Publication: China Brief Volume: 3 Issue: 12

By Gordon G. Chang

China’s problem is that it is stuck in the middle of the reform process, while North Korea’s is that it is just starting it. To arrest the continued deterioration of North Korea’s economy, Kim Jong-il, the communist world’s first and only hereditary leader, put his personal stamp on sweeping economic reforms implemented last July. Pyongyang formally ended the rationing system, which wasn’t functioning anyway. The government started buying food at prices that approximated those on the booming black market. Wages were immediately raised. People–and state enterprises–were forced to pay their own way. In theory, the sweeping plan made sense.

In practice, it has been a disaster. Kim’s program was inherently inflationary, and the government only aggravated the problem by printing more money than it needed to, perhaps to cripple the “shadow economy” by debasing the currency held by private traders.

The effects on the economy were dramatic. The price of rice, the North Korean staple, increased 4,000 percent, and other items went up even more. Wages skyrocketed between 900 and 1,500 percent.

As the Washington Post reports, “runaway inflation is emptying millions of pocketbooks and bottlenecks in production are causing widespread shortages.” Some factories have stopped paying the higher wages that the newspaper called “the cornerstone of the reforms.” Others have stopped paying cash to employees altogether. Coupons are handed to workers, but there are few goods to acquire with the new unofficial currency. Moreover, some workers are paid with ten-year, zero-coupon bonds. In an era of high inflation they are almost worthless.

After the government mishandled the recent round of economic reforms, the currency went into free fall. Earlier, the U.S. dollar fetched 2 won. Today, the greenback gets 142 won at official rates and 700 on the black market. In March of this year the government announced that it would, for the first time in its history, issue bonds. Analysts say that the “people’s life bonds” will account for 10 percent of the government’s receipts.

“It’s not like it was in 1997 when people were starving to death,” said Lee Xiangyu, a North Korean. She had escaped to China but was apprehended by the authorities. They sent her back to her homeland, where she was imprisoned for fleeing the country. “But it’s worse in a way. Because everybody had hope for a little while and now they are desperate again.” Lee knows the meaning of desperation. After her jailing, she again sneaked into China because there was no money back home–prices were rising and the large raises were not being paid.

“Their new economic policy has failed,” says Oh Seung Yul, an economist in Seoul at the Korea Institute for National Unification. “The North Korean economy does not have the capacity to rehabilitate itself through its own efforts,” says Yoon Duk-ryong of the Korea Institute for International Economic Policy. The researcher at this thinktank run by Seoul believes that North Korea is not even saving enough to cover current depreciation of plant and equipment. Factories are being taken apart and sold as scrap in neighboring China. Public infrastructure is in a state of decay, Reuters reports, and some of it is beyond repair.

“At the moment, they’re basically a post-industrial society, a subsistence economy by and large,” says Mike Newton, an HSBC economist. “Everyone’s talking about the economic collapse of North Korea as though it’s some sort of future event. The reality is that it’s happening now.”

And that is why the authorities are taking steps to keep the North Korean people in check. The apparent failure of last July’s reforms has persuaded the government to vigorously enforce the permit system, which limits travel outside of a North Korean’s home province. The system was relaxed during the middle of last decade when the worst of the famine forced North Koreans to search for food, but it was reintroduced at the end of that decade as the crisis subsided. Now the authorities are again stepping up enforcement to control population movements, according to this past April’s Far Eastern Economic Review.

It looks almost as though political disintegration will follow economic failure right away. Some bureaucrats are refusing to follow orders from the North Korean capital, so social order could dissolve without a local government presence. And as a U.S. Army officer in Seoul told Reuters, “When people are eating dirt to satiate their hunger, it is hard to stay in power.”

It is true that no society constantly on the verge of economic failure can continue functioning forever–eventually something has to give. The issue is not whether the North Korean regime will fall. It will, of course, at some point. The issue for policymakers is when will it fail. As we have seen, some societies are able to withstand pressures that would break lesser nations. Abnormal North Korea, unfortunately, has defied the assessments of many analysts. “Outsiders have predicted and planned for the collapse of North Korea for years, but the communist government of Kim Jong-il has time and again proved the political obituaries to be premature,” writes Reuters.

There were predictions that North Korea would crash in 1994 when Kim Il-sung died and his son, Kim Jong-il, took over. And who would have thought the government could survive the famine of the mid-1990s, when perhaps two million North Koreans, almost 10 percent of the population, starved to death? In the middle of the last decade the administration of Bill Clinton reasonably believed that the North would soon fall apart.

Today there are some who think the downfall of the system is just a matter of time, but that assessment should not be the basis of American policy towards Pyongyang. “It would be hard to starve North Korea into submission because that society did not collapse in the mid-1990s when things were really bad,” points out Charles Armstrong of New York’s Columbia University. If we doubt this academic, we only have to remember that the worst famine in history, the one caused by Mao Zedong’s Great Leap Forward, did not substantially endanger the stability of the Chinese state.

As much as we might like to see a better government in Pyongyang, the current regime is probably secure for the present time. The normal rules of social stability do not seem to apply to that zany land. “A country as badly off as North Korea, it only seems natural that there would be some unrest,” says a Western diplomat in Seoul. “But we don’t see serious signs of opposition.” Ivan Oelrich of the Federation of American Scientists agrees. Referring to Kim Jong-il, the Washington, DC-based analyst notes, “I don’t think he’s worried about the peasants picking up bamboo poles and beating them on the gates of the palace.”

Thomas Hubbard, the American ambassador, explains why the people appear to be in no mood for rebellion. Referring to the North Koreans, he says: “They seem to be sustained only by an irrational fear of the United States, and an equally irrational adulation of their own leadership, both of which they have been taught for decades in complete isolation from the rest of the world.” The North Korean people are too isolated to know the truth and too weak to oppose the regime even if they did. As one North Korean refugee recently told Dow Jones, when you spend six hours a day wandering the countryside for potable water, you don’t have much time for bringing down the government.

Gordon G. Chang is the author of The Coming Collapse of China, published by Random House.