will eventually prefer the home-based shops, leading to emptying of the general markets.

Merchants within the official markets are now required to publish item prices written in plain view of the customer, and must follow strict limits on prices in accordance with official regulations. The authorities likely see this as another aspect of control that is lost when merchants sell from their homes.

It is also known that the regime wishes to suppress the spread of information throughout the country, which can occur more freely and easily within a home shop environment between merchants, customers, and wholesalers. The authorities are already having difficulty in monitoring the spread of information throughout the 439 official markets that now exist in the country. Kim Jong Un must see these clandestine home shops as a serious threat, as they can conceal exchanges of information from the authorities.

As the states funding sources come under pressure due to the strengthening of international sanctions, the official markets have become a valuable source of tax revenue, and any migration away from this model threatens the governments revenue stream.

According to several Daily NK sources within North Korea, the tax for a merchant selling in the official markets varies between 500-1500 KPW per day. The tax tends to be higher for stalls selling more expensive items, but the average is approximately 1000 KPW. With more than 400 markets nationwide and an average of 1500 stalls per market, the tax revenue amounts to roughly 600 million KPW per day (equal to approximately 75,000 USD per day, assuming 1 USD = 8000 KPW).

The authorities rely on these de facto tax revenues to maintain control over the markets via managers and security agents, as they often do not provide a separate salary. Thus, the threat of emptying general markets represents both a political problem and an economic one.

It remains to be seen what effect a crackdown on these home shops will have on the country's marketization in general. While the authorities in this instance are signaling their opposition to unsanctioned market activity, they have over the years implicitly encouraged makeshift home factories and other individual economic activity by extracting fees based on such activities during citizen production drives and other mobilizations.

The government has for years now tacitly accepted market activity in general, acknowledging its role in allowing its citizens to survive after the collapse of the state distribution system. A crackdown on home shops runs counter to this trend. However, the states attempts to reign in unsanctioned activities have fallen short in recent times, with the closure of markets on Kim Jong Il's birthday (February 16) this year resulting instead in a surge in grasshopper merchant activity.

Official markets are also simply inaccessible to residents living far out in the countryside and in smaller villages. Residents used to have to travel at great cost and effort to reach the nearest market, but merchants have stepped in to provide delivery services or bring in necessities to sell in temporary stalls or out of homes in these hard-to-reach areas. Business people who are able to travel abroad often purchase South Korean items in bulk on their way home, passing them off to enterprising merchants who then travel, sometimes from home to home, selling the items in villages across the country. The people of North Korea have come to rely on these market innovations for survival, and banning them will be no easy task.

It therefore appears unlikely that the states crackdown on home shops will succeed in the long term. The authorities will have to strike a balance between their wish to maintain the surveillance and tax revenue streams that come with official market operations and the ramifications of interfering with the countrys formidable market forces.

*Translated by Colin Zwirko
*Edited by Lee Farrand

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