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North Korea: Witness to Transformation

Slave to the Blog: Racketeering Edition

by | March 7th, 2013 | 07:00 am
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Several recent stories have reminded us of the rent-seeking nature of the North Korean regime. First up: summitry. Evan Ramstad at the WSJ’s Korea Real Time offers a summary of the revelation by outgoing President Lee Myung Bak about a possible 2009 summit, but the Chosun Ilbo fills in really important details.

The late summer of 2009 was one of those fleeting moments of hope when thaw was in the air. In his Independence Day speech on August 15, President Lee said the South was ready to start talks with North Korea “any time and at any level.” The death of Kim Dae Jung—the architect of the first North-South summit—provided cover for a four-man North Korean delegation headed by Kim Ki Nam to visit Seoul. Leaks that the North Korean delegation had proposed a summit were carried in the major South Korean dailies, although the Blue House denied that a summit had been discussed.

As it turns out, there was a discussion of a summit. But the message had apparently been conveyed—via the Chinese—from South to North rather than from North to South. Negotiations ensued in Singapore 2009 between former labor minister Lim Tae-hee from the South and the North’s Kim Yang Gon, director of the United Front department of the Workers’ Party. The sticking point was money. How much? According to the Chosun Ilbo, $500-600 million in rice and fertilizer aid, which had effectively been cut from the first of the year, and perhaps some cash too; that was about the price that Kim Dae Jung paid for the first summit. Negotiations continued through November at Kaesong, when the North Korean delegation even presented a draft summit declaration including a resumption of aid.

A key principle of racketeering is that your threats have to be credible if the mark refuses to pay following the shakedown. Very shortly after this effort failed to pay out, we had the sinking of the Cheonan. The link between the failed summit negotiations and the Cheonan episode is by no means implausible to us; North Korean policy turned hostile in a hurry after the first of 2010.

Next up, law suits. Last week, North Korea announced it planned to sue Taipower  for US$10.1 (NT$300 million) for failure to fulfill a contract. Taipower signed the contract in January 1997 to dispose of 60,000 barrels of low-level radioactive waste in an abandoned coal mine in Pyongsan, North Hwanghae Province. But Taipower reneged on the deal under international pressure, concerns about the inadequacy of the storage site, and failure to secure permits to export the material from Taiwan’s nuclear regulatory commission. North Korea is now suing for the cost of building the disposal site. In fairness to North Korea, they may have a legitimate business grievance. But how would we know given the track record? In any case, it’s amusing to contemplate North Korea trying to sue its way out of the net of sanctions that the rest of the world has imposed as a result of its petulant behavior.

So what is all of this cash needed for? Simple: sidepayments. Radio Free Asia reports that the Young General has resorted to about the most transparent form of loyalty-buying that can be conceived: direct transfers to high-ranking military officers onto cash cards. Money on the cards can be spent at stores and restaurants equipped with card readers that accept foreign currency. Four-star generals reportedly get around U.S. $1,200 each month on their cards, three-star generals get U.S. $1,000 and two-star generals make U.S. $700. These payments are on top of their monthly salaries. At 2000-6000 won, the average government worker’s monthly salary is about $0.70 to $2 at prevailing market exchange rates; thank goodness for purchasing power parity. Nonetheless, this kind of extravagance makes recent estimates of the distribution of income more plausible. My colleague Marc Noland has recently reported on estimates that would put North as one of the more unequal countries on earth.