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North Korea’s Economy Flagging under Crippling International Sanctions, Threaten Old and New Elites

The overall lack of cash and the government’s confiscation of what it finds among the elite are creating discontent but not so much as to trigger organized unrest

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north korea's economy, international sanctions
North Korean Leader Kim Jong Un visits Taesong Department Store just before its opening, in this photo released April 8, 2019, by North Korea's Korean Central News Agency. VOA

By all accounts, North Korea’s cash-strapped economy is flagging under crippling international sanctions and the slowdown means the traditional elite and a rising merchant class may be feeling pinched, experts say.

“The elites in Pyongyang are really feeling it,” said Joshua Stanton, a Washington attorney who helped draft the North Korean Sanctions Enforcement Act in 2016.

“They’re having a very tough time right now. I think they’re losing their wealth rapidly. And they’re concerned about the government’s policies and directions, and the failure to get sanctions lifted in Hanoi,” he continued.

north korea's economy, international sanctions
People walk beneath portraits of late leaders, Kim Il Sung, left, and Kim Jong Il, in Pyongyang, North Korea, April 18, 2017. VOA

North Korean aristocrats

The most privileged government and military officials, considered North Korea’s aristocrats, are estimated to number about 2,000 people. Born into families who backed the country’s founder, Kim Il Sung in the 1940s and 1950s, they are fiercely loyal to the Kim dynasty, said William Brown, former CIA analyst and a North Korea economy expert.

Despite their fealty to current leader Kim Jong Un, this top echelon of what is supposed to be a classless society is losing money. The state-run enterprises they control in the centrally planned socialist economy — heavy industries such as mining and light industries such as textile and clothing factories — have been hit hard by the sanctions that President Donald Trump refused to lift at the Hanoi summit earlier this year, demanding that North Korea agree to full denuclearization as a precondition for relief.

These families share their profits from state enterprises with a newer privileged class, the merchants called donju, who help the aristocrats by facilitating the export of goods produced from state-run mines, farms and factories or by selling them domestically now that sanctions make overseas trade difficult, Brown, the economy expert, said.

Similar to oligarchs or private entrepreneurs and capitalists by the Western standards, the donju emerged from the market economy, which grew out of the country’s worst famine in the 1990s as workers, paid by the state in food rations, started trading whatever they could find for food on black markets. The markets established in a time of shortages were legitimized, then encouraged under Kim. Today, the donju partner with the elite families, providing funds for construction projects such as building apartments in Pyongyang while the families provide labor, usually workers they re-assign from state-owned enterprises.

north korea's economy, international sanctions
North Korean Leader Kim Jong Un visits Taesong Department Store just before its opening, in this photo released April 8, 2019 by North Korea’s Korean Central News Agency. VOA

“The donju touch on about just everything, everything from construction to manufacturing to things happening in the markets to transportation issues,” said Ken Gause, director of the International Affairs Group at the Center for Naval Analyses.

“Right now, they’re under increasing pressure in terms of … getting the hard currency that they need in order to continue to do various projects that they do inside North Korea, which allows them to maintain their influence that they have within the regime and on the society,” he added.

Limiting luxuries, confiscating wealth

Unlike ordinary North Koreans, members of these privileged classes enjoy a luxurious lifestyle. Some drive imported cars. Some occasionally travel abroad. Others send their children to the country’s prestigious Kim Il Sung University, Kim Jong Un’s alma mater.

But as the government runs ever shorter on hard currency, it’s confiscating their wealth.

“[The] North Korean government has always historically used a lot of its money to keep those people happy,” said Stanton, listing gifts of luxury goods, apartments and “access to … material wealth.”

But that’s changing, Stanton said, “because the government is running out of money, it’s doing a lot of anti-corruption investigations and inspections. It’s trying to find their money, their savings, any cash that they have stored away, any bank accounts that they have in China, any wealth that they’ve accumulated.”

The overall lack of cash and the government’s confiscation of what it finds among the elite are creating discontent but not so much as to trigger organized unrest.

“They could put pressure on Kim definitely,” Brown said. “But [as] more of a loyal opposition rather than a radical opposition. I think … the most likely unrest would come from workers, state enterprise laborers, miners, people who are working for the state and who are barely being paid at all, and have to go into the marketplace to make a living.”

international sanctions, north korea's economy
FILE – In this Sept. 9, 2016, photo, a man watches a TV news program reporting North Korea’s nuclear test at Seoul Railway Station in Seoul, South Korea. North Korea has conducted five nuclear tests at its Punggye-ri site, the first in 2006. VOA

A ‘mounting toll’

In October 2006, the U.N. Security Council (UNSC) imposed sanctions on North Korea in response to Pyongyang’s first nuclear weapons test. They were designed to pressure North Korea into ending its nuclear ambitions by banning sales to Pyongyang of heavy weaponry, missile technology and material, and select luxury goods, according to a Council on Foreign Relations backgrounder. In March 2016, the UNSC sanctioned sales of aviation fuel to North Korea after its fourth nuclear test.

Since November 2016, after Pyongyang’s fifth nuclear test, the UNSC has aimed sanctions at North Korea’s economy by banning its export of key commodities such as copper, coal, seafood, textiles and labor.

The sanctions were aimed at cutting off foreign currency flowing into the country — most of the wages paid to North Korean workers contracted to work overseas ended up in Pyongyang — and the UNSC capped North Korea’s imports of the crude oil and refined petroleum that the country needs to sustain its economy and run the military.

Since Trump took office in 2017, the U.S. has issued its own set of sanctions through the so-called “maximum pressure campaign,” which blocks from the U.S. financial system any foreign business or individual involved in trade with North Korea, and exposes any assets of the foreign businesses or individual to seizure by the U.S. government. Last week, U.S. officials seized a North Korean ship allegedly used in the illegal coal trade.

international sanctions, north korea's economy
Undated photo released by the U.S. Justice Dept. on May 9, 2019 shows the North Korean cargo ship ‘Wise Honest’. VOA

“I’m convinced that the international and other sanctions on North Korea are taking a mounting toll on [North Korean] economy,” said Evans Revere, former State Department official in the George W. Bush administration.

“The pressure from sanctions and related measures may not now be enough to destabilize the regime,” he added, “but if these measures remain in place, and especially if more sanctions and other measures are applied, they have the potential to do so.”

Economic growth impaired

According to a report on 38North, a website devoted to analyzing North Korea, the growth rate of the country’s economy in 2018 was 4.6%, the lowest since 2006, based on the assessment it made from the data on North Korea’s 2019 budget reported at its parliamentary session in April.

“This corresponds with Western reports on sanctions, especially those issued since 2017, having an impact on North Korea’s economy,” the report said.

Troy Stangarone, senior director at the Korean Economic Institute, said, “Kim Jong Un does face a dilemma” of how long he can “continue on the current path without sanctions relief.”

Many coal mines in North Korea are reportedly closed because of a drop in coal exports, and transportation and military sectors are also struggling because they are running short on raw materials.

Scores of government-backed factories closed after the Hanoi summit, and workers were told to find work elsewhere because the factories are unable to keep the lights on, pay their workers or provide food rations.

“What we have now is a situation where North Korea’s heavy industry appears to be collapsing,” Stanton said. “The effect of this is going to become more noticeable in the coming weeks and months.”

Rations reduced

North Korea is currently facing a food crisis with more than 10 million people estimated to be without enough food to last until next year, according to a U.N. report on the country’s food security issued earlier this month.

As the state-enterprises are failing, displaced factory workers are turning to the private markets to make money, much as they did in the 1990s.

“It allows people to get off the official economy, the economy that is controlled by the state, which has basically dried up early since the ’90s, into the 2000s, and the 2010,” Gause said. “That part of the top-down economy has been weaker and weaker, and the markets have basically filled in the gaps.”

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Stangarone said, “As long as North Korea’s able to control the flow of information and maintain control of the population, I think this shift towards marketization is probably permanent.”

Gause said, “If [Kim] is not able to show progress on [economy] … either one, he’s got to re-engage in diplomacy with the United States and see if he can get sanctions relief there or he has to potentially go toward more brinkmanship in order to try to reset the chess board.” (VOA)

Next Story

North Korea Bans Imports of Chinese Pork on Fears of African Swine Fever Epidemic

“North Koreans prefer Chinese pork to domestically produced pork, because it has thicker layers of meat and fat,” said the source

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chinese pork, african swine fever
The import ban seems to have had no effect on the price of pork, making the source believe that Chinese pork is still getting in. Wikimedia Commons

North Korean authorities have banned imports of Chinese pork as an African swine fever (ASF) epidemic rages north of the Yalu River border between the two countries.

According to the latest update from the U.N. Food and Agriculture Organization, China has seen 138 ASF outbreaks since August 2018 and more than a million pigs have been culled since the initial outbreak in Liaoning province, which borders North Korea.

North Korea’s ministry of agriculture confirmed the country’s first ASF outbreak in Chagang province on May 23 and South Korea’s ministry of unification has proposed discussions on how the two Koreas can work together to stop the further spread of the disease.

But RFA sources in North Korea say Chinese pork is still being sold in local markets. “A few days ago I heard from a customs official that North Korea has completely blocked all imports of pork and beef from China to prevent the spread of African swine fever,” said a source from North Hamgyong province in an interview with RFA’s Korean Service on June 2.

chinese pork, african swine fever
Pigs stand in a barn at a pig farm in Jiangjiaqiao village in northern China’s Hebei province on May 8, 2019. Pork lovers worldwide are wincing at prices that have jumped by up to 40 percent as China’s struggle to stamp out African swine fever in its vast pig herds sends shockwaves through global meat markets. RFA

“North Koreans prefer Chinese pork to domestically produced pork, because it has thicker layers of meat and fat,” said the source. “I heard that in some areas, including Pyongyang and Sinuiju, they are trying to control pork sales, but no action has been taken yet in North Hamgyong,” said the source. The source said that the ban is quite rare, especially since diseases among livestock are common during this part of the year.

“There have been infectious swine diseases in the past, but they never banned the import of pork from China. At this time of year, we are usually hit with infectious swine diseases and many pigs are culled, but none of the residents bury the dead pigs,” the source said. The import ban seems to have had no effect on the price of pork, making the source believe that Chinese pork is still getting in.

“The price of pork is between 14 and 15 Chinese Yuan (slightly more than $2) per kilogram, which is the same as before the authorities banned Chinese pork. Even though customs authorities are blocking pork imports from China, there is so much pork being smuggled in,” the source said. Another source, also from North Hamgyong, said the ban is strange, given that North Korean customs officials generally follow the lead of their Chinese counterparts.

“On the first of the month, pork that was to be brought in from China was quarantined at North Korean customs and sent back. It is unusual for our customs office to block this pork shipment because it didn’t have any problem going through Chinese customs,” said the second source.

“That [particular] pork shipment was to be brought in by a Chinese citizen of Korean descent who is a restaurant owner in Rason,” the second source said. “He thought there would be no problem going through customs because he regularly brings in pork from China. But the Wonjong customs office did not let it pass through on orders from the Central Committee,” the second source said.

chinese pork, african swine fever
“North Koreans prefer Chinese pork to domestically produced pork, because it has thicker layers of meat and fat,” said the source. Wikimedia Commons

The second source said the restaurant owner was surprised his shipment was held back. “He has had no problem bringing in pork from China for several years now. Even when swine fever [started] spreading in China, he kept bringing it in. It’s the first time he has been stopped and he’s totally bewildered,” the second source said.

The second source said that the price of pork remains stable despite the ban, and no cases of ASF have been reported in Rason. Even so, residents have become fearful of the disease.

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“[They think] African swine fever is highly contagious and has a fatality rate of 100%, but Chinese pork is still being sold at the local markets and no restrictions have been announced,” said the second source. According to a USDA fact sheet, ASF is deadly only to domestic and feral pigs and does not affect humans. People can, however, spread the virus by coming in contact with the bodily fluids of infected livestock.

According to a source in South Pyongan province, North Korea has not culled pigs in any of its state-run farms where an ASF outbreak has occurred. The pigs instead were supplied to sausage factories at low cost. This has caused a flood of sausages to enter the market, cutting the price of sausage in half. (RFA)

Reported by Jieun Kim for RFA’s Korean Service. Translated by Leejin Jun. Written in English by Eugene Whong.