Morale: Despots Can Breathe Easier

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November 21, 2018: South Korean intelligence estimates that North Korea has spent at least $4 billion on imported luxury goods since current leader Kim Jong Un took over in 2012. Despite growing sanctions, those luxury imports have continued and in 2017 averaged about $50 million dollars a month. Analyzing Chinese customs data it was found that about half the money spent since 2012 went for consumer electronics, a third went for luxury cars. The rest went for items like liquor, non-electronic consumer gadgets, high-end appliances, luxury home furnishings, clothing (fur coats and quality materials for custom-made suits and dresses), cosmetics, luxury watches and jewelry.

North Koreans are hungry because of these imports because, in 2017, diverting the cash to basic foods would have tripled the tonnage of rice imported. One reason more North Koreans are not enraged by these luxury imports is that over half the senior officials and their families live in Pyongyang, the capital, which has always been the modern looking and affluent area in the country. Most North Koreans never get to visit the capital and personally witness all that wealth. Residence in the capital requires official permission and that is difficult to get. Police are constantly tracking down and arresting those living in the capital without permission. Another attraction of the capital is that it is one of the few areas in North Korea where there is a regular and reliable electricity supply. For all those reasons the capital is seen as a very special place and even hungry North Koreans can appreciate the need to impress foreigners, because living conditions in the rest of North Korea are not impressive at all.

Since 2014 a growing number of high level North Korean defectors brought with them more details on how the North Korean dictatorship kept its key political, administrative, security and scientific personnel happy by raising foreign currency and using it to buy and smuggle in consumer and luxury goods. The foreign currency earning schemes were often illegal and the North Koreans working on them were told that the money earned was being used for the public good. Many senior officials left when they discovered what all this foreign currency was really buying. Defectors like this worry the North Korean leadership a great deal.

That few percent of the population that runs North Korea are now beginning to worry more about basic survival, rather than getting a new iPhone, sound system or flat screen TV. But these fears are have not been widespread enough to cause any changes in policy. That is slowly changing as more senior ranking defectors get out and go public with what they witnessed or participated in. Sales of weapons technology and weapons (ballistic missiles) was long a major source of foreign currency. This has been known since the 1990s and foreign nations began pushing back. By 2007 North Korea was visibly angry about the increasing trade sanctions imposed by Japan. In retaliation, North Korea declared that all Japanese goods must be removed from the capital and major cities within three years. That meant no Japanese cars, appliances, food products and, in general, anything that would be seen in public. The shortage of Japanese luxury goods was a big deal with the wealthy party and military elite because Japanese cigarettes were particularly popular, and addictive. At the time most cigarettes cost about fifty cents a pack, while Japanese brands usually cost nearly four dollars. Because of the 2007 decree, you could not get the Japanese stuff at any price, and a lot of well-off North Koreans were not happy. More recently there was a similar banning campaign against South Korean goodies.

Although GDP increased by 25 percent since 2005, most of that increase went to the military and the few thousand families that run the country. They have Western gadgets, new cars and impressive homes (visible on Google Earth) outside the capital. Inside Pyongyang, there is a lot of new construction, including stores selling luxury goods. In the rest of the country, all you see is poorly maintained slums with frequent electrical blackouts and growing shortages of fuel for heating and transportation. The GDP growth comes largely by allowing Chinese firms to operate mines and factories, using cheaper North Korean labor. The government seizes most of the profits from this increased economic activity, leaving most North Koreans with less than they had a decade earlier. This caused growing unrest, including anti-government graffiti (unknown a decade ago) and more people fleeing to China and from there to South Korea with details of the hell up north. China has been urging North Korea to allow economic freedom, as China did in the 1980s. But many in the North Korean leadership believe this would lead to revolution and ultimately be a catastrophe for them. The U.S. and many other aid donors have told North Korea that they will only resume food aid if the north will allow foreign officials to monitor the distribution. American food aid was halted in 2009 when North Korea expelled these observers. North Korea had been increasingly selling food aid to raise cash for imports (of weapons and luxury goods). The north cannot do this with observers present and refuses to back off on this policy.

The impact of China enforcing all the UN trade sanctions against North Korea has, since it began in early 2018, caused serious shortages of foreign currency. This is how you measure the true impact of any sanctions on North Korea and you know the sanctions are bad when Chinese exporters of consumer goods for the North Korean ruling class (two or three percent of the population, including immediate family, who run the government, universities, research centers and security forces) are now demanding cash in advance. China is the main access point for the thousands of luxury items North Korea imports each month to keep their ruling class content and willing to do what it takes to keep the Kim dynasty in power. There are numerous reports from China about exporters losing sales of these goods to North Korea because bills are not being paid. So suppliers are demanding cash in advance and the North Koreans don’t have it. The Chinese suppliers are complaining to anyone who will listen because this trade with North Korea is big business in some Chinese cities on the border.

Another side effect of the new (since the 1990s) entrepreneur (donju) class in North Korea is that a growing number of donju are openly providing luxury goods for the North Korean upper class. This is seen mostly in the capital, where most of the senior officials and their families live. Although this helps keep the senior leadership and their families loyal it is causing less affluent (95 percent of the population) North Koreans to talk about the need for another communist revolution. This is reminiscent of what happened in the Soviet Union towards the end, where there were several jokes about members of ruling families discussing their continued high-living standards until the most elderly member of the family, who remember why and how the original 1917 revolution broke out, ask “but what if the Reds (communists) come back?”

 


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