Even North Korea has a currency market, albeit a black one. The recent movements of the US dollar reveal a lot about what’s going wrong in this “workers’ paradise”.
The official exchange rate in the north is Wn150 to the dollar. But since late last year the greenback has soared from around Wn2,000 to Wn2,600 on the black market. The latest market update, courtesy of North Korean defectors, says that in the capital Pyongyang or in Shinuiju, the main border town with China, a dollar will get you Wn3,800 to Wn4,000. As the average monthly salary is around Wn3,000, that takes wages to less than a dollar a month.
Whenever the future of the Democratic People’s Republic of Korea looks particularly bleak, North Koreans start getting rid of their won, hoarding dollars and hiding their valuables. Some fear a war and hope the dollars will come in handy when the GIs invade. Others know from past experience that, whenever Kim Jong Il runs short of money, he will again find ways of squeezing the populace and seizing their valuables.
North Koreans cannot help but believe that war could break out at anytime since they are constantly told this. But for the moment, Washington’s offensive is financial, not military. Precisely because Kim Jong Il is so short of hard currency, some North Koreans fear the regime could fall.
Blacklisted
Last autumn, the US blacklisted the Banco Delta Asia SARL (BDA) in Macao, and nervous depositors rushed to withdraw their deposits. In a desperate attempt to stay solvent, the BDA announced it was cutting all ties with Pyongyang and froze nearly 50 accounts linked with North Korean companies and institutions.
Many of these accounts are used by the Kim dynasty to handle its business transactions. When North Korean officials arrived in Macau demanding that the money be released, the Macau authorities expelled them.
Washington has also announced penalties against any shipping company doing business with Pyongyang, and has targeted a small Hong Kong subsidiary of the Bank of China for holding what was said to be up to $2.7 million in fake US currency. Japan too has joined in the sanctions, cutting off a steady flow of remittances from Korean Japanese loyal to Pyongyang.
The sanctions are the result of a lengthy criminal investigation in the US, and the arrest of dozens of Asian gang members primarily involved in counterfeiting and drug smuggling.
North Korea earns an estimated $2 billion a year from illegal trafficking in arms, drugs, fake currencies, counterfeit cigarettes and medicines and other contraband like ivory. Over the past 20 years, dozens of North Korean diplomats have been expelled from countries around the world after being caught engaging in such illegal activities.
While there is little doubt that North Korea is guilty as charged, it is the timing that is causing the most alarm – and not just in North Korea. What is Washington signalling by its latest moves?
The financial sanctions came into effect just when an agreement was reached in Beijing last September by all six countries taking part in the six-party talks on North Korea’s nuclear programme. Since the sanctions, Pyongyang has refused to return to the talks, and there now seems little prospect of a breakthrough while President Bush remains in office.
China initiated the talks after the Iraq invasion, hoping to prevent North Korea from being referred to the UN Security Council by the US. After North Korea admitted to an American official that it had indeed breached the 1994 Agreed Framework, Washington threatened to bomb North Korea, a threat that then seemed credible.
In 1994 the two countries came close to full-scale war, when President Clinton reached a temporary deal with Kim Jong Il’s father, Kim Il Sung, that might have paved the way to a normalization of relations. Kim Il Sung died shortly afterwards, but Clinton doggedly carried on with an engagement policy.
Just months before the Clinton administration left office, secretary of state Madeleine Albright made a trip to Pyongyang to propose a summit in Washington. Kim Jong Il rejected the invitation and insisted the Americans come to Pyongyang, an invitation that Clinton turned down, preferring to negotiate with Yasser Arafat.
Disappointments
Some believe that if only Kim Jong Il could win the trust of the Americans (together with the right security guarantees and aid), then Kim would lead North Korea down the path of Chinese-style reforms. Such hopes have been repeatedly raised and then quickly dashed over the past 25 years.
North Korea promulgated its first foreign investment laws back in 1984. It has opened and closed special economic zones, authorized markets and small businesses and then closed them. It has promised to reform the currency, to lift wages and to end rationing. It has even sent students abroad to study market economy. No coherent programme has ever emerged from all this.
The latest round of “reforms” started in 2002, but has proved yet another disappointment. After legalizing the existence of “farmers’ markets” and ending grain rationing, North Korea reintroduced grain rationing last autumn, closed the markets and expelled the UN and other foreign aid workers.
No one knows how to explain this behaviour. It might be a function of Kim Jong Il’s capricious character; or domestic political factors such as the intrigues of “hardliners”; or perhaps North Korea is simply responding to the shifting geopolitical pressures.
Empty promises?
Throughout its existence, North Korea has survived on foreign aid and has always managed to switch from one patron to the next, promising each in turn whatever they wanted to hear. In the 1980s, it was the Soviet Union, then it was the US and the United Nations. More recently, it has been China and South Korea, who together have pumped in around $2 billion in aid a year.
Generally, its patrons have little to show in return for their generosity. South Korea has for the past eight years given unstinting diplomatic and financial support to Kim Jong Il but has gained no tangible benefits – no reciprocal visits, no family exchanges, no domestic reforms, and no end to the nuclear programme.
This may be because Seoul and Washington have been pulling in opposite directions. In any case, if Washington’s economic sanctions continue to snowball, then Seoul will be forced to drop its showcase projects, such as the investment by South Korean firms in the Kaesong economic zones, and Hyundai’s tourist project in the Diamond mountains. Chinese companies and banks that do business with North Korea could be targeted too.
The result would either be to force Pyongyang back to the negotiating table or, as seems more likely, to disrupt all North Korea’s economic dealings with the outside world for the next three years. No reform would be possible under these conditions.
Jasper Becker is the author of Rogue state: the continuing threat of North Korea (OUP, New York, 2005)