North Korea Descending Into Economic Chaos

I’ve long believed that functionally, there were two North Korean economies — a mostly capitalist (and to the U.N., illicit) “palace” economy that funds Kim Jong Il’s regime, and an increasingly capitalist (and to Kim Jong Il, illicit) “peoples’ economy” that rose from the ashes of the failed Public Distribution System. Some say that international food aid ended the Great Famine, a famine that may have killed millions of North Koreans. There is some truth in this, but international food aid began to sag in 2005, when the regime announced that it would reject further shipments of food aid and accept only “development” aid. The regime partially relented, but only after it expelled most U.N. aid workers and cut the list of North Koreans eligible for aid from 6.5 million to 1.9 million. More donor fatigue followed after the missile and nuclear tests of 2006 and ongoing reports of diversion — as one World Food Program official put it, “They don’t like our monitoring.” North Korea has since rejected food aid from the United States, which also insisted on some watered-down monitoring measures, which North Korea initially accepted and later reneged on. Even when North Korea did accept food aid and some monitoring controls, we’ve always known that some significant but unknowable percentage of our food aid was being diverted. Only a tiny percentage of the North Korean refugees Yoonok Chang interviewed in China — just 3% — reported that they’d personally received any international food aid (see Page 29 of this study).

North Korea’s food production never fully recovered to pre-famine levels, production that was only sustained with subsidized Soviet fuel and fertilizer. Storms that took out power lines and temporarily closed a few roads in South Korea were invariably reported to be catastrophic to North Korean harvests — indeed, North Korea has claimed bad harvests due to natural disasters in nearly all of the last five years. But of course, the North Korean regime also made the decision (see pages 11-13) not to shift more of its balance of payments from military purposes to food. There wasn’t enough food being grown, and what food the regime controlled wasn’t being allocated fairly or efficiently. As it will, a market arose to correct those inefficiencies. It is probable that the rise of illegal markets — called jangmadang in Korean, these were the rebirth of the people’s economy — has done much more to keep North Koreans alive in the last decade than aid. As Blaine Harden notes in today’s Washington Post,

After a decade of explosive growth, markets have substantially supplanted the central government as a means of employing and distributing food to North Korea’s 23.5 million people. The kudzu-like spread of grass-roots capitalism — and the government’s inability to control it — has angered Kim and his top lieutenants. [Washington Post, Blaine Harden]

By last year, 80% of North Koreans depended on food from the markets for their survival, and that was in spite of some very persistent efforts by the regime to close those markets down.

United Nations officials estimate that half the calories consumed in North Korea now come from food bought in private markets. Recent surveys of defectors have found that as many as 75 percent of them were involved in market activities before fleeing the country. [WaPo]

And of course, it’s a lot harder to control people if you don’t control their food supply. I suspect that this realization is what led us to the Great Confiscation — that it was an effort to crush the market economy that the regime continues to pursue despite the misery, the discontent, and the hunger that it’s causing:

Strong-armed currency reform in North Korea, which has confiscated the savings of small businesses and forbidden the use of foreign money, is now causing runaway inflation and contributing to food shortages, according to several reports from inside the closed state. Currency reform is part of an aggressive crackdown on free markets by North Korean leader Kim Jong Il.

His government has ordered the closure by the end of March of a large wholesale market in the northeastern port city of Chongjin, according to Good Friends, a Seoul-based aid group with a network of informants inside the country. Another major wholesale market near the capital, Pyongyang, was shut down in June. [WaPo]

After some initial shock and hesitation, the regime appears to be intensifying the Great Confiscation, and the economic chaos it has caused is also accelerating:

The currency moves have raised the real prices even higher for essentials impoverished North Koreans were already having trouble buying due to persistent inflation and reduced the few goods they can buy by restricting external trade with China. Merchants risked imprisonment for operating outside of the state economy if they drew attention to themselves by converting large cash holdings in the small window North Korea allowed people to change over money, which likely led to considerable losses for those selling food, clothes and appliances. [….]

“The first public rallies we see in North Korea will not be about freedom or democracy, but they will be about livelihood,” said Kay Seok, a researcher in the Asian Division for Human Rights Watch in Seoul. For the past five years, North Korea has been trying to exert more influence over the economy, which has only grown weaker since Kim Jong-il took over in 1994 due to mismanagement. [Reuters, Jon Herskovitz]

It is economic issues that dominate the relative levels of content and discontent in North Korean society. In their daily lives, and making allowances for different personalities and backgrounds, North Koreans think about more vague and abstract ideas just as all human beings do. But it is the sense that the regime is making them hungry and miserable — that it denies them happiness and hope — that opens North Koreans to political and religious dissent. What an authoritarian system provides that democratic societies often don’t is the sense of sure and decisive leadership that can’t be questioned and doesn’t need to be. I suspect that Kim Jong Il can’t have much of an aura of infallibility in times like these:

North Korean citizens are struggling under the weight of so many changes to their daily lives in a very short period of time, say sources inside the country. One in North Hamkyung Province told The Daily NK wearily on the 5th, “Everything is changing these days. We can see no further than the end of our noses.

Notably, the declaration, “On punishing severely those who use foreign currencies within our Republic,” has made a big difference. Banning the use of foreign currency within North Korea, since it was released by the People’s Safety Agency on December 26th the Yuan exchange rate has skyrocketed. [….]

In this unstable situation several rootless rumors have begun to circulate among the people, only making them more confused. People are saying that this redenomination is only a temporary measure and that permanent denominations will be issued in 2012, or that all bills over 1,000 won will be scrapped, so traders and foreign currency exchange dealers will not receive bills bigger than 500 won. [Daily NK]

For now, pay raises and massive handouts of the new currency are keeping some of the people content for the time being. But there aren’t many goods or much food for North Koreans to spend that money on, and that currency may not be worth much if and when there is.

Although official markets are closed, illegal alley markets continue to evade the authorities. Accordingly, the state-designated rice price, 44 won per kilo, has been superseded in such markets by prices of 100 won in border areas and up to 300 won in interior provinces. The Daily NK’s inside sources estimate that this upward movement will not reach its limit for some time, and traders foresee a return to rice costing more than 2,000 won per kilo. [Daily NK]

We’re mostly left to speculate about how much more the discontent could spread:

Noland said in a separate interview that the North’s leaders could face problems if they tried to enforce the foreign currency ban on military and security offices, which run quasi-state businesses that funnel funds to the leaders of those groups. “If you look at North Korea, there are no civil society institutions capable of channelling mass discontent,” he said.

“The one real chance for political instability is if they try to enforce the ban on foreign exchange for the military and security services.”

The North has been able to stamp out dissent through regular purges of its leadership, a suffocating internal spy network and a massive political prison system where anyone thought to be working against the state is jailed, often with their families. [Reuters]

It all depends on whether the security forces stay loyal, and if I had to bet my life on that now, I’d say they would.