Andrei Lankov offers some thoughtful analysis on recent North Korea developments in the Asia Times:
Contrary to oft-stated accusations, Pyongyang leaders are neither irrational nor ideology-driven; they are a bunch of brilliant Machiavellians, very apt at exploiting the fears and controversies of their enemies and their partners alike.
Their country’s economy is in a sorry state, to be sure, but survival of the population has never been a major item on their agenda. They just want to stay in control and not be overthrown by popular insurrection or by a coup - they are very good at this game.
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However, over the past year or so, something strange has begun to happen in Pyongyang. The North Korean leadership has taken some actions that have clearly damaged the interests of the ruling clique. It seems that the once formidable manipulators have for some reason lost their ability to judge and plan.
The recent currency reform is the best example of such weird and self-defeating policy decisions. For years, the Pyongyang government has waged campaigns against the unofficial and semi-official markets that have played a decisive role in North Korea’s economic life since the collapse of the state-run economy in the 1990s. As another move in this ongoing (and, perhaps, unwinnable) struggle, last November the government initiated currency reform that was meant to undermine the power of black-market merchants.
The reform was modeled on confiscation-oriented currency reforms once used in the Soviet Union and other communist countries. One morning, the populace suddenly learned that old bank notes were null and void and had to be changed for new ones within a week. The exchange rate was set as 1:100, so, for example, 1,000 “old” won should be exchanged for 10 “new” won.
Accordingly, all retail prices and fees were also reduced one hundred times. Harsh exchange limits were introduced: only the equivalent of US$30 in cash could be changed by one person. The use of foreign currency, which had become very common in North Korea’s retail economy, was banned.
The measures are standard for communist-style currency reform, since such reform usually pursues the double goal of fighting inflation and reducing the power and influence of the unofficial black economy.
However, North Korea’s planners also did something unexpected: they claimed that nominal wages and salaries would not change. In other words, a person who prior to the reform received a monthly salary of 3,000 won, would still receive 3,000 won, but paid in the new currency. Effectively, it meant that all wages in the country suddenly increased 100 times. To assure consumers, the government issued stern warnings against profiteers who dared to raise prices of goods and services.
For a brief while in December and early January, North Korean customers felt rich and consumers expected that even such luxuries as, say, Chinese bikes (a North Korean equivalent to a Porsche) were now within their reach.
The actual result was less impressive. The dramatic increase in salaries launched an equally dramatic round of inflation, so in the past three months the price of rice (and the black market exchange rate) has increased 50 times, from the official required 20 “new” won per kilogram to 1,000 “new” won. The government’s “stern warnings” were ignored. In the near future, prices are likely to return to pre-reform levels. The reform has failed completely and it only succeeded in making people irritated and in demonstrating the government’s inability to control a situation.
The unprecedented decision to raise wages doomed the entire affair from the start. But why was it done? Why was an otherwise standard package of well-tested measures saddled with this self-defeating (and, frankly, stupid) addition?
In the realm of diplomacy, North Korea is not faring much better. For decades, Pyongyang has demonstrated uncanny skills in manipulating its neighbors from whom it squeezed unconditional aid and unilateral concessions. The usual tactics consisted of three stages. In the first stage, the North Koreans raise tensions. Secondly, they launch missiles, test nuclear devices and make threatening statements. Finally, once tensions are sufficiently high for the world to feel uneasy, there are negotiations in which Pyongyang extracts aid that is essentially a reward for calming a crisis the North itself manufactured.
This time, both stage one and stage two were seriously mishandled. First, the North Koreans used both their trump blackmail cards - a nuclear test and a missile launch - almost simultaneously (analysts expected space of at least a few months before these two events). They also showered Washington with especially bellicose rhetoric, even though the Barack Obama administration was initially relatively soft on the North Korean issue.
As a result, the excessive activity of the North Koreans backfired: the US foreign policy establishment finally realized that North Korea would not surrender its nuclear program under whatever circumstances. This reassessment of the situation (or belated realization) meant that the US was now far less willing to shower Pyongyang with concessions. In the past, gifts were presented as incentives to surrender nuclear weapons, and since such surrender is now seen as unlikely, such generosity is not necessary. (See US finally wise to Pyongyang’s ways, Asia Times Online, November 12, 2009)
The North Koreans are now beginning to realize that the old trick is not working. They have only themselves to blame. Had they been slightly more careful last year, a significant part of the US establishment would still nurture the illusionary dream of “denuclearization through negotiations”.
The third stage of asking for aid was also handled badly. The unnecessarily aggressive rhetoric of the past was replaced by unusual softness in a short time - previously, the switch took months. Since August, North Korea has essentially begged to restart negotiations with the US and, especially, South Korea.
Pyongyang is demanding to restart cooperation projects. It is quite remarkable, since two of the three major projects - tours of Keumgang Mountain and Kaesong city tours - were abruptly stopped by North Korean authorities a year ago. Needless to say, the South Korean government is not too eager to restart negotiations. After all, so-called intra-Korean cooperation is essentially unilateral South Korean aid in disguise and Seoul sees no reason why it should hurry with the resumption of money transfers to Pyongyang. North Korean softness is (wrongly) seen by Seoul hardliners as a victory of the hard line they are advocating, so they say that an even harder approach will probably bring greater success.
Meanwhile, the North Korean government also did something it has never done before: it said “sorry” to the people. In January, Nodong Sinmun, a government mouthpiece, reported that Dear Leader Kim Jong-il felt bad for being unable to provide his subjects with the level of material affluence they were once promised.
The promise was moderate, to be sure. In the 1960s, Kim Il-sung, the founding father of the country and also father of the current dictator, promised that eventually all Koreans would eat rice (not corn or barley) and meat soup, live in houses with tiled roofs (not thatched), and wear silk clothes.
Every North Korean knows that even this moderate paradise has failed to materialize. However, the fact has never been admitted openly. In the past, economic difficulties and hardships, if mentioned at all, were always explained as they should be explained in a solid dictatorship, that is, by references to scheming enemies, above all US imperialists.
This time, Kim’s remark indicated that the system itself might bear some responsibility for economic problems.
In accordance with the new mood, a high-level official allegedly expressed his regret about the chaos created by the currency reform while addressing a large group of the party faithful. This might appear like normal behavior, but in a dictatorship that claims the possession of absolute truth and an infallible leader, such statements are very unusual - and, indeed, dangerous. They are likely to be seen as signs of fallibility and weakness, and every dictator knows that such signs should not be shown.
In other words, something has changed in Pyongyang recently - seemingly, after Kim’s illness in late 2008, when he reportedly suffered a stroke. The most likely explanation seems to be biological: the increasing inability of the ailing dictator to pass reasonable judgments and control people around him.
One can easily imagine how the Dear Leader (perhaps even driven by genuine sympathy to his long-suffering people) would look through a currency reform plan and say: “And what about poor wage-earners? Should we not reward the people who remained loyal to the socialist industry and did not go for black markets? Why not increase their salaries, so they will become affluent, more affluent than those anti-socialist profiteers of the black market?” Few, if any, officials would dare to explain the dire economic consequences of such generosity.
It is also possible that the deteriorating health condition of Kim has led to growing rivalry between factions so the North Korean leadership is now increasingly disunited, with rival groups pushing through their own agendas.
At any rate, something unusual seems to be happening in Pyongyang and it’s probably the time to think about the future a bit more seriously. We are heading towards serious changes, and unfortunately nobody seems prepared.