Rethinking policy on NK in the Kim Jong Un era

Foundation of the North Korean Economy:
Supply and Demand of Foreign Currency

If you include the tremendous amounts sent
by South Korea during the Kim Jong Il era (over USD 7 billion since Kim Dae
Jung’s Presidency) and consider the myriad legal and illegal methods of
garnering foreign currency that the regime uses to keep their accounts flush,
the Kim dynasty has secured billions in what basically amounts to a slush fund.
This money has been poured into maintaining the lavish lifestyle of the regime,
pursuing developments on their ballistic missile program, cementing the
regime’s longevity, and purchasing luxury items as gifts for the purpose of
bribing underlings. 

Kim Jong Il officially declared that simply
being on the throne in Pyongyang was sufficient for commanding respect and
maintaining order over North Korea’s 24 million subjects, but the truth is that
he invested in gifts and kickbacks to his advisers and champions to purchase
that loyalty.
 

Forget displays of military strength and
provocation, you can see the regime’s power by simply looking at the business
advantages conferred to the authorities. Top officials can see strip shows, be
entertained by traditional korean ga-yo music with wild dances, attend lavish
banquets, and more. These kinds of events and services are considered
unspeakably lavish and imprudent when viewed from the prudish, conservative
outlook the regime encourages for its normal residents. But the power elite in
Pyongyang can commit such contradictions with a smile on their face. Such is
the potency of the regime.
 

Kim Jong Un’s core supporting class is a
minority of the population but they serve as the core of his political machine.
The power elite of Pyongyang are expanding their grip by doling out privileges
to their supporters.
 

The desire gratification business in
Pyongyang is in bloom. Men and women now hope to live well, eat well, dress
well, and revel in their opulence. Party loyalty can make such desires a reality
for the upper crust.
 

Demand is up for luxury apartments, pizza,
cafe lattes, amusement parks, fashion based on the cosmopolitan looks of South
Korea’s K Pop stars, private educations, and even room rentals for premarital
relations. To satisfy this demand, foreign currency is necessary.  

There is a pronounced trickle down effect.
The upper class’s demand for the aforementioned goods and services resulting in
legal and illegal exports, foreign remittances, foreign sources of aid, and the
distribution and sale of imports. Of course, processing, distribution, and
retail done at the local level by ordinary residents does not cross North
Korea’s physical borders into the outside world. But it’s no exaggeration to
say that the source of most of the country’s economic activity comes from
foreign currency pulled in from trade and aid.

80% of goods for sale at the jangmadang
(markets), are said to originate from China. From this
perspective, it’s easy to see that the success of North Korea’s economy is
hinged upon interaction with foreign entities and the foreign cash that such
interactions bring in. 

In a 2013 publication from the Unification
Policy Research Institute, analyst Jang Hyeong Soo said, “The total amount of
foreign currency thus far accumulated by North Korea is not a modest amount,
despite the fact that there are tremendous expenditures and deficits in certain
sectors.”
 

In the 22 years from 1991 to 2012, North
Korea’s economy managed to bring in approximately $17.9 billion more than it
exported, amounting to a significant deficit in terms of goods trade with the
international community. If we look specifically at the supply and demand for
foreign currency in North Korea, out of this $17.9 billion, $5.1 billion
(excluding South Korean sources) came in the form of international aid and
funds provided for purposes such as encouraging “denuclearization.” Looking at
North Korea’s oil and coal trade with China over the course of the same period,
North Korea maintained a profit of about $4.8 billion.
 

Trade with South Korea brought in a profit
of approximately $4 billion during this time. Cooperative ventures include
projects like the Kaesong Industrial Park and the Geumgang tourism center. If
we include Chinese tourist visits, foreign cash remittances, and shipping
charges, North Korea’s service industries netted a handsome profit of $3.9
billion in those 22 years. Overseas restaurants and other projects, such as
providing manual labor for overseas logging and mining companies, brought in
about $1.3 billion. Illegal weapons and other illicit sources of trade amounted
to approximately $600 million each, amounting to North Korea’s smallest sources
of foreign cash. If you add up all the different kinds of illicit and illegal
sources of income for the regime, we get a total surplus of about $2.8 billion
over those 22 years.
 

Jang Hyeong Soo believes it is prudent to
pause the discussion here in order to contemplate an important consideration.
Most estimates indicate that smuggling operations between North Korea and China
represent a deficit for North Korea. However North Korea’s illegal overseas
sale of gold bullion more or less balances out that amount. On the whole, North
Korea has been able to accumulate ample stacks of foreign cash that has been
pumped in through the methods described above. “This accumulated cash has
served as the unofficial source of money used for market trading even at the
local level in North Korea. This has opened North Korea’s economy up to a
vulnerability. The works can be gummed up when liquid supplies of foreign cash
experience sudden changes or become unavailable. However, the foreign cash
earned at the government level has been sufficient to continue investing in the
development of ballistic launch capabilities for nuclear projects,” Jang Hyeong
Soo explained.  
 

Meanwhile, Jang Hyeong Soo also notes that
the meteoric increase in cell phone availability and usage that began in
Pyongyang reveals the regime’s intent to rake in foreign cash from another
source: its own residents. The residents’ contribution is not meager. For
prospective cellular customers, the path to their object of desire is paved in
foreign currency. That’s because you need foreign currency to buy the phone and
then you’ll need more foreign cash to pay for the service. The registration fee
is $140 and the minimum price for a new phone in 2012 was an average of $300.
The production cost is about $80. If we use those figures, and consider that
two million people signed up for cell service from 2008-2012, that means the
regime netted a  profit of $280 million in registration fees and $440
million in phone sales. In four years, the total amount of foreign cash moved
from residents’ hands to the regime comes to about $720 million from phones
alone. This kind of figure reflects the relative ease at which North Korea is
able to extract foreign cash from various sources.
 

According to data from the Korea Trade
Investment Promotion Agency [KOTRA], North Korea brings in about $230 million
in foreign currency per year. The Korea Development Institute [KDI] puts that
number at $440 million per year. Of course, a significant portion of this ($7
billion) was the result of Kim Dae Jung’s summit meeting with Kim Jong Il. Illegal remittances and profits from Kaesong Industrial park are prime examples
of foreign cash sources made possible by the Sunshine Policy. 

However, North
Korea’s shelling of the Cheonan ship, which killed 46 South Korean sailors,
prompted President Lee Myeong Bak to enact the May 24 Measures. These economic
sanctions aimed to apply political pressure by isolating the North’s economy.
But exports for minerals and manpower sharply increased since then, which gave
the North an opportunity to compensate for the losses they suffered when they
lost the cooperation of South Korea. In conclusion, through their desire
satisfaction businesses and market activities, Pyongyang has been able to
continually secure enough streams of inflowing foreign currency to keep them
afloat. In many ways, foreign currency sources can even be looked at as the
foundation of the North’s economy.
 

The Possibility that the Bribery-Market
Economy System will Expand
 

The following conditions serve as potential
constraining factors for the North’s Bribery-Market Economy: 1). Economic
Features, 2). Structural Features, and 3). Political Features.
 

First, we shall turn our attention to
economic factors.  The economy’s expansion will continue to depend upon
steady streams of foreign cash. The regime and the ruling elite, along with
supporters in organizational roles from the middle class, and normal residents
are all involved in the earning and spending of foreign cash. However, Kim Jong
Un is going to try to continue limiting and controlling the flow of said funds.
For example, the purge of Jang Song Thaek, who had amassed a fortune of 80
million euro. We can also look at the cell phone industry as a prime example of
how the regime relocates foreign cash into regime coffers. If we exclude the
wide scale smuggling operations at the Sino-NK border, there are no major
foreign currency operation in the country that the regime does not have control
over.
 

Now we will turn our attention to
structural factors. Through its industries, the North simply attempts to use
large scale domestic production for the sake of creating short term profits.
This is done at the expense of longer term enterprises. The profits of longer
term enterprises could be reinvested in infra projects and other services for
residents. The regime’s short term profiteering is done at the expense of
ordinary residents. There are now about 20 Special Economic Zones (SEZs) in
North Korea. But progress and development has been stalled at most of them. The
problem with these SEZs is that they lack roads and electricity, and the regime
is turning to outside investors to develop these aspects for them. As long as
the country continues to rely on Chinese products and invest in short term
money making schemes instead of long term investments, there is no way that
they will be able to break the cycle and begin developing their own
infrastructure.
 

Last of all, we look to political factors.
To understand present conditions, it’s necessary to take a slight detour to the
past in order to look at Kim Jong Il’s reign. During the tenure of South Korean
Presidents Kim Dae Jung and Roh Moo Hyun, Kim Jong Il believed he could very
quickly improve and develop infra projects through Southern assistance. In
looking to improve his nation’s economy, Kim Jong Il did not merely want
factories from the South, he also wanted energy solutions, railways, streets,
medicine, and educational training as part of a holistic attempt to revitalize
the North’s social infra. Even worse, through the six party talks, he was on
the path to receiving even more international aid. But Kim Jong Il made a
conscious decision to prioritize nuclear developments over and above the welfare
of his people. He chose to solidify his political foundations at the expense of
all North Koreans.
 

The real reason that the Kim dynasty
continually disregards making improvements to the living standards of its
people is because even though North Korea is regarded as a very poor nation and
the people suffer as a result, the regime is satisfied as long as those in
power can maintain their authority through the use of totalitarian tactics such
as political prisons, incrimination based on guilt by association, severe
punishments for minor offenses, and brainwashing propaganda. Kim Jong Il can
focus merely on the welfare of his support circle in Pyongyang, as they serve
as his limbs in doing his bidding.
 

Even if Kim Jong Il had sincerely wished to
raise the standard of living, he would have been too late. The relationship
between structural components of the the economy and his political base would
have made those sort of improvements unlikely. That means that short of a
transition to a market economy, progress on this front is very difficult. But
by missing opportunities for incremental economic reforms, we saw the economy
swallow up portions of Kim Jong Il’s political base. For this very reason we
saw Kim Jong Il be satisfied to use Kaesong Industrial Park merely as a means
to receive wage payments in foreign currency instead of benefiting from the
economic model in order to learn about market economies and grow organic North
Korean enterprises. In the absence of strong North Korean enterprises, Kim Jong
Il turned to foreign currency earning schemes to make up the difference. To put
it simply, Kim Jong Il was satisfied with using the bare minimum to accomplish
his political supremacy.
 

However, the situation has changed
significantly since Kim Jong Un came to power. As portrayed by North Korea
Confidential authors Daniel Tudor and James Pearson, North Korea’s social
landscape has undergone significant changes. Following the Arduous March, a
famine in the mid 1990s that killed hundreds of thousands, ordinary residents
resorted to capitalist methods in order to make a living. With the
consolidation and increased importance of public markets came exposure to
foreign ideas through South Korean soap operas and other television programs,
movies, DVDs, USBs, and Micro SDs. As a result, most North Koreans began to
turn their back on the tedious and propaganda infused Pyongyang films and media
they were used to in favor of South Korean classics like, “Gyeo-ul Yeon-ga,”
(Winter Sonata) and, “Ching-gu,” (Friend).  Additionally, when the State
Distribution System failed to deliver food to residents, loyalty to the regime
eroded congruently. Though it was customary to view such banned foreign films
alone in the beginning, people gradually came to watch with friends and family.
These days, a little bribe can get North Koreans out of many of their problems.
 

Witnessing the surging popularity of
“entertainment-rich capitalist culture,” North Korea attempted to compete by
creating a schedule of programs that imitated Korean Wave media products from
the South. For example, North Korea’s Korean Central Television aired movies
from England and America. At a popular New Year’s concert in 2013, the
Moranbong band unveiled dance routines and music reminiscent of cabaret. But
the most memorable aspect of this event was when a Mickey Mouse character took
the stage while an animated video of missiles striking America played on a
screen in the background. The spectacle was unique indeed. While simultaneously
striking and attacking Imperialist America, a canonical American image was
being accepted into the cultural fabric of North Korea.  
 

So, while these sorts of Korean Wave and
international cultural phenomena were being accepted into the heart of North
Korean culture, Kim Jong Il continued to propagandize about how North Korea
would emerge as a strong and prosperous nation in 2012. Even if there was no
practical possibility of this happening, the regime was determined to slap that
title on the nation by 2012. Aside from an intercontinental ballistic missile
launch at the end of 2012 and a nuclear test at the beginning of 2013, there is
little to no evidence that North Korea has any characteristics of a great and
prosperous nation.
 

The regime became unable to deny or ignore
the presence and importance of the jangmadang. The ruling elite themselves have
a preference for Korean Wave and international media. Therefore, it is against
their interest to block the smuggling of foreign media in any systematic way.
Between the jangmadang, foreign media, and the desire satisfaction businesses
developed to cater to the wealthy and connected Pyongyang upper crust, North
Korea was forced to become accustomed to this unblockable “trilemma.” Sick of
hearing about myths and fabrications surrounding the Kim dynasty, ordinary
residents have grown tired of propaganda. This trend is particularly strong
with those who grew up after the 1990s, when faith and loyalty in the regime
reached an all time low following the suspension of the public distribution (ration)
system.  For this generation, survival and desires are more important than
loyalty. Success and money are more important than ideology.
 

We understand that there are many
motivations and goals for the changes that the Kim Jong Un regime is beginning
to institute. First, a premium is being placed on the desire satisfaction
businesses that cater to the Pyongyang elite. Foreigners witnessing the
lifestyles of these Pyongyang-ites (or Pyonghattanites as they are sometimes
referred to) might be fooled into thinking that North Korea’s economy is
booming. Next, the regime collects on bribery systems surrounding these
businesses, which gives them an additional way to suck up and monopolize their
hold on the nation’s limited stocks of foreign currency. North Korea’s society
is becoming increasingly polarized. The regime needs to keep their supporters
at the top and prevent the emerging market class from garnering too much sway.
To put it simply, Kim Jong Un is going to have to institute a plethora of
changes in order to maintain the status quo.
 

But there are no guarantees that we will
see continued change in North Korea. Actually, the potential for the opposite
trend to emerge is a bit higher. In order to gain a tighter control of the
foreign currency, Kim Jong Un will likely continue to revitalize Pyongyang and
keep his compadres in riches. This will inspire the middle class to give bribes
and pledge loyalty to the regime in order to break into the coveted inner
circle. Under such a system, the vast majority of normal residents will
continue to live a persecuted existence, defined by toil and scraping by, all
so that the regime can maintain its power.
 

The Mysterious Future of the Kim Jong
Un Regime and a Paradigm Shift in Inter-Korean Relations
 

However, the collaboration between the
bribery-based market system and the Kim Jong Un regime’s political base will
not be a lasting union. First of all, whether they are a brainchild of Kim Jong
Un himself or a product of his leadership team, the crazy acceleration of
political purges, reshuffling, and appointments is not a good start on the path
to becoming a prosperous nation. Generals’ stars have been plucked, Kim Jong
Un’s uncle Jang Song Thaek has been executed, defense minister Hyon Yong Chol, was executed for “dozing off at a meeting.” Although such
maneuvers are meant to project strength, these episodes highlight the regime’s
instability. North Korea has collected the triple crown of decrepitude by
nabbing the number one ranking on the corruption index and last place rankings
for democracy and political legitimacy. Expecting economic progress in such
turbulent times in pure nonsense. In July, the Korean press did a report on top
North Korean generals living in exile abroad. With the continuation of Kim Jong
Un’s lunacy, we can expect to see this cycle of bringing in new leadership and
kicking out the old continue.
 

The influx of Korean Wave and foreign
culture into North Korea’s borders is unlikely to stop anytime soon.
Particularly Pyongyang, but also perhaps other regions, will begin clamoring
for an uptick in the availability of desire satisfaction services. In point of
fact, right now Chongjin’s women have more fashion freedom than their
counterparts in Pyongyang. These girls regard even Ri Sol Ju as a stodgy and
conservative dresser. The first region to stop receiving rations from the
government during the 1990s famine was North Hamgyong Province, which is
located near the Chinese border. Many in this province are the friends and
family members of defectors. People from this region use cell phones on Chinese
networks to exchange information with the outside world. Moreover, the regions
near the ceasefire line in the south have easy access to South Korean
television and radio broadcasts. With the right gear, it’s possible to get info
in real time from South Korea. Therefore, these regions are heavily subject to
the winds of change. Winds that are eroding Kim Jong Un’s political legitimacy.
 

More than anything else, Kim Jong Un’s
nuclear tests and developments are a threat to the peace and stability of all
Northeast Asia. This makes for a complicated political environment and
motivates South Korea to partner up with America for the placement of missile
defense and retribution systems. But in totalitarian North Korea, Kim Jong Un
has no choice but to launch missiles in the Western Sea or near the DMZ. South
Korea is discouraged from developing its own nuclear capabilities by the
world’s powers, so a conflict in the region could easily escalate in a domino
effect. In this type of atmosphere, there are many who hold the position that
in order to equalize the balance of power, South Korea needs to develop nuclear
weapons of its own. Supporters of this position are likely to multiply. The Kim
Dynasty labored for 30 years to secure nuclear abilities and gain the
correspondent tactical advantage. It’s hard to estimate what would happen if
North Korea were actually to fire a nuclear missile, but it is probable that
the regime would not be able to exist for very much longer after the fact.
 

This is the point where South Korea should
seriously reconsider their policy agenda. Thus far, most of South Korea’s
interactions with the North have begun with the premise that the North requires
vast amounts of economic aid. The left wants to move forward with symbolic
gestures, exchanges, and reconciliation: in the model of Kim Dae Jung’s
Sunshine model. The right favors economic assistance on the condition of nuclear
disarmament. President Park’s July 1st, 2015 suggestion that steps towards
nuclear disarmament be traded for infra development in North Korea’s SEZs
certainly fits within the conservative party’s mold. But these tactics have
continually failed in the past and we have no expectation that things will
change for the better in the future. Once the North gets rid of their nuclear
capabilities, they know that the South and the world at large will be able to
simply ignore them.
 

In this light, North Korea really does not
need our economic assistance at the moment. As we have seen from Jang Hyeong
Soo’s paper, the North is skilled at bringing in and retaining foreign
currency, which it can use to put out any economic fires should they arise. The
real explanation for their economic depravity is hidden within the nature of
the regime itself. The upper elite feed off the misery and suffering of the
common citizens. Without this oppression, they would not long be able to retain
their positions of authority. For these reasons, North Korea has an incentive
to continue antagonistic behaviors on the world stage in order to get
attention. South Korean presidents have a one term (five year) limit, which
gives them little time to make progress in the face of such antagonism. North
Korea is the only winner in this game of chicken, of provocation and aid
solicitation. That’s why South Korea’s policies have been so inept at dealing
with the Kim Dynasty up to this point.
 

South Korea should respond in kind to the
North’s antagonistic behaviors. South Korea needs to continue the legal and
large scale introduction of foreign ideas and information into North Korea
while simultaneously pressuring the regime to disarm their nukes. It’s time to
stop looking at the North as a little brother in need of economic assistance.
Now is the time to look for the regime’s breaking point in order to stop the
horrors that they regularly commit on their people in order to retain their
authority. The time has come for a fundamental shift in policies regarding
North Korea. Considering the fact that the North will never willingly throw
away their nuclear capabilities, the South needs to develop a system of
political and military counter measures in tandem with a new diplomatic
approach.

*Views expressed in Guest Columns do not necessarily reflect those of Daily NK