North Korean Economy Watch

Blane Harden wrote an excellent article for the Washington Post on the KPA takeover of state-owned trading companies and how these companies are increasing natural resource exports to China.  (As an aside, China has just recently ceased publishing North Korean trade data).  This is interesting because just a year-and-a-half ago we were discussing Jang Song-thaek’s anti-corruption campaign which was supposed to be closing down KPA companies and making them reapply for export licenses with the Ministry of Foreign Trade (meaning the WPK could start dipping into the revenue pools).

Quoting from Mr. Harden’s article:

The potential profits are eye-popping: China is one of the world’s most voracious consumers of raw materials, and North Korea’s mineral reserves are worth $5.94 trillion, according to an estimate by South Korea’s Ministry of Unification. China has been critical of North Korea’s nuclear program and missile tests, but it also has vastly increased its economic ties with Kim’s government.

Kim is increasingly creaming off a significant slice of Chinese mineral revenue to fund his nuclear program and to buy the loyalty of elites, according to “North Korea, Inc.,” a recent report by the United States Institute of Peace, a Washington-based group funded by the U.S. Congress.

The report echoes the views of North Korean analysts in South Korea, Japan and the United States, who say the military has elbowed out other ministries and the Korean Workers’ Party to take control of exports that earn hard currency. The military is also sending trucks to state farms to haul away as much as a quarter of the annual harvest for its soldiers, analysts say.

“The military is by far the largest, most capable and most efficient organization in North Korea, and Kim Jong Il is making maximum use of it,” said Lim Eul-chul of the Institute for Far Eastern Studies in Seoul.

North Korea is perhaps the world’s most secretive and repressive state, but it makes no attempt to hide the ubiquitous role the military plays in the daily lives of the country’s 23.5 million people. Soldiers dig clams and launch missiles, pick apples and build irrigation canals, market mushrooms and supervise the export of knockoff Nintendo games. They also guard the country’s 3,000 cooperative farms, and help themselves to scarce food in a hungry country.

…

Missile sales were for many years major earners of foreign currency, according to a report for the Strategic Studies Institute by Daniel A. Pinkston, who is now a Seoul-based analyst with the International Crisis Group. But the cost of the arms trade has gone up and sales have declined as a result of U.N. sanctions imposed after the North’s nuclear tests in 2006 and this year, South Korean analysts say.

The military has thus turned to its new Chinese cash cow. As the army has taken over management of mines in North Korea, mineral exports to China have soared, rising from $15 million in 2003 to $213 million last year. Led by those sales, the North’s total trade volume rose last year to its highest level since 1990, when a far more prosperous and less isolated North Korea was subsidized by the Soviet Union.

A unique advantage the Korean People’s Army brings to foreign trade is a well-disciplined workforce that has to be paid — nothing. Soldiers receive food, clothes and lodging, but virtually no cash. This competitive edge makes military-run trading companies especially attractive to the North’s leadership, according to the Institute of Peace report.

Based on confidential interviews with recent North Korean defectors, four of whom said they worked for trading companies run by the military, the paper concludes that a “designated percentage of all revenues generated from commercial activities . . . goes directly into Kim Jong Il’s personal accounts.” The rest of the revenue flows into the operating budget of the military.

The full article is worth reading here.

Additionally, the report by the Institute of Peace cited above, “North Korea, Inc.”, can be downloaded here. The paper is on my reading list this weekend, but here is the introduction and conclusion:

Introduction: Assessing regime stability in North Korea continues to be a major challenge for analysts. By examining how North Korea, Inc. — the web of state trading companies affiliated to the Korean Workers’ Party (KWP), the Korean People’s Army (KPA), and the Cabinet — operates, we can develop a new framework for gauging regime stability in North Korea. Insights into the Democratic People’s Republic of Korea (DPRK)1 regime can be gained by examining six core questions related to the DPRK state trading company system. First, what are DPRK state trading companies and how did they emerge? Second, how do DPRK state trading companies operate? Third, what roles do they play? Fourth, why are DPRK state trading companies important? Fifth, what major transformations are taking place in the DPRK state trading company system? Sixth, what are the implications of the manner in which this system is currently functioning?

Conclusion:  Despite lingering problems with the fragmented Public Distribution System, the challenges of chronic food shortages, and a deteriorating economic infrastructure system, the DPRK regime has proven to be remarkably resilient. By operating North Korea, Inc. — a network of state trading companies affiliated to the KWP, the KPA, and the Cabinet — the regime is able to derive funds to maintain the loyalty of the North Korean elites and to provide a mechanism through which different branches of the North Korean state can generate funds for operating budgets. During periods when the DPRK’s international isolation deepens as a result of its brinkmanship activities, North Korea, Inc. constitutes an effective coping mechanism for the Kim Jong Il regime.

While North Korea remains an opaque country, we now have greater access to unique defectors with the following characteristics — prior experience working in DPRK state trading companies and current business dealings with former colleagues in North Korea through channels in China. By closely examining DPRK commercial activities and capabilities, a new field of North Korea analysis can be structured to produce insights into the internal dynamics of the DPRK regime. This new line of inquiry would help to broaden our understanding of an evolving North Korea.