EAI Asia Security Initiative Working Paper No. 4

Author

Byung-Yeon Kim works mainly on transition economics and applied econometrics, in particular with reference to North Korea as well as East European and CIS countries. He received B.A. and M.A. from Seoul National University, and D.Phil. from the University of Oxford. He is currently Professor of Economics at Seoul National University, and has held faculty positions at University of Essex and Sogang University. He has been a visiting researcher at University of California at Berkeley, Woodrow Wilson Center for International Scholars, Bank of Finland Institute of Transition Economies, and Institute of Transition Period in Moscow, and elsewhere. He published more than twenty articles in international journals such as Journal of Comparative Economics, Economics of Transition, Journal of Economic History, Economic History Review, and Oxford Bulletin of Economics and Statistics.

Abstract

This paper uses data from surveys of North Korean refugees to investigate the relationships between markets, bribery, and regime stability in North Korea. More specifically, it tests four hypotheses about the characteristics, trend and extent of North Korean bribery and the extent as well as trend of bribery. We find that bribery in North Korea is characterized as “bad” corruption because, unlike other socialist countries, it is tied mostly to informal markets rather than to the formal sector, and fails to increase the supply of goods and services in any substantial way. It is found that bribery is widespread and household expenditure on bribes is exceedingly high. The average share of spending on bribes as a proportion of total household expenditures from 1996 to 2007 was 8.95 percent, which translates to 6-7 percent of annual North Korean GDP. Despite this high level, however, the share of bribes in household expenditures has not significantly increased from 1996 to 2007, implying that the authorities are still able to deter it from expanding even though they might have difficulty in reducing it substantially.

This paper suggests that the current situation relative to the informal economy and bribery may be characterized as one of equilibrium among the dictator, government officials, and market participants, in that the three actors do not intend to change their behavior regarding bribes significantly for the time being. However, the equilibrium is fragile. Increasing bribe-taking from participants in market activities can cause the interests of the police machinery to become misaligned with the interests of the dictator, which may further destabilize the regime to the point of collapse when the dictator is perceived to be weak and the fear factor is reduced.

Introduction

One of the striking features of the current North Korean economy is the prevalence of bribery. According to the 2008 Worldwide Governance Indicators compiled by the World Bank, North Korea is one of the most corrupt countries in the world: Somalia is the worst country, followed by North Korea. This status is in line with numerous testimonies from North Korean refugees. They report that bribes are necessary whenever they take one small step, providing anecdotal evidence on bribes in connection with market activities, travel, college admissions, and even with escaping from North Korea.

Corruption is defined as the abuse of entrusted powers for private gains (Bardhan 1997). Shleifer and Vishny (1993) define government corruption as the sale of government property by government officials for private gains. Corruption can be classified into various categories in terms of its type (Andvig and Fjeldstadt 2000). Bribery, which is an illegitimate transfer of resources from one body to another one, is a part of corruption. Embezzlement refers to the theft of resources by those who are responsible for administering them. Fraud involves trickery, swindling, and deceit for private benefit at the cost of others. In addition, corruption may take forms such as extortion, which denotes receiving money, favors, or resources extracted by use of coercion, violence, and threats. Favoritism can be included as a part of corruption as it involves the abuse of power.

Some scholars classify corruption in terms of degree. Grand corruption, which typically involves high-ranking bureaucrats and politicians, refers to large-scale corruption, and the value of corrupt transfers is high and often tied to one-time exchanges. In contrast, petty corruption takes place at lower levels of the administrative hierarchy and is more pervasive, involving transfers of smaller value. Petty corruption is closely related to people’s day-to-day daily life experiences, such as the “street-level extortion” of policemen and “speed-money” at lower administrative levels involving bribes to facilitate bureaucratic action such as the speedy processing of an application. Rose-Ackerman (1978) denotes grand corruption as legislative corruption and petty corruption as bureaucratic corruption.

There are two contrasting arguments on the effect of corruption on a society. One group of scholars argues that corruption corruption negatively affects the economic performance of a country by preventing businesses from starting and growing and by distorting the allocation of talent (Murphy, Shleifer, and Vishny 1991; Mauro 1995; Rock and Bonnett 2004). Furthermore, corruption endangers the stability of a society in both market and socialist economies by causing the deterioration of credibility in formal and informal institutions. Treml and Alexeev (1994) and Grossman (1998) maintain that corruption related to the informal economy caused the disintegration of the Soviet economy. According to these authors, the expansion of the informal economy, which increased corruption and rent-seeking activities, distorted the information required for efficient planning and undermines the ideological foundations of the society. Socialist countries are also arguably more vulnerable to corruption because it weakens the fundamentals of socialism, based on equity and institutional control over society (Grossman 1998).

In contrast, many other studies suggest that corruption can be regarded as “greasing the wheels” of an economy that suffers from hold-ups by bureaucrats and the grabbing hand of the government (Leff 1964; Huntington 1968; Rock and Bonnett 2004). According to this perspective, corruption, which can act as the second-best option in helping economic agents to bypass such institutional deficits, contributes to improving efficiency in the economy. In the context of the Soviet economy, some form of corruption was used to increase output as the tight requirements of plans “forced” the managers to break rules in order to achieve plan-fulfillment goals (Heinzen 2007). More specifically, the managers of firms used secret money to purchase raw materials and spare parts that were not always delivered in accordance with the plan (Harrison and Kim 2006).

The above discussion suggests that the relationship between corruption and the stability of a socialist regime is not clear-cut. Corruption appears to be a double-edged sword for the stability of a socialist regime. Corruption may contribute to the stability of a socialist regime by allowing the purchase of much needed inputs of production to fulfill the planned output target. However, members of the public, who believe that the socialist system is neither credible nor fair, are likely to mistrust it all the more. In addition, information needed for planning is distorted if firm managers rely not on the plan but on other ways of production, which may lead to a weakening of control for the firms’ central planners. Moreover, corruption is likely to destabilize a socialist regime if it is tied to informal market activities rather than fulfilling the planned output target.

What are the relationships among bribery, markets, and regime stability in North Korea? This analysis first presents several hypotheses on the characteristics of bribery, and the behavioral patterns of the dictator, officials, and market participants in connection with bribery, markets, and regime stability. In more detail, the following questions will be asked: Does bribery in North Korea contribute to the stability of the regime? Is there any possible equilibrium among the three actors, namely, the dictator, officials, and market participants, in North Korea currently? What does this equilibrium tell us about the extent and trend of bribery? These questions are important not only to evaluate the current situation faced by the North Korean authorities but also to comprehend the future of the North Korean regime. Following the presentation of the hypotheses, they will be tested empirically using data from surveys of North Korean refugees.

In order to conduct empirical exercises, data are needed that enable the measurement of the extent of bribery in North Korea. Obviously, data on bribery are hard to come by because the revelation of bribe-giving or bribe-taking is likely to present difficulties in most countries. In this regard, data from surveys of North Korean refugees who have settled in South Korea offer a unique opportunity to understand the nature and the extent of bribery in North Korea. The refugees are relatively free to reveal details about their bribe-giving while they were living in North Korea. Although it must be remembered that the samples of North Korean refugees are not drawn randomly from the North Korean population, the increasing number of refugees from various strata of society indicates that the survey data can provide useful information on the extent and nature of bribery in North Korea. In addition, multivariate regressions can mitigate the problems arising from nonrandom samples.

This paper is laid out as follows. Section 2 focuses on state policies toward markets, and provides a brief history of the North Korean economy and its current situation. Section 3 presents hypotheses in connection with markets, bribery, and the stability of the regime based on the analysis of objectives and capacity of the dictator, government officials, and market participants. Section 4 presents the data used in this paper and provides some statistics on the North Korean informal economy. Using data from surveys of North Korean refugees, Section 5 evaluates the hypotheses presented in Section 3. In Section 6, we discuss the implications of prevalent bribery for the North Korean regime and present our conclusions in Section 7...(Continued)