Bankruptcy of North Korean Foreign Currency Management System Due to “Royal Court” Economy

Kim Jong Il is well known for leading an extravagant lifestyle. From caviar and Champaign to Mercedes Benzes and Hennessey Cognac, Kim Jong Il lives well, while ordinary North Koreans are forced to endure great hardship.

In the process of financing such an opulent lifestyle, Kim has created a two-tiered economy in which the “royal court” economy takes precedence over all else.

In fact, the “royal court” economy is putting such a great strain on North Korea’s economic system that the country’s foreign currency management system is breaking down.

This is the view put forth by Kim Kwang Jin, a senior researcher at the Institute for National Security Strategy and a North Korean defector, in his recently published paper, “A Study on the Changes in North Korea’s Foreign Currency Management System”

According to the study, the origins of the “royal court” economy can be found in Kim Jong Il’s “gift politics” system.

So-called “gift politics” began as Kim Il Sung started handing over the reins of power to Kim Jong Il in the early 1970s. The younger Kim used gift giving as a means to strengthen his supporting faction and power base.

Even now, Kim Jong Il gives “royal gifts” to the people on national holidays including his father’s and his birthdays. Kim Jong Il hopes such actions will cultivate obedience and loyalty among the people.

Kim Kwang Jin pointed out other factors that led to the emergence of the “royal court” economy including the continuous deterioration of the economy since the 1970s, the strengthening of the Worker’s Party, a lack of industrial materials, and the growth of the military-industrial complex.

The study classified the court economy into two components, the “military economy” and the “party economy,” each operated by different sections of the Worker’s Party, the military, and foreign currency-earning departments.

As the “royal court” economy developed, it started taking on a life of its own, separate from the main economy. It started managing its own planning, production, distribution, trading, and financing facilities.

Examples of this phenomenon include the 39th Department’s establishment of Daesung Bank, the 38th Department’s establishment of Koryo Bank, the Munitions Industry Ministry’s foundation of Changkwang Credit Bank, and the Guidance Department’s establishment of the Northeast Asia Bank.

“Banks such as these were linked to Kim Jong Il’s personal funds and were kept isolated from the national financial system. Consequently, a dual foreign currency management system was created: the foreign currency management system for the regular citizens, operated through general trading banks and the “royal court” foreign currency management system run by the banks associated with various departments,” explains Kim.

According to Kim’s thesis, general trading banks controlled by the cabinet have lost business to banks associated with the “royal court” banks and are now bankrupt. Meanwhile the “royal court” economy has absorbed many profitable enterprises and linked them to the personal funds of Kim Jong Il, eating away at the people’s economy.

“The authorities have tried to regenerate the people’s foreign currency management system but the existence of the ‘royal court’ economy prohibits it,” concludes Kim.

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