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

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 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.

"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."

​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.

"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)