Economic reform in Menghe

Economic reform in Menghe refers to a series of economic reforms undertaken in the Socialist Republic of Menghe from 1987 onward. Broadly speaking, these changes consisted of a gradual transition from a state socialist command economy to a state capitalist mixed economy. Private firms were legalized, state-owned enterprises were corporatized, and mixed-ownership Jachi-hoesa came to dominate the Menghean economy. As a result of these reforms, Menghe experienced rapid economic growth from the late 1980s onward, a phenomenon known as the Menghean economic miracle.

In Menghe, the reforms are grouped under a variety of names, including the Second Opening-Up (Menghean: 두 번째 캐방, Du Bŏnjjae Kaebang), the Choe-Jo Reforms (최-조 개혁, Choe-Jo Gaehyŏk), and the New Socialism (신세대 사회주의, Sinsedae Sahoejuyi). While many of the reforms are capitalist in nature, centering on an increased role for markets and a loosening of central control, the ruling Menghean Socialist Party has insisted on classifying them as reforms within Socialism, and retains a central if indirect role for state economic policy.

Notably, economic reform in Menghe is not complete, and remains an ongoing process. State-owned enterprises still dominate certain economic sectors, including natural resources, and Jachi-hoesa corporations remain dependent on their political ties. Despite state efforts to combat corruption, bribes and personal connections often override market competition, creating barriers to the expansion of impartial rule of law. Most recently, the government has embarked on a "Domestic Innovation Campaign," attempting to break out of a production chain where products are designed abroad and assembled in Menghe.

Background

Economic conditions in 1987

At the end of 1987, Menghe was in a state of deep economic crisis. State-led industrialization drives under Sim Jin-hwan had produced a strong core economy built around heavy industry, particularly sectors related to defense. But the light industry and consumer goods sectors were very weak, and actual household incomes remained low, in part due to high defense spending. Menghe's large state-run factories were also notoriously inefficient, and much of the growth of the 1960s and 1970s was driven by increased employment of resources and post-war reconstruction rather than improvements in productivity.

Ryŏ Ho-jun's tenure as Chairman of the Menghean People's Communist Party created even larger crises. As part of his drive for mass-led communism, Ryŏ forcibly broke up many of the large state-owned enterprises, splitting apart the administrative planning system and in some cases literally breaking up factories to ship individual pieces of equipment to village workshops. The resulting backyard furnaces produced low-quality steel which was often unusable, and at the height of Ryŏ's decentralization drive, many farmers melted or disassembled cooking pans and farming equipment in order to supply the needed iron.

The DPRM's controversial nuclear weapons program also contributed to this period of stagnation and decline. After Menghe conducted its first nuclear test in November 1984, the Septentrion League voted to enact STAND's enforcement clause, imposing a total economic embargo on the DPRM. Even longtime communist allies like Maverica, Innominada, Polvokia, and East Dzhungestan severed trade with Menghe, alienated by Ryŏ's belligerent rhetoric and concerned that standing with Menghe could provoke a broader conflict. The embargo led to severe shortages of oil, plastics, sugar, and high-grade machine parts, and struck at a time when domestic stockpiles of strategic goods had already been depleted by Ryŏ's economic decentralization drive.

In the midst of this already dire situation, an El Niño cycle struck in the mid-1980s, causing a severe drought across southern Menghe. Menghean farmers were still struggling to adjust to a large-scale collectivization campaign, as well as shortages of farm tools and other industrial inputs. Due to embargo-related trade restrictions, Menghe was unable to import food, and past disruptions to the country's railway infrastructure and planning apparatus greatly hindered the delivery of food aid from the still-rainy northeast. This resulted in a devastating famine which may have caused upwards of 20 million deaths.

Regime change

See also: Decembrist Revolution

On December 21st, 1987, Choe Sŭng-min seized power in a military coup, disbanded the Menghean People's Communist Party, and established the Interim Council for National Reconstruction. Among his early goals was thorough revitalization of Menghe's economy and the immediate delivery of foreign aid to famine-stricken regions. Choe revived the popular slogan of Buguk Gangbyŏng, or "Enrich the Country, Strengthen the Military," which first gained popularity in Menghe during the late 19th and early 20th centuries. Compared with rulers of the Greater Menghean Empire, however, Choe added a new twist of interpretation, stressing that a rich economy was a precondition to a strong military.

Early reforms: 1987-1994

Ideological changes

Choe and his allies recognized that repairing the damage of the Ryŏ years would require a major overhaul of the country's economic policy, but at the outset, they lacked a clear blueprint about what to change. Most high-ranking military officers and economic planners favored a return to the highly-centralized planned economy of the Sim Jin-hwan years, which had succeeded in raising steel output and supporting the growth of the armed forces. Other reformists, particularly rehabilitated MPCP members purged by Ryŏ, called for a new emphasis on light industry, agriculture, and consumer goods, as well as public services like healthcare and education. With the MPCP out of power and hardline leftists imprisoned or executed, the new government faced few ideological constraints, but there was still a widespread belief in the country that economic revitalization would rely on some kind of reformed socialism. The renaming of the Democratic People's Republic of Menghe to the Socialist Republic of Menghe reflected this conviction.

Choe Sŭng-min initially agreed with this assessment. In his pre-coup writings, he was fiercely critical of individual greed and the merchant-led order of the Republic of Menghe, which was widely regarded as corrupt, unjust, and dependent on foreign powers. In his first speeches after the coup, he affirmed that the new regime would return Menghe from Ryŏ's dysfunctional communism to a new form of socialism, which listeners at home and abroad interpreted as a return to the Sim Jin-hwan years. At the same time, Choe spoke extensively about the need to establish a more efficient or rational form of Socialism, with the aim of generating higher productivity and economic growth without the destabilizing effects of private enterprise. Choe first termed this system saesan jungsim sahoejuyi, or "socialism based on the assessment of productivity," though in the international press it became better-known as "meritocratic socialism."

Meritocratic socialism never acquired a clear, unified formula, and the Menghean Socialist Party later dropped the term in the late 1990s in favor of "new-age socialism" (sinsedae sahoejuyi). Its main underlying principle was that workers and managers should receive stronger incentives to increase productivity in the context of state-owned enterprises. For workers, this meant the expansion of piecework wages and cash bonuses awarded for meeting quotas. Reforms to layoff regulations meant that managers could more easily dismiss workers who consistently fell below quota, though only if they could provide documentation to this effect. Similarly, upper-level managers were instructed to promote, relocate, or dismiss lower managers depending on measures of job performance at their firms. Work units which consistently failed to meet their quotas would be placed under new management or disbanded altogether.

The new regime also embarked on a new campaign of construction, signaling further parallels with the DPRM's past emphasis on heavy industry. Having opened the country to international trade, and negotiated a small détente with Dayashina, Choe ordered provincial and prefectural governments to organize the construction of new factories with state-of-the-art machinery, with a particular focus on steel, fertilizer, and electronics. Entire plants were imported from overseas, many of them export-oriented, with the intention of repaying construction and aid loans with the hard currency won from international trade. All factories built during this early period were state-owned, and constituted outright purchases of equipment rather than foreign direct investment.

Planning documents and policy studies from 1989 and 1990 signaled ambitious plans for meritocratic socialism. One ministerial paper proposed a standardized wage-productivity scale for all workers, and another laid out plans for the installation of a large computer network to record inputs, outputs, and stockpiles in all factories. In actual practice, however, subsequent reforms took a very different direction.

Agricultural decollectivization

While most early ideological discussion in the Menghean Socialist Party focused on heavy industry, the first emergency reforms targeted the agricultural sector. In early Jamuary 1988, the new Menghean government secured an agreement with the Septentrion League in which Menghe would turn over its nuclear weapons stockpile in return for immediate food and medical aid. Themiclesia was among the first countries to send the needed aid on a large scale. The Army also dispatched its own logistical units to ship grain from less-affected to more-affected regions.

Under pressure to prevent a fourth year of famine in 1988, the Interim Council for National Reconstruction passed the Emergency Guideline on Agricultural Contracting. This guideline maintained state ownership over all agricultural land, but it instructed village committees to divide up their farmland into individual plots, each of which would be farmed by a single household for the entirety of the year. The basic principle, shared with previous agricultural reforms in some communist countries, was to improve productivity by eliminating redundancies and coordination problems and allowing each household to specialize on a given plot. Farmers in Gangwŏn Province had experimented illegally with similar measures in the mid-1980s, earning the recognition of Army officers. Approximately 40% of Menghean villages enacted some form of agricultural contracting in 1988, and an additional 30% adopted it in 1989.

At the outset, the Interim Council government regarded agricultural contracting as an emergency relief measure rather than a permanent solution. The Emergency Guideline was drafted in less than a month so that it could be distributed ahead of spring planting, and it did not incorporate any in-depth input from agricultural experts. Speeches and documents from the summer of 1988 mention long-term plans for agricultural industrialization and the consolidation of village plots into large farms, which would have necessitated a return to collectivization or direct management. In light of this, the Emergency Guideline was specific in stating that the state would maintain ultimate legal ownership of all land, even as village committees were left free to contract out small plots to households.

This outlook changed in the fall of 1988, when the first half-year harvests began coming in. Counties that had implemented agricultural contracting reported substantially larger yields than those that had not, and overall yields rose well above their peak numbers in the early 1980s. Not all of this change stemmed from the reforms: the summer monsoon cycle of 1988 saw normal rain levels, bringing an end to the past three years' drought, and villages in formerly drought-stricken regions were more likely to implement agricultural contracting. Nevertheless, it quickly became clear that household farming was more productive than collective farming, even in large industrial farms. Because the DPRM had only implemented large-scale collectivization in 1983, most farmers still had recent memories of farming personal plots, and in many cases the household contracting plots lined up with pre-collectivization plots.

Choe Sŭng-min quickly picked up on the implications of this trend, positioning himself as the personal architect of Menghe's agricultural reforms. In the spring of 1989 he made a widely publicized tour of farming villages in North and South Chŏllo to oversee the contracting process and congratulate farmers on the past year's harvest. This move made him dramatically popular among the rural population, particularly in the south, and helped cement his position as the most visible figure in the post-coup government. Other top military officials were slower to change their course and remained fixated on heavy industry, in some cases openly criticizing the Chairman for his repeated tours of rice fields and grain mills.

The success of agricultural decollectivization opened the way for deeper reforms of Menghe's agricultural system. In August 1989, the Supreme Council issued an executive order authorizing county governments to experiment with household surplus retention. Under the surplus retention system, each household plot in a farming village was required to turn over a certain quota of grain or other crops to the village's state-run food distribution center, but it could sell the remaining surplus food directly to consumers or enterprises at market value. Some villages had already experimented with similar reforms during the previous year in an effort to incentivize farmers to work harder, but these experiments now had official government support. This time, Choe Sŭng-min took a visible role in the new policy from the outset, even when it brought him into open debate with leftist conservatives worried about speculation and price gouging. With the drought period at an end and food production rising, the increase in food prices was only modest, winning Choe more support from rural Menghe.

Emergence of private firms

Another source of unexpected success was the emergence of small, privately run firms, especially in the countryside and the urban periphery. The small business boom directly benefited from the surplus retention system of 1989, which effectively allowed farming households to set up private food stalls and transport companies, but even before the Decembrist Revolution some prefectural governments in the Donghae region looked the other way as villagers set up private workshops to make much-needed goods. Like the agricultural reforms, the toleration of small private business proved popular among the general population after it delivered higher productivity, and state media exaggerated Choe Sŭng-min's role in its adoption. By 1990, many county governments were using state construction funds to build permanent market buildings where private sellers could rent out stalls to sell food and handicrafts.

Initially, the Menghean Socialist Party sought to impose some limits on the growth of private business, which still contradicted its statist ideology. The 1989 surplus retention reform stated that households could not hire any workers from outside their families to work contracted plots or transport and sell goods, but in a culture with large extended family networks, this restriction proved impossible to enforce. A revised law passed in 1991 stated that village enterprises could hire paid workers outside the owner's family, provided that they did not hire more than ten. This law was also poorly enforced, though the ten-worker ceiling would remain important in Menghean economic regulations until the 2000s.

Impressed with the success of private farming and food distribution, and encouraged by the central government's stated support for these practices, many local governments began tacitly encouraging town and village households to diversify into other sectors, such as weaving cloth, making household implements, and repairing farm tools. This, too, was initially treated as a temporary measure: once industrial control had been rationalized, the argument went, these small firms could be rationalized as well.

Special economic zones

In a further bid to experiment with foreign imported facilities, the city of Sunju established a special economic zone in 1990. Covering just four square kilometers around the former foreign trading port, this zone was open to foreign direct investment: foreign private companies could set up privately run workshops or factories within its boundaries, and could import and export goods without working through a state-owned intermediary. Haeju Prefecture followed suit in 1991, setting up a ship breaking facility and adjacent space for steel-recycling mills.

These moves stirred controversy in upper government circles, as private enterprise and foreign investment were still forbidden in most of the country. Many in the Menghean Army's officer corps remained hostile to the idea of letting foreign profit-driven firms operate on Menghean soil, and Choe himself initially opposed the idea. But as the world economy emerged from a prolonged period of stagnation, and as rising economic instability in Fyrland began driving away investors, the administrators of both zones were quickly inundated with business applications. Sunju expanded its SEZ to the entire district in 1992, and in 1993 the neighbouring government of Yobu Prefecture set up a special economic zone north of Altagracia, where the border with Menghe had recently been opened to trade and travel. Bonggye, once a small fishing town, quickly grew into a minor city as peasants from other parts of the country flocked there to seek work in the export-processing sector.

Changing course

While small private farms and firms performed far outside of state expectations, the Socialist government's first central planning initiatives fell short of their goals. Crippled by Ryŏ Ho-jun's purges and decentralization campaigns, the economic planning bureaucracy was in no condition to monitor productivity with the rigor and consistency that meritocratic socialism demanded. As late as 1991, the Ministry of the Economy had yet to produce a set of piecework quota schedules for individual workers in different industries, let alone a plan for monitoring output consistently. Production bonuses were mostly left at the discretion of factory managers, and served mainly as symbolic rewards for model workers rather than a widespread incentive system. Factory managers did begin using their power to lay off unproductive workers, but city and county governments discouraged them from restructuring the workforce too deeply, out of fears that widespread unemployment could lead to social unrest. And higher managers in state-owned enterprises rarely made use of their new power to dismiss and promote lower managers based on their performance, effectively returning to the previous planning system in which both sides falsified production reports in order to avoid punishment.

The new model factories ordered by the central government also proved disappointing. While the delivery of cutting-edge machining equipment from Dayashina and Hallia drew media fanfare, it soon became clear that the problems of state-run inefficiency persisted even in new firms. Local governments moved to protect important firms from competition, command prices remained unable to keep up with shifts in supply and demand, and a shortage of hard currency forced planners to cancel many of the foreign-imported factory projects they had laid out in 1989. One internal economic white paper warned about a return to the slowing economy of the early 1980s, followed by eventual stagnation.

Faced with disappointing results from the state sector, and concerned that stagnation could bring a rival faction into power or topple his new government altogether, Choe Sŭng-min made a remarkable about-face on economic policy. Previously an outspoken advocate of centralized economic planning, he gradually softened his tone on private enterprise, and by the end of the decade he would openly embrace it. Biographers disagree on whether this change in tone represented a pragmatic embrace of market economics or a tactical move to abandon the declining planning faction. Go Hae-wŏn, an ideological leftist, resigned from his post as General-Secretary of the Menghean Socialist Party on 23 July 1992, likely under pressure from Choe and others over his opposition to further market reform. Choe Sŭng-min took his place as General-Secretary at a special session of the Central Committee of the MSP, consolidating his power as the supreme ruler of Menghe. In a live, televised speech from that session - an unprecedented gesture in Menghe - Choe praised the spectacular success of the rural economy, noting that small enterprises, rather than large ones, had emerged as the drivers of Menghe's economic recovery. In addition to shifting the MSP's official ideology, this televised speech further strengthened Choe's nationwide image as a leading supporter of economic reform.

The Menghean elections of 1994 firmly consolidated Menghe's economic reform program. In the second round of legislative elections after the Decembrist Revolution, the MSP secured 87.4% of the seats in the National Assembly. Although genuine opposition parties were banned and the MSP's vote share declined compared with the sham elections of 1989, high turnout at polling stations and low support for the MSP's coalition parties signaled widespread acceptance of the economic reform agenda. At the National Assembly's opening session, Choe Sŭng-min was re-elected Chairman of the Supreme Council by unanimous acclamation, in a procedure which was carefully orchestrated to prevent the voicing of any Nay votes. When assembling his new Supreme Council, Choe appointed Cho Ha-jun as the new Minister of the Economy, dismissing Bak Jun-chang, the architect of Choe's previous state-owned enterprise initiative. As governor of South Chŏllo Province, Cho had gone further than any other province head in encouraging the growth of small private firms, and he had already gained a reputation as an unusually avid supporter of market reform. His appointment sent a clear signal that Choe Sŭng-min was committed to further economic reform, even if it meant challenging top players in planning faction.

Boom years: 1994-1999

Gradual privatization

With Cho Ha-jun's faction solidly in control, economic reform shifted in a more liberalizing direction. The National Assembly passed the Provisional Law on People's Enterprises near the end of 1994, allowing private businesses to hire as many as 100 employees if they secured a license from their prefectural government.

While small private firms remained the main drivers of growth in this period, Cho Ha-jun saw reform of the inefficient state sector as his main priority.

Administrative reforms

One of the few successful innovations to come out of the meritocratic socialism initiative was the cadre evaluation system. Under this system, leading officials at the town, county, prefecture, and provincial levels were given annual scorecards based on economic output in their jurisdictions. These scores, in turn, informed higher officials about which subordinates to promote and which to dismiss.

As economic growth emerged as the leading priority of the Menghean Socialist Party, cadre scorecards became increasingly important in personnel management. Higher officials also favored the scorecards because their simple numerical measures were easier to compare than more subjective assessments of good governance and quality of life. This had a twofold effect on cadre promotion: it forged strong incentives to maximize economic growth in one's own jurisdiction, and it created a filtering effect in which better economic policymakers moved up the ranks into higher posts.

Growth of trade

This period also saw an explosion in the number of special economic zones. Interpreting the 1994 elections as a positive sign, both Sunju and Haeju expanded SEZ status to their entire jurisdictions in August 1994. The following year, twelve other coastal cities followed suit: Quẚng Phẚ, Pyŏng'an, Giju, Dongchŏn, Chanam, Gyŏngsan, Ranju, Anchŏn, Donggyŏng, Changtae, Chŏngdo, and Baekjin. In addition to legal approval, foreign firms in these cities also enjoyed preferential tax treatment. This brought a major surge in foreign direct investment: as Fyrland's economic position continued to slide and the world economy entered a period of upswing, Menghe quickly emerged as a major center of supply-chain manufacturing, with a competitive advantage in cheap but skilled labor.

Growth accelerates

With Cho Ha-jun in command, the pace of reforms accelerated, and so did the pace of economic growth. The annual rate of GDP increase surged from 5.6% in 1990 to 12.8% in 1997, and showed no signs of falling below the 10% mark. In the first ten years since the Decembrist Revolution, GDP per capita had more than doubled. Doubts about the desirability of economic reform had largely melted away.

Under the terms of the Second New Five-Year Plan, local government administrators were given a "scorecard" based on their ability to generate economic growth, a meritocratic policy which Choe had initially endorsed in 1990. Yet after twenty-five years of Socialist rule, there were few professional economists in the country. Local officials at all levels responded with a policy termed "sowing grain," in which they sponsored large numbers of small private enterprises in a vast range of sectors, diversifying their investments in order to see what approaches worked. State confiscations of private capital remained common, as property rights were ambiguous and rule of law was weak, but by rewarding sound economic behavior government agencies gave former Communist Party members incentives to embrace the market economy.

To attract more foreign trade and investment, Jo Ha-jun also authorized the opening of special economic zones in Emil-si, Dongchŏn, Gyŏngsan, Haeju, Anchŏn, and Baekjin. As early as 1990, special economic zones had opened in Donggyŏng and Sunju, but this move expanded the list to include all of Menghe's largest port cities. Foreign firms in these areas enjoyed preferential tax and regulatory policies, and for the first time since 1964 foreign-owned factories were welcomed on Menghean soil. Drawn by the promise of low wages, obedient workers, and stable energy prices, foreign firms flocked to Menghe, especially from New Oyashima.

In 1998, the government attempted to consolidate this growth by passing the National Law on Enterprise Restructuring, an attempt to clarify the bewildering array of enterprise types which had emerged in the turbulent 1990s. It laid out six official enterprise categories, and specified taxation, regulation, and ownership guidelines for each:

1. Public Services (Gong'ik-saŏb)
2. State-Owned Enterprises (Gukyu-hoesa)
3. Autonomous Enterprises (Jachi-hoesa)
4. Medium Enterprises (Jung-giŏb)
5. People's Enterprises (Inmin-giŏb)
6. Small Enterprises (So-giŏb)

As the third, fourth, and sixth categories were by default privately owned, this constituted a tacit recognition that private capital could exist within a Socialist economy, and a legitimization of the de facto private enterprises which had emerged in the early 1990s. Moreover, it specified that People's Enterprises (a form of collective run with local worker input, often purely nominal) and State-Owned Enterprises were to be primarily motivated by increasing productivity and profit, separating them from non-profit public service agencies. A 19% value-added tax was applied fairly uniformly across the board, though the tax rate was lighter for small enterprises and public services were exempt, thus replacing SOE profits with formal tax income as the main source of state revenue.

Crisis and recovery: 1999-2003

Financial crisis

Main article: 1999 Menghean financial crisis

Breakneck economic growth, however, came at a cost to stability. As wages rose and price controls were lifted, inflation increased, and CPI increases of 5-10% per year became the norm. Jo Ha-jun generally showed a relaxed tolerance for inflation, as it gave households an incentive to buy durable goods and take part in neighborhood credit circles. By 1998, however, inflation was reaching dangerous levels, surpassing an annualized rate of 50% in the first quarter of 1999.

This put severe pressure on poorly performing enterprises, many of which were owned by city, town, or prefectural governments. Debt of all kinds had increased during the reform period, but debt to foreign investors was particularly high, as the country's soaring GDP growth rates had drawn in large amounts of foreign capital.

As news of inflation spread, the Inminpye abruptly plummeted in value on foreign exchange markets, just two years after the Menghean Central Bank had loosened restrictions on currency trading. This wiped out the accumulated profits of offshore enterprises in Menghe, leading to a panicked flight of capital from the country. Attempts to prop up the Inminpye only succeeded in draining Menghe's foreign currency reserves. Caught in the squeeze between high input costs and low exchange rates, state-owned enterprises began defaulting on foreign loans, setting off renewed capital flight and a second drop in the Inminpye's foreign value.

Technically speaking, the Menghean economy did not enter a recession during this period, as annualized GDP growth in 1999 stabilized at 2.1% (though growth was negative in the third quarter of the fiscal year). Yet it ended six straight years of GDP growth rates above 10 percent, and led to fears of a prolonged slowdown.

Government response

In the short term, the Menghean government reacted swiftly by buying up non-performing loans, transferring the debt from local SOEs to the central bank. This assuaged international fears of a large-scale debt default or a confiscation of foreign capital. The state also took steps to rein in inflation, including the forced sale of government bonds to Jachi-hoesa. In an unprecedented move, Choe Sŭng-min agreed to relinquish Menghe's long-standing territorial claim to the Renkaku Islands in exchange for debt forgiveness from New Oyashima. In all, only 26% of foreign capital in Menghe was lost to default.

In the wake of the crisis, the Menghean government identified two main culprits. The first was the cumbersome state-owned sector itself. Throughout the 1990s, Jo Ha-jun had advocated for selling off the worst-performing state-owned factories, but only now did he have the political capital to overcome their ties to local government. Many facilities were handed to Jachi-hoesa, with Taesan and Kimsŏng taking the largest share, while others were auctioned off to private investors. The auctioning process itself was strictly regulated, to prevent sales from being made on the basis of political connections. At the same time, in critical sectors like natural resources and energy, the state consolidated SOEs into state conglomerates, increasing the level of centralization. This policy became known as "rule strictly in the castles, rule loosely in the villages."

The second culprit reformers identified was foreign capital itself. The Menghean economy, they argued, had been too vulnerable to the interests of foreign investors, who too easily turned to speculation or panic in times when stability was most important. The government canceled its proposals to legalize private banks or banks within Jachi-hoesa, and cracked down on large lending circles. It also required that foreign loans above a certain size be subjected to central review, and imposed new restrictions on foreign businesses operating within Menghe. All of these moves centralized the nexus of capital flows around Menghean state-owned banks, solidifying government control over macroeconomic policy.

Reforms under fire

The 1999 financial crisis created a crisis of confidence in the Menghean leadership, and especially in Jo Ha-jun, whose inflationary policies in the preceding years were widely believed to be the origin of the Inminpye's devaluation. Choe Sŭng-min fell under fire as well, as he had played a visible role in Menghe's economic reform, refused to fire Jo after the crisis, and effectively agreed to the sale of Menghean territory. Rumors of a coup spread through Donggyŏng in November 2000, and a group of high-ranking generals headed by the Vice-Chairman of the Supreme Council were arrested, allegedly on the basis that they had accepted bribes from private producers hoping to escape default.

By 2003, it was clear that the economy had survived the crisis, and was on track to grow as quickly as it had before 1999. This development reassured economic conservatives, and opened the way for a new series of reforms. The new course, however, was different; Jo Ha-jun resigned in 2003, and the new administration had a decidedly more statist bent at the center, even as it promoted private enterprise at the periphery.

Second generation of reforms: 2003-2012

The ten years that followed represent a second peak period of economic growth, with annual GDP growth rates again in the 10-percent range. While economic reforms in this period are sometimes grouped under the header of "retrenchment," the reality is somewhat more complicated. While the government loosened its direct control of state-owned enterprises and embarked on a new wave of privatizations, it also strengthened its capacity to regulate the economy as a whole, with the help of a growing professional bureaucracy funded by the returns from past growth.

Administrative reform

While in 1988 Menghe had a severe shortage of trained economic staff, by the early 2000s the level of training among civil servants was increasing. College-educated managers, bureaucrats, and policymakers became more common, though they often held degrees in engineering rather than economics or business management, and those with degrees in the latter fields had usually earned them overseas. Generous pay increases, coupled with tight meritocratic requirements in the application process, brought skilled employees into the lower-level bureaucracy as well.

Greater economic knowledge allowed Menghean government agencies to adopt qualitatively different strategies in the realm of industrial policy. Rather than encouraging small-enterprise growth across the board, as they had in the 1990s, local governments began focusing their efforts in specific areas and directly coordinating with private businesses. This resulted in the consolidation of small private firms into more stable mid-size enterprises, and the emergence of local areas of specialization.

Changes were even more pronounced in the center. Following Jo Ha-jun's resignation, the Ministry of the Economy was divided into a Ministry of National Economic Development and a Ministry of International Trade and Investment. The former coordinated domestic developmental policy, such as infrastructure expansion, while the latter focused on trade policy and export-oriented development.

The National Economic Research Bureau (NERB), established in 2004, was another influential addition. By giving the Menghean government in-house offices for economic research, it eliminated the need to consult with private enterprises, foreign firms, or international organizations, which might have conflicts of interest - a frequent accusation made during the 1999 financial crisis. The NERB was placed within a new Ministry of Information and Statistics, which, in addition to conducting censuses and monitoring the government's expenditure, required firms above a certain size to submit regular information on inputs, outputs, and profitability.

Embedded autonomy

The Menghean reforms of the 2000s also witnessed the full emergence of a system which political economists have termed "embedded autonomy," or sometimes "governed interdependence." These terms were originally developed in reference to developmental policy in New Oyashima during the 1970s. More broadly, there is scholarly agreement that Menghe has developed into a true developmental state, rather than a transitional Socialist economy.

Generally speaking, Menghean embedded autonomy means that the economic bureaucracy is sufficiently accountable to private interests that it focuses its efforts on development, but not so accountable that it is vulnerable to regulatory capture. This distinguishes it from liberal market economies, on the one hand, and developing-country kleptocracies, on the other.

During this period, central subsidies increasingly focused on key industrial sectors, and were nearly always made conditional on performance - firms which failed to meet deadlines or maintain adequate profit margins would see their funding transferred to more efficient competitors. The creation of an Economic Planning Forum, gave managers and bureaucrats an institutionalized way to coordinate development policy, often with personal input from Choe Sŭng-min himself.

Ongoing efforts: 2012-present

The most recent reforms, those implemented after 2012, have focused on a second transition: that from an industrial economy to a knowledge economy. As Menghean wages and living costs grew, the country could no longer compete on the basis of cheap labor alone, and risked falling into a middle-income trap if it failed to develop a domestic knowledge sector. These reforms were also motivated by a desire to escape the assembly stage of the smile curve, where profits are lowest, and move into design and marketing.

Notably, this effort has not constituted an abandonment of industrial policy as such. Instead, planners have worked to integrate research and development with improved in-house manufacturing capability, usually with the use of labor-saving equipment. This has been accompanied by a drive to improve the quality standards of Menghean goods, in order to escape Menghe's reputation for producing inexpensive copies.

See also

• Economy of Menghe
• Menghean economic miracle
• Jachi-hoesa
• 1999 Menghean financial crisis