Why Can’t North Korea Keep Up With the Neighbors?

(Bloomberg Businessweek) -- Back in 1989, as the communist bloc began its tumultuous collapse, North Koreans were more than twice as wealthy as their comrades in China. Then came the Chinese economic miracle, offering the most successful formula for transition from poverty to prosperity in recorded history. Across the border in Pyongyang, however, the ruling Kim dynasty resolutely declined to follow.

Just why successive North Korean leaders—not only Kim Jong Un, but also his father Kim Jong Il and grandfather Kim Il Sung—were so reluctant to embrace change is an enduring puzzle. The Beijing model, after all, managed to pull off a rare trick, delivering market-led growth, integration with the global economy, and entrenched Communist Party rule all at the same time.

As recently as 2016, in a party congress speech, Kim still championed his country’s heroic, guns-over-butter resistance to the “wave of bourgeois liberty and wind of ‘reform’ and ‘openness’ around us”—a thinly veiled rebuke to China.

His more recent comments suggest a shift. He has charmed South Korea with talk of opening up for investment, at least in restricted economic zones. And he’s talked of switching focus from the development of North Korea’s nuclear arsenal to concentrate full time on a more China-like “socialist economic construction.”

Whether that represents a true change of heart, or just a tactical retreat in the face of sanctions that reduced trade with China by more than 60 percent in the first quarter, is impossible to know for sure. What’s clear is that Kim and his family have long seen the opening up of the state they so ruthlessly isolated from the rest of the world as a severe risk to the legitimacy of their rule.

That perception helps explain the sometimes-bizarre frailties of the North Korean economy, which the government sustained with coal, textiles, narcotics, counterfeit greenbacks, and more recently cybertheft rather than submit to reform. It may account, too, for some of Kim’s hot-again-cold-again approach to his planned June 12 summit with Donald Trump, which the Korean leader first proposed and then threatened to cancel. (Update: On May 24, Trump called off the summit, citing “tremendous anger and open hostility” on the North Korean side.) In one sense, the Kim regime’s reluctance to embrace change is brutally simple: “Had the government instituted Chinese-style openness and reform 25 years ago, the top leadership would either be dead or in prison,” says Andrei Lankov, a regular visitor to the North who studied in Pyongyang as a Soviet citizen.

It’s a fate that could yet await Kim—as John Bolton, Trump’s national security adviser, reminded him earlier this month when he demanded that North Korea accept a nuclear deal modeled on the one former Libyan dictator Moammar Qaddafi signed in 2003. (Qaddafi was butchered in the streets of the city of Sirte eight years later, following a Western military intervention against him.) When Pyongyang then threatened to call the summit off, Trump warned Kim that he could also end up like Qaddafi if he doesn’t negotiate an end to sanctions. Whatever the wisdom of U.S. megaphone diplomacy, it described perfectly the Catch-22 Kim faces.

Both the cult of personality that surrounds the dynasty and North Korea’s rare condition as one-half of a divided nation have made the seemingly obvious solution to the country’s transition unappealing, according to Lankov, now a professor of history at South Korea’s Kookmin University. In China, he says, the Politburo could declare Mao Zedong 70 percent wrong and embrace private property. But any acknowledgment of imperfection in Kim Il Sung—the “Heavenly Leader” who North Korean school kids are taught almost single-handedly defeated the Japanese in World War II—remains an untouchable live wire. Kim can’t afford to question the wisdom of his father or grandfather in what has always been as much a monarchy as a communist state.

South Korea is twice as populous and holds an equal claim to govern the peninsula should reunification take place. That makes the success of the South, achieved without the blessings of the Kim family’s leadership, potentially destabilizing for the North and dangerous to the dynasty. The gap in gross domestic product per capita between North and South is probably the widest between any two neighboring countries on Earth—a multiple of 22 in 2016, according to the Bank of Korea. Opening the borders would not only reveal the threadbare nature of the Kim regime’s legitimizing mythology but could also trigger mass migration and economic colonization. “The new capitalism in North Korea wouldn’t be built by North Korean officials, but by the managers of Samsung and Hyundai,” says Lankov.

It isn’t that nothing has changed in North Korea since 1989. A lot has. A market economy has been growing from the bottom up, ever since a famine—mislabeled the “Arduous March” by the government—cratered the old system in the 1990s. Parts of the economy, including textile mills, have become low-cost parts of the Chinese industrial supply chain. More recently, Kim has begun not only to tolerate the de facto private economy but also to support it in small ways, such as giving more decision-making freedom to the managers of state-owned businesses. Reliable data on North Korea’s economy are scarce to nonexistent, but recent visitors to the North say they saw few outward signs of economic distress from the latest sanctions. Pyongyang is now home to a mini-construction boom, as well as a burgeoning middle class and the cafes to serve them.

Still, China’s GDP per capita is about eight times as high as North Korea’s. Private property and enterprise remain nominally illegal, cohabiting uneasily with the remains of a broken command economy. And despite the North’s high levels of literacy and education, the strides China has made in artificial intelligence and robotics are a distant dream.

“It wouldn’t be correct to say they have taken no steps to reform, there were initiatives,” says Benjamin Katzeff Silberstein, a Korea specialist and associate scholar at the Foreign Policy Research Institute, a Philadelphia think tank. But the leadership hasn’t been willing to take the risks needed to make those policies transformative. Nor is it clear the leaders are willing now to do more than take what they see as free money and limit foreign investment to special economic zones, he says.

What is clear is that the challenges posed to Pyongyang by systemic reform and a Chinese-style opening to the global economy haven’t gone away. They will remain rational constraints on Kim’s decision-making.

The roots of the Kim dilemma lie in the brutality of the 1950-53 Korean War, during which as much as a quarter of the North’s population was killed. The U.S. Air Force bombed urban centers until, in 1951, Major General Emmett O’Donnell could testify to the Senate Armed Services Committee that there were “no more targets in Korea.” No peace treaty was signed, and Kim Il Sung retained the military discipline of the war to mobilize his population for a peacetime recovery.

The North Korea that emerged was more Stalinist than Stalin’s Russia. Kim Il Sung, however, didn’t die until 1994, more than 40 years after the Soviet leader who had engineered his installation in Pyongyang. Wartime rationing and bans on private business were never lifted, producing a virtually cashless economy under tighter political control than in other postwar communist countries. That worked, just, until the famine.

Faced with starvation, the population began freelancing outside the broken state system to survive. What emerged since the 1990s “is a very peculiar economy, about half-planned and half-market,” says William Brown, who spent a career analyzing North Korea for the U.S. Central Intelligence Agency. He now lectures on East Asian economies at Georgetown University in Washington, D.C. Workers at the state-run Pyongyang textile mill earn about 3,000 won per month, a street value of about 40¢, says Brown. They also pay nothing for their housing or utilities and receive food rations from the state. Factories that export their products are allowed to pay their workers up to 30,000 won a month in exchange for reduced benefits, he says. Meanwhile, Chinese-owned mills are allowed to pay 300,000 won, although their workers receive no state benefits at all. “People try to arrange it so that one of a husband-and-wife team works in the state sector, so they get free rent and power, and the other is out in the market economy earning cash,” says Brown.

The effects of this hybrid system are most obvious in the energy sector. In the old economy, coal produced from North Korea’s mines would be allocated to the nation’s power plants, which then distributed electricity to the population at virtually no cost. That’s still supposed to happen, but at least until sanctions hit, the temptation to export power to China for hard currency was strong. Plant managers distributed bribes all the way up the system to make it possible, according to Brown. Power from the grid remained cheap in theory, but unreliable for ordinary people in practice because the coal to produce electricity was going across the border. North Koreans responded by buying Chinese solar panels to power their homes. In recent photographs these can be seen attached to rooftop masts, to discourage theft.

A third, “court” economy, meanwhile, secures hard currency for the elite by trafficking illegal goods abroad. According to numerous accounts, this business is run by an agency known as Office 39. In Illicit: North Korea’s Evolving Operations to Earn Hard Currency, a 2014 study by the Washington-based Committee for Human Rights in North Korea, Sheena Chestnut Greitens used data from contraband seizures and defector testimony to trace the regime’s criminal ventures back to the 1970s. That’s when about a dozen North Korean diplomats were expelled from Scandinavian countries for smuggling alcohol, cigarettes, and hashish, using their diplomatic pouches as a distribution network.

Later, according to the study, the government switched to using foreign organized crime syndicates to sell heroin, manufactured from state-mandated poppy farms, methamphetamines, and counterfeit cigarettes and pharmaceuticals. The U.S. government has also accused North Korea of producing the world’s most sophisticated counterfeit dollars, known as “supernotes,” beginning in 1989.

North Korea’s government has dismissed such claims, and some analysts also question the data, much of which comes from governments keen to discredit Pyongyang. The study found that since 2005, intercepts of North Korean smuggling have fallen sharply, even as claims of cybertheft—including North Korea’s alleged ties to 2016’s $81 million cyberheist from the Bangladesh central bank—have risen.

By proposing the summit in the first place, Kim may just have been looking to defuse military tension with the U.S. and forestall the inevitable financial squeeze as a rising current account deficit caused by sanctions burns through the nation’s foreign currency reserves. China accounted for 83 percent of North Korean exports by 2016, and its decision to join a series of United Nations sanctions last year as North Korea tested intercontinental ballistic missiles and a powerful nuclear weapon appears to have been decisive. Questions remain about how strictly China implements the sanctions, but by November, Chinese customs data showed no exports of oil products to North Korea at all, as well as sharp cuts to shipments of corn and rice.

It’s also possible, however, that Kim saw the summit and nuclear talks as an opportunity to do what he and his predecessors have never dared before: to push the hermit kingdom onto a path of much broader, Chinese-style economic reform that would make it a more normal if still authoritarian state. If so, says Katzeff Silberstein, “politically, that’s going to be very difficult to do.”

To contact the editor responsible for this story: Howard Chua-Eoan at hchuaeoan@bloomberg.net

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