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     Aug 10, 2011

The secret world of North Korea's new rich
By Andrei Lankov

SEOUL - When people in the West talk about North Korea, they usually imagine a country of hunger and floods, populated by starving children, subsistence farmers and goose-stepping female soldiers. These stereotypes - like nearly all stereotypes - are not completely unfounded, but misleading nonetheless.

North Korea is a poor place, no doubt, even though recent reports about looming famine seem to be part exaggeration and part deliberate stratagem, initiated by the regime to obtain aid from the international community. Nonetheless, 2011 Pyongyang has a booming restaurant scene and the traffic on its broad streets - once notoriously empty - is steadily increasing in volume.

Well-fed North Koreans are frequenting newly opened sushi bars and beer houses as well as a local hamburger joint. On the streets of the North Korean capital, one can see a lot of visibly

undernourished people, but also a number of women clad in designer clothes.

One should not be surprised by these sights, which can be encountered not only in Pyongyang, but also in a number of major North Korean cities.

The past 20 years saw the slow-motion collapse of a hyper-centralized economy that was once a defining feature of North Korea's "nationalist Stalinism". Grassroots capitalism has replaced state socialism and this quiet transformation predictably brought in a remarkable income inequality.

North Korea's new rich made their fortunes amid the economic chaos and social disruption of the great famine of 1996-1999. This new bourgeoisie matured in the next decade as the North Korean economy started to partially recover from the disastrous 1990s.

As a North Korean female refugee said to this author a few days ago: "Until 2005, all but officials lived similar lives. But after 2005, everybody can see the difference between rich and poor." Perhaps the change is difficult to associate with just one year, but on balance she seems to be correct.

Who are they - the North Korean new rich? The upper crust of this social group consists of high-level officials. Some of them have gained their wealth through illegal means, but many have seen their business activities permitted and even actively encouraged by the government. Most of the money is made in foreign trade, with China being by the far the most significant partner.

Many North Korean companies, despite being technically owned by the state, are effectively private and are run by top officials and their relatives.

That said, these people are not that frequently seen on the streets of Pyongyang. They live in their own enclosed world, of which not much is known.

But if we go one or two steps down, we will encounter a very different type of North Korean entrepreneur - somebody who has made his or her (yes, surprising many of them are women) money more or less independent of the state.

Complete independence is not possible because every North Korean businessman has to pay officials just to make sure that they will not ask too many questions and turn a blind eye to activities that are still technically illegal. In many cases, North Korean entrepreneurs prefer to disguise their private operations under the cover of some state agency.

Take for example Pak. In his early 40s, he runs a truck company together with a few friends. The company has seven trucks and largely specializes in moving salt from salt ponds on the seacoast to major wholesale markets. The company employs a couple of dozen people, but officially it does not exist. On paper, all trucks are owned by state agencies and Pak's employees are also officially registered as workers of state enterprises.

Pak bought used trucks in China, paying the Chinese owners with cash. He then took them to North Korea where he had the vehicles registered with various government agencies (army units are the best choice since military number plates give important advantages). Pak paid officials for their agreement to "adopt" the trucks. This is so common in the North that there is even an established rate of how much fake registration of a particular type of vehicle costs at which government agency.

Kim was a private owner of a gold mine. The gold mine was officially registered as a state enterprise. Technically, it was owned by a foreign trade company that in turn was managed by the financial department of the Party Central Committee. However, this was a legal fiction, pure and simple: Kim, once a mid-level police official, made some initial capital through bribes and smuggling, while his brother had made a minor fortune through selling counterfeit Western tobacco.

Then they used their money to grease the palms of bureaucrats, and they took over an old gold mine that had ceased operation in the 1980s. They restarted the small mine and hired workers, bought equipment and restarted operations. The gold dust was sold independently (and, strictly speaking, illegally) to Chinese traders.

The brothers agreed with the bureaucrats from the foreign trade company on how much money they should pay them roughly between 30-40% and the rest was used to run the business and enjoy life.

One step below we can see even humbler people like Ms Young, once an engineer at a state factory. In the mid-1990s, she began trading in second-hand Chinese dresses. By 2005 she was running a number of workshops that employed a few dozen women.

They made copies of Chinese garments using Chinese cloth, zippers and buttons. Some of the materials was smuggled across the border, while another part was purchased legally, mostly from a large market in the city of Raseon (a special economic zone which can be visited by Chinese merchants almost freely).

Interestingly, Ms Young technically remained an employee of a non-functioning state factory from which she was absent for months on end. She had to pay for the privilege of missing work and indoctrination sessions, deducting some $40 as her monthly "donation". This is an impressive sum if compared with her official salary of merely US$2.

The North Korean new rich might occasionally feel insecure. They might be afraid of the state, because pretty much everything they do is in breach of some article of the North Korean criminal code. A serious breach indeed - technically any of the above described persons could be sent to face an execution squad at the moment the authorities change their mind.

Indeed, such was the sorry fate of a significant number of first-generation North Korean businessmen, those who began to make money in the early 1990s, immediately after the collapse of the Juche (self-reliance)-style Stalinist economy. In 1994-1995, the execution of profiteers and embezzlers, occasionally conducted in public, was a part of a large campaign launched by the central government. The fear still lingers, but over the past 15 years such large-scale campaigns have never been conducted on a nationwide level. But for any business person, the risk is quite real.

However, it is difficult to say that they try to keep a low profile. On the contrary, nowadays one can see a lot of conspicuous consumption in North Korea, where the average official figure is misleading - virtually no North Korean family survives on the official wage alone.

The average monthly income is actually higher - thanks to the nearly universal involvement with the unofficial economy - and seems to be close to $15. Business people earn much more. People like Kim or Young usually make as much as a few thousand dollars a month, while smaller businesses (like a corner shop or tobacco workshop) bring in income measured in a few hundred dollars a month.

It is no surprise that the new rich enjoy consumption. Overseas travel is out of the question (it is permissible only for top business people related to the upper elite and/or the Kim Jong-il family), and domestic travel does not seem to be very popular. Nonetheless, the new rich frequent restaurants where a good meal will cost roughly as much as the average North Korean family makes in a couple of weeks.

They buy houses - technically the sale of real estate is illegal, but in the past two decades North Koreans have developed many techniques that allow the circumvention of these measures with ease. They buy all kinds of household appliances, flat-screen TVs, computers, large fridges, motor bikes. Even private cars have begun to appear, though in most cases successful businessmen prefer to register their used Toyotas and Hondas as the property of some state agency.

There are some peculiar problems that the North Korean new rich face. For example, even Pyongyang, let alone smaller cities, has a very unreliable supply of electricity. Large batteries and small power generators are of help, but only to a certain extent. Batteries are enough to run a TV or a DVD player, but power-hungry air-conditioners and fridges need a constant supply of electricity that is not readily available.

Surprisingly, many people in the countryside still buy fridges, even though the contraptions are unusable most of the time. I have frequently come across North Koreans who have boasted of the fridge they own, only to admit that they do not have electricity to switch it on.

To my perplexed question of why they spent so much money on such a useless device, my interlocutors would usually reply that a fridge was an important and even useful status symbol. An affluent household nowadays is expected to own a fridge, even if it is used as a bookshelf (as was the case with one of my North Korean acquaintances).

In some cases, fridges are on all the time - like the air-conditioners which are seldom bought for prestige purposes alone. At first glance, a small power generator appears to be the solution, but this is not really the case. Such generators are easy come by in the North, but they are not reliable, consume a lot of expensive fuel and - last, but not least - are very noisy. So, even though many rich North Korean families have such machines, these devices are usually only used on special occasions.

Surprisingly, more common is the seemingly exotic practice of electricity theft. A North Korean of wealthy means makes a deal with a local military commander or manager of the local power grid, then an illegal power cable connects the entrepreneur's house with a power grid sub-station or military base (military installations are usually supplied with electricity even when the common customers are switched off).

I know of a rich neighborhood in a relatively affluent borderland North Korean city where half a dozen households made an illegal deal with a manager of the power grid. Each family pays the equivalent of $7 and has round the clock access to an unlimited electricity supply. All these houses boast air-conditioners, a supreme luxury in the countryside.

What will happen to these people? What is their role in the future of North Korea? Ostensibly, there seem to be reasons to be optimistic. The rising merchant classes in Europe of the 17th and 18th centuries eventually destroyed feudal monarchies. So why shouldn't we expect a similar fate for the Kim regime, which has a surprising amount in common with the states of pre-modern Europe?

This indeed might happen: the growth of the private economy is slowly eroding the authority and control of the government and concurrently is bringing dangerous ideas to North Koreans. Business people themselves see the state and its officials as a swarm of parasites (frankly, this feeling seems to be mutual).

However, there is an interesting twist. If a North Korean revolution comes, it is likely to be followed by unification with (or rather absorption by) the South: the allure of the rich and free South is seemingly irresistible. However, if this were to happen, the future of North Korean nascent businesses would not be rosy. It is telling that in the countries of the former communist bloc, surprisingly few bosses of communist-era black market businesses managed to adjust to the new, "regular" capitalist environment.

In North Korea, their peers are likely to fare even worse, since they will have to compete with the capital and expertise of South Korean businesses.

Paradoxically, the long-term interests of the emerging North Korean business class might coincide with that of the Kim regime. Unlike normal people in the North, both groups - officials and entrepreneurs - have an interest in maintaining a separate North Korean state. Unification with the South is bound to spell disaster for both groups.

A person who is now running a couple of small shops might eventually, if North Korean capitalism continues uninterrupted growth, become an owner of a supermarket chain. If unification comes, he or she would be lucky to survive the competition with the South Korean retail giants and keep the few corner shops they had.

However, the alliance between the regime and the newly emerged North Korean entrepreneurial class does not seem likely: neither corrupt officials nor greedy black market operators are that far-sighted. This is probably very good news for the vast majority of North Koreans who are likely to benefit much from the collapse of the regime and possible unification with the South.

Andrei Lankov is an associate professor at Kookmin University in Seoul, and adjunct research fellow at the Research School of Pacific and Asian Studies, Australian National University. He graduated from Leningrad State University with a PhD in Far Eastern history and China, with emphasis on Korea. He has published books and articles on Korea and North Asia.

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