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 during this period, 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 Sahoejuŭi). While many of the reforms are capitalist in nature, centering on an increased role for markets and a loosening of central control, the ruling Menghe 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.

Early reforms: 1987-1995

Meritocratic Socialism

Upon coming to power after the Decembrist Revolution, Choe Sŭng-min and the Interim Council for National Reconstruction viewed economic acceleration as their most important task. Choe promoted the 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. He was motivated not only by the recent damage inflicted by drought and famine, but also by the wider recognition that New Oyashima had achieved a developed-country standard of living while Menghe remained impoverished, decisively tipping the military balance against the latter in past standoffs over the East Menghe Sea.

Contrary to some accounts of the reform, however, the newly established Choe regime did not initially view a mixed economy as the ultimate goal of its economic policy, and did not seek to emulate Oyashimese economic policy from the mid-to-late 20th century. Instead, the ultimate objective of Menghe's early reforms was 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 himself termed this Meritocratic Socialism (생산 중심 사회주의, Saesan Jungsim Sahoejuŭi), more accurately translated as "Socialism based on assessment of productivity."

A centerpiece of Choe's Meritocratic Socialism was the reinstatement of incentives for higher production, on a far larger scale than even General-Secretary Sim's reforms in the 1970s. Beginning in 1988, managers were instructed to expand the use of piecework wages, and permitted to relocate workers to other departments if they showed low skill or effort in their current jobs. Simultaneously, the dissolution of the Menghe People's Communist Party had also undermined the old Nomenklatura system of hiring Party officials as managers, and local authorities were advised to promote or fire the heads of state-owned enterprises based on their job performance.

At a macroeconomic level, the Menghean government 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 détente with New Oyashima, 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.

Future plans in this realm were ambitious, ranging from the creation of a standardized wage-productivity scale for all workers to the installation of input/output-monitoring computers in all large factories. Yet for a variety of reasons, productivity in the state sector fell short of expectations, while a vibrant new private sector emerged from below.

Decollectivization of Agriculture

Another set of reforms took place in the agricultural sector. Here, the main aim of the government was to improve productivity in the field and transportation to cities, with the goal of raising food supplies and preventing another famine. Agriculture was not, however, a priority, and the Ministry of the Economy did not invest heavily in procuring new farming equipment or spreading more productive crops. Instead, early agricultural reform was carried out under the slogan of "making more from limited means," with the goal of stabilizing output through minor improvements in efficiency. Major revitalization would come later, after output in heavy industry was high enough to supply the capital goods necessary for agricultural modernization.

Actual events, however, unfolded in a different direction. During the summer harvest season in 1988, several prefectural governments in Chŏnro Province authorized the use of a "household responsibility system," dividing up communal land into individual plots each worked by a single family. The stated goal of the reform was to generate "productivity through focus," eliminating redundancies or coordination problems and allowing each household to focus its knowledge and energy on the conditions in a single area. Farmers in Gangwŏn Province had experimented illegally with similar measures in the mid-1980s, providing the inspiration for wider adoption.

The Supreme Council was initially skeptical about the viability of these reforms, with Vice Chairman Ri U-sŏng deriding them as a "reversion to the peasant economy." After the summer harvest of 1989, however, it was becoming clear that towns and villages with household agriculture were seeing much higher harvest increases than those with centralized communes, even in cases where commune managers had embraced meritocratic methods. In an early demonstration of pragmatism, Chairman Choe made an abrupt about-face on this issue, publicly endorsing the household responsibility system and calling for its adoption in all areas of the country, if possible before the next planting season began. By the beginning of 1993, only 2% of Menghean farmland was still organized in town or village communes.

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. Hoping to improve issues of distribution and lighten the burden on state transportation infrastructure, in 1988 the state cautiously authorized rural families to transport agricultural goods into the cities and sell them at local markets, as long as they adhered to price ceilings on the sale of rice, bread, and other staple foods. Initially, this was intended as a temporary measure to address food shortages, but owing to its success at reducing shortages and generating employment, the state recognized it as a permanent measure. By 1990, town and city governments across the country were building permanent covered stalls to support agricultural markets.

Early private firms, however, soon extended far beyond the food-shipment role, with entrepreneurs in many towns and villages setting up independent workshops to manufacture and repair agricultural tools or machinery. Seeking to restrain local governments' sometimes heavy-handed responses, the National Assembly passed a 1991 law legalizing small private enterprises with fewer than ten employees. 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.

The resulting explosion of small-firm activity surprised even the most progressive reformists. The planned economy's long-standing focus on heavy industry had left a massive vacuum in light industry and small-scale manufacturing, which usually make up a significant share of the labor market in developing countries at similar levels. As "meritized" state-owned enterprises began shedding workers to meet output targets, local governments fearful of social instability rushed to integrate the newly unemployed workers into flexible private-sector jobs, often tolerating private firms with payrolls well above the 10-worker limit. Other towns and villages set up collective enterprises to absorb the new labor slack, then turned a blind eye as managers run them as profit-maximizing firms.

Consolidation

The rapid growth of small private enterprises in rural areas came as a shock to central planners. The initial effort to develop the state sector had fallen short of expectations; 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 most of the foreign-imported factory projects they had laid out in 1989.

As in agricultural policy, Choe Sŭng-min ultimately accepted a pragmatic response, praising the rural private sector as the successful product of reforms and a model for future progress. This triggered a hostile response from Socialist conservatives, most of whom had previously been members of the Menghe People's Communist Party. A brief power struggle ensued, but with the rural economy showing solid growth after decades of stagnation, the reformist faction maintained the upper hand. In July 1992, Go Hae-won resigned as the General-Secretary of the Menghe Socialist Party, and Choe Sŭng-min took his place, sealing his monopoly on political power in Menghe.

The following year, Choe promoted Jo Ha-jun as the new Minister of the Economy, granting him sweeping power over the reform process. As governor of Chŏnro Province, Jo Ha-jun had already overseen spectacular economic growth, in large part due to his consistent support for agricultural decollectivization and rural enterprises. This move also gave a clear signal within the Menghe Socialist Party that Choe was not dogmatically attached to his previous state-owned proposals, and would tolerate an increased role for private capital. The Second New Five-Year Plan, announced in 1994, reflected Jo's influence, concentrated planned work in physical infrastructure while leaving considerable free room for private enterprises to develop in accordance with provincial and prefectural guidelines.

Boom and bust: 1995-2003

Growth accelerates

With Jo 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.

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