North Korean Economy Watch

Wall Street Journal
Marcus Noland
4/12/2010

North Korea likes to project an image of strength to the world. But back home, there is a serious economic crisis playing out that could have long-term repercussions. Historians may look back and see this as a tipping point.

The crisis originated in November, when the government sprang upon the public a confiscatory currency reform that wiped out household saving and the working capital of traders and entrepreneurs. The value of the North Korean won predictably plunged as people abandoned it for foreign currencies and even physical goods—anything that could preserve value. The second shoe dropped a month later when the state extended its war on privately held capital, banning the use of foreign currencies.

The government’s intent was to reconstitute orthodox communism. Earlier in August, North Korean leader Kim Jong-il’s sister, Kim Kyong Hui, telegraphed the move in an essay extolling the superiority of central planning over the decentralized market—even trashing the notion of giving enterprise managers greater autonomy in the context of a socialist economy. The regime’s basic motive—to crush the market and strengthen direct state control—was confirmed by central bank statements immediately after the reform.

But the policy, which was supposed to constitute the political coming out of expected heir Kim Jong-un, Kim Jong-il’s third and youngest son, unleashed extraordinary, though sporadic, protests. The government backtracked, allowed markets to reopen and in February issued an unprecedented apology. Park Nam-ki, a 77-year-old technocrat who upon becoming the Party’s economics chief allegedly vowed to end the “capitalist fantasy,” was scapegoated and reportedly executed.

Once broken, the economy may prove difficult to repair. Prices for goods such as rice, corn, and the dollar rose 6,000 percent or more after the reform. And while prices have come down from their peak as the government has relaxed some of its strictures, they are currently still 600 percent or more above their prereform levels—in spite of the money-supply contraction.

The United Nations’ Food and Agriculture Organization reports that the country is more than one million metric tons short of grain. This estimate is likely exaggerated due to faulty methodology, but anecdotal reports of hunger are emerging from returning visitors and refugee networks. It appears the government persuaded farmers in cooperatives to accept cash in lieu of half of their annual in-kind grain allotment—then rendered the bonus worthless via the currency reform. Farmers are now hoarding grain however they can: The United Nations Development Program reports that post-harvest losses amount to 30 percent. The farm economy has been severely disrupted. But unlike the 1990s famine, which was largely an urban phenomenon and killed perhaps a million people, hunger is now reported in the countryside.

The state’s response to these developments has not been reassuring. After Mr. Park was executed, he was replaced by an octogenarian, Yun Gi Jeong, known primarily as a confidante of North Korea’s founder, Kim Il-sung. The political police have been bureaucratically elevated and placed directly under the National Defense Commission, from where Kim Jong-il runs the state. This is not the behavior of a confident or competent government.

The recent missteps are particularly damaging because they are so obviously self-inflicted and nakedly incompatible with the regime’s narrative that ascribes all the nation’s challenges to hostile foreign forces. A survey of 300 North Korean refugees conducted in November 2008 by Stephan Haggard of the University of California San Diego found that respondents were increasingly accessing foreign sources of news and disinclined to accept the government’s explanations, instead holding it responsible for their plight. The currency fiasco will accelerate these trends.

Widespread disillusion, even dissent, does not guarantee mobilization, however. The same survey found that the population remains atomized and mostly fearful of communicating these views, even to friends and family. But the state can justify its hatred of the market in one respect: People participating in market activities are significantly more likely to communicate their dissent to their peers.

There is no reason to expect that this attempt to revive orthodox communism will succeed. But an influx of aid, which would allow the state to keep goods on the shelves and satisfy key constituencies, would make it easier. It is rumored that Kim Jong-il will visit China later this month and that the Chinese will extract a commitment by the North Koreans to rejoin the stalled Six Party Talks over its nuclear program.

If North Korea does agree, economic distress and the opportunity to wheedle more aid out of China and the United States may explain this change of heart. China has effectively taken up the mantle of the previous South Korean government’s “sunshine policy,” and within the US government there are already discussions of another “food for talks” swap to bring the North Koreans back to the table.

North Korea’s retrograde moves are wrecking its economy and propagating discontent among the masses. But the country is bereft of civil society institutions capable of channeling that discontent into constructive political action. Aid and repression may permit the regime to pursue anachronistic communism for some time, but the next leader will inherit an ultimately untenable situation.