How North Korea’s Economy Defies Sanctions

Courtesy of The Wall Street Journal, a look at how North Korea’s day-to-day commerce in the country has remained resilient, rice prices are stable and gasoline prices have eased:

The U.S. has been leading a world-wide campaign to pressure North Korea into giving up its nuclear arsenal through an increasingly stringent sanctions regime. Available evidence suggests it’s not working.

Economic indicators show day-to-day commerce in the country has remained resilient. And many residents, having lived through much harsher conditions in the 1990s, appear to be adapting as market forces take deeper root, according to three dozen defectors, humanitarian workers, government officials and other visitors interviewed by The Wall Street Journal.

Tougher sanctions, including new restrictions on foreign trade approved in 2016 and 2017, have caused North Korea some pain, depriving the regime and elites of revenue from commerce with other countries, including China.

In other ways, North Korea’s economy appears to be holding up well. Rice prices have remained stable, and gasoline prices, which rose after sanctions were tightened, have fallen significantly from highs in the fall of 2017.North Korea’s currency, the won, has held steady against the U.S. dollar. Construction projects continue in the capital. And many foreign products that were more visible before tighter sanctions, such as Chinese processed foods, have been replaced with locally made options as domestic factories expand output, former residents and recent visitors said.

Several visitors to Pyongyang and a few other major cities said they even observed some improvements in daily life, including more electricity and cheaper coal, which makes it easier to heat homes.

“There is no clear sign that the state is in trouble,” said William Brown, an adjunct professor at Georgetown University who has served as a North Korea expert for U.S. intelligence agencies. In fact, there are signs the economy is growing, at least in the increasingly important private sector, he said.

Gathering a more precise picture of North Korea’s economy is hard. Official data is sparse and unreliable, forcing experts to rely heavily on defectors and their networks, mainly in border regions and Pyongyang. Visitors have restricted access to rural areas, where conditions are typically worse than in the showcase capital.

One humanitarian worker who visits several times a year, and last traveled to North Korea in September, said she saw food shortages in the countryside. Former residents said such problems have existed for many years.

Many researchers suspect North Korea may be propping up its economy by spending down foreign-currency reserves that accumulated before sanctions were tightened. The country has a history of dressing up its capital for foreign visitors, and no one knows when its foreign-exchange reserves will run out.

If sanctions are damaging North Korea’s economy, it would first be observed through weakened sales of luxury items and durable goods like household electronics and clothes, said Kim Byung-yeon, a professor of economics at Seoul National University. But in North Korea it isn’t possible to observe these warning signs, because of a lack of data. Sanctions would affect purchases of the wealthier class before they affect staple goods like rice, he said.

One prominent defector, former North Korean deputy ambassador to the U.K. Thae Yong Ho, said in a press conference on Feb. 19 that he believed Pyongyang was running out of funds to build some projects. If sanctions continue, major construction projects are likely to be delayed while state companies could go bankrupt, Mr. Thae said.

Just how long Mr. Kim can keep the economy afloat is a pivotal question for Washington. Although sanctions existed before 2016, they started getting much stricter that year, with the United Nations eventually blocking North Koreafrom sending guest workers overseas, capping its oil purchases and curtailing its sales of coaland other goods abroad. Washington adopted sanctions to strengthen enforcement.

Continuing sanctions evasion, including illicit, midocean ship-to-ship transfers of oil, and state-sponsored hacking campaigns are keeping needed foreign currency and oil flowing.

President Trump and North Korean leader Kim Jong Un are in very different places than when they first met in Singapore last year. WSJ explains how domestic and international forces may affect their positions at the negotiating table in Vietnam. Photo composite: Sharon ShiChina, North Korea’s longtime ally, has provided economic assistance to Mr. Kim’s regime even though Beijing has said it enforcesall U.N. sanctions on North Korea.

Researchers and defectors also broadly agree that North Korea’s economy has become more flexible in the past decade. Its failing centrally planned system, in which the state controlled practically everything, doling out jobs, wages and food, has given way to a dynamic entrepreneurial economy that provides more ways for people to earn money.

The transformation began years ago and has accelerated under Mr. Kim. The leader has generally left private marketplaces alone and given farmers freedom to sell surplus production for a profit.

“Kim Jong Un’s greatest deed was the lack of regulations on the market,” said Joung Eun-lee, a North Korea researcher at the Korea Institute for National Unification in Seoul.

About 70% of North Korea’s economy is now market-based, according to estimates from Kwak In-ok, a North Korea economy researcher at Sookmyung Women’s University in Seoul. As sanctions have tightened, he said, illicit trade has expanded, helping to keep businesses running.

North Korean households now generate more than 60% of their income from informal market activities, according to Mr. Kim at Seoul National University in his recent book, “Unveiling the North Korean Economy.”

Some residents pay fees to be exempt from showing up to their official state-assigned jobs, which offer paltry salaries. They then make money in the informal market economy, and hand over a portion to their official job’s manager, who doesn’t report their absence to higher officials, according to former residents and researchers.

One North Korean escapee who left the country in 2017 said he made a living by setting aside some shrimp and fish he caught while working at a seafood company to sell through the black market. Other families he knew made shoe soles and sold them to other families that made shoe tops. 

“It’s all capitalism there now,” he said of North Korea.

Another defector, who left last year, said he took unofficial jobs as a wholesale retailer transporting eggs. He didn’t show up at his state-appointed job, which he was able to get out of by paying the equivalent of about $7 a month to his manager. He said his family was able to make ends meet this way, but that he decided to leave to make more money for them in South Korea.

There are now over 400 official marketplaces in North Korea where both domestic products and imported goods, often smuggled, are sold, with some undergoing renovations in recent years, according to experts who monitor North Korea’s markets through satellite imagery. The number of markets has doubled since 2010, according to a report released by the Center for Strategic and International Studies, a Washington think tank, in August. Pyongyang generates tens of millions of dollars a year in revenue through taxes and fees on the markets, according to the report.

South Korea’s central bank estimated the North’s economy contracted by 3.5% in 2017, the latest data available. But several North Korea experts said the figure is unreliable because it doesn’t reflect informal economic activity, which appears to have increased.

A researcher who has visited the country at least a half-dozen times a year since 2003, including in January, said there haven’t been visible changes on the ground under sanctions. During the most recent trip, “we saw construction projects everywhere” and “a tremendous amount of construction materials being transported,” the researcher said.

Defectors and experts said tighter sanctions could even be adding momentum to North Korea’s transition to a more market-oriented economy, albeit one that isn’t recognized formally, and with the regime taking bigger cuts of activity.

In its first decades after the Korean War, North Korea operated on a centrally planned system established by Mr. Kim’s grandfather, Kim Il Sung. It fell apart in the 1990s when the Soviet Union collapsed and China stopped sending aid, contributing to a famine that left about three million people dead.

Mr. Kim’s father, Kim Jong Il, allowed stalls to sell a limited selection of goods at state-dictated prices. But he worried such markets would get out of hand and undermine state control, and often tried to subdue them, while steering more money to the military. A currency reform in 2009 failed disastrously, sending food prices soaring and wiping out many people’s savings.

Kim Jong Un reversed course after inheriting power in 2011, laying out a “byungjin” policy in 2013 that made economic growth and military advancement the state’s top two priorities.

He turned a blind eye to public markets as long as merchants delivered payments to the regime, and didn’t clamp down on U.S. dollars and Chinese yuan, which once were forbidden but now are used widely, from taxis to street stalls, albeit clandestinely in many cases.

One defector said there are now only three things money can’t buy in North Korea without state permission: A private sedan car, and freedom to travel inside the country, or abroad.

Sanctions Squeeze

International sanctions on North Korea have tightened in recent years as the country escalated its nuclear program. Sanctions before 2016 included restrictions on financial transactions, luxury goods and weapons. 

Economic experts said Mr. Kim also appears to have maintained a policy of keeping the North Korean won steady by refusing to print more local currency—a crucial change that economists credit with keeping inflation in check and allowing residents to save without seeing their nest eggs threatened.

In 2015, Mr. Kim approved rules that gave companies more autonomy to conduct business, including letting companies determine the price and production of goods.

Factories can now find their own suppliers and customers as long as they achieve revenue targets dictated by the state, and farmers can sell surplus production after meeting the state’s quota, according to a report published in June by the Korea Institute for Industrial Economics and Trade in Seoul.

The change helped embolden state-linked companies set up by wealthy North Koreans known as donju, or “money masters,” who have amassed capital through informal markets and provide steady sources of income to the government.

One North Korean escapee who left the country in 2018 said he paid authorities $80,000 to purchase a state-owned factory and its equipment and about $25,000 for a trade permit to establish a steel trading company five years ago.

The defector said he sold steel to Chinese counterparts assigned by the state but underreported his production in order to sell some goods through the black market and to his own Chinese contacts. He used the profit to fund the company’s expenses such as electricity bills and staff salaries, and pocketed some profit for himself.

Regardless of his company’s performance, he was required to send about $15,000 a month to Pyongyang. His company turned to domestic sales channels and smuggling to meet the state’s allotted foreign cash quota. Sometimes he filled the gap with his own money.

A key tension, experts said, is whether the Kim regime will demand so much money from the donjus that it makes the economy unsustainable. Some said those efforts have already begun. Others said Mr. Kim will show restraint.

“Kim Jong Un knows that the market can’t function without donjus,” said Lee Hyung-seog, a senior researcher at the Institute for National Security Strategy in Seoul. “They are the backbone of North Korea’s economy.”

At Tongil Market, the largest local market in Pyongyang, North Korean products such as electronic tablets and televisions have increased to replace Chinese goods. The Kwangbok Supermarket stocks new domestic brands of clothes, shampoo and toothpaste.

“The range of [products] has expanded, if anything,” said Marcus McFarland, a tour guide for Koryo Tours, who was in Pyongyang in early February. A food court there now serves three local beers, compared to one two years ago, he said.

A defector, who said she left North Korea in 2016 after tiring of constant government surveillance, said she keeps in touch with family back home who told her that friends who once bought Chinese processed foods have turned to domestic options, which are cheaper and more suited to their tastes. A recent visitor said there are now more than 10 domestic types of instant ramen noodles.

This entry was posted on Tuesday, February 26th, 2019 at 6:56 am and is filed under North Korea.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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