North Korean Economy Watch

The Daily NK has published an article describing how the DPRK retail sector works. It is far from perfect, but it explains some of how the complicated retail and distribution systems work.

Daily NK recently interviewed Hwang Cheol Min, who left North Korea in 2012 after eight years as manager of a commercial administration office in North Pyongan Province. He gave the latest details on the distribution of consumer goods and other products.

-What is the function of administration offices such as yours?

It’s the agency that manages the distribution of goods in a given city or county. Goods produced by factories in accordance with the national economic plan are transferred to them through provincial, municipal, and county wholesalers, and we then supply those goods to state-owned stores.

-How are the managers of such entities selected?

Managers of county-level ones are selected from among provincial Party cadres. Municipal ones are chosen through consultation between the Central and provincial arms of the Party. The necessary requirements for the job are, first, a good Party record, and then a business degree and work experience in the sector. Many are graduates of Jang Cheol Gu Pyongyang Commercial University and Wonsan University of Economics.

– What is the affiliation of these offices, and how are they organized?

They are positioned under the commercial departments of municipal people’s committees. Municipal ones are classified as “1st class enterprises,” and deal with various things like planning, commerce, accounting, labour, logistics, etc. This is what makes them bigger than county-level ones. Managers of “general stores,” which are under the administration offices, must be ratified by the municipal Party, while those responsible for ordinary stores are chosen from within the executive branch of the administration office. The executive branch is composed of a junior Party secretary, departmental secretary, and a manager, whose daily reports get reported to the city, provincial, and Central Party by the Party secretary.

– How are they comprised?

They have a Commercial Administration Section, Food Services Section, Conveniences Section, and Services Section (this office oversees things like bathhouses, massage parlors, and hairdressers). The Services Section was once classified under the Conveniences Section, and the Food Services Section was under the Commercial Administration Section, but they were both hived off after jangmadang (markets) cropped up in the 1990s.

Each Food Services Section has about 500 restaurants within its remit, of which less than 100 are state-owned; all the rest are private. But to run a private restaurant you need a certificate confirming approval from the Food Services Section. It used to cost 50,000 won a month in fees, too, which the Food Services Section must transfer up to the relevant people’s committee. Individual targets for the Food Services and Services sections are set by the planning section of the relevant people’s committee, while the overall Commercial Administration Office plan is set by the State Planning Commission. Food Services and Services sections often bribe people’s committees to get their targets reduced so they have a chance to make a profit.

– How many shops are in the average city and what is their function?

Shops are the places that directly supply and sell the goods to residents. There are those that sell foodstuffs and others that sell light industrial goods. In a city of seventy thousand households, there would be seventy stores; one per every thousand families, and six of the larger general stores. Store managers submit a list of their households to the commercial administration office, and in turn they get goods like doenjang [fermented soybean paste], soy sauce, salt, shoes, toothbrushes, etc. from the office, which they are then meant to supply to residents.

-What goods do these offices distribute?

Those manufactured in North Korea, and those supplied by the UN. During the [presidencies of Kim Dae Jung and Roh Moo Hyun], volumes of UN goods rose dramatically. When UN goods arrived at the port at Nampo, they were greeted by the United Front Department of the Party and the Central Wholesale Office. The former body divided them up by origin (China, US, and South Korea), removed all South Korean labels and handed them over to the latter. They took bribes from local commercial offices seeking to receive a greater share of the UN goods […] UN goods supplied the seed money for Kim Jong Il’s “gift politics.”

-What are the key parts of such an office’s plan?

The agencies must distribute Class 1 consumer goods such as alcohol, doenjang, shoes, soap, toothbrushes, toothpaste, etc. to individual families on the four major holidays (Chinese New Year’s Day, February 16th, April 15th, and Chuseok). However, an even more important thing is keeping the 4th Warehouse [for strategic goods] stocked. If the manager fails to send 5% of production to the 4th Warehouse then he can be held legally responsible.

Also, military goods in the warehouse must be replaced once every three years with new ones. These warehouses are often located in remote mountainous spots, and nobody can go in there except the Party secretary, commercial administration office manager, and 4th Warehouse employees.

-What is their present condition?

Take the cosmetics factory in Sinuiju that Rodong Sinmun [recently] said was operating normally. The Commercial Administration Office should receive seventy thousand bars of soap monthly from the factory, but if they don’t pay a monetary sum worth roughly thirty thousand bars of soap at market price to the factory, they won’t get it. The agency will then immediately sell forty thousand bars of soap on the open market in order to recoup the purchase price. The same goes for shoes as well. The purchase price of a pair of running shoes is two pieces of rubber. The agency must pay the market price of rubber to the factory in order to receive the shoes.

In this situation, the commercial side will cooperate with store managers to engage in trade. The store managers obtain loans from donju [money men, often Chinese-Koreans], then use the funds to order goods from the administration office. The office is permitted to buy and sell goods nationally, and has a license to trade with China, so they use the money to trade in sugar, flour, oil, refrigerators, etc. from China. These are then sold at wholesale prices to stores. The stores will then sell the goods at a price slightly higher than the market price. If the scale of the trade gets bigger, the office can enlarge operations by obtaining bank loans on the pretext of “bringing to fruition the Party’s plan of enhancing citizens’ living standards.”

-Do North Korean banks charge interest on loans?

There is no interest on bank loans in North Korea. A commercial trader is backed by the name of a state agency, so once his credit has been confirmed the bank manager sets a lending schedule and just transfers the cash. However, if the borrower does not give 20% to the bank manager at the time of the transfer then he won’t be able to transact future loans. Just like the saying “money goes to money,” the bank manager profits readily at the expense of the nation.

Some additional information on the DPRK’s official retail sector can be found here (page 414).

I am working on a more comprehensive organization chart.

Read the full daily NK story here:
The Hidden World of NK Commerce
Daily NK
Seol Song Ah
2014-06-27