North Korea’s Two Tier Economy.

The World Affairs article, “The Defector’s Tale: Inside North Korea’s Secret Economy,” by Kim Kwang Jin provides a rare first-hand account of how the economy of the world’s most enigmatic totalitarian state, North Korea, actually works. The collapse of the Soviet Union in the 1990’s brought devastation to the largely dependent, and derivative, North Korean socialist economy. Kim Kwang Jin worked as a “revolution fund” manager at a North Korean front bank called North East Asia Bank in Singapore to which he and his family later defected after becoming disillusioned with the North Korean regime. Like many scholars, Kim Kwang Jin wonders how such a backward and isolated nation like North Korea was able to develop a nuclear weapon, given its lack of a functioning economy and any kind of desirable natural resources. The dual disasters of the collapse of the world socialist economic system that accompanied the loss of North Korea’s greatest benefactor and the death of Kim Il-sung on July 8th of 1994 precipitated a hard currency crisis that Kim Jong-Il knew could spell the end of his regime. This is why the North Korean economy diverged into a two tiered system, with one retaining the traditional socialist style economy and the other, what Kim Kwang Jin calls a “Royal Court Economy,” operating outside of central planning, and indeed, in many respects, also from any kind of monitoring. Kim Kwang Jin estimates this “shadow economy” produces some 200 times the amount of hard currency than the centrally planned North Korean “People’s Economy” produces, and it is this “shadow economy,” specifically constructed to suit the needs of the Kim dynasty and the regime’s elite, that has enabled North Korea to purchase the technology needed to make its nuclear weapons.

The fusion of the military and industrial complex that preceded the creation of a two tier economic system became with Kim Il-sung’s mobilization efforts in the 1970’s with the 1972 “Committee for Economy 2” providing the framework for establishing the infrastructure needed to merge the military and industrial sectors of the nation into a cohesive identity. The 1970’s were a heady time for North Korea, with its economy doing well, coupled with a renewed drive to reunite the peninsula under the D.P.R.K.’s flag. This was not to continue, however, with the 1980’s and the North’s various financial problems undermining much of the socialist economy even before the collapse of the Soviet system in 1991. The two tiered system was born as much out of necessity as it was the bifurcation of the “social” and “revolutionary” spheres. Kim Jong-Il’s creation of Korean Worker’s Party Office 39 to handle industry and trade, coupled with such institutions as the Daesong General Bureau, are examples of the two track economic system as these function separately from the centrally planned industries. Office 38 handles services and tourist operations within North Korea, the focus of its and its sibling Office 39 being in the generation of hard currency. Kim Kwang Jin asserts that, while these operations generate much needed hard currency for the regime, it is North Korea’s insurance fraud that generates the most money for the regime. In a comical story of purported insurance fraud against a British firm, North Korea filed a claim for insurance for a helicopter that had crashed, killing its occupants. The absurd story is as follows:

“In 2005, it was the North Korean airline, Air Koryo. When I met with an attorney working for a London-based reinsurer, I was told of an accident in North Korea in which a pregnant woman carrying triplets was riding in a helicopter that crashed into a warehouse. The amount claimed was preposterously high, but beyond that it was obvious to anyone with even a passing familiarity with North Korea that the story itself was forged.

In North Korea, the birth of triplets—read as a portent of national prosperity—is treated as extremely special, especially by Kim Jong-il. Families of such babies are given new homes with specially assigned nurses. Kim sends an ornamental “silver knife” to each of the triplets and assigns a helicopter to bring the pregnant woman to give birth in Pyongyang, where he hosts a birthday party and leaves detailed instructions for their future. In some cases, the triplets provide life-long propaganda for the state media, which covers their upbringing, education, military service, and loyalty to Kim, creating a sentimental attachment in the North Korean heart. At the same time, flying in a helicopter in North Korea is extremely unusual. Helicopters are used for the military, or to carry high-ranking foreigners (if permission is granted by Kim). A handful of North Korean high-ranking officials are also given this privilege. So the chance of a helicopter accident is slim, and the forging of an accident involving or ‘killing’ any prominent visitor or high-ranking North Korean official would be very difficult to pull off. A pregnant woman best suits the story, as conveying them to a hospital is an already known practice (at least to North Koreans) and ‘life casualties’ can add significantly to KNIC’s claim. Perhaps my colleagues at KNIC invented the story with the hope that, given what they assumed was a universal human veneration of women pregnant with triplets, it would stir a wave of sympathy among the reinsurers at the same time that it raised money. ”

The D.P.R.K. also makes money from its munitions sales, with funds gained from insurance fraud diverted to weapons development, which is handled by the Korean Workers’ Party Munitions Industry Department. The most prominent of banks created to service these “shadow economy” producers is Danchon Bank, believed to have assets totaling some $6 billion and with regional offices specializing in the arms and terror trade in the Middle East, Myanmar, and Africa. To quote: “Although North Koreans like exaggerating such figures, this does not diminish the fact that Danchon remains the largest bank in North Korea in terms of assets and operation volume. I estimate that the Danchon Bank may have handled several hundreds of millions of dollars every year, most of which are generated from sales and proliferation of WMDs.” Ultimately, Kim Kwang Jin is pessimistic of the ability of China, South Korea, the U.S. and Japan to bring North Korea to heel and actually pursue meaningful reform. He advocates, instead, for using the various financial levers these nations have over North Korea to bring about change on the peninsula. The development of a two-tiered economic system has long been speculated by North Korean scholars, but the exact details of how it operates remain obscured by North Korea’s opaque nature.

[World Affairs Journal]