Hermit economics hobbles Pyongyang

Aidan Foster-Carter writes in the Financial Times about some poor decision-making coming out of Pyongyang:

Great Leader? Pyongyang’s fawning hagiography not only grates, but is singularly unearned. Even by its own dim lights, North Korea’s decision-making is going from bad to worse.

Last year saw two spectacular own goals. Missile and nuclear tests were a weird way to greet a new US president ready to reach out to old foes. The predictable outcome was condemnation by the United Nations Security Council, plus sanctions on arms exports that are biting.

Domestic policy is just as disastrous. December’s currency “reform” beggars belief. Did Kim Jong-il really fail to grasp that redenomination would not cure inflation, but worsen it? Or that brazenly stealing people’s savings – beyond a paltry minimum, citizens only got 10 per cent of their money back – would finally goad his long-suffering subjects into rioting? Forced to retreat, officials even apologised. One scapegoat was sacked – and possibly shot.

By his own admission, Mr Kim does not do economics. In a speech in 1996, when famine was starting to bite, the Dear Leader whined defensively that his late father, Kim Il-sung, had told him “not to get involved in economic work, but just concentrate on the military and the party”.

That awful advice explains much. Incredibly, North Korea was once richer than the South. In today’s world, this is the contest that counts. “It’s the economy, stupid” is no mere slogan, but a law of social science.

Having taken an early lead, Kim senior threw it all away. He built the world’s fourth largest army, crippling an economy that he refused to reform, viewing liberalisation as betrayal. His own personality cult was and is a literally monumental weight of unproductive spending.

Used to milking Moscow and Beijing, in the 1970s North Korea borrowed from western banks – and promptly defaulted. That was not smart; it has had to pay cash up front ever since.

Pyongyang also resorts to less orthodox financing. In 1976 the Nordic nations expelled a dozen North Korean diplomats for trafficking cigarettes and booze. In December a Swedish court jailed two for smuggling cigarettes. More than 100 busts worldwide over 30 years, of everything from ivory and heroin to “supernotes” (fake $100 bills), leave scant doubt that this is policy.

Yet morality aside, it is stupid policy. Pariahs stay poor. North Korea could earn far more by going straight. The Kaesong Industrial Complex (KIC), where South Korean businesses employ Northern workers to make a range of goods, shows that co-operation can work. Yet Pyongyang keeps harassing it, imposing arbitrary border restrictions and demanding absurd wage hikes.

Now it threatens to seize $370m (€275m, £247m) of South Korean assets at Mount Kumgang, a tourist zone idle since a southern tourist was shot dead in 2008 and the north refused a proper investigation. Even before that, Pyongyang’s greed in extorting inflated fees from Hyundai ensured that no other chaebol has ventured north. Contrast how China has gained from Taiwanese investment.

In this catalogue of crassness, the nadir came in 1991 when the dying Soviet Union abruptly pulled the plug on its clients. All suffered, but most adapted. Cuba went for tourism; Vietnam tried cautious reform; Mongolia sold minerals. Only North Korea, bizarrely, did nothing – except watch its old system crumble. Gross domestic product plunged by half, and hunger killed up to a million. Now famine again stalks the land. The state cannot provide, yet still it seeks to suppress markets.

All this is as puzzling as it is terrible. China and Vietnam show how Asian communist states can morph towards capitalism and thrive. Kim Jong-il may fear the fate of the Soviet Union if he follows suit. True, his regime has survived – even if many of its people have not. Yet the path he is on is patently a dead end. Mr Kim’s own ill-health, and a belated bid to install his unknown third son as dauphin, only heighten uncertainty. Militant mendicancy over the nuclear issue – demanding to be paid for every tiny step towards a distant disarmament, then backsliding and trying the same trick again – will no longer wash. North Korea has run out of road; the game is finally up.

What now? A soft landing, with Mr Kim embracing peace abroad and reform at home, remains the best outcome. But if he obdurately resists change, we need a plan B. The US and South Korea have contingency plans for the north’s collapse. So does China, separately. Tacit co-ordination is urgent, lest future chaos be compounded by a clash of rival powers – as in the 1890s. Koreans have a rueful proverb: when whales fight, the shrimp’s back is broken.

But Beijing will not let it come to that. China is quietly moving into North Korea, buying up mines and ports. Some in Seoul cry colonialism, but it was they who created this vacuum by short-sightedly ditching the past decade’s “sunshine” policy of patient outreach. President Lee Myung-bak may have gained the Group of 20 chairmanship, but he has lost North Korea.

Nor will Mr Kim nuzzle docile under China’s wing, though his son might. As ever, North Korea will take others’ money and do its own thing. In early 2010 new fake “super-yuan” of high quality, very hard to detect, started appearing in China. They wouldn’t, would they?

Read the full article here:
Hermit economics hobbles Pyongyang
Financial Times
Aidan Foster-Carter


6 Responses to “Hermit economics hobbles Pyongyang”

  1. mvb says:

    Foster-Carter implies that previously North Korea was allowed to export arms. I know they’ve done some business with Burma and Syria, but who else? Is there a website or an article that someone can recommend that lists the specifics about North Korean arms exports?

  2. Gag Halfrunt says:

    Try the Stockholm Institute for Peace Research Arms Transfers Database.

    North Korea has worked with Iran and Pakistan on missle development. IIRC the US intercepted some North Korean Scud missiles on their way to Yemen, but eventually had to let Yemen take delivery because the Scuds weren’t covered by any UN sanctions. Ethiopia is a long-standing customer for North Korean weapons, and when the Ethiopian army invaded Somalia in 2006 they bought a fresh batch of arms from their North Korean friends, to the slight embarrassment of their American friends. 🙂

  3. tibor gaal says:

    First of all, U.N. Security Council’s website contains U.N. Sec.Council resolutions which tells which classes of arm export/import activity is banned for the DPRK and its partners in their relations. Second: it is legal to export/import arms when it is not banned. DPRK export its arms to developing countries which are accepting its political systems, I think these arms deals are part of state secrets. In 100 years of time we will know more about it than today. Third: I expected deeper analisys from Aidan Foster-Carter than this article. He didn’t try to understand DPRK’s motives. It would be better to collect evidences than accusing and saying weird words toward another type of political/economical systems. Evidence collecting is a tougher task than preaching democracy. Democracy preaching doesn’t reach average north koreans, only we can read it.

  4. nk_kevin says:

    tibor, there was no mention of democracy in this post until you brought it up! I also don’t read into the article any attack on another country’s system; rather, it clearly targets the policies of this country. The analysis here cites solid facts; where are your evidences to refute them?

  5. mary says:

    nk_kevin, by democracy, i think tibor means the western/democratic convention of economic reform, and i completely agree with him on his third point.

  6. tibor gaal says:

    Dear Friends, It is far away from me to offend someone. But, my experience – living in a former socialist country, Hungary – makes me drawing different conclusions as my experience is different.
    ‘hard facts and evidences’: in current and former socialist countries there are no such. In the DPRK economic (and arms trade) statistics are non-existent for the public. If they would be publicc we hardly can use it because they are based on production-based evaluations (e.g. X company produced 60 tonnes of potatoes, Z company produced 1000 tones of bricks) while our western standard is based on IAS (int.accounting standards) financial evaluation method. In democratic countries the economic policy, decision making, execution, consultation are free and everyone can join while in the current/former socialist countries people cannot join freely, an ellitte decides and keeps it as ‘top secret’. In 1980’s Hungary people didn’t know about the indebtedness level of the country because these data weren’t released. A small group of well-connected economists (working in the Hungarian National Bank, Finance Ministry, State Planning Agency, and top communist state/party (party is called MSZMP) officials) knowed it, but, they didn’t talk. In my opinion DPRK’s reform process will be slow and bumpy, because they don’t want to chose our capitalist system. I think they don’t know what to do!