Intelligence: What North Korea Really Fears

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April 6, 2016: North Korea is constantly talking of American aggression against them but the North Koreans rarely go into details. The truth is that what North Korea is really complaining about is American (and South Korean and Japanese) culture, customs and cash getting into the country and undermining loyalty to the communist dictatorship that has been running North Korea into the ground since the late 1940s. This became much worse after the Soviet Union collapsed in 1991 and Russia halted its massive annual contributions of cash, fuel and food. The socialist dictatorship did not quite know how to handle it. While the government tried to figure it all out over a million North Koreans starved to death. Something less visible also occurred; the development of a growing free market. The government found enough food to halt the starvation but most North Koreans have been going hungry ever since. The black market was another matter entirely. The presence and success of free enterprise, which is what the black market is, made it obvious that the command economy preferred by the communist government was inferior and if fatal famines were to be avoided the new markets would have to be tolerated.

There were setbacks in this new policy of tolerated some free enterprise. For example in 2009 the North Korean government took drastic, dramatic and disastrous action to deal with government created inflation and curb the growing economic power of the free market entrepreneurs. The government quite suddenly revalued its currency. This was done without warning and people were told they could only exchange the equivalent of a hundred dollars in currency. Thus 100 old won get you one new won. Officially this was done to deal with rampant inflation. A less savory reason was to destroy the rising power of people who have made lots of money in the recently legalized markets as well as the many illegal (“black”) markets.

What caused the inflation was not enough new goods were allowed into the country to absorb all that new wealth. Thus there was inflation, as more money chased fewer goods. This drove up the price of food. In a market economy, farmers could have increased output in response to higher prices. But the government still controlled most aspects of the farm economy, and continues to make a mess of it. The currency exchange also enabled the hard line communists in the government to wipe out those who sought to improve their economic situation. The reality was that (only Communist Party members are allowed to live better.

The legalizing of the black market activity began in 2003, initially just for food, disturbed many government leaders. They saw the growing wealth of entrepreneurs as a danger to communist control of the country. The entrepreneurs could now bribe corrupt officials (who also suffered heavy losses during the currency change). After 2009 the government made a great display of shutting down “illegal” markets and seeking to find and arrest corrupt officials. But that led to more corruption as many people would starve to death or die of disease if they could not get food and medical help (especially foreign medicines) in the free markets.

There was another casualty of currency exchange fiasco the government does not like to discuss; the North Korean currency was informally replaced. After 2009 a lot of the new wealth was not kept in the form of North Korean currency. Foreign currency, mainly Chinese and American (even if a lot of it is counterfeit) became more common. Assets became more popular. This could be anything from tons of food, to apartments and even kilos of methamphetamine. A kilo of meth sells for about as much as it costs to "buy" a state owned apartment from its current occupant. Since 2009 no one depends on North Korean currency to store ones wealth. After the 2009 exchange, which wiped out the legitimate savings of many North Koreans as well as legal and illegal profits of entrepreneurs, no one really trusted the North Korean won any more. It was not just the currency exchange, but the fact that the government just prints as much currency as they want and ignores the fact that this is the main cause of inflation. After 2009 that was no longer the case because a lot of expensive good could not be bought with local currency. Only Chinese, American or Euros were accepted, although verifiable valuables could also be used to barter.

The 2009 effort was the first currency exchange for inflation since 1959. For half a century, the government tightly controlled the economy, and inflation was not a problem. Up until 2009 the hard liners in the government thought it was possible to get back to the good old days. That won't be happening. But even communist despots can dream. Meanwhile the entrepreneurs switched to foreign currencies, often in electronic form. This was made possible by the presence of legal, or illegal, money brokers in China. These brokers used a network of Chinese businesses in North Korea that have trouble getting profits back to China. The brokers also had a network of money brokers in South Korea who wanted to get money from the North Koreans (over 25,000 of them) who had made it to South Korea. These North Korean expatriates send over $15 million a year back to families in North Korea and while the brokers fees in China and North Korea can cost as much as 20 percent of the amount being sent back, the recipients will have cash hand delivered to them. That cash comes from the Chinese profits stuck in North Korea and the money wired in from South Korea goes to the Chinese firms who have operations in North Korea.

The North Korean government knows of this use of brokers but is reluctant to try too hard to disrupt it. After all these brokers are bringing all that money into the North Korean economy each year. This new cash source has had some curious social side effects in North Korea. For example it has led to changing tastes in marriage partners. For decades a government official (especially secret policemen or diplomats) or military officer was the ideal candidate. Marriage brokers have long been used to help make matches and since 2009 tastes in spouses has shifted. Now the ideal candidate is from an entrepreneurial family or one that receives regular deliveries of hard currency smuggled in from family members who had illegally left North Korea. For decades such escapees were denounced as traitors. But as more of them got out (over 20,000 to South Korea since 2000 and even more to China) and prospered a robust smuggling networks developed to get remittances back to family in North Korea. These remittance families, especially those getting money from kin in South Korea, were obviously living better and the corruption in the North Korean bureaucracy had reached the point where these newly wealthy families were no longer harassed by the secret police or local officials. When families of officials want their kids to marry into these newly rich families you know there has been a fundamental shift in attitudes up north, despite what the Kim family and their inner circle want. Many government officials have seen where all these changes are going and are joining the entrepreneurial and illegal-migrant class themselves.

 


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