Policy Area: Economy

The Shakedown State
Nicholas Eberstadt, American Enterprise Institute, October 31, 2003.

If we want to understand how North Korea has managed to survive despite literally disastrous economic mismanagement--without giving up its membership in a recently reduced "Axis of Evil"--we might want to observe the famous political dictum: "follow the money."

Pyongyang's international trade and financial flows, indeed, provide a clear, if disturbing, glimpse into the playbook that brought us to the current North Korean nuclear crisis.

How do we "follow the money" in the case of a hypersecretive state like the North Korea (a.k.a. the Democratic People's Republic of Korea, or DPRK) given that the government has never even published a statistical yearbook since it came to power in 1948? The answer: we can reconstruct North Korea's trade situation, based upon the reports of its trading partners, summarized on a worldwide basis. As one might imagine, such "mirror statistics" (as specialists call them) about North Korea's global commerce are not perfect--far from it! But the tale they tell is clear and consistent.

North Korea's normal commercial exports collapsed with the end of the Soviet empire, and they have have never recovered. Although "mirror statistics" detect a slight uptick in such North Korean sales over the last few years, the 2002 total (the most recent year for which we have such global numbers) was still down at least 60 percent from 1990, the era of politically determined Soviet purchases of DPRK goods.

No other government on the current scene has suffered such a severe, and prolonged, commercial export failure. North Korea's civilian sector exports amounted to less than $40 per person a year in 2002: an extraordinarily low level for a population that is both literate and mainly urban. To go by the money trail, the DPRK today looks like a state essentially without visible means of support.

Yet this apparent lack of legitimate earnings has not obviously constrained North Korea from procuring goods and merchandise from around the world in recent years. Quite the contrary: between 1998, the year that Kim Jong Il formally assumed Pyongyang's "highest post of state," and last year, the DPRK's reported imports nearly doubled, jumping by close to a billion dollars over the interim.

While North Korea's 2002 import level was hardly sufficient to bring the good life to all its citizens, it was manifestly adequate to keep the state machine running according to its own fashion. No less important for North Korea's future prospects, 2002 saw the highest reported level of inflows of foreign supplies since the demise of Soviet socialism.

The excess of reported imports over identifiable commercial exports is a more or less permanent feature of North Korea's international accounts--but the size of that margin varies by the year, and those fluctuations bear directly on the health of the North Korean system.

In 1994, the year of the last big North Korean nuclear drama, this margin amounted to about $500 million. By no coincidence, the following year the North Korean state acknowledged a food crisis at home and issued a desperate all-points appeal for international humanitarian aid. Between 1996 and 1998--when this margin averaged just $550 million a year--North Korea was in the grip of a famine that was killing hundreds of thousands a year, and Pyongyang grimly described the country's plight as an "Arduous March."

By 2002, however, North Korea's visible import surplus shot up to nearly $1.2 billion--over twice the "Arduous March" level. Thanks in large measure to this upswing in net reported external resources, the talk in Pyongyang's media today is no longer about the food problem, but instead about Pyongyang's own preferred priorities: things like "military first politics" and becoming a "strong and prosperous state."

Ever since its founding in 1948, North Korea has relied heavily on aid from Communist allies. But North Korea's jump in international spending over the past five or six years cannot be explained by aid from Beijing, much less, of course, Moscow. During the "Arduous March" years of the mid-to-late 1990s, China permitted a trade imbalance with the DPRK that averaged about $430 million. That de-facto lifeline then accounted for practically all (nearly four-fifths) the extra goods North Korea procured in excess of its commercial earnings.

But China's implicit aid for North Korea has been going down, not up, of late. In fact, according to Chinese trade figures, Beijing's implicit net transfer of resources to Pyongyang in 2002 was $270 million, about $200 million less than in the previous year and was the smallest annual Chinese bequest to the DPRK since the fall of the USSR.

If we factor China out of the picture, a truly striking trend emerges from North Korea's trade flows. In 1997, leaving out Chinese assistance, North Korea reportedly managed to pull in less than $100 million in imports not covered by its legitimate commercial exports. By 2002, this total had risen to $900 million. Clearly, the DPRK was developing new means of state finance--but we're not talking about bank loans here. North Korea has been a financial pariah since its debt default in the 1970s: business with Pyongyang today is strictly cash-and-carry.

So what are Pyongyang's new, non-visible, avenues of revenue generation? The general picture will be familiar to attentive reader of the past few years' international news accounts. There was official aid from capitalist countries--South Korea, the U.S., Japan, the EU--most of it given the promise of shutting down the DPRK nuclear program, or the hope of better North-South relations.

There were also illicit foreign aid payments. As is now known, Nobel Peace Laureate Kim Dae Jung's government secretly paid Kim Jong Il hundreds of millions of dollars to purchase the then-heralded June 2000 Pyongyang summit.

State-sponsored counterfeiting is reportedly a growth industry for North Korea, along with state-sponsored drug trafficking. And then, of course, there is the DPRK's notorious retailing of military goods (a commerce that readers from the Middle East will already know about all too well).

If we match up these "mirror statistics" with the news headlines, we see the outlines of a survival strategy for what we might call a "shakedown state."

North Korea's leadership abhors the prospect of expanding its normal trade with the outside world --indeed, it calls such peaceable transactions "ideological and cultural infiltration," and attributes the downfall of the Soviet empire to commerce-based subversion. To protect its own totalitarian system from potentially destabilizing external contamination, North Korea's leadership has specialized in exporting strategic instability and living off the protection payments it extracts from the outside world.

In Washington, Seoul, Beijing and Tokyo today, hopes are still high that North Korea can eventually be talked into trading away, or selling off, its nuclear program. North Korea's money flows cast a somber light on that prospect. It seems exceedingly unlikely that a skilled international extortionist would voluntarily give up such a promising tool for the trade, especially when the alternative of earning an honest living is judged to be potentially lethal to his system.

Nicholas Eberstadt holds the Henry Wendt Chair in Political Economy at the American Enterprise Institute and is author of The End of North Korea.

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