Archive for NK Economics

North Korea’s circular firing squad

The reaper has come for two more key North Korean diplomats:

South Korea’s Yonhap news agency said that Pak Kwang-Chol, an associate of the young supremo’s uncle and political regent Jang Song-Thaek, was seen returning home after making a brief stopover in Beijing. The envoy and his wife were reportedly escorted by North Korean officials onto a flight to Pyongyang.

Sweden is an influential diplomatic player in Pyongyang, AFP said. Since the United States and North Korea have no diplomatic ties, the Swedish Embassy represents US interests in the country, acting as a kind of go-between. [link]

And this:

Hong Yong, the North’s deputy permanent delegate to UNESCO, and his wife were spotted at Beijing airport on Monday before taking the flight to Pyongyang, South Korea’s Yonhap news agency said. Hong, one of Jang’s associates, took the post only six months ago, it said, quoting a diplomatic source in Beijing. [AFP]

Pyongyang had previously recalled its ambassadors to Malaysia and Cuba, presumably also as part of the purge. North Korea has historically used Malaysian banks for money laundering, and Cuba has recently emerged as a North Korean arms supplier.

In addition, the Joongang Ilbo now reports that “two Workers’ Party executives, two cabinet members, two soldiers and one corporate manager” (a total of seven others) were also executed with Jang. The South Koreans are saying that for now, the purge has only reached Jang’s highest-level supporters:

“We are seeing signs that those who were deeply involved with Jang are being recalled and purged,” Ryoo Kihl-Jae, South Korea’s unification minister in charge of cross-border affairs, told lawmakers. 

The purge however appears to be targeting a relatively small circle of officials, Ryoo said, rejecting speculation of a sweeping clear-out of party and military ranks. “We do not see that it (the purge) is being carried out on a large scale, though it still needs to be seen to what direction it would develop,” he told members of parliament’s foreign affairs committee. [AFP]

I’m not sure I believe that. As early as December 6, The Daily NK reported that “municipal and provincial Chosun Workers’ Party secretaries and cadres from judicial and security organs have been summoned en masse to Pyongyang,” although it’s not clear how many were purged, and how many were simply called in to observe the festivities in which Jang was denounced and purged.

The same appears to be the case with North Korea’s cadres in China, who are more visible to us. In mid-December, it was reported that North Korea had recalled large numbers of China-based cadres who were involved in enterprises earning and laundering foreign currency. The subscription news site East Asia Intel also reports that Pyongyang is recalling “large numbers of North Korean businessmen” who worked in Shenyang and Dandong, “to facilitate trade” with China, and “attract Chinese investment.” Without getting behind the paywall, I can’t tell whether the report is based on new information, or simply regurgitates what South Korean sources had previously reported. Taken together, these reports suggest that the purge won’t be confined to the top echelons.

North Korea’s ongoing crackdown on cross-border movements, in an apparent attempt to prevent defections by potential targets of the purge, is circumstantial evidence of the purge’s potential to affect a significant number of North Koreans. Pyongyang has assigned more guards to patrol the border and asked four Chinese companies to suspend their tours of the North (a Chinese tour bus seems like an unlikely way to escape North Korea; it seems more likely that Pyongyang is afraid of what the tourists might see).

North Korea’s lower and middle castes will feel the most immediate impact of this crackdown. They are the most likely to rely on illicit cross-border trade, or try to cross the border to find work or defect. Reports from inside North Korea tell a mixed story. Although the regime has cracked down on cross-border movements since the purge, Chris Green writes that the regime isn’t cracking down on markets and trade internally. Domestically, the regime is sending a business-as-usual message, while discouraging any unauthorized discussion about Jang’s purge. For once, the regime shows signs of trying to mitigate (perhaps “calibrate” is a better word) the impact of its brutality on lower-caste North Koreans.

In the longer term, however, this will inevitably disrupt the regime’s own finances, possibly severely. North Korea’s ambassadors play an important role in financing the regime, by making both legal and illegal business deals. The diplomatic corps’s mercenary nature is so notorious that the U.N. Security Council’s latest resolution begins by referring to “the illicit activities of diplomatic personnel” and “transfers of bulk cash.”

It also seems increasingly clear that Jang was purged as part of a struggle over North Korea’s resources, and who gets to use them for everything other than feeding the hungry. North Korea’s mineral industries are most often mentioned as in contention. Fighting over those resources is affecting Pyongyang’s ability to profit from them. According to the Daily NK, as early as October, North Korea took the extreme measure of halting gold mining and exports to reassert control of that income stream. (That is extremely interesting, in light of other reports that the North’s agents in China were selling off gold. The continued sale of gold after the purge could suggest that officials in China were defying orders from Pyongyang and preparing to go to ground, consistent with what we read here.) North Korea’s “special economic zones” and its overseas restaurant operations have also been associated with Jang, and will probably be affected. In the background, the North is hinting at a general tightening of the North’s economic restrictions. That will be another drag on efficiency and investor confidence.

Everything this regime prioritizes relies on the business relationships that are now being questioned, and on the overseas currency-earning operations staffed by the people who are being purged today. If my guess is right, we’ll soon see data showing a drop-off in North Korea’s imports and exports (although those data are certainly questionable). That will inevitably affect Pyongyang’s ability to buy the loyalty of a new Inner Party, to finance its WMD programs, to control the borders, and to feed its army. It might even affect the pace of construction at showpiece projects, like water parks and ski resorts. Anyone but an impulsive psychopath would have to realize that.

North Korea’s overseas money men, called home, go to ground instead

After the news broke that Jang Song Thaek has been purged, The Daily NK reported that the regime was summoning party cadres from other parts of North Korea to Pyongyang. Now, new reports tell us that North Koreans in China are also being called back, possibly to be purged themselves. The Joongang Ilbo carries a fascinating interview with Lee Keum-Ryong, a defector and Free North Korea Radio correspondent, and obviously a very brave man. Lee defied the risk of abduction, or perhaps a curbside injection of neostigmine bromide, to get close to many of these North Koreans in Beijing. He reports that many of them have since vanished, but not all of them went home.

“I went to an office building where North Korean officials in the business of trade, whom I have personally known for some years, used to work. Stuff had been removed from all three rooms and [North Korean] strangers were standing guard. I waited for hours for North Korean officials to show up, but they didn’t. A source in China told me ‘a whole group of team members seemed to have disappeared’ and those who were standing guard at the office were an arrest squad [sent from Pyongyang].

“I [finally] reached a North Korean official in hiding through a go-between. The man, who worked for a trading company under the North Korean administrative department previously led by Jang Song-thaek, said, ‘I was able to flee [from arrest]. And I expect others [with ties to Jang] have done the same. I don’t know what to do next.’” 

The official told Lee he was mulling fleeing to another country, possible the United States or a European country. When asked how many North Koreans fled from arrest, the North Korean said he did not know. 

The Joongang Ilbo adds that about 70 to 80 North Koreans in Europe, who also had ties to Jang, may also have to decide whether to defect or return.

Pyongyang usually keeps the wives and children of its overseas agents at home, as hostages. The fact that any significant number of them refuse to return home suggests that cohesion and discipline are breaking down. It may also reflect the sentiments of officials in Pyongyang, although the choices there are more stark.

One of Lee’s Chinese sources told him a majority of North Korean workers [in Beijing] “are frightened and desperate.” “In Beijing alone, there are about 30 North Korean workers, and they are now nowhere to be seen … We don’t know whether they went back [to Pyongyang] voluntarily,” said the source. 

Most of those who disappeared are senior ranking members of North Korea’s trading companies who have worked with Jang over many years and have transferred foreign currency to Pyongyang. Lee quoted his Chinese source as saying there was an arrest squad dispatched from the North, fueling speculation that those who returned to their country did it involuntarily. 

“I bet their [North Koreans in China] position is that there is nothing to hope for after the execution of Jang Song-thaek,” said a Chinese businessman. “[Those who have disappeared] are North Koreans stationed in Beijing, Shenyang and Guangzhou. Those who were in Guangzhou are the people who looked after Kim Jong-nam, the eldest son of Kim Jong-il,” he said. 

Many of these North Koreans were “in China to enhance bilateral trade and investment.” Some analysts interpret the order as a sign that the regime disapproves of Chinese-style reforms.

NK office

[via Yonhap]

At a minimum, removing these deal-makers will necessarily have some adverse effects on the deals they were making, or made. That will undo a great deal of connection-building and negotiation, and will damage economic relations between China and North Korea. The regime’s denunciation of Jang for “instruct[ing] his stooges to sell coal and other precious underground resources at random” and “selling off the land of the Rason economic and trade zone” will certainly chill new investment deals, and scare cadres into reinterpreting existing ones, causing more conflicts with investors. Regime banks accounts could even be lost if the only people who know where it is die without telling where they are.

Not that any of these things would be bad, mind you.

It’s hard to imagine that this purge could fail to cause a significant disruption in Pyongyang’s money flows. Could they really be dumb enough to do that to themselves? If they were dumb enough to destroy their own currency, then I suppose they are.

For what it’s worth, a North Korean official interviewed by the AP says that Pyongyang’s economic policies won’t change, that North Korea welcomes foreign investment, and that Pyongyang will proceed with its special economic zones. Not that I suppose this is really about me, but the interview answers my swipe that the AP hasn’t interviewed any North Korean officials or adding any useful information to our speculation about the purge. Whether these assertions are useful information is a question I’ll leave to you, to time, and to the boys at the Inmin Poan-Bu to tell, but they are exclusive and newsworthy. Good for the AP reporters for making the effort.

Let them drink beer: Kim Jong Un’s North Korea, where Orwell meets South Park

This week, the U.N. gave the North Korean government another million dollars for flood disaster aid to North Korea. Last month, the U.N. World Food Program appealed for $98 million to feed hungry North Koreans. Earlier this year, European NGOs blamed international sanctions for their difficulties paying for their operations in North Korea. And yet somehow, Kim Jong Un has found plenty of grain for brewing beer:

North Korea completed construction of a brand new brewery in Haeju city that has up-to-date production facilities, the communist country’s leading newspaper said Thursday.

The Rodong Sinmun, an organ of the ruling Workers’ Party of Korea, said the brewery has fermentation, filtering, cold storage and bottling facilities that will allow it to produce alcoholic beverages to benefit people. [Yonhap]

This also happened in Animal FarmIt’s as if the North Koreans read Orwell and mistook parody for utopia.

You get similar ideas from this picture of Kim Jong Un supervising the construction of what richly deserves to be known as Cartmanland Pyongyang, “a waterpark, complete with slides, a wave machine and a restaurant.”

North Korean leader Kim Jong-Un inspects the construction site of the Munsu Swimming Complex

I’m not sure that oligarchical hedonism equates to capitalism, but it sure isn’t socialism. There’s no denying that this is a change from the image that the first two Kim emperors displayed, but is it a good change? It certainly isn’t reform.

Let’s assume that North Korea abandons all pretense of socialism and class equality. Say it declares itself to be a capitalist or mixed economy–exactly what proponents of engagement have spent the last two decades so eager to see that they sometimes celebrated signs that no one else could see.

Why does it follow that a non-socialist North Korea would be any less of a danger to its own people, or to us? Isn’t it more likely that a capitalist North Korea would simply use its increased concentration of wealth to threaten us more? Wasn’t Nazi Germany a mixed economy?

New Focus on North Korea’s changing economy

They paint a vivid picture of an economy in a halting transition:

* For better or for worse, loan sharks who trade in currency and their connections to the regime have become an important part of the new economy.

* How businessmen make donations to regime projects to buy indulgences — letters of appreciation — from the regime, and use them as amulets against its enforcers of dependency.

* The decay of the Public Distribution System (PDS) continues to progress.  Teachers has been among the most favored recipients of state rations until recently.  Now, they moonlight as traders in the jangmadang to get by.  Who in North Korea still lives on the PDS?  From what I’ve read recently, it seems to be going the way of the pay phone, even in Pyongyang.

* There is also a fascinating report about the Ryugyong Corporation, which controls North Korea’s illicit drug business at all levels of vertical integration.  The report paints a surprisingly nuanced view of how Kim Jong Il would control these illicit activities overseas.  There was more negotiation and less outright coercion than I would have thought, and the report seems credible and well-sourced, although the estimate of “tens of thousands” of dollars a year seems implausibly low.

Best Graphics of the Week (So Far)

The first shows the persistence of regionalism, in living color.

Via Yonhap; hat tip to Step Haggard and Jaesung Ryu.

If I’m sitting in Pyongyang right now — and also, if I’m a malignant narcissist with a bloated army — I’m thinking the people who voted this way must be punished.  One sense of ill foreboding has been replaced by another.

The second graphic is a newer, higher resolution image of the Koreas at night.

Don’t stop there.  The full-resolution version is simply stunning.

So is it time for me to update my masthead image yet?  Things have hardly changed in nearly 20 years.  Aside from the fact that there are more lights on some parts of the Sea of Japan than on land in North Korea, it struck me that those fishermen in Chongjin sure do venture far out to sea at night.  It must take days to get there.  And even then, the lights on their boats are dimmer than those on the South Korean boats.

 

Reform Watch: North Korea can now afford to bury its orphans in Snoopy T-shirts

As a vibrant market economy arises from an underdeveloped one, it does not lift all boats as a rising tide would.  Some get very rich fast, and some stay very poor.  Such periods of rapid development are politically risky times, as uneducated masses are drawn away from their hardscrabble farm lives and packed into factory dormitories, slums, and shanty towns in the cities.  Those places become hothouses of envy and radicalism that can bring down the political systems in which wealth and poverty coexist uneasily.  It’s no coincidence that Marxist ideas rose as societies industrialized, and waned as most of the world entered a post-industrial phase.   Marxism is an ideology built around an emotion — envy.  To survive the political turbulence of industrialization, a strong state must have the means and the will to suppress lawlessness, but it must also inspire enough faith in The System that the masses harbor real hope that their lives will continue to improve under it.

On the surface, the coexistence of wealth and poverty in North Korea can resemble what we see in developing societies.  But in what sense can it be said that North Korea, a place where the government wraps an iron fist around most commerce and predetermines the potential of its citizens before they’re even born, is “developing?”  Are we really seeing the rise of a capitalist class in Pyongyang, or is the same old elite-class hoarding just becoming more ostentatious?  The great irony of North Korea is that its most destabilizing force today is the same kind of class envy that propelled most of the Marxist revolutions of the last century.  Two excellent news stories this week contrast the superficial trappings of wealth in Pyongyang with an exacerbation of poverty and continued starvation everywhere else.  While the elite in Pyongyang have never had it so good, children continue to starve and die in the markets of other North Korean cities.

Food prices have spiked, the result of drought and North Korea’s defiant launching of a rocket in April that shut down new offers of food aid from the United States. Development organizations also blame speculators who have hoarded staples in anticipation of reforms that have yet to materialize. The price of rice has doubled since early summer, and chronic shortages of fuel, electricity and raw materials continue to idle most factories, leaving millions unemployed.

“People were hopeful that Kim Jong-un would make our lives better, but so far they are disappointed,” said a 50-year-old named Mrs. Park, who like Mrs. Kim spoke on the condition that only her last name be used, fearing retribution when she returned home.

A member of the ruling Workers’ Party from a major city, Mrs. Park said that to feed her family, she sells cornmeal cakes from a market stall, but she complained of sluggish sales and famished children who snatch her wares from beneath a protective swatch of fabric. More than once this year, she said she walked by the lifeless bodies of those who were too weak to steal.

“I would have given them food if I had any,” she said, looking away with shame.  [N.Y. Times, Andrew Jacobs]

This is some of the best journalism the Times has produced about North Korea in my memory.  I hope we’ll see more of Mr. Jacobs’s work.  Another giant, Barbara Demick, writes:

Women wearing fancy shoes, miniskirts and trousers, fashions popularized by the chic wife of North Korea’s not-yet 30-year-old leader. Brand new high-rise apartment buildings, which she’s heard have washing machines and refrigerators. People walking down the street yammering into cellphones stuck to their ears.

All things that, for now, at least, seem beyond the reach of the 52-year-old Kim, who, although she counts herself among the privileged as a resident of the North Korean capital, can barely afford to eat rice.

“Of course, they’re showing off with their cellphones. Who wouldn’t?” she snapped.

[....]

“There is more construction, more people building things, more to buy in Pyongyang. But day to day, our life is actually harder,” said Kim, who like many North Koreans working outside the country uses a pseudonym.

[....]

“Maybe 1 out of 10,000 North Koreans can afford to eat white rice every day like the people in China,” said a 58-year-old man from Suncheon, 30 miles north of Pyongyang, who has been working in a brick factory in China.

At North Korea’s state-owned factories, wages are so low (often less than $1 per month) that people will pay for the privilege of not showing up to work. They use their time instead to collect firewood or edible greens or to trade something on the market.

As for the vaunted North Korean military, rank-and-file soldiers have so little to eat that their parents have to send money and food for them to survive. Cornfields have to be guarded 24 hours a day to prevent thievery, with many of the culprits being hungry soldiers. [L.A. Times, Barbara Demick]

Both articles are absolute must-reads.  Also not to be missed, and on the same theme:  this piece in The Atlantic, and this one by Laura Ling, although five points shall be deducted from Slitheren for all references to “Kangnam Style.”

Separately, other reports are claiming that North Korea’s food situation is as bad as it’s been at any time since the Great Famine.  I’m a committed agnostic about any statement that claims to represent the true food situation in North Korea, given the restrictions on access to reliable data and the substantial variations that probably exist from region to region.  It’s clear, however, that North Koreans don’t think their lives have improved during the centenary of Kim Il Sung’s birth or since the coronation of Kim Jong Un.  The perception of declining living standards is bad news for any ruling regime, but it’s fatal when it’s so easily contrasted to the rising and conspicuous wealth of a privileged few.  As a consequence, class envy in North Korea is almost certainly both deep and wide, and it’s turning North Korea into a Brechtian dystopia where the masses live by the laws of Erst kommt das Fressen and Der Mensch lebt durch den Kopf.

Hat tips to several readers.

UPDATE:  But then, the Kim Dynasty has become less Marxist with each generation, and more an expression of Emmanuel Goldstein’s oligarchical collectivism (I’m not the first one to be astonished by how much Goldstein’s criticism of Oceania sounds exactly like North Korea, but don’t take my word for it).  That’s why it shouldn’t surprise us that even the statues portraits of Marx and Lenin have been removed from Kim Il Sung Square.

North Korean Reform Watch 6

We don’t know how extensive North Korea’s agricultural reforms are meant to be, but we do know that North Korea wants us to think that it’s instituting big reforms in its agricultural sector, because it took the AP’s Jean Lee on a show tour of a collective where the “farmers” were primed to tell her it was so. Is it too cynical of me to tend to disbelieve any fact that North Korea wants me to believe is true? Props to Lee for her hard work at getting this sentence past her “colleagues” at KCNA:

North Korea has a per capita GDP of $1,800 per year, according to the U.S. State Department, far below that of its neighbors in Northeast Asia, and its rocky, mountainous terrain and history of natural disasters has long challenged the Kim regime to provide enough food.

Yes, that is all! Nineteen consecutive years of drought-slash-flood that for some reason target all parts of North Korea, exclusively, but which never seem to impede the flow of rice or Omega watches to Pyongyang! I love officially approved news, don’t you?

Meanwhile, we are reminded again why we ought to be skeptical of all that optimistic speculation, like this example from The New York Times. And then, a day later, Yonhap reports, “North Korea’s rubber-stamp parliament closed its session Tuesday, the country’s state media announced without making reference to economic reforms widely expected to come from the unexpected meeting of legislators.” So there’s that. Not that there’s a particularly strong causal link between legislation and policy in North Korea, but given how rare it is for North Korea to put on this puppet show twice in a year, does the absence of any major legislative initiatives suggest that some of the strings have become tangled?

Meanwhile, on the more tangible side of North Korean economic policy, fewer things have changed than some would have us think:

After nearly two years of interrogations while imprisoned in the inhumane Yodok camp, also called simply “No. 15,” Jang became aware he was there because he had earned so much foreign currency, the defector recalled in a meeting in Seoul of North Korean survivors of the country’s political prison camps.

Jang said hundreds of other hard-working foreign-currency earners were sent to the political prison for the same reason.

While North Korean authorities assigned an annual foreign currency target of more than US$1 million to each foreign income unit, completing the assignment drew suspicion from the government because they assumed that achieving the ambitious goal must involve irregularities, Jang explained in a package of written recollections released at the meeting. [Korea Times]

Lest you wonder if I’m the only one asking for stronger evidence to support this wildly optimistic speculation, there more here, from Luke Herman.

Curb Your Enthusiasm: On Change in North Korea

Over at Destination Pyongyang, Chris Green offers some useful cautions to those who have allowed themselves to become unduly aroused at the prospect of reform in North Korea based on “evidence” that is either superficial, questionable, irrelevant, or some combination of these things.  Green questions “hyperbolic” reports that North Korea will abandon its central rationing system — a system that is more responsible for North Korea’s famine and hunger than any other single factor — because that would mean ceding a key means of controlling its subjects.  He also cites evidence that North Korea is, while denying any intention of reforming, also showing some leg to hopeful observers abroad to attract foreign aid.

It’s Stephan Haggard, however, who does the best job of putting all of this into perspective in a few short paragraphs, when he says:

Let’s calibrate expectations. First, to our knowledge there is no document that actually spells out—in print—the reform measures that are getting so much Western attention. Everything we are speculating about is based on reporting from a small handful of second-hand Korean sources. This is significant not only because the reform rumors may simply be false, but because the leadership has not committed publicly to the measures that are getting so much attention.

Second, however, this is understandable because no leader of North Korea is going to stand up and embrace market-oriented polices and protection of private property rights per se. Any reform (or “improvements” [??]) must be embedded in an ideological justification that ties it to the existing regime and its historical antecedents in the Great and Dear Leaders. The document “Let Us Effect Kim Jong Il’s Patriotism and Step Up the Building of a Prosperous Country”—released to the public on July 26—is not available in English yet, although the KCNA devoted no fewer than four separate stories to it on August 3. But it is laden with efforts to tie vaguely-worded economic objectives to patriotism and Kim Jong Un’s family lineage; this is the sort of ideological engineering we would expect.

Third, it is also important to recognize that no reform in such a system is going to overthrow the state-socialist system or be big-bang in form. Given the nervousness and ambivalence of the leadership toward the market—some of it well-founded–policy changes are going to be piecemeal, experimental and modest. Moreover, their objective is going to be strengthen—not weaken—the state socialist system. “Reform” could even make things worse; think the 2009 currency conversion.

Finally, there has been a lot of loose talk suggesting that “reform” implies some sort of political change. To the contrary, economic reforms or improvements are designed to consolidate power and forestall political change, not lead it. One need look no farther than the DPRK’s northern neighbor to understand that dynamic.

My point here isn’t that North Korea’s rulers will always resist all changes to the system.  They probably know better than anyone that current trends aren’t sustainable forever, no matter how many checks China writes.  Commentators like to mock predictions of regime collapse in North Korea, but in fact, North Korea has been in a state of steady economic, political, physical, and social disintegration since 1993, and while domestic terror can delay the inevitable, it can’t prevent it.  Only North Koreans know for certain, but I suspect that outside Pyongyang, the people are deeply discontented, and all that still glues the regime’s rule together is the lack of any alternative, which still can’t quite arise because of the people’s isolation, fear, and exhaustion, and probably some residual awe and nationalism.  An internal challenge — which at this point, would have to come from within the military — could inflame North Korea and morph in a Syrian-style civil war as quickly as clandestine communications allow the news to spread.  Ironically, the only thing that could really gird it among the disillusioned masses now is the threat of some external force.  That’s about all the regime’s propaganda really has left.

My point is, however, that any changes in North Korea in the short term will be modest and cosmetic, designed to preserve the regime’s control and its essentially repressive and threatening character.  The junta will seek to eliminate marginal inefficiencies, wrest control of currency-earning enterprises from disfavored factions, and attract external aid through cryptic inducements and diplomatic scams.  North Korea’s rulers — whose record of “reform” is largely one of retrograde incompetence — will not direct significant economic reforms until they find themselves under far more immediate and severe economic and political duress than they’re feeling today.  For now, there is only sketchy evidence to suggest that this is the case, and only in isolated places beyond Pyongyang’s well-guarded gates.  North Korea still seems to be getting plenty of support from China, and I doubt that North Korea would be threatening to tie a toe tag on the 2005 Joint Statement (long a dead letter in any event) if it didn’t have some confidence about its short-term survival.

Of course, there’s always the possibility of a mutiny or a coup by some disgruntled general, but it’s impossible to assess the likelihood of such a development.  That possibility has lurked, unconsummated, for a long time now.

In the medium term, however, the sort of distress that would force significant economic (and then, political) change is starting to look more and more likely.  Why?  For the same reasons that toppled Communist regimes from Kabul to Berlin in the five-year period starting in 1989, and transformed almost every other nominally Communist regime that still stood at the end of that period — the loss of great-power sponsorship.  Almost alone, North Korea barely survived that period by finding itself a new sugar daddy.  But within the next two years, and probably much sooner, China will begin to feel the full economic and political impact of the bursting of its real estate bubble.  Next will come a threat to its banks, many of them laden with bad state-directed debts.  Already, we’re seeing the first small signs of capital flight.  Today, China’s behavior resembles the manic cycle of like a 19 year-old meth addict whose high has just peaked.  China’s crash will be a very bad thing for the U.S. economy, too, of course, and it will be a time of extreme geopolitical danger.

The bright side to that dark cloud is that China will be seeking a lot of economic indulgences — on trade, exchange rates, intellectual property, market accessibility, and interest rates — from its most important trading partner, which will put us in a relatively stronger position to ask for other things in return. If we’re foresighted enough, the end of China’s sponsorship of North Korea will be one of those demands.  Even if we’re not, China might independently decide that North Korea is an expense it can’t afford.  That will force North Korea to make significant concessions to its neighbors, to its own people, to a new economic reality, and to us.  But once that juggernaut starts rolling downhill, there will be no controlling its speed or direction.

Update:  I also recommend this guest post by Gene Choi at Witness to Transformation.  Again, the change at all levels of society comes from the bottom up, not from the top down.

Told you so: Now that the FTA is in effect, South Korea wants to use it to put North Korean-made products on your store shelves

So now that the Free-Trade Agreement between the U.S. and South Korea is officially in effect, the supposedly conservative South Korean government is pulling a bait-and-switch, reviving the demand of its leftist predecessor to include products made by the virtual slave laborers in Kaesong, North Korea in the deal:

South Korea is pushing to include the Gaeseong industrial zone in North Korea in its free-trade deals with the U.S. and Europe, a step that would deepen cross- border ties after the North’s leadership transition.

“Unification is already taking place in Gaeseong, with daily encounters and shared interests,” said Yoo Dong Ok, the chairman of Daewha Fuel Pump Industries and a spokesman for South Korean companies operating in the manufacturing enclave. Shipments from the factories, mostly textiles and car parts, would quickly surge 15 percent if they win free-trade status, Yoo estimated in a March 20 interview.

Yoo and the government in Seoul want the fruits of North Korean workers’ labors on the shelves of stores in Chicago and Berlin, even as they condemn the regime of new leader Kim Jong Un for a planned rocket launch. [Bloomberg]

Yeah, you say, but who exactly in the South Korean government is actually saying this?

Trade Minister Bark Tae Ho said on March 14 that he will try to persuade the U.S. and European Union to recognize products made in Gaeseong as South Korean.

Oh.

The perverse result of this would be that North Korea has an FTA with the United States and Japan does not. What a splendid way to celebrate the one-year anniversary of North Korea sinking a South Korean warship, even as the North prepares to test a missile satellite. Some very smart people told us that this would never happen. I don’t doubt that the Korea Lobby’s many foot soldiers in this town encouraged them in believing that. From the beginning of Lee Myung Bak’s presidency until now, every South Korean diplomat you saw, heard from, had lunch with, or who introduced so-and-so at this-or-that think tank was an FTA monomaniac. They were like annoying insurance salesmen or subway evangelists who always found ways to steer every conversation (however clumsily) toward trying to pitch their product — in this case, the FTA. Which, without its North Korean entanglements, would be a good thing for both countries.

And if a conservative South Korean government is pushing the expansion of the FTA into Kaesong now, what do you suppose a leftist South Korean government would do? It’s not the first time I’ve seen the Korea Lobby (and its State Department enablers) pull something this unprincipled and cynical, and it’s why I’ve learned that you just can’t trust them.

North Korea’s Economy Contracts, Despite Chinese Sanctions-Busting

The Donga Ilbo publishes a very interesting study finding that North Korea’s economy has contracted recent years, mostly due to the loss of South Korean aid and the effect of sanctions:

South Korean assistance to the North surged to raise the indicator to a high of 236.9 in 2007, a huge leap from the baseline score of 100 in 1995. The communist country`s trade volume also jumped 43.4 percent due to the expansion of trade with China. The North`s economy began to shrink from 2008, when the South halted aid. Notably, the indicator fell to as low as 86.5 in 2009 to tie the record-low set in 2000. Due to deterioration of inter-Korean relations, the volume of South Korean government assistance to the North tumbled over the period to 36.2 in 2009, down 84.7 percent from that in 2007. A decline in external trade except with China due to tougher international sanctions against Pyongyang also hastened the deterioration of the North Korean economy. Due to the participation by Singapore, one of the North`s top five trading partners, in the sanctions, the combined volume of the North`s trade fell about 10.7 percent, resulting in the indicator falling from 186.3 in 2008 to 166.3 in 2009. [Donga Ilbo]

The chief lesson I take from this is that a well-orchestrated campaign of international sanctions can still damage North Korea’s official economy enough to cause long-term decline, even despite China’s efforts to circumvent it.  Although all statistical analysis of the North Korean economy is inherently suspect, note that this study relies heavily on an analysis of government-to-government aid and official trade statistics, meaning that the majority of this impact is presumably felt by North Korea’s palace economy.  Downstream, that also affects some of North Korea’s population, but only that shrinking minority that still relies on salaries and benefits from the regime, rather than the black market.

The effect of those sanctions probably still isn’t enough to achieve one of its intended effects — to force the regime to actually dismantle its nuclear programs or allow meaningful verification — although I suspect that for a brief moment in 2006, it might have been.  That time, North Korea was saved from both extinction and negotiated disarmament by Chris Hill, Condi Rice, and George W. Bush.  This time, China has to do and pay more to offset not only the effect of sanctions, but the loss of South Korean aid and another, perhaps even more important factor — the self-inflicted wound of North Korea’s currency “reform,” a/k/a The Great Confiscation of 2009.  It would be interesting to see any decent translation of this study, but especially one that has data to measure the effects of that fiasco.

As if on cue, Marcus Noland provides additional evidence of the continuing effects of the Great Confiscation.  The Great Confiscation, of course, was intended to drive most of the commerce of ordinary North Koreans back under the regime’s economic control.  The G.C. certainly did terrible damage to the black market system temporarily, but it didn’t extinguish markets, and it has also had severe and adverse effects on the official economy, too.  The loss of confidence in, and inflation of, the North Korean currency has persisted, has recently been exacerbated by the succession of Kim Jong Eun, and has driven money out of the North Korean banking system and into people’s mattresses, or into the alternative black-market financial system.  To restore confidence in the currency, Noland suggests, Kim Jong Eun may be taking a tip from the economic policies of Ron Paul by minting gold coins (I’m glad that I haven’t lost my ability to savor ironies like this).  However, the minting of gold coins in North Korea is neither a new development nor, most likely, a hint of that North Korea is going on the gold standard.  See my comment to Noland’s post for an explanation.