The consequences of Kim Jong-il's
shortsighted policies will reverberate through
North Korea long into the future.
Even
with the Dear Leader gone - he was announced to
have died of a heart attack on December 17 - the
regime is still responsible for the monumental
promise he made to the nation: establishing a
powerful and prosperous state by Kim Il-sung's
centennial celebration in 2012.
The
leadership could have arbitrarily called for an
extended mourning period and subdued expectations,
but it did not. The period of national mourning
lasted just 13 days and the regime will be
expected to fulfill its vow.
The new
fledgling leader Kim Jong-eun and the late
leader's inner circle face the immediate challenge
of preventing the total
collapse of the domestic
economy. The blind rush to achieve a semblance of
prosperity has fallen dramatically short of its
goal and now the entire country is spiraling
head-first towards another famine; As was the
elder Kim's grand legacy.
So how will
Pyongyang express its power and prosperity in 2012
as the country teeters on the brink of economic
meltdown?
Alongside acquiring food aid
from the United States without compromising its
nuclear capabilities, Pyongyang's primary
objective will be geared towards curbing rampant
food prices and bringing inflation under control.
Although this may not appear as spectacular as a
show of military might, the stakes are high as
this will be the first real test for the regime in
the post-Kim Jong-il era.
Some North
Koreans enjoyed temporary material well-being in
the last years of the despot's rule. Foreign
observers have noted that the denizens of
Pyongyang have cell phones, wear more fashionable
clothing, receive reliable electric power, etc.
However, the short-term benefits of the regime's
economic policies will have a serious impact on
the long term well-being of the country's 24
million inhabitants. After all, nothing comes
without a price.
Since the disastrous
currency reform in the winter of 2009-10, North
Korea's economy has been in flux. The
redenomination of the North Korean won not only
obliterated personal savings accounts in the
Chosun Central Bank, it also deterred people from
trusting the government with their assets.
In a desperate measure to increase
savings, the bank instituted higher interest rates
and eased access to savings. [1] This, in
conjunction with the emergence of private markets,
may have temporarily staved off mass starvation
and even spurred relative increase in material
wealth.
However, the pre-existing
disparity in personal income compounded by unequal
access to cash has now produced a serious
imbalance in the economy. The increased demand for
food in more prosperous areas like Pyongyang has
prompted prices to rise, rendering the much needed
grain too expensive for large portions of the
population. [2]
With the Public
Distribution System practically non-existent, the
people do not have a social safety net when the
market fails. This is especially true for urban
dwellers who do not have private gardens or small
hillside patches to rely on for food.
The
increased availability of cash in the North Korean
economy has created other economic woes. Before
the currency reform of 2009, the availability of
money was suppressed by the central bank that
often confiscated up to 20% from individuals'
accounts.
In order to instill trust in the
central bank, the interest rates have been raised
and people have been allowed to withdraw from
their savings without being subjected to
state-sanctioned theft. While allowing North
Koreans to access their savings unimpeded has
obvious benefits, it also created a sudden
increase in the money supply which invariably
produced inflation.
Plenty of other
governments have attempted to boost economic
activity by increasing the money supply, but this
method has been heavily criticized by many
economists as a socially inequitable and unfair
method of resolving economic stagnation.
Especially because the inevitable inflation often
constitutes an invisible and arbitrary tax that
most heavily impacts the poorest members of the
society. This scenario is even truer when the
economy is contracting like in North Korea.
The current situation in North Korea
effectively illustrates the consequences of
irresponsible expansionary monetary policy.
According to studies by Marcus Noland at
the Peterson Institute for International
Economics, the cost of rice has increased 131% and
138% for corn since 2010. [3] In addition, Noland
observed that unlike in 2010 when the price of the
grains fell following the harvest, the prices of
grains have continuously increased unchecked in
2011. Overall, basic goods are now more expensive
than they were before the currency redenomination
two years ago. [4]
North Korea has been
facing an overall deficit in grains for a while,
but Pyongyang's overhasty economic policies may
have exacerbated the unequal distribution of the
much desired foodstuffs.
Because of the
inflation, many sources report that North Koreans
are turning to US dollars or Chinese renminbi
(yuan) to secure their assets. However, with the
North Korean won continuously devaluing against
both currencies, the people will have a harder and
harder time finding ways to protect their
possessions.
The biggest challenge for the
new regime will be to resolve these immediate
hardships. Restricting the money supply and
controlling food prices may be operationally
challenging and unpopular, but the alternative is
completely losing control of the economy.
Humanitarian non-governmental
organizations and international organizations have
already warned the world about the seriousness of
the situation in North Korea; ghastly reports of
malnourished children being hospitalized and the
prevalence of starvation-related diseases wreaking
havoc.
Now with winter setting in, North
Koreans may also have to make the difficult choice
between fuel and food. If the inflationary
pressures remain, vast portions of the population
will starve or freeze to death by the end of the
winter.
It is difficult to conceive of a
way to prevent mass starvation without relying on
US assistance; at the same time, it is hard to
imagine Pyongyang genuinely surrendering nuclear
capabilities or curving weapons exports to be
offered the much-needed aid.
The danger
lurking around the corner is the possibility of
North Korea falling back on anti-Americanism to
channel the public's distress away from the
falling living standards. It will not be a
particularly difficult task as the state
propaganda apparatus has already pointed to US-led
sanctions as the key source of the country's
hardships.
According to some sources, Kim
Il-sung engaged in provocative actions in 1968
precisely because of this: to convince the people
that sacrifice was necessary for national
security. [5]
What does this mean for
2012?
Provocative actions carry the
additional cost of discomforting or alienating
North Korea's key regional partners who currently
provide crucial income, investment and
development.
However, if North Korea's
imploded economy bottoms out even further, then
Kim Jong-eun or whoever takes charge of the regime
may feel the need to bolster state legitimacy by
displaying its military capacity and portraying
the US as an immediate threat.
Kim
Jong-il's death has augmented uncertainty in the
region and consequently thrust the respective
military forces to prepare for military action.
The potential for a serious crisis has always been
present on the Korean Peninsula, but under these
circumstances when the dangers are acutely severe,
any presumption could spell disaster.
We
remain sincerely uncertain about North Korea's
future. However, it would be a grave error for any
party facing the North Korea predicament to
underestimate the merciless edge of a regime
working in the margins.
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