The Impossible State

Goats.

This was once thought to be an antidote for North Korea’s economic ills. The terrain in the northern portion of the peninsula is mountainous and not suitable for farming. There are no green plots of grass for grazing cows, and therefore no source of dairy products or meat. So, in 1996, the North Koreans started a campaign to breed goats. These mountain animals are a good source of milk and meat; moreover, they feed on the shrubs tucked away high in the rocky terrain. The goat-breeding campaign led to a doubling of the goat population almost overnight, and tripled it within two years. This solved a short-term problem, but it had long-term consequences that were more destructive. The goats completely denuded the areas they inhabited, chewing up every single shrub in sight. This then had the effect of removing the last line of the land’s defense against the annual massive rains. The result? Annual monsoons led to deluges of biblical proportions, which wiped out the little remaining arable land and flooded the coal mines that were a source of energy. This only worsened the chronic food and energy shortages. The goat story is a microcosm of North Korea’s economic trap. The undertaking of measures as a short-term expedient exacerbates a long-term problem, for which there is no long-term solution.

FIVE BAD DECISIONS

The North Korean economy is a puzzle. How does a country that in 1945 emerged as one of the most industrialized societies in Asia decline to the point of famine and near-collapse over five decades? The end of World War II saw the emergence of a state that benefited greatly from Japanese colonial economic development. As a centrally planned socialist economy in the early Cold War years, the North did quite well, certainly better than the South. The Korean War destroyed all of these advantages. The United States did more bombing runs in the North and laid more ammunition on the country than it did in all of World War II. But China and the Soviet Union worked quickly to rebuild the country, and the North experienced an economic boom in the 1970s when per capita income outpaced the South and industrial production was growing at a staggering 15.9 percent. From the 1980s, however, things started to slow down. Production targets could not be met. Equipment and machinery broke down. By the 1990s, the economy was in free fall, registering negative growth rates for the first time in its history. The decade ended with a terrible food shortage. Since then, the economy has been on life support with help from the Chinese, but with no real chance of recovery. Today, the per capita GDP of the country is just under $1,000, while that in the South is nearly twenty-two times higher.1

This nightmarish odyssey is all the more amazing given that North Korea’s 47,000 square miles (120,538 sq km) of territory is rich in resources. Lying beneath their feet are estimated to be over 100 billion metric tons of limestone, 14.7 billion tons of coal deposits, 6.5 billion tons of magnesite, 3 billion tons of iron ore, 12 million tons of zinc, 1.2 million tons of nickel, and substantial deposits of silver and gold. The U.S. Geological Survey assesses North Korea’s reserve of coal, iron ore, and limestone as comparatively large, given the size of the country and potentially having impact on global markets.2 It has significant untapped reserves of magnesite and is believed to be a source of rare earth materials. A Goldman Sachs report estimated the value of North Korea’s mineral deposits at 140 times the country’s GDP.3 Some European drilling companies believe there may be oil deposits in the seas west of the country. How did economic failure happen? And why is it impossible for the regime as it is currently structured to implement true economic reform? I believe Pyongyang made five bad historic decisions that doomed its economy. North Korea’s economic decline in many ways approximates the perfect storm. Poor choices by the leadership both exacerbated the economy’s vulnerabilities and exhausted its assets. It did not seek to reform, instead relying on handouts from China and the Soviet Union to survive, and when this assistance dried up, the economy collapsed. Contributing to the free fall of the economy were major natural disasters that wiped out indigenous sources of food.

BAD CHOICES

The first of the five bad decisions came in the aftermath of the Korean War, when Kim Il-sung focused exclusively on heavy industrial development. Kim had at his disposal very willing patrons in Moscow and Beijing to help rebuild the country. During the early Cold War years, the Soviet Union and the People’s Republic of China were virtually the North’s only sources of aid and trade. According to declassified CIA documents, in September of 1953 the USSR granted North Korea $250 million in aid, half to be used for the military, a quarter for light industry, and the final quarter for heavy industry. In December of the same year, the Soviets remitted North Korea’s war debt and eased the terms of repayment for pre–Korean War loans.4 The Chinese also chipped in, supplying an estimated 45 percent of North Korea’s total trade in the 1950s with an annual value of about $100 million.5 And from the onset of the Korean War to the end of the decade, China is estimated to have granted the North over $500 million in aid and loan credits.6 All in all, during the 1950s, the North received in excess of $1.65 billion in aid from its Soviet and Chinese benefactors.7 Kim took advantage of this support and rebuilt the economy with a particular emphasis on heavy industry. The lack of attention to agriculture and light industry would not have been a problem if the regime engaged in more trade. What other countries, however, might have seen as trade-based interdependence, North Korea saw as trade-based vulnerability. In compliance with the juche ideology, the regime emphasized self-sufficiency in food, agriculture, and light manufacturing. What emerged therefore from the Korean War was a quintessential mercantilist strategy aimed at promoting the growth of state power through heavy industrialization. On August 5, 1953, only two weeks after the armistice signing, Kim Il-sung gave a speech titled “Everything for the Postwar Rehabilitation and Development for the People,” the focus of which was on reconstruction and expansion of heavy industries. Iron and steel plants, heavy machinery, mining, chemical fertilizers, and oil refineries were all projects that were seen to constitute the basis of national power that would eventually overthrow the South. In the Three-Year Economic Plan of 1954–1956, 81 percent of resources went into heavy industry; by contrast, only 19 percent went into light industry. This produced a terribly distorted economy that focused entirely on producers and almost totally ignored consumers. Despite all of the help from the Soviets and from the Chinese, Moscow was uncomfortable with the lopsided nature of development. They saw clearly that the DPRK plan defied rational economics. For a centrally planned economy with heavy industrialization, the rural workforce needed to be mobilized into an industrial workforce. Yet this would then deplete the labor force necessary to sustain agricultural self-sufficiency. Even without the strain of heavy industry, the North Korean economy was not suited to be self-sufficient in agriculture under the best of circumstances. With only 20 percent arable land, North Korea was a rugged mountainous terrain with a cold northern climate that allowed for only short crop seasons. A normal country would have traded aggressively in order to meet its food needs, but the regime undertook other far-fetched ideas to maintain the semblance of self-sufficiency. In the 1980s, for example, as food stocks were depleting, the government tried land reclamation projects on the west coast of the peninsula in order to create more arable land, but this failed. From that point forward, the regime relied increasingly on patron aid from China to meet its food shortfalls.

THE CH’ŎLLIMA MOVEMENT

The second bad decision was to rationalize economics in terms of ideology rather than letting economics trump ideology. Rational economics for North Korea was something called the Ch’ŏllima movement. An economic manifestation of juche ideology, Ch’ŏllima espoused the idea that any shortfalls could be made up for by the “revolutionary zeal” of the people, which would result in superhuman productivity gains that could outpace that of any other economy. Started in the mid-1950s, Ch’ŏllima was, in part, a response to decreased Soviet support after the first Three-Year Plan, which ended in 1956 and which Moscow thought overemphasized heavy industry and stressed the economy unnecessarily.

The Ch’ŏllima ideology drove massive inefficiencies in the economy because it always substituted longer work hours for technological innovation. In the 1960s, for example, North Korea decided to build electricity plants based on thermal power and coal. This seemed like a smart move given the country’s large coal deposits. With help from the Soviets, they proceeded to build the Pyongyang Thermal Power Plant and the Pukch’ang Thermal Plant. The size and scale of these plants, however, presented the North with an unexpected problem—they could not excavate enough coal to feed the plants. Using antiquated blasting technology, the North could excavate only about five or six tons of coal per day. In the West, by comparison, continuous coal-mining technologies allowed one machine operated by two workers to produce exponentially more than this output in a day. The North’s answer was simply to force the workers through the Ch’ŏllima mentality to work longer hours to increase productivity. Ideology also trumped economics when it came to considering alternative sources of power. By the 1970s, the North had set out targets for total energy production, which it hoped to meet with hydropower plants. In fact, they built one sprawling plant that had a total new projected capacity of 4.4 million kilowatts, but they were only able to produce 250,000 kilowatts. Naturally, this raised the question of whether the DPRK should consider oil-burning power plants, but Pyongyang rejected this idea out of hand for reasons of juche. Kim Il-sung affirmed the righteousness of this decision:

Certain scientists have in former days suggested that oil-burning stations should be built, saying that oil-power stations can be built in less time than hydroelectric plants. That is true. However, if we build oil-burning stations, we will have to import oil from other countries, for it is not available in our country. This is contrary to our party’s policy of building an independent economy. Therefore, I did not accept the scientists’ suggestion and decided to build power stations that rely on the resources of our own country.8

Formally introduced at a session of the Supreme People’s Assembly in June 1958, Ch’ŏllima broke the backs of the workers. It was a labor exploitation policy that only added further irrationality to economic policy by putting party hacks in positions of decision-making. Committees of ideologues were sent as supervisors over plant managers to enforce loyalty. Making laborers work harder under tough conditions is challenging enough with the offer of material incentives. But the only “incentives” under Ch’ŏllima were attainment of spiritual purity and the imperative to manifest ideological zeal. The dangers of seeming “impure” by not meeting production targets were obvious.

The next two decades saw the North increasingly diverting resources to the military at the expense of the regular economy. The Seven-Year Plan of 1961–1967 sought to contract heavy industry in its first three years, which one might think foretold efforts to rebalance the economy. As initially announced, the 1961–1967 Seven-Year Plan aimed at bettering living conditions, including promises of bigger, healthier diets from an improved agricultural sector and the availability of more consumer goods as the light industrial sector was strengthened. On the contrary, however, the resources were redirected to a massive military buildup, not to light industry and agriculture. As the Cold War heated up, North Korean leaders largely abandoned the rebalancing of the economy starting in the early 1960s and instead focused on building an “impenetrable fortress,” pulling resources from other sectors and further straining already weak budgets and living conditions. In December 1962, the DPRK announced a four-point military modernization program to: (1) arm the people; (2) modernize weaponry; (3) fortify the country; and (4) train each solder.9 Workers moved from plants to building vast underground tunnel networks to house artillery and military equipment. The entire society was militarized for men from the ages of fifteen to forty-five and for women from eighteen to thirty-five. (A Young Red Guard was created for those fifteen to seventeen years old.) Strains on the economy from this redirection of resources became apparent. All of the target goals of the Seven-Year Plan fell behind schedule so that authorities had to extend the plan another three years, to end in 1970. Once again, low priority was placed on the people, with no emphasis on light industry or agriculture. Pyongyang’s economic policies constituted abuses of human rights.

DEBT

The third bad decision took place in the 1970s. It related to foreign debt. The DPRK continued the same trends of the previous decade as economic resources were diverted to the military. Despite having half the population, North Korean military spending exceeded that of the South every year from 1968 to 1979. The buildup of this decade included increasing the size of the armed forces from 485,000 to 680,000, which was twice that of the ROK. By 1980, troop numbers stood at 720,000 and continued to swell, with the majority deployed along the thirty-eighth parallel with their sights set on the South. Special forces grew from 15,000 (1970) to 41,000 (1978). The military began Scud missile development, boosted its submarine and surface fleet, and the air force grew to over 200 attack planes. The army added 2,500 armed personnel carriers, about 1,000 heavy tanks, and 6,000 or so artillery tubes and rocket launchers. Military doctrine was revamped to increase the speed, power, and lethality of attacks in combat, focusing on rapid advance and infiltration tactics. In spite of its relatively limited technological base, by 1992 the North had twice the number of tanks and artillery that the U.S.-ROK defenses had in the South.10

Academic Lee Hy-Sang, who has written one of the best scholarly treatments of the North Korean economy, has noted that this obsession with aggrandizing the military was driven by ideology as much as it was by external security threats. Self-reliance required the strongest military one could muster. The net effect, however, was an increasingly reckless and irresponsible approach to the economy.11 In order to offset the strain of the military budget on the economy, the DPRK should have directed efforts at excavating coal and other mineral resources to trade for hard currency, which might then have been used to finance heavy industry development, light industry, and to address energy shortages. Instead, the government decided to engage in massive borrowing from foreign markets. At the time, it seemed like the right decision. Sino-American rapprochement and U.S.-Soviet détente transformed relations between the East and West, and in this wider political context Western European countries were willing to extend credit to countries like North Korea. More important, the North began looking over its shoulder as the 1970s saw the gradual acceleration of South Korean growth and development of major heavy industries like the P’ohang Steel Complex.

So, in 1972, Pyongyang borrowed $80 million from France to build a fertilizer plant. The following year, they borrowed another $160 million, from the United Kingdom, to build a cement factory. In 1974, they borrowed $400 million from countries including Japan for large-scale plant equipment. In fact, between 1970 and 1975, the North borrowed approximately $1.2 billion before foreign governments realized that Pyongyang could not service the debt. These numbers do not account for whatever else might have been provided to the North from Eastern bloc countries and China. Thus, in 1976, the debt market dried up for the North as precipitously as it had opened to them six years earlier. Trapped by its own self-reliance ideology, the North could not do things normal nations would, such as issue bonds to finance its debt. Today, North Korea’s external debt is estimated at $12.5 billion and no one expects them to pay it off. An attempt was made to pay back some of this in 1990 and 1991, but the DPRK has long since defaulted on its long-term debt. Pyongyang has occasionally asked Russia and former Soviet satellites like the Czech Republic to forgive the majority of the debt. In response, these countries have asked for North Korea to repay part of the debt through barter. Pyongyang asked Russia in 2007 to make a “high-level political decision” to forgive $8.8 billion in unpaid debt. In August 2010, Prague asked for zinc ore as repayment for an outstanding $10 million in unpaid loans from the Cold War when it provided Kim Il-sung with machinery and equipment. Pyongyang responded that it would provide four hundred tons of “heavenly ginseng root” worth some $500,000. Since annual consumption of the root in the country was barely two tons, this would have kept Czechs well-stocked with ginseng—which, among its many reported benefits, boasts of enhancing sexual vitality—for two hundred years.12 An unusual secondary market has emerged for North Korean debt that a few courageous investors have dared to enter. It sells DPRK debt paper at about 6 cents on the dollar, based on the bet not that Pyongyang would ever repay but that under a future unification scenario, South Korea would want to reestablish North Korean creditworthiness as it worked to gradually reintegrate the two systems. If Seoul were to take on this debt, it could repay it all, speculators hope, with only one week’s addition to its foreign exchange reserves. Even if Seoul were to pay off only a portion of the debt, speculators could make six to seven times what they have paid for North Korean paper.

OLYMPIC ENVY

The fourth bad decision came in the 1980s, when the North invested in several economic mega-projects, all of which failed. If you had to name one person who unwittingly contributed to North Korea’s bad economic decisions of the 1980s, it was the late Juan Antonio Samaranch. Why not Kim Il-sung? Because in 1981, Samaranch, as head of the International Olympic Committee (IOC), oversaw the awarding of the 1988 Olympics to Seoul. This outcome was in many ways North Korea’s worst nightmare. It bestowed international accolades on the rival regime, which hit at the heart of the DPRK’s legitimacy. Seoul would be only the second East Asian city in modern Olympic history—after Tokyo in 1964—to host the premier summer games. The South’s economic takeoff alone was hard enough for the North to swallow, but at least they could hide that fact from their people. The Seoul games promised to be South Korea’s “coming out” party on the world stage, showcasing its double-digit economic growth and industrial wares in the same way they did earlier for Tokyo. To have this celebration all happening on North Korea’s border threatened core legitimacies the regime tried to uphold about itself. At first, the North set forth proposals to cohost the games, which the South begrudgingly listened to. But when negotiations with the IOC and Seoul failed due to inordinate North Korean demands, the leader-in-waiting, Kim Jong-il, resorted to terrorist attacks on South Korean airplanes and airports to scare away visitors, the most horrific of which was the bombing of a South Korean passenger airliner in 1987. Matters for the North only became worse when both China and the Soviet Union announced their plans to participate in the Seoul games after very successful lobbying efforts by the South Koreans.13 With the summer games having been plagued by superpower boycotts in 1980 (Moscow) and in 1984 (Los Angeles), the Seoul games were shaping up to be the most widely attended and most important Olympics of the twentieth century.

All of this created, for lack of a better term, “Olympic envy” on the part of the North. The regime engaged in a series of wasteful large-scale projects throughout the 1980s. These were prohibitively expensive endeavors aimed to compete with the South as well as mobilize labor to work harder for the state. These projects, several of them left unfinished, had the effect of hollowing out the economy—which, in conjunction with the cutoff of Soviet and Chinese patron aid at the end of the decade, laid the groundwork for collapse in the 1990s. One project was for tideland reclamation. North Korea was short of arable land and therefore sought to create some 300,000 hectares (1,160 sq mi, 3,000 sq km) of land on the west coast of the peninsula. This was a massive project, which dredged tidal flats that were submerged under one to two meters of water (3 to 6 ft) and turned these into usable farmland. It became known in Korea as the “find new land” project. The North managed to complete about 20,000 hectares (77 sq mi, 200 sq km) over a decade until Kim Il-sung’s death in 1994, after which the project was left uncompleted. The West Sea barrage was a $1.77 billion project to build the longest dam in the world, longer than the Panama and Suez Canals. The dam was to cut across the Taedong River, which would serve to irrigate the newly reclaimed tidelands on the west coast of the peninsula. Three divisions of North Korean military troops were put to work on this project, which ultimately was also left uncompleted.

Some of these mega projects even sought to defy earth’s natural forces. One of these was a hydrothermal project at T’aech’ŏn power station. It aimed at building a forty-meter (130 ft) tunnel underneath a mountain that would serve to divert flowing streams into a nearby river. The purpose was to raise the water volume of the river, thereby increasing the hydrogeneration capacity of the river. Another massive failure was the Sunch’ŏn Vinylon Complex. This was a second-generation vinylon complex that was to annually produce 100,000 tons of vinylon, a synthetic fiber referred to, within the DPRK, as the “juche fiber.” The project failed because the North could not perfect a new technology for production of ammonia, which was critical to less costly large-scale production of vinylon. However, rather than perfecting the new technology before building the plant, the North proceeded on both at the same time. Thus, when they could not perfect the ammonia production technology, and Soviet funding ran out, the entire project failed—all 250 plants and 52,000 tons of equipment were rendered pretty much useless at a cost of over $5 billion. In the end, it seems the whole vinylon industry was more important to the North politically than practically or economically. The material is supposed to be durable and highly heat-tolerant, but excessively stiff, uncomfortable, largely resistant to dye, and prohibitively expensive to produce for any countries other than the DPRK.14 While the rest of the world produced and used the more practical nylon, North Korean schoolchildren were forced to sing the praises of the “juche fiber” in revolutionary songs, such as “Ode to Vinylon,” “Three Thousand-ri of Vinylon,” and “Vinylon, Pride of My Country.”15 Another massive failed project was the Sariwŏn potassic/potash fertilizer plant. The project started in 1988 with the goal of increasing production to 500,000 tons of potassium fertilizer each year. This was, again, a case of building a larger-scale plant at the same time that they were trying to perfect new technology that would make a larger capacity of production affordable. In this case, aside from the fertilizer, it was technology for producing aluminum using a local mineral, feldspar—rather than the traditional input, bauxite—that proved not to work. And so, the project, worth about $3.5 billion, failed after Soviet funding dried up again.

As if these failures were not enough of a cautionary tale to economic planners, in 1989 North Korea underwrote the World Festival of Youth and Students. This was their answer to the Seoul Olympics, and they invested in massive infrastructure-building as if they were hosting their own Olympics. Spending somewhere in the range of $4 to $9 billion, the North built, at breakneck pace, 260 major facilities in two years, among them 12 athletic facilities, including a 4,000-seat table-tennis stadium, 3,000-seat badminton stadium, and the 150,000-seat Rŭngrado May Day Stadium, which was the largest stadium ever built at the time in Asia. Four new hotels were erected for the occasion, the most famous of which was the 105-story Ryugyŏng Hotel. Built in the shape of a black obelisk, the structure towers over the Pyongyang skyline. Construction began in 1987 and was to be finished by the 1989 Youth Festival. The hotel was meant to have three thousand rooms, seven revolving restaurants, and to be complete with casino and nightclub on the banks of the Pot’ong River. At 330 meters tall (1,080 ft), it was at the time the tallest hotel project in the world. Like all the other wasteful projects of the 1980s, this, too, was left unfinished. In 1989, construction was halted because of design problems, one of which was reportedly that planners realized the elevators could not operate in the angular elevator shafts that were built to the shape of the overall hotel. The project was completely halted in 1992 for lack of money. Undoubtedly embarrassed by this massive failure, the DPRK initially tried to deny the existence of the hotel—despite its towering presence over the Pyongyang skyline—by airbrushing it out of pictures, but this charade did not last long. Looking like a palace that Darth Vader might inhabit, the structure was named by Esquire magazine in January 2008 “The Worst Building in the History of Mankind”—a “hideous” structure that has remained unfinished and unoccupied for two decades despite sapping 2 percent of the country’s GDP to build it.16 In 2008, Egypt’s Orascom Group started to refurbish the Ryugyŏng tower, some believe, as Pyongyang’s condition for awarding the Egyptian company with a $400 million exclusive cell phone contract. The estimated costs to finish the hotel range as high as $2 billion. The plan is to have the hotel open in 2012 to commemorate the one-hundredth birthday of Kim Il-sung, but this, too, is likely to set the North Koreans up for another high-profile failure, as there are numerous construction problems, including concrete rotting in the building’s foundations after having sat exposed for two decades.17 Tearing down the building would make the most sense. Driving past this structure, I was impressed by its size, as it dwarfs everything in the vicinity, even the monuments to Kim Il-sung. However, I could not help but view it less than the symbol of North Korean modernity and “strong state,” and more as a tombstone to the economic mismanagement of the 1980s.

SOVIET ABANDONMENT

The massive outlays of capital, manpower, and energy for the Potemkin projects of the 1980s drained the economy, paving the way for utter collapse in the ensuing decade. The key variable for collapse was the end of Soviet and Chinese patron aid. The end of the Cold War in Europe had ripple effects in Asia. Through a very effective Nordpolitik, or Northern Policy, South Korea reached out to Eastern European countries and the Soviet Union for commercial and trade-based ties irrespective of competing ideologies. I will spell out the details of the policy in later chapters, but the primary result of this policy was the breakthrough normalization of diplomatic relations with Moscow in September 1990. If the Seoul Olympics were not enough of a blow to the DPRK’s core legitimacy, the official recognition of its archrival in the South by one of Pyongyang’s biggest supporters was worse. The political impact was clear, but the economic impact of Soviet–South Korean normalization was deadly. Suffering from their own economic problems, Moscow benefited from a massive $3 billion loan from the ROK as part of the normalization deal, and had no intention of seeing any of these assets offset by increased liabilities of patron aid to the North. So, almost immediately upon normalization, Moscow informed Pyongyang that it was cutting off patron aid to the North and instead demanded that the North now pay market prices. Moscow also indicated that it was terminating military cooperation with the North. This had an additional economic impact, because it terminated another form of revenue to the regime from the export of Soviet-designed military equipment and arms sales.

The effect of Moscow’s abandonment was both immediate and devastating. For decades, Pyongyang had enjoyed favorable trade terms with the Soviet Union and with China in the form of subsidized barter trade, patron aid, and debt-financed trade. The end of this assistance spelled the breakdown of the economy. Russia accounted for 49.5 percent of total DPRK trade in 1985. By 1993, this dropped an unimaginable sixfold. Total trade with the Soviet Union plummeted to less than $100 million by 1994, one-thirtieth of what it had been four years prior.18 Soviet-made imports by the DPRK sat at about $175 million in 1990, but by 1992 they were less than $10 million, and by 1994, basically nonexistent.19 In 1987, the Soviet Union sent North Korea nearly 50 percent of its food imports, and in 1988, it was still close to 25 percent, totaling nearly $100 million for the two years. Yet over the course of the following six years, as the famine was fast approaching, the Soviets sent somewhere between just $20 and $25 million, many years sending nothing at all.20

But the worst-hit sector was energy. North Korea, which used to import oil at the greatly discounted rate of 25 percent of market prices, was now saddled with a hopelessly unaffordable oil bill. Pyongyang had been importing about 3.5 million tons per year, but after the change in terms, oil imports dropped by more than 50 percent in one year, down to 1.5 million tons. In 1990, petroleum imports had fallen to 410,000 tons, and by 1991, to just 45,000. And while crude oil made up nearly 22 percent of the North’s imports from the Soviets in 1987, by 1990 it was just under 7 percent.21 This was one of many areas to be impacted by the decrease in Soviet support, but it was distinct in that it had ripple effects throughout the economy. The reduction in oil imports hurt domestic coal production, because the ammonium nitrate necessary for explosives in blast mining required petroleum products that were now in short supply. The lack of oil hurt annual crop production, because it led to a decline in the production of chemical fertilizers. Exacerbating the energy shortages was the perceived need to irrigate the remaining precious arable land that existed despite the fertilizer shortages. This, in turn, hurt the North’s one semi-successful source of domestic power production—hydropower. Because the lack of oil led to a decline in chemical fertilizers, the regime was forced to store water in order to flood rice paddies during the spring-season planting of seedlings. But this diversion of water reduced the capacity to produce hydropower. Moreover, the lack of oil made it impossible to compensate for the electricity shortfall with other forms of power to pump water into the fields. The lack of crude oil basically rendered the economy unable to function. Electricity stopped flowing, transportation stopped, machinery stopped. Large-scale agriculture became impossible. Trucks, trains, and tractors ground to a halt. Vital economic sectors saw drastic declines. Steel production, for instance, went from 3.1 million tons in 1991 to 1.7 million by 1994. Cement production atrophied by 55 percent, going from 8.9 million tons in 1989 to 3.9 million in 1993. And chemical fertilizer went from nearly 1.7 million tons in 1989 to just over 1.3 million by 1994, a near–24 percent reduction. In 1993, it was reported that many factories were running at a mere 20 to 30 percent of their full capacities.22

China initially boosted aid to their Communist brethren in the aftermath of Soviet abandonment. By 1993, Beijing provided 77 percent of North Korea’s fuel imports and 68 percent of their food, but this was only temporary. Beijing normalized diplomatic relations with Seoul shortly after the Soviets did, and subsequently also declared an end to patron aid and demanded that all transactions for fuel and food now be paid in cash or barter. In spite of the fact that China replaced the Soviet Union as the North’s number-one patron in these years, the early 1990s saw a fairly steep decline in aid and trade from Beijing. Sino-DPRK trade was never more than half of what the Soviets’ had been, and showed great fluctuation, receding by 31 percent in 1994, 3 percent in 1996, and nearly 40 percent in 1998. In 1989, the Chinese exported over 1.1 million tons of crude oil to the North. But by 1994, this figure had dropped to 830,000, and by 1999, to just over 300,000.23 Though China tried to reverse course in the later-1990s, as the North’s famine set in, the trend continued. By 1999, due to these political developments and the atrophy of the North Korean economy, the total trade volume between China and North Korea was about a quarter of that of 1990.24 Aid followed a similar trajectory. While official aid in 1991 is estimated to have floated around $230 million, by 1994 it was a lot closer to $100 million.25

It was in response to this crisis that Pyongyang made its fifth and most dire decision. As economist Lee Hy-Sang notes, the North could have adapted to the crisis in a couple of ways. They could have tried to boost exports in order to pay for needed imports, but there was not much that the economy could produce that it could sell on international markets, except for goods made with gulag labor (discussed in chapter 5), or some illicit items (discussed below). Moreover, the regime remained under a phalanx of trade sanctions because of its deviant behavior on the nuclear front. The United States maintained trade sanctions dating back to the Korean War, which restricted the export of all goods except humanitarian aid–related ones. North Korea was under additional sanctions due to its place on the State Department’s list of states that support terrorism, which prohibited trade and denied the country access to international financial institutions and Export-Import Bank funding. The North was placed on this list by the Reagan administration in 1987, after the bombing of a South Korean passenger airliner over the Andaman Sea. Another set of sanctions levies the highest import duties possible on any North Korean–origin item imported by the United States, and another set of sanctions—for North Korean proliferation activities and nuclear test of 2006—overlap with the previously described ones. Even after many of these sanctions were lifted by the Clinton administration in 1995 and 1999, as part of the 1994 nuclear agreement, North Korea could not rely on trade to address its needs.

Another way to deal with the crisis might have been commercial borrowing to help the regime through the tough times. But Pyongyang’s credit reputation among both Western and Eastern bloc lenders was shot after the defaults of the 1970s and an outstanding debt of $12 billion owed to banks and governments. This left one other alternative, which was to seek foreign assistance from the United Nations, foreign governments, and NGOs. But as two preeminent scholars of the North Korean economy, Noland and Haggard, have argued, the North completely mismanaged the situation. First, allowing their pride and ideology to impede need, Pyongyang refused to acknowledge the seriousness of their situation to the outside world. They had brief interactions with the World Food Programme and the ROK in the early 1990s, but these did not result in substantial assistance. Instead, the North waited almost two years before seeking some assistance from Japan in 1994 (Japan provided the North with 378,000 metric tons of food the following year),26 and then, not until 1995, did they decide to make an international appeal for help. Second, despite the fact that food constituted some 70 percent of all the outside assistance the North was receiving in the 1990s through 2000, the regime created unacceptable terms for the assistance they were to receive. The government was completely inflexible with regard to access and monitoring requirements for food donations from the United Nations and from NGOs. For example, despite the fact that the WFP 1998 appeal for 680,000 tons of food for the DPRK was the largest in history, the regime only allowed twenty-four monitors for a country the size of Pennsylvania the year prior. They denied entry to the U.N. Special Rapporteur on the Right to Food, Jean Ziegler, even though the United Nations was responsible for feeding easily one-third of the North Korean population. And for nearly ten years from the program’s inception, the regime denied entry to any Korean-speaking WFP staff, in order to minimize contact with the population. Moreover, they reacted violently to any attempts to tie international assistance with a government commitment to correct some of the structural problems in the economy. Indeed, during one 1998 U.N. meeting on agricultural assistance, the North Korean delegation participated in an earnest fashion with positive disposition. But when one of the non–North Korean participants mentioned the need for “reform,” the North Korean delegation closed their binders and walked out of the room, despite the fact that they desperately needed the assistance being offered to them.27

North Korea’s obstinate refusal to consider any serious reform as a condition of receiving assistance led to its fifth bad economic decision. Pyongyang effectively turned North Korea into an economy dependent wholly on external aid to survive. Rather than augmenting the economy with this foreign aid as a way to divert national resources to needed reforms, the government simply consumed the aid as a form of revenue. In the decade following the flood, the DPRK received over $2.3 billion in assistance from the world. A good part of this was in the first three years (1995–1998), when it received $1 billion in international assistance, including $349 million from U.N. agencies, $352 million from South Korea, and $299 million from NGOs and other governments. The WFP provided over 4 million tons of food. It is estimated that the United States, ROK, Japan, and China accounted for over 80 percent of total food aid to North Korea from the 1995 flood through 2007.28 All the while this aid was being consumed, the regime continued to divert precious scarce national resources to the military buildup and its military-first politics. By the end of the 1990s, the economy was wholly one-third dependent on foreign aid.

Moreover, because the regime was doing nothing really to increase the supply of any economic resources, they simply chose to suppress demand by calling on workers to “eat two meals a day” and “tighten their belt two more notches” for the sake of the Revolution. This was an untenable situation. While the world community continued to put up with North Korean intransigence, and the WFP annual appeals for North Korea continued to get answered by well-meaning countries, sooner or later, countries and NGOs would become fed up with the North’s inflexibility that violated every norm of humanitarian giving. By 2002, donor fatigue among Western countries started to set in with declining contributions to the WFP annual appeals. WFP staff hated working in North Korea with government counterparts who would lie on a daily basis to restrict access, yet at the same time make outrageous demands that the WFP provide gas to fuel the military’s vehicles that would pick up rice donations from ports, and subsequently divert some 30 percent of it to its own coffers. Other NGOs, such as Médecins Sans Frontières (Doctors Without Borders), left the country earlier than that, in 1998, when the regime demanded that they stop providing patient care and instead only give out medicine. Oxfam and UNICEF followed. By 2005, the only countries that were giving to the North were South Korea and China.

Corruption also became endemic to the North in these years. As the famine began to envelop the country, dire need forced vast numbers of North Koreans to fend for themselves for the first time. This created new vulnerabilities among everyday North Koreans, and new opportunities for party apparatchiks to prey upon them. The mass movement of people roaming the countryside in search of food, unofficial trade and transit across the Chinese border, and a massive influx of food aid created opportunities for North Korean officials to profit every step along the way. Officials could be paid to forge travel documents, bought off to look the other way during cross-border transit, and bribed to distribute more aid to certain areas or certain families. These KWP officials were often as hungry as average North Koreans, so these bribe offers were not exactly a hard sell. During the Sunshine Policy years in the South, the fact that so much of the aid was donated without even a modicum of monitoring requirements exacerbated this problem. The breakdown of central control of the public distribution system and the hundreds of millions of metric tons of food that flooded into the country meant that local officials had unprecedented power and leverage over those around them. And as Lord Acton famously stated, “Power tends to corrupt, and absolute power corrupts absolutely.” This was particularly true in the North Korean case, as there was no rule of law and no real legislative infrastructure to deal with corruption on an official level. Today, corruption seems to have become the grease for the wheels of North Korea’s crippled economy. Yi Tong-hun, a defector from the North who fled in 2006, describes how “corruption in North Korean authorities has exceeded all conceivable limits. Bribes are required for everything, from getting a travel permit to obtaining the references needed to enter a good college.”29 In the words of North Korea expert Andrei Lankov, the “abuses are so systematic that corruption has become an incurable disease.”30 As an aid-dependent economy, North Korea truly became a black hole for foreign assistance, because no positive reform was coming of it and no one could confirm whether the donations were going to the neediest or being diverted to the military. The policy of “suppressed demand” made the population even more vulnerable to starvation and disease. It was in this context that monsoons of biblical proportions hit North Korea in 1995.

MONSOON SEASON IS a regular occurrence on the Korean Peninsula. Usually arriving in July or August, the rains are welcomed as a respite from the heat of the summer, and are usually followed by a dry and hot remainder of August. In 1995, the effect of torrential rains was exacerbated by the subsistence crisis the regime was already facing. The energy crisis, created by the drop-off in trade with the Soviet Union, caused many North Koreans to deforest the countryside in search of lumber for firewood the previous winter. Denuded lands then became vulnerable to flooding. The August 1995 floods basically broke the back of the North Korean economy and led to the great famine. It destroyed the four western provinces in the North, and wiped out about 70 percent of the annual rice harvest and over 50 percent of the maize harvest. The International Federation of the Red Cross reported that over 100,000 families were rendered homeless and over 400,000 hectares (988,422 acres) of arable land was destroyed. Vital economic infrastructure was laid waste to, energy supplies were ravaged, and because they were stored underground, between 1.2 and 3 million tons of emergency grain reserves were lost.31 Roads, bridges, and rail systems were torn apart, hospitals and health clinics destroyed, and water supply and irrigation systems rendered useless. It was noted at the time by the U.N. Department of Human Affairs that flooding of this magnitude had not taken place in the DPRK in at least seventy years.32 In September 1995, Pyongyang finally acknowledged the gravity of the situation and made an unusual international appeal for help. Pyongyang submitted humanitarian aid requests to the U.N. Department of Humanitarian Affairs, WFP, World Health Organization (WHO), UNICEF, and Red Cross, estimating that the floods caused $15 billion in damages (an inflated figure that was more than the DPRK annual GNP). The international community aimed to feed 8 million people who went starving because of a 2-million–ton shortfall of food. WFP efforts peaked in 2001, when they raised 1.5 million tons exclusively for North Korea. The WFP initially started an appeal for aid to help an estimated 500,000 needy, but it soon realized that it was trying to feed 8 million, and subsequently engaged in one of the largest emergency food operations in its history. It is noteworthy, however, that the regime continued to deny any economic mismanagement on its part, instead explaining the need to stem solely from the summer monsoon that flooded their lands. The pain and suffering of the great famine of the 1990s is chronicled in chapter 5. Ultimately, the famine was the result of five very bad decisions outlined above, which informed a half century of horrific economic mismanagement. The statistics are staggering: it is rare for an industrialized economy such as North Korea’s to contract in size, but starting in the 1990s, the country experienced negative growth up until 1998, shrinking by nearly 46 percent in the process.33 By the 1990s, machinery no longer worked, fuel and electricity were absent, and factories had ground to a halt (although employees still had to go to “work” for daily indoctrination sessions). The country could not meet 50 percent of its food needs. The ration system broke down. Food riots at distribution centers and warehouses were reported. The famine killed as many as a million people, who did nothing to deserve such a fate.

ILLICIT ACTIVITIES

THE “TONY SOPRANO OF NORTH KOREA”

The North Korean economy by the 1990s was one-third dependent on foreign aid and one-third based on commercial (minerals, metals, agriculture, and fishery products) and arms exports. It is widely believed that an equal third of the economy is based on illicit activities. As a result of these activities, over the years North Korea has been granted a number of rather ignominious titles, such as “Gangster Regime,”34 “Wiseguy Regime,”35 “Narco Korea,”36 and its leader Kim Jong-il has been called the “Tony Soprano of North Korea.”37 Since the late 1960s and early 1970s, the North has been involved, to varying degrees, in the production and trafficking of narcotics, fake currency, money laundering, the production and distribution of counterfeit products, insurance fraud, and the smuggling of humans, precious metals and stones, and endangered species parts. These criminal activities have financed North Korea’s ballooning national debt, kept its military machine churning on, helped keep Kim and his cronies in the lap of luxury, and even potentially advanced the North’s nuclear and missile programs. While, like all other aspects of North Korea, the facts here are murky at best, there is no doubt that the regime in Pyongyang has and continues to direct a variety of criminal activities to advance the interests of the state. What is occurring in the North is a novel form of state criminality. Generally, corrupt leaders will have gangster connections (such as Slobodan Milosevic of Serbia), will turn a blind eye to criminal activity within their state (allegedly, such as Hamid Karzai in Afghanistan), or will lack the capacity to effectively deal with powerful criminal organizations (such as Felipe Calderón in Mexico). Yet in North Korea, while the regime certainly does not have a monopoly on the criminal activity that takes place within and around its borders, a great deal of it has been and continues to be directed from up on high, by the offices of the leadership itself. It practices a special form of “criminal sovereignty,”38 in that its status as a nation-state in the international system protects it from the risks and consequences that individuals and non-state organizations would normally face for partaking in such activities. It uses the protection of its territory and the organs of its government to enable or to carry out crimes for profit. In sum, it is a criminal state par excellence.

For the past four or five decades, the North Korean leadership has sanctioned or participated in the commission of a variety of criminal activities involving multiple actors and organizations, spanning nearly every continent on the globe. Since the mid-1970s, when North Korea began defaulting on its international debts, the regime began to look to transnational criminal activity as a means of supporting its faltering economy. Because the central government was unable to pay for many of its embassies abroad, the regime initiated a policy of “self-financing” for its overseas diplomatic missions.39 This policy encouraged North Korean diplomats to find high-profit, time-efficient means to finance the embassies in which they worked, and narcotics trafficking and other illicit activities fit this bill perfectly. Diplomats began smuggling drugs and gems in their diplomatic pouches and used their diplomatic immunity to protect them from prosecution. Over time, the North’s illicit network branched out, involving military personnel, intelligence officials, foreign criminal syndicates, and terrorist organizations. These activities rose steadily since the early 1970s, but saw a marked increase during the famine years as the North Korean economy began to implode.40 Today, while estimates vary greatly, most open-source material regarding North Korean criminal behavior put the profits from these activities somewhere between $500 million and $1 billion per annum,41 and showing no signs of slowing.

A key question though is whether North Korea’s criminal activity is merely state-sanctioned or is actually state-directed. Are the Kim family and the Politburo in Pyongyang simply allowing local officials and criminal organizations to commit transnational crimes, or are they, in fact, ordering these activities to be carried out to profit the regime? In the early years, North Korean criminal activity was largely state-centered, with narcotics and counterfeit materials being produced within the DPRK and trafficked abroad by North Korean diplomats. During this time, North Korean criminal activity was directed from the infamous “Bureau 39” of the Korean Workers’ Party. This institution has been headquartered in downtown Pyongyang, just blocks away from the foreign tourist–frequented Koryŏ Hotel, since its inception in the 1970s to fund Kim Jong-il’s rise to power.42 This office is thought to have as much as $5 billion stashed away in offshore bank accounts from Macao to Switzerland to Luxemburg, and uses these funds to direct its criminal enterprises, fund military and WMD-related (weapons of mass destruction) activities, and buy loyalty from North Korean Party elites.43 Its representative offices are stationed at every major port and rail junction across the DPRK, and it has liaison offices in every province, city, and county in the North, allowing North Korean officials from all over the country to operate with ease.44 North Korean counterfeit products are known for their extremely high quality, and North Korean drugs such as methamphetamines, for their high purity. This is due to the safety that the state provides in the production of these products, with the use of resources that only a state can afford. Counterfeit currency, pharmaceuticals, and cigarettes are manufactured in state-run factories, and narcotics grown or produced on state-run farms and in state-run labs.45 The North Korean regime uses merchant ships and naval vessels, foreign diplomatic posts, and state-run companies to run its criminal enterprises. It employs middlemen, uses front companies and foreign entities, and constructs complex financial arrangements to cover up its complicity. There is simply no question that a great deal of North Korean transnational criminal activity is state-directed rather than state-sanctioned. But its criminal empire is certainly not confined to the North Korean state.

Through its smuggling networks, the DPRK government has employed, partnered with, and even been employed by a variety of organized-crime groups and terrorist organizations. Historically, the North Koreans tended to operate with non-state organizations with which they shared ideological affinity, such as the socialist terrorist organization, the Japanese Red Army. Yet as the years have progressed, these ideological ties have become less and less important, and profit, more and more. Over the years, the North has been suspected of dealing with the Japanese Yakuza, Chinese triads, South Korean criminal organizations, Irish mobsters, Russian mafia dons, and Southeast Asian crime groups. The North Koreans use these groups to buy, sell, and transport illegal drugs, counterfeit products, and precious stones on the international black market. It is even reported that the North Korean government provides safe haven to members of foreign criminal organizations within the DPRK territory, to employ in currency counterfeiting and drug production facilities.46 Kim Yŏng-il, a defector who was formerly an official in North Korea’s National Security Agency, attests that in the 1990s, opium produced on state-run farms was “processed and refined into heroin under the supervision of several drug experts who were brought from Thailand to assist the North Korean government in its drug production program.”47 There have also been reports of members of the Burmese underworld helping the North establish its drug labs, Taiwanese criminal delegations being hosted by North Korean officials, and Chinese and Taiwanese counterfeiters running factories within the DPRK territory.48 What seems to have developed, and what the North Korean authorities have recognized, is a mutually beneficial, symbiotic relationship between themselves and these transnational criminal organizations. The North Korean state provides these crime groups with high-quality, high-purity products such as narcotics and counterfeit goods, the safety of sovereign territory or territorial waters, and vast economic and logistical resources. The criminal organizations, in turn, provide the North with greatly reduced levels of risk, the security of plausible deniability, and allow the state to stay out of “turf wars” over illicit economic markets.49 But the North is not simply an employer of these non-state actors. The “Pong-su incident” of April 2003—when a North Korean crew was caught on a North Korean state enterprise–owned ship (the Pong-su), attempting to smuggle 125 kilos (275.6 pounds) of Burmese-origin heroin to Australia—shows that the North is also willing to be a transporter for organized crime groups.50 By partnering with these types of organizations, the North has been able to garner considerable sums of money to keep the regime afloat.

One of the most important sources of illicit revenue for the regime in Pyongyang comes from the growth, harvesting, manufacturing, processing, storage, sale, and transport of illegal drugs. A 2008 report by the Congressional Research Service on the subject points out that “since 1976, North Korea has been linked to more than 50 verifiable incidents involving drug seizures in more than 20 countries,”51 including Bulgaria, Ethiopia, Germany, Singapore, Turkey, Venezuela, and Zambia, among many others. While the North has produced and trafficked a variety of drugs, including cocaine, hashish, and illegal hallucinogenic tablets, it has historically focused most centrally on the production and distribution of opium and opiate derivatives, such as heroin, and methamphetamines, more commonly known as “crystal meth.” Initially, the North Korean government dabbled in the trade, buying and selling foreign-produced drugs on the international market. In the mid-1970s, however, the regime began to cultivate and harvest opium plants as a matter of state policy, and to refine and export heroin across the globe. All collective farms were ordered to devote 25 acres to poppy fields and opium production.52 The regime continued to invest in these activities to compensate for lost arms sales revenues after the conclusion of the Iran-Iraq War in 1988. A major shift in North Korean drug production took place in the famine years of the mid-1990s, when torrential rains and persistent droughts forced the regime to shift its focus to the non-weather-dependent manufacture of methamphetamines.53 Skyrocketing demand in China, Japan, Russia, and Southeast Asia (along with higher profit margins than heroin) is also said to have influenced this decision.54 The regime currently maintains the capacity to produce fifty tons of opium and ten to fifteen tons of methamphetamines per year,55 and while the estimates here also vary widely, the North is thought to procure between $70 and $200 million in profit through these activities.56 Defectors describe the North as a “narco-state in which all aspects of the drugs operation—from schoolchildren toiling in poppy fields to government-owned processing plants to state-owned cargo ships and trading companies—are controlled by Kim [Jong-Il].”57

Recent years have seen a marked decline in DPRK drug activity, with its name not even showing up in the annual UN World Drug Report since 2007.58 A 2011 State Department report also affirms that for eight consecutive years there have been “no known instances of large-scale methamphetamine or heroin trafficking to either Japan or Taiwan with direct DPRK state institution involvement.”59 The reasons for this decline could be many, but chances are that the North hasn’t had a sudden change of heart. It is more likely that the regime is focusing on other important illicit activities, such as producing its world-renowned high-quality “supernotes.”

In 1994, two North Korean trading company executives carrying diplomatic passports were arrested in Macao for attempting to deposit US$250,000 in high-quality counterfeit $100 notes to a local bank. In 1996, a North Korean trade counselor to Romania was expelled from the country for exchanging $50,000 in fake U.S. currency; in Ulan Bator, another DPRK official that same year was arrested for dumping $100,000 in U.S. currency on the black market. And in 1998, a DPRK party official was caught trying to exchange $30,000 in U.S. notes for rubles. These seem to have been among the first public appearances of North Korea’s “supernotes,” but they certainly weren’t the last. Since the mid-1990s, North Korean–origin counterfeit U.S. currency has shown up in places ranging from Manila and Belgrade to Las Vegas and San Francisco. The supernotes, known to North Koreans as kattalio, are estimated to generate between $15 and $100 million in profit for the North Korean regime.60 These notes are of such high quality that most analysts trace their origin to North Korea’s state mint, the Trademark Pyongyang Printing House, otherwise known as “Number 62 Factory.”61 They are believed to be printed on a $10 million Intaglio-type printing press (the same type used by the U.S. Bureau of Currency and Engraving) purchased from Japan, using Hong Kong–bought paper and ink from France.62 In August of 2005, the FBI completed two ongoing undercover operations focusing on China’s triad crime syndicates, code-named “Royal Charm” and “Smoking Dragon.” The string of arrests across Atlantic City, Los Angeles, Las Vegas, Chicago, Philadelphia, and San Francisco led to the seizure of large quantities of ecstasy and methamphetamines, counterfeit cigarettes and pharmaceuticals, and a reported $4.5 million in North Korean–origin counterfeit U.S. currency of “exceptional quality.”63 In October of the same year, former head of the Official Irish Republican Army (OIRA), Sean Garland (known as “The Man with the Hat”), was arrested in Belfast, on an extradition application, by the U.S. government, on charges of running a ring that distributed supernotes in Belarus, the Czech Republic, Denmark, Great Britain, Ireland, Poland, and Russia.64 Currently, the notes are said to have a global circulation of approximately $45 million,65 but in reality it is nearly impossible to make such estimates, for as one U.S. government official put it, “We have no idea how much they’re counterfeiting, because it’s so good.”66

But the North’s counterfeiting activities don’t end with high-quality currency. Over the past few years, North Korea has gained notoriety for its high chemical purity and high-quality packaging in counterfeit cigarettes and pharmaceuticals.67 There are thought to be around a dozen factories within the DPRK territory devoted to producing multiple brands of American and Japanese cigarettes. Most estimates of the regime’s profit from black-market cigarettes range from $80 to $160 million annually, carrying a street value of as much as $720 million.68 Intelligence gathered by satellite imagery and the Japanese coast guard is reported to show North Korean ships regularly transferring containers of counterfeit cigarettes onto ships registered in Taiwan, Cambodia, and Mongolia.69 Cities in Belize, Greece, Japan, the Philippines, Singapore, and the United States are among the thirteen hundred locations worldwide in which North Korean counterfeit cigarettes have surfaced.70 In 2006, federal indictments alleged that organized crime groups arranged for one forty-foot (12 m) container of North Korean–origin counterfeit cigarettes to enter the United States each month, each individual container costing as little as $70,000 but fetching a street value of $3 to $4 million.71 Along with fake Marlboros, the North Koreans are also adept producers of counterfeit pharmaceuticals. Most notable among these are sildenafil and tadalafil, known more commonly by their brand names, Viagra and Cialis. Like the knock-off cigarettes, these erectile dysfunction meds are also said to be expertly packaged and of extremely high chemical purity.72

On top of their narcotics trade, their supernotes operation, and their counterfeiting of cigarettes and Viagra, the North Koreans are believed to engage in a variety of other illicit activities to keep the leadership’s coffers full. One such example is the trafficking of endangered species and animal parts, with DPRK diplomats having been caught in the past trying to transport hundreds of pounds of elephant tusk and rhino horn.73 Precious metals such as gold are also thought to be traded on the black market by members of the North Korean regime.74 Nor is insurance fraud beneath the DPRK government. It is believed that by falsely reporting accidents, such as a 2005 helicopter accident and an early 2006 ferry accident, the North may have profited in the excess of $150 million in 2006 alone.75 And finally—and perhaps most sadly—human beings are another one of North Korea’s important “commodities” in their illicit network. In the U.S. State Department’s June 2010 Trafficking in Persons (TIP) Report, North Korea is designated, along with just 11 other countries (out of 177) as a “Tier Three human trafficker.”76 This designation is reserved for countries that do not even meet the minimum standards for prevention of human trafficking within their territory and are making no effort to do so, and the North has carried this label since 2003. Through its prison camp slave-labor network, foreign work operations such as Russian logging and Mongolian mining camps, and the sale of North Korean brides across the border to rural Chinese buyers, the North Korean regime has proven itself to be among the worst of the worst in one of the most abhorrent of human rights violations.

A key question going forward is to what extent the North Korean government would potentially be able to curtail its transnational criminal activities. There is some concern over the degree to which the North’s elicit economy has become “institutionalized,” with its smuggling networks and drug production operations having possibly taken on a life of their own.77 A second and equally important question is whether Pyongyang would be willing to modify its criminal conduct. This makes one wonder, with the North Korean economy in shambles, its inexperienced leadership, and the country receding further and further into global isolation, whether the leadership will up the ante with regards to transnational criminal activities. Of course there is no way of knowing what the regime has planned, but they obviously have to do something. And at this point, the light of reform doesn’t appear to be at the end of North Korea’s long, dark economic tunnel.

WHITHER REFORM?

Because the United States does not have diplomatic relations with, or an embassy in the DPRK, our protecting power is Sweden. It was therefore with great appreciation that I accepted an impromptu invitation from the Swedish ambassador Mats Foyer in Pyongyang to attend a reception at his residence after my long day of official meetings with our North Korean interlocutors. I thought it would be interesting to interact with the NGO and diplomatic community that would be in attendance, and the promise of a glass of Merlot after three days of North Korean liquor added to the allure. Upon arrival, I was locked into a conversation with the Chinese ambassador in Pyongyang, who berated me for the Bush administration’s neoconservative policy toward North Korea and scolded me for the administration’s belief that it could collapse the deceivingly sturdy regime. He carried a brief better than any hard-line North Korean I had met. After disengaging myself from this unpleasant exchange, I met a young couple from New Zealand, who were doing microfinance in North Korea. Admiring their adventurist spirit (who does microfinance in North Korea?) and their stories of the equivalent of Costco runs to the Chinese border, I asked what exactly they did in Pyongyang. They admitted that microfinance in North Korea amounted to teaching basic accounting, inventory, and business administration skills. The lack of such basic training is apparent in the country. Some of the academic exchanges that have taken place with schools such as Syracuse University (U.S.), the University of Warwick (UK), University of Essex (UK), the University of Sydney (Australia), and Australian National University have aimed to teach woefully undertrained North Koreans these basic skills.78 Indeed, North Korean bureaucrats have shared company with and received sage advice from some of the greatest financial minds in the Western world. I recall a session in New York City in 2008, in which luminaries such as the former vice chairman of Goldman Sachs Bob Hormats (who, appropriately, was also former senior economic adviser to Henry Kissinger and managed U.S. diplomatic and economic relations with China during its late-1970s reforms), and former chairman of the Federal Reserve Paul Volcker sat with a visiting delegation of North Korean economic and financial experts and offered them five hours of counsel on economic reform. To this day, I do not know whether these North Koreans had any understanding of who these senior American figures were, or how much it would have cost had Volcker or Hormats billed them for the consultation. But the failures of the North Korean economy are not caused by these undertrained bureaucrats, or the absence of any Nobel Prize laureates in economics in their own universities. Technocrats know very well the extent of the problems. Nor is the problem that North Koreans are somehow genetically incapable of economic reform and growth. One need only look at the South Korean experience to see the preposterousness of such a proposition.

The primary cause for the bad economic choices of the last fifty years sits at the very top of the political structures in Pyongyang. And the only obstacle to genuine economic reform relates to the leadership’s prizing, at any cost, its iron grip on the regime. The North Korean leadership faces in its own minds a fundamental reform dilemma. They need to open up to survive, but in the process of opening up, they unleash the forces that lead to the regime’s demise. Resisting the system in North Korea today is virtually impossible, because the society is so closed. The masses are preoccupied with basic subsistence. And the elite seek only to ensure their relative share of the sparse gains that could be had from the system rather than contemplating a change of it. Any openness begins to generate a spiral of expectations and inexorable forces for change—the overturning of systems like North Korea occur not when things are at their absolute worst, but when they begin to get better. The North Koreans have seen this happen in South Korea, where economic growth and a burgeoning middle class eventually precipitated the downfall of military dictatorships. They have also witnessed this throughout Eastern Europe and with the fall of the Soviet Union. The Kim family and its cronies know that true economic reform will ultimately improve the lives of the North Korean people, but this will also set off a spiral of expectations. Once the people taste the sweetness of change, they become impatient for more rapid change, if not revolution. China, when it undertook modernization reforms under Deng Xiaoping some forty years ago, was willing to risk a degree of political decentralization for economic growth, because, as Deng famously said, “To get rich is glorious.” For the North Korean leadership, however, political control is still the most valued currency.

HALFHEARTED REFORMS

For these reasons, pundits misjudge signs of economic reform in North Korea. The moment Pyongyang appears to undertake measures that could vaguely be associated with marketization or entrepreneurship, there are clarion calls that reform is finally afoot in the country. But these so-called reforms end up disappointing all, because they are, at best, tactical actions done out of temporary need (for reasons described below). Even when the North tries measures to open the economy a crack to invite trade and investment, these efforts are halfhearted because of the political masters’ fears that they might lose control. One area of attempted economic reform and opening, for example, centered on special economic zones (SEZs) set up by the DPRK on the border with China (Sinŭiju Special Administrative Region) and Russia (Rajin-Sŏnbong Free Economic and Trade Zone). North Korean authorities had grand visions that these zones would attract foreign investment, but the way they mishandled all aspects of these enterprises demonstrated a fundamental lack of business knowledge, an inflated sense of self-importance, and a fear of losing control. These zones were created in the 1990s as North Korea’s response to the end of the Cold War and to rival South Korea’s very successful Nordpolitik outreach to communist nations. Pyongyang thought it could also capitalize on the thaw in inter-Korean relations occasioned by a 1992 agreement on political reconciliation signed between the two governments, and the conclusion of the 1994 nuclear agreement with the United States. These SEZs, it was hoped, would constitute a solution to the North’s growing economic malaise. Rajin-Sŏnbong (now known as Rasŏn) is a 465-square-mile (1,200-sq-km) special economic zone in the northeast corner of North Hamgyŏng Province, butting up against the 12-mile (19-km) border with Russia along the Tumen River. Sitting 800 kilometers (500 mi) from the capital, the zone was established to promote growth by attracting foreign investment, and to serve as a hub for regional transportation.

Sinŭiju was a special administrative region that sits in the northwest corner of the country, in Pyongan Province, just across the border from the Chinese city Dandong. The Chinese-Dutch orchid and property tycoon Yang Bin (listed in Forbes in 2001 as the second-richest man in China) was appointed by the North Koreans to be the first governor of the region, but Yang was shortly thereafter arrested by Chinese authorities on charges of forgery, bribery, fraud, and tax evasion, and is currently serving out an eighteen-year jail sentence in Shenyang. They enacted a Joint Venture Law and some laws to protect foreign investments, but really little else in terms of a juridical infrastructure governing taxes, operating regulations, liability, and a host of other requisite issues. This would require a level of transparency that the political masters would not be comfortable with. They naively assumed that simply announcing that they were open for business would draw hordes of hungry investors.

The projects garnered some initial Western investment, but this was largely in building infrastructure and refurbishing ports in the SEZs. Manufacturing investment, which was what the North had hoped for, did not come—in large part because of dilapidated infrastructure, official corruption, and only partial adherence to agreed-upon economic reforms in the areas. According to a British journalist who traveled to Rasŏn in late 2010, the city still seemed stuck in a “Stalinist time warp,” with traffic consisting mostly of oxen-driven carts and Chinese-style lorries, and infrastructural construction carried out by men with picks, shovels, and wheelbarrows. There are no streetlights in the area, and because of poor drainage, the city’s main square becomes “a sea of mud” on days when it rains.79 Sinŭiju has never really resurfaced since Yang was arrested in the summer of 2003, though there was some talk of its being relocated to Wihwa Island on the Yalu River as recently as 2009.80 These projects are basically in a perpetual state of “talk” with very little “action,” with the North Koreans simultaneously trying to attract investment (more like aid) while fighting off the need for reform, and having very little success in the process.

The other area of attempted reform in this period regarded inter-Korean trade. The first recorded trade between the two Koreas was in November 1988, in the form of a forty-kilogram (90-lb) box of clams that arrived in Pusan. The next was a shipment of 612 pieces of Korean artwork that arrived in Pusan on January 1989. But here again, the North set conditions that aimed to circumvent the fundamental reform dilemma—i.e., conditions that maximized their cash inflow but minimized any interaction that could have deleterious effects on the population. Thus, almost all of the initial trade with the South was conducted through intermediaries, so that the North could claim none of it was of South Korean origin. Direct trade started in 1991, on a barter basis, but even here the North set out conditions. The delivery of South Korean rice, for example, in exchange for North Korean anthracite could not be delivered in bags that had anything written on them indicating South Korean origin.

Many believed that a sweeping set of reforms enacted by the North in July 2002 was the real deal, after a decade of halfhearted and failed efforts. As these reforms emerged at the end of the 1990s out of a collapsed economy, famine, energy shortages, and negative growth, many believed the North had finally learned to put aside ideology and obsession with political control as the only way to survive. I was asked to testify before the U.S. Congress on the meaning of these reforms after they were enacted. I made a prediction then that the reforms, which looked great at the time, were temporary and tactical. I would have been happy to be proved wrong, but regrettably, I wasn’t.

JULY 2002 REFORMS

The July 2002 market liberalization reforms undertaken by North Korea were generally associated with four measures. The first was a basic monetization of the economy. The government abolished the coupon system for food rations, relaxed price controls, thereby allowing supply and demand to determine prices. In order to meet the rise in prices, the government also hiked wage levels—for some sectors by as much as twentyfold (from 110 won/month to 2,000 won/month), and for other “special”-wage sectors (government officials, soldiers, miners, farmers) by as much as sixtyfold. Small-scale markets sprouted up all over North Korea, and the public distribution system broke down. Second, the government abandoned the artificially high value of the North Korean won, depreciating their currency from 2.2 won to $1 to 150 won to $1. This measure was aimed at encouraging foreign investment and providing export incentives for domestic firms. Third, the government decentralized economic decisions. Measures entailed cutting government subsidies, allowing farmers’ markets to operate, and transplanting managerial decisions for industry and agriculture from the central government into the hands of local production units. Enterprises have to cover their own costs. Managers have to meet hard budget constraints. Fourth, the government pressed forward with special administrative and industrial zones to promote foreign investment in the Sinŭiju Special Administrative District, Kaesŏng industrial project, and the Kumgang (Diamond) Mountain tourism project.

At the time, these reforms were hailed by the outside world as historic. They represented the first attempt in the regime’s history at widescale economic change. People focused on the fact that the regime was recognizing flaws in the socialist-style economy as the source of the problem rather than blaming its economic woes on outside actors.

. . . the socialist economic management method is still immature and not perfect. . . . If we stick to this hackneyed and outdated method, which is not applicable to the realities of today, then we will be unable to develop our economy.81

By decentralizing decisions, and separating the local economy from the central economy, these pundits lauded, local governments and counties could set their own production levels and prices, which encourages competition. State-owned enterprises were now given incentives to meet government production targets and then sell surplus on the open market for profit.82 Visitors to North Korea noted a new, albeit limited, spirit of entrepreneurship. Caritas and other international relief organizations reported makeshift small-scale markets with kiosks selling drinks, cigarettes, and cookies, as the public distribution system broke down.83 The government’s sanctioning of these open-air markets—where consumers could purchase goods at (lower) prices not determined by the government—was widely seen as a harbinger of major change. A description by the Guardian in 2003 gave a sense of the optimism: “Compared with the dusty, quiet, almost empty state department stores, Pyongyang’s Tongil Market is a hive of activity and noise. Shoppers haggle noisily with the 150 or so stall holders for a staggering range of goods; secondhand Japanese TVs, Burmese whiskey, and Korean dog meat. Most of the goods are from China. Some—including Western diarrhea pills, which sell for 3 [pounds sterling] apiece—are kept under the table. Prices are determined by the market, not—as is the case everywhere else—by the state . . . The openness and activity suggest that Tongil market is the best hope for North Korea’s future—one that would bring it closer in line with the successful economic reforms that have transformed neighboring China.”84 Policy pundits jumped on this bandwagon, claiming that Kim Jong-il should be encouraged in his efforts to reform “by stealth” without confronting his domestic opponents to change. ROK president Kim Dae-jung proclaimed that these reforms represented the North Korean leader’s acute “intellectual ability and discernment [as] a reform-minded and the type of man we can talk with in a common-sense fashion.” Peter Maas wrote in the New York Times that Kim was reform-minded like a Korean Jimmy Carter but with a “harmless feudalism.” And Don Gregg, former U.S. ambassador to the ROK and close friend of Kim Dae-jung, proclaimed that the reforms showed the DPRK wanted to emulate the Park Chung-hee model of state-led capitalism.85

The significance of these reforms, however, did not guarantee their success. The measures proved not to constitute the equivalent of North Korea’s religious “conversion” to capitalism. Neither the language nor the nature of the reforms carried the same conviction of those seen in China or Vietnam. More important, many of the reforms were motivated situationally rather than dispositionally—i.e., they constituted coping mechanisms to deal with immediate problems rather than a wholesale, prescient shift in economic ideology. Pyongyang authorized monetization of the economy and authorization of farmers’ markets to buy and sell goods, for example, largely because the public distribution system had broken down. The government simply had no goods to ration to the public. It could no longer provide the measly 600–700 grams of daily food allotment to it citizens (800 grams for the elite), so it had to allow markets for subsistence. They knew this meant giving up some control, but there was no choice in the matter. In the decade after the 1995 flood, for example, the PDS for food was about 80 percent supplied by international assistance. So, when there was no food, the government suspended the PDS and allowed markets to operate. But when food arrived, they reinstituted the PDS. The PDS, in this sense, was not a system to ration things equitably: it was an entitlement distribution system that formed the basis of social and political control.

Similarly, local managers were given more leeway not because the central government “trusted” their entrepreneurial capabilities but because state-owned enterprises were experiencing plunging outputs and high absentee rates for workers, which required some drastic measures to incentivize them. Monetization of the economy looked like another significant departure from the North’s socialist ways, but it had the effect of asserting political control over the elements of the economy that constituted the biggest threat—black market entrepreneurs. The activities of these individuals were the collective answer to market failure. They operated underground and traded in goods that the government could not supply (or could supply at inflated government prices). Farmers would sell their produce in these markets after meeting state production quotas. International aid recipients would keep some of the rice, but then take a portion of their allotment to the black market to fetch a high price. Consumers would spend money sent to them by relatives in China or South Korea to acquire secondhand VCRs and watch forbidden South Korean soap operas. These constituted threats, in the minds of the political masters, precisely because they operated outside the control and eye of the Orwellian state. In this regard, the lifting of price controls and devaluation of the currency undercut these entrepreneurs (and the general population) by rendering their cash holdings a fraction of their value while also causing massive inflation.

These reforms ultimately failed as they created more problems than they solved. The lifting of price controls led to runaway inflation: low supply and low output brought significant increases in prices and further devaluation of the won. By comparison, China’s initial price reforms in 1979 drove up the price of rice by 25 percent. In North Korea, the price after the reforms went up by at least 600 percent, and the value of won dropped from 150 for $1 to 700 for $1.86 Fixed-income workers were devastated by these dynamics, as were the military and laborers. (Farmers were hurt marginally less, because they benefited from the inflated prices of their produce.) The North only managed to squeak by because of the aid from China and South Korea. North Korea needed to meet the upward pressure on prices created by the reforms with either increased production (not feasible yet) or increased imports. The growth in North Korean imports in years following the 2002 reforms was largely financed by aid inflows from Seoul and Beijing. As Nicholas Eberstadt argues, Chinese aid went well beyond what was publicly reported, with the best indicator probably being the trade deficit between the two countries: “The DPRK’s seemingly permanent merchandise trade deficit with China actually constitutes a broader and perhaps more accurate measure of Beijing’s true aid levels for Pyongyang (insofar as neither party seems to think the sums accumulated in that imbalance will ever be corrected or repaid).”87 During this period, it was reported that Beijing provided some $470 million in aid annually to North Korea, amounting to 70 to 90 percent of fuel imports and 30 percent of grain imports.88 China increased shipments of corn and wheat in early 2003; and during a visit by chief PRC legislator Wu Bangguo in October of 2003, in a meeting with North Korean Politburo member Kim Yŏng-nam, the Chinese reportedly offered $50 million in aid.89 Japanese media reported that the aid was nominally for a glassworks plant, but Pyongyang could spend the aid at their discretion.90 Food was an important component of Chinese aid during these years, officially averaging over 287,000 metric tons from 2000 to 2007, and peaking at just over 450,000 metric tons in 2005.91 The Chinese also built numerous factories and other production facilities for little or no cost, provided the North with between 600,000 and 700,000 metric tons of oil annually at “friendship prices” (highly subsidized by the PRC government), and allowed the North to run up massive trade deficits, with an implicit understanding that they likely wouldn’t be repaid.92

Chinese trade with the North also absolutely exploded over these years. While trade with China made up a substantial 20 percent of all North Korean commerce in 1999 and 2000, by 2004 this figure had just about doubled, totaling 39 percent.93 The increases in value of this trade were equally impressive. At the turn of the millennium, it sat at $488 million, but would more than triple in value to nearly $1.6 billion by 2005.94 In 2003, China also increased overall trade with North Korea by nearly 40 percent, according to the Korean International Trade Association. North Korean fuel imports from China rose 53.2 percent to $187 million, backfilling the end of U.S. shipments of fuel oil after the breakdown of the nuclear agreement at the beginning of 2003. In addition to Chinese trade and aid, the North received easily over $1 billion in aid from a South Korean government and public then enraptured by the Sunshine Policy. During President Kim’s first full year in office, South Korea provided the North with just $29 million in food, fertilizer, and humanitarian aid. But this number climbed rapidly during his and President Roh’s tenure, reaching a whopping $635 million in 2007.95 Food aid exhibited a similar pattern. Starting at just 12,000 metric tons in 1999, it would average just under 370,000 metric tons over the following eight years, topping out at 542,000 in 2003.96 Inter-Korean trade was another important source of support for the ailing DPRK economy. Total trade between North and South was equivalent to about $78 million in 1998. But this figure, too, increased rapidly, doubling by the following year ($144.4 million), doubling again by 2002 ($298.8 million), and reaching a high of nearly $800 million by 2006.97

As one longtime international aid worker very familiar with North Korea put it figuratively during these years, “North Korea has its own 911 number—access to state-of-the-art health care, agricultural support, and aid . . . and that number rings in Seoul.”98 The ROK Unification Ministry estimates that since 1995, $2.4 billion in aid has been provided to North Korea by Japan, the United States, South Korea, the European Union, and the United Nations (food, fertilizer, medicine, and fuel oil). From 1995 to 2007, China, South Korea, the United States, and Japan provided over 80 percent of North Korea’s food aid, and from 2000 onward, it was generally over 90 percent. But from the years 2002 to 2005, the North got the majority of its food from just China and the South, and in 2006 and 2007, they provided it all.99 Indeed, these aid “revenues” constituted the most successful part of Pyongyang’s so-called reforms. As noted above, the economy became perpetually dependent on foreign aid for one-third of its needs. This inflow of cash and goods without any adequate supervision by NGOs or the state created ripe opportunities for corruption to take hold.

Thus, the one major national effort at economic reform in 2002 never amounted to what it was made out to be. Many argued that the unprecedented and far-reaching nature of the July 2002 measures demonstrated North Korean intentions to seek integration into the international community, to receive engagement by the United States and allies, and to trade their nuclear programs for help from the outside world. The danger of fixating on the economic reforms was that these optimists were giving much more credit to North Korean security preferences than they deserved. Even if we gave the North the benefit of the doubt on their economic reforms, there is no logical link between DPRK desires to reform on the economic front and a change in their security intentions. To seek economic reforms and pursue a ramping up of national power through nuclear weapons and ballistic missiles proved not only plausible but also fully consistent with Kim Jong-il’s concept of kangsŏng tae’guk or “rich nation, strong army.” But the point is that the DPRK could divorce its economic intentions from its security preferences. Economic reform does not necessarily mean they are equally interested in trading away their nuclear weapons—a common and mistaken assumption made by many analysts of the economic reforms. Pyongyang could, in fact, want to have its cake and eat it, too.

DPRK’S “MOONSHINE” POLICY

It was no coincidence that the DPRK’s most vigorous economic reforms overlapped with South Korea’s Sunshine Policy. Two liberal administrations in Seoul, those of Kim Dae-jung and Roh Moo-hyun (2003–2008), pursued unconditional economic engagement on a large scale for one decade. The two presidents believed that they had to convince the regime that its external environment was benign and that no one was out to collapse Kim Jong-il’s house. The Kim and Roh administrations pursued economic engagement both to pacify the belligerent North and to spur slow reform. These objectives, in turn, would avoid a DPRK collapse and the dreaded “hard-landing” scenario for unification, which would be prohibitively costly to the South Koreans. Every time the Kim Jong-il regime responded to Seoul’s unilateral offers of assistance, these South Korean governments felt validated in their hopes that their policies were working.

But Pyongyang had its own Moonshine Policy. Accepting such assistance in hard times was a no-brainer. While it led the gullible South Koreans to believe in their Sunshine Policy, it played ROK aid at home as “gifts” to its Great Leaders from the weaker South, all the while keeping both hands in their southern brethren’s deep pockets. Pyongyang agreed to two major inter-Korean economic projects that became the hallmark of the Sunshine Policy. It also agreed to two summit meetings in which South Korean presidents traveled to Pyongyang to pay their respects to Kim Jong-il. Seoul hailed all of this as a transformative change in the DPRK. The Kaesŏng Industrial Complex and the Kumgang Mountain tourism enterprise constituted new steps in inter-Korean economic cooperation. The Kaesŏng Industrial Complex is a joint North-South industrial park located just across the DMZ in North Hwanghae Province, forty-three miles (70 km) from Seoul. Housing over 120 South Korean companies, the eight-hundred-acre complex employs over 47,000 North Korean workers earning approximately $45 a month. (Sadly, this is a far better opportunity than most in the North.)100 Workers produce a wide variety of goods, such as pajamas, motorcycle helmets, socks, printer cartridges, and fish nets, for export to South Korea and around the world.101 The start-up costs for the complex were $374 million, 40 percent of which was provided by the South Korean conglomerate Hyundai-Asan and the remainder was left up to the South Korean government.102 The Kumgang Mountain tourism project, for its part, was in operation starting in 1998, and hosted over 1.9 million South Korean tourists since its inauguration.103 Two-night, three-day packages ranged from $230 (250,000 Korean won) to $1,140 (1,250,000 Korean won) per person, depending on the time of year and quality of accommodation.104 Here visitors took in the breathtaking scenery of the T’aebaek mountain range area, soaked in natural hot springs (called on-chŏn in Korean), and sampled North Korean cuisine, art, and culture; all, of course, under the watchful eye of North Korean minders. (I discuss this in greater detail in chapter 9.)

The more successful Seoul believed its Sunshine Policy was, the more effective was Pyongyang’s Moonshine. Kaesŏng and Kumgang were acceptable to the North Korean leadership because they met two core conditions. First, the projects funneled large sums of cash to the leadership. The agreements for these projects mandated a sum of $942 million to be transferred from Hyundai-Asan to the North Korean government; much of it in cash and heavily front-loaded over a seventy-five-month period (approximately $150 million per year).105 While the exact profit figures are a matter of dispute, the Kaesŏng Industrial Complex is additionally thought to generate between $20 and $34 million annually in hard currency for the North Korean regime.106 Given that the complex has been in operation since 2005, but only really in full swing since 2007, a conservative estimate of the DPRK’s total revenue is upward of $80 to $135 million in cash profit alone. Kumgang Mountain tours, too, have been an important source of support for the regime. While the amount of hard currency Kumgang generated for the regime is unknown, from 2001 up to the program’s cancellation in 2008, the South Korean government provided the North with over $76 million in aid through the program.107 These may sound like trivial amounts to the average American—used to a national debt in the tens of trillions—but its impact on North Korea’s $28 billion GDP is certainly significant.108 In this regard, the epic June 2000 summit between Kim Dae-jung and Kim Jong-il, which won the former a Nobel Peace Prize, was also a cash cow for the latter. It was later revealed that Seoul paid $500 million for the meeting.

Second, neither project had the potential for enlightening the people and empowering forces for change. In the case of the Kaesŏng Complex—a joint venture that married South Korean capital and technology with North Korean labor to produce watches, flatware sets, and other light manufactured items for export—Pyongyang carefully managed the terms of this endeavor. South Korean managers were not allowed to pay North Korean workers directly. Instead, they paid a DPRK government intermediary, who did not pay the workers. This became apparent in 2005–2006, when the South Korean government invited foreign journalists to Kaesŏng as part of a publicity campaign for the Sunshine Policy. Journalists quickly figured out that even as the DPRK intermediary negotiated higher wages each year from the South Korean companies, it was, at best, paying a small fraction of those wages to the workers. In lieu of wages, workers were receiving three meals per day and a clean work environment. The North also screens all workers for their “loyalty” to the regime before they are eligible to work at Kaesŏng. A nearly-all-female workforce was selected (a factory full of young men posed too many risks), and contact between South Korean managers and the workforce is restricted by the North. South Korean managers are sequestered off into their own cafeteria during lunch hour, and, if need be, are treated in segregated medical facilities. In the instances when the South Koreans do communicate with their Northern counterparts, they reportedly have trouble understanding each other, as a result of how much their languages have parted ways since the early fifties.109 Party music, militantly singing praises to Kim Il-sung and Kim Jong-il, blares out of loudspeakers on the factory walls. In 2005, the South Korean press reported rumors that a Romeo and Juliet–style romance between a South Korean man and a North Korean woman had blossomed in the complex. But Kaesŏng’s South Korean workers wrote these off as dubious, for the simple reason that the North Korean women in the complex are never alone. According to one such worker, “There are big social differences between us. There is no sense of the individual in North Korea . . . they even go to the toilet in pairs.”110

In the case of the Kumgang Mountain complex, all foreigners were separated from the regular population not only by the site’s secluded location on the mountainous east coast of the peninsula, but also by fences, barbed wire, and a phalanx of guards. Military personnel were stationed at regular intervals throughout the tour area, raising bright-red flags when tourists committed infractions such as taking unauthorized pictures or straying away from the pack. “Environment rangers” stood tense, with watchful eyes, on the lookout for breaches of tour regulations, and ready to spout official party line at the drop of a hat. Fines were handed out, too, for carrying contraband items such as cellular phones or cameras with telephoto lenses, or for taking pictures while riding on the bus.111 Large granite rock-faces throughout the tour are engraved with North Korean slogans, such as “Long live Suryŏng (Great Leader) Kim Il-sung, who has sacrificed his lifetime to bring happiness to us,” and “Let’s devote our lives to Suryŏng Kim Il-sung!” These propaganda messages are said to be absolutely immense, with each individual character standing as tall as thirty feet (9 m) and as wide as twenty-six feet (8 m), carved over two feet deep (60 cm) into the rock.112 Serious missteps, moreover, were not tolerated. One group of tourists found this out the hard way in July 2008, when North Korean guards shot a fifty-three-year-old South Korean woman in the back for inadvertently trespassing into a restricted area on the beach. (The tours were suspended after this incident.) Meanwhile, the regime annually made between $80 and $85 million off the project with no real impact on the population.113 It is these sorts of projects that qualify as “economic reform” in the minds of Sunshine Policy advocates. When the obvious problems regarding North Korean restricted access and stifled reform are pointed out, Sunshine proponents respond with lectures about the need for patience and magnanimity on the order of decades before true change will be visible in the North. This probably coincides very well with the North’s Moonshine Policy.

North Korea practiced Moonshine with China as well. Every time Kim Jong-il made a visit to China, his Chinese interlocutors urged him to visit factories and cities to see the benefits of capitalism with Communist characteristics. Over the past decade, Kim willingly visited a wide variety of facilities in China, including fiber optics, computers, telephones, laser technology, computer software, and a human genome complex. The table below lays out the number of times Kim did this in the last decade.

logo

With each visit to a Chinese plant, journalists and scholars proclaim a new chapter in North Korea’s economic transformation. And each time they are proven wrong. Kim invariably made these trips to appease his Chinese hosts (and to receive the requisite aid packages), but had no intention of reforming. Many times, on the sidelines of Six-Party Talks, I would ask Chinese counterparts about the need to push the North to reform economically. The Chinese would look at me like I was some sort of idiot, responding, “Do you think we have not told them this before? We have told them many, many times!” I asked if they referred the North to China’s own experiences as a template to be emulated. Again, I was looked at like some sort of Martian, with the response that the Chinese have always lectured the North about the comparison. The North Korean response was: (1) “Don’t lecture us”; and (2) “North Korea is not China.” I then asked, what about a comparison to Vietnam? But the North Korean answer, the Chinese said, was the same (but with a twist): (1) “Don’t lecture us”; (2) “North Korea is not Vietnam”; and (3) “We still face a threat from the American imperialists, which Vietnam does not, because it defeated the United States in a war.” (!) Arguably, North Korea’s Moonshine Policy has been more successful than South Korea or China’s Sunshine Policy.

In the end, the source of North Korea’s five bad economic decisions and the impediments to reform are the same. These are flaws of the political leadership, not of economic expertise. Only when the regime prizes wealth and growth more than its vice-like grip on power will true economic reform come to the North.

NEOJUCHE REVIVALISM

North Korea is in the midst of making a sixth bad decision. Like its past, the economic future of North Korea will be dictated by political ideology rather than rational economics. As I have argued throughout this book, the post–Kim Jong-il ideology is taking a harder-line conservative turn, a hybrid of 1950s–1960s juche self-reliance messages and 1990s sŏn’gun (military first) capabilities as a nuclear weapons state. This neojuche revivalism characterizes the economic reforms of the mid-1990s to mid-2000s as a temporary straying from the core ideology. The reforms failed not because of government incompetence but because they represented spiritual pollution rather than innovation; a recipe for disaster rather than an antidote for recovery. Economically, this means that Pyongyang is returning to the megaprojects of the 1980s and a rejuvenation of the Ch’ŏllima spirit. We have seen large projects like the February 8 Vinylon Complex in South Hamgyŏng Province (not to be confused with the Sunch’ŏn Vinylon Complex mentioned earlier), the Ryongsong Machine Complex, and the Hŭngnam Fertilizer Complex being refurbished in the past two years. These large endeavors require large amounts of resources and will last as long as the Chinese continue to fund them. But, in the end, they are about political control more than they are about economics. They try to sap every bit of labor and individualism out of the population as they prepare for a new leader to command undisputed loyalty.

CHOCO PIES

One cannot help but wonder whether the small but stifled steps already taken toward reform have left an indelible mark on North Korean society. The political leadership uncorked the bottle cap of reform only slightly, for fear of losing control, but even this small release can ignite forces beyond the Kim family’s iron grip.

The best example of this? Choco Pies.

Choco Pies are the popular South Korean equivalent of the American Oreo cookie or Hostess Twinkies. It is a confectionary treat manufactured since 1974 in South Korea by the Orion Company. It consists of two chocolate-covered cookies sandwiched together by a bed of marshmallow (so it’s actually more like an American s’more or MoonPie). These individually wrapped, 120-calorie treats have been a non-nutritious staple of every South Korean child’s diet for years, and lately Choco Pies have garnered a significant part of the local cookie markets in China, Vietnam, Uzbekistan, Japan, and Indonesia. At the Kaesŏng Industrial Complex, I noted earlier that the DPRK government did not allow the workers to be paid fully in wages directly by South Korean companies. The management, however, did compensate the workers with hot meals in the factory cafeteria and a small monthly stipend. In 2005, one of the ROK businesses operating at Kaesŏng started to reward their workers with one or two Choco Pies per day. The female laborers tasted the treat and knew they had something of value. Popularity of the Choco Pie spread and other South Korean businesses at Kaesŏng put in orders with Orion to have ten thousand boxes shipped immediately. DPRK workers, however, stopped eating them and started to hoard them for sale outside of Kaesŏng. ROK unification officials said that soon after distribution of the Choco Pies started, the factory trash-handlers could hardly find a spent wrapper. Rather than being consumed daily at Kaesŏng, many of these Choco Pies were selling on the black market for as much as $9.50 per pie. (They cost about 45 cents at your local 7-Eleven in South Korea.)114 According to a Japanese newspaper report, nearly 2.5 million Choco Pies are traded in North Korea today. Kaesŏng workers quickly figured out that selling one of these confectionary delights could fetch one-sixth of their monthly wage.

Choco Pies tell a larger story of how even the smallest opening can encourage an entrepreneurial spirit. As stifled as the North Korean population was from experiencing the real fruits of opening and reform, the small steps taken by the regime during the period of Sunshine Policy opened their eyes to an economic life outside of the state’s PDS. The thriving black markets have created entrepreneurs who are working for themselves rather than for the Dear Leader. These underground markets started to sprout up after the famine years as the people could no longer rely on the government to provide food or products. You can find them everywhere. A recent newspaper report estimated that a majority of people in North Korea admit that they rely on the black market to obtain goods because they cannot obtain them from the government distribution system. The wealthier in North Korea might sell stored food in the markets at prices higher than the government-set price. International assistance in the form of grains and rice would find its way to the black market. Farmers gained a sense of individual ownership by tending small, thirty-p’yŏng (about the size of a football field) private plots of land to sell their produce in the market, while they pay token attention to weed-filled collective-farm plots. Traders sell anything they can in these markets, ranging from scrap metal scavenged from an idle factory to banned South Korean DVDs smuggled in from China. Factory workers pay their foreman a bribe to be signed in as working on the state payroll (which has not paid them in months), but then they spend the day fishing squid to sell in the markets. Consumers in these markets got a sense of individual purchasing power. They had savings to buy a widget in the market. This was not a widget rationed to them, so they had to choose which one they wanted in the market and bargain for the best price. People were making economic choices that previously had not been given to them by the state.

Because of Kaesŏng, tens of thousands of North Korean women today, though not paid market wages, still have the experience of working in a modern South Korean–made factory and receiving three meals a day in a clean cafeteria. These women will not revolt against the government, but they will tell others of their experiences. Nearly 2 million ROK tourists have passed through the Kumgang tourism project, and thousands have taken tours of the Kaesŏng facility. The North Korean government collected a boatload of cash through this, but at the same time, they exposed their own workers and guides to the sight of affluent South Koreans. A German writer on Korea, Rüdiger Frank, captured best the anger that such exposure can create among North Koreans. Recalling his own experience in Germany, Frank recalled how a cash-starved East German government opened its highways to visitors from West Germany. East Germans had heard about the affluence on the other side of the Wall, but seeing it was a completely different thing. The sight of shiny new BMWs, Mercedes-Benzes, and Audis angered many East German men, who worked hard their entire lives only to drive an old Trabant. As Frank notes, the anger was not taken out on West Germans but on their own government for being so inadequate. This accumulated frustration was ultimately let out in the autumn of 1989.115

This anger was clearly on display in North Korea in 2009 and 2010. In November 2009, the regime proclaimed a surprise redenomination of the national currency. The public was given no forewarning. They were told that they had one week to exchange old currency notes for new ones at a ratio of 100 to 1. Moreover, citizens could exchange no more than 100,000 won. Exchanges beyond this amount would be at a rate of 1,000 to 1. Citizens were told to deposit any excess currency in the state-run banks. This measure, the first of its kind in seventeen years, was designed to crack down on private markets and to reassert state control over the economy. It wiped out in one stroke lifetime savings of households by rendering any amount beyond 100,000 won virtually valueless. For one family, what was once a lifetime of savings of $1,560 tucked under the mattress was now worth $30 amid a soon-to-be-worthless pile of bills. Entrepreneurs were effectively being sought out for punishment as well, because any excess currency or working capital they deposited in banks targeted them by state authorities as involved in nonsocialist activities.

The redenomination measure created panic and anger throughout the population. The ceiling of 100,000 won meant that families could convert only enough money to buy the equivalent of a fifty-kilogram (110-lb) bag of rice. The one-week time frame created outright panic as North Koreans looked to buy foreign currency on the black market, or buy goods that might retain value with the old currency. This led to massive price increases and shortages in the markets. An interview with one family captured the desperation and despair of the moment:

He emptied the living-room cabinet drawer that held their savings and split it with his wife and daughter, telling them, “Buy whatever you can, as fast as you can.” The three bicycled furiously to Chongjin’s market. “It was like a battlefield,” he said. Thousands of people frantically tried to outbid one another to convert soon-to-be worthless money into something tangible. Some prices rose 10,000 percent, he said, before traders shut down, realizing that their profits soon would be worthless, too. The three said they returned home with 66 pounds [30 kg] of rice, a pig’s head, and 220 pounds [100 kg] of bean curd. The construction worker’s daughter had managed to purchase a small cutting board and a used pair of khaki pants. Together, he said, they spent the equivalent of $860 for items that would have cost less than $20 the day before.116

The government tried then to shut down the markets, set state prices on goods, and ban the use of foreign currency. But unlike other times, when the citizens responded with passiveness, this time there were widespread reports of social discontent. Some families committed suicide out of hopelessness once their savings had been wiped out by the government. Others substituted anger for despair. Graffiti criticizing Kim Jong-il appeared on the sides of buildings. People were heard loudly denigrating the government—an action that could easily get one thrown into a gulag. There were reports of attacks by people against local police who were patrolling the markets and trying to restrict hours of operation. And in Hamhŭng City, citizens were displaying unusual signs of civil disobedience by burning their old currency in the public square.

The unprecedented nature of this openly expressed anger was manifest in the government’s response. Pyongyang tried increasing the ceiling on exchangeable currency per household to 150,000 won, but citizens remained angry. None would deposit excess currency in the banks as the government had directed. Popular anger was so strong that the government took the unusual step of issuing a public apology for the sacrifices the people were making for the Dear Leader. Government backtracking was evident in the offer of compensatory wages at old wage rates, which effectively resulted in a hundredfold increase in income with the new currency.117 This then caused market chaos, as confidence in the new currency’s value also collapsed and the value of North Korean bills, old and new, was unknown. Public anger was spontaneous and unorganized, but still the government had never expected it, nor knew how to deal with it. In the end, the state resorted to tried-and-true tactics—it executed two government officials, including the Korean Workers’ Party director of finance, Pak Nam-gi, in a stadium in Pyongyang to assuage discontent. They also executed an inordinately large number of citizens, reportedly as many as fifty-two in the immediate aftermath of the redenomination, while they had only sixteen public executions in all of 2010 prior to the currency redenomination measure. These presumably were intended as a deterrent from further civil unrest.118

The state of the North Korean economy since the 2009 currency redenomination has not gotten any better. Shortages of food and other goods are still reported. The government has no capital. Three out of four factories today are mothballed. Inflation is rampant, and a poor harvest in 2011 ensures more hardship. And no one seems to be exempt from the dire economic times, with even the military reportedly being forced to subsist on animal feed.119 A colder-than-average winter in 2010–2011 and an outbreak of foot-and-mouth disease among North Korean livestock have significantly raised the risk of starvation among the North’s people. Life expectancy (67.2) remains below figures from the late 1980s (70.2) and well short of that of the South (79.8).120 The regime has even apparently halved the official size of Pyongyang, to reduce the number of loyal residents it needs to support.121 Pockets of protest are said to have broken out, with average North Koreans gathering in small groups, shouting, “We can’t live! Give us fire! Give us rice!”122 The government has responded to this crisis in the very same four steps they have taken in the past. First, when the government had nothing left to ration through the public distribution system, they removed restrictions on markets to allow people to fend for their subsistence through this mechanism. Second, to meet food shortages, they do not contemplate long-term reform or sustained means to purchase food, but seek handouts from the international community to tide them over until the next harvest. This year, Pyongyang already made requests of E.U. countries and the WFP to resume food shipments. The DPRK representative at the United Nations also asked the United States to resume food shipments that Pyongyang unilaterally suspended in March 2009. Third, they seek out the lowest-hanging fruit among international benefactors. Thus, Pyongyang has also recently demonstrated interest in restarting the inter-Korean projects that have the potential to once again funnel large amounts of cash to the regime. Finally, they rely on their trusty ally in Beijing. They continue to ask the Chinese for help, and in return for this help, Kim Jong-il and his son continued to pay token visits to high-tech factories.

The eternal optimists will confirm with these measures their proclamations that the North is cycling out of its belligerent phase of 2010 with the Cheonan sinking and Yeonpyeong Island artillery attacks, and is returning to engagement in 2011 and 2012. These foolhardy people will once again point to the government’s tolerance of market mechanisms as a sign it is contemplating fundamental reform. They will make the leap from the regime’s expedient actions to full-throated declarations that the heir, Kim Jong-un, is rejecting a harder-line ideological direction in favor of an enlightened reform path.

In truth, however, the economic policies of the post–Kim Jong-il era will be held prisoner to ideology and to the regime’s obsession with not losing control. The government’s leniency on market restrictions will last as long as the government cannot support the PDS. But once it can, it will reimpose control and stifle as much free enterprise as possible. After a period of international food assistance helps to replenish stocks, Pyongyang will once again reinstate onerous restrictions on access and monitoring and will eventually eject humanitarian aid workers on charges of “spying.” And the North will continue to pursue Moonshine projects with the ROK as a way to secure large sums of cash, and will react with threats if Seoul tries to propose any conditions regarding transparency or reciprocity. Dr. Pak Hyŏng-jung of South Korea’s Korea Institute of National Unification (KINU) is one of the most astute observers of North Korea’s internal machinations. He argues that the leadership, ironically, felt very comfortable with its position in the year between North Korea’s first nuclear test (October 2006) and the summit with ROK president Roh Moo-hyun in October 2007. Why? Because their nuclear test succeeded in pressing the Roh government to engage with Pyongyang as a means of pacifying the threat, ultimately leading to the summit in 2007, which promised many benefits to the North. Moreover, Pak argues, once they received these Moonshine benefits, the government had the sustenance that enabled it to reimpose market restrictions: “With having acquired the prospect of receiving increased economic assistance from the South at the second summit in October 2007, [the] North Korean regime felt safe to intensify anti-reformist policy, which would be sure to deteriorate the sterility of the economy. The regime significantly raised the level of market crackdown from October 2007 . . .”123

The only variable that changes in this sad economic algorithm is the North Korean people. With each expedient nod to the market by the cash-strapped economy, the regime is unwittingly exposing mothers, fathers, sons, daughters, aunts, and uncles to capitalism, to the generosity of outsiders, and to the flaws of its own economic policies. The change is microscopic but it is real, so that the next time the government tries its old ways of reasserting control over the economy and wiping out the people’s savings, there will be a different response. In 2011, North Koreans banned all news of the public demonstrations in Egypt and Libya that toppled dictatorships in these countries. They banned all public gatherings, and put tanks in the main square as a warning for a reason: they sense popular dissatisfaction as a result of the last two decades of economic mismanagement. And the regime’s ideology of neojuche conservatism, which accompanies Kim Jong-un’s rise to power, offers no economic solution. It promises only more bad economic decisions. North Korean people are too oppressed to revolt the way we saw in the Middle East. They have no weapons and have no capacity to organize against the state. They have been taught to praise Kim Jong-il and Kim Jong-un, to hate the Americans, Japanese, and South Koreans, and to be distrustful of the Chinese. But if there is one issue that animates their hatred and anger against the omnipotent state, it is economics. It is not human rights abuses, or their international isolation because of nuclear weapons, or the corrupt bureaucracy that cause average citizens to set fires in the streets or yell at local police. Anger mounts when the government allows the people to fend for themselves, they succeed in some small fashion, and then the state tries to reassert control by taking this away.

THE FATHER OF Sunshine Policy, the late Nobel laureate and ROK president Kim Dae-jung, was right that the world’s economic engagement could plant seeds of change in the North. But Sunshine Policy advocates were wrong in their belief that this change would be gradual. Their hope was for market reform to be led by an enlightened DPRK government that over decades would take advantage of the world’s proffered hands to prevail over entrenched domestic hard-liners. The North would then, through reform, close the economic gap between the North and South, thereby paving the way for a gradual integration and unification—the so-called soft landing. Sunshine Policy was not about fomenting revolution. Yet the agent of change that we all point to rising from the ashes of the North Korean economy is the people. Precisely because of the economic failures of the past decades, they have been forced, out of the need for survival, to view the world differently, to think for themselves rather than for the state. It is hard to imagine enlightenment out of utter poverty, but that is what is happening slowly in North Korea. And when this anger erupts, it will be violent and bloody.