SEOUL, South Korea — It read like typical North Korean propaganda: soldiers toiling on snowy hills near the border with China, racing to finish construction on a tourist resort and making great sacrifices for the glory of the state.
But the report in March in a North Korean state newspaper also revealed the economic dysfunction under Kim Jong-un, the North Korean leader. Workers building up the city of Samjiyon, one of Mr. Kim’s marquee projects, were “breaking the frozen ground with hammers and chisels and carrying earth with stretchers and gunny sacks,” the report said.
The report, in the newspaper Rodong Sinmun, the mouthpiece of the government, followed South Korean media reports of cases of pneumonia and frostbite in Samjiyon. Together they suggest that American-led sanctions over North Korea’s nuclear weapons program are hurting Mr. Kim in a way they haven’t before: by targeting the state-run economy and the party and military elite who support his totalitarian rule.
In that context, North Korea’s test of a “guided tactical weapon” on Thursday might be both a sign of his frustration and a warning to Washington that there will be no progress on nuclear disarmament unless the sanctions are eased.
For years, the North Korean state has produced coal, iron ore, seafood and textiles for export, mostly to its ally China. Mr. Kim and top officials have used this export revenue, as well as the earnings of North Korean workers abroad, to finance nuclear weapons, large projects like Samjiyon and their own privileged lifestyles.
Previous international sanctions aimed to prevent North Korea from acquiring weapons parts and technology. But the newer ones, imposed in the past few years, ban those lucrative exports, depriving Mr. Kim’s regime of its main source of income.
As a result, party officials, soldiers and police officers who make a living off the state are feeling the effects more sharply than ordinary people who have already learned to fend for themselves through hundreds of unofficial markets, according to defectors and economists.
“Hardest hit by sanctions are those 20 to 30 percent of the population who stay on the government’s socialist payroll and rations,” said Jiro Ishimaru, a Japanese journalist who monitors North Korea with the help of correspondents there. “Enterprising North Koreans can make as much in a day selling vegetables in the market as many military officers can make a month in official wages.”
Five rounds of sanctions have been imposed by the United Nations Security Council since early 2016, when North Korea conducted its fourth nuclear test. At the time, China and others argued that the sanctions would disproportionately affect ordinary North Koreans and could backfire.
Instead, the sanctions seem to be having an impact, with Chinese imports from North Korea falling 88 percent last year. American officials have said that in February, when Mr. Kim and President Trump went to Vietnam for their second summit meeting, North Korea asked the United States to lift these last five rounds of sanctions. North Korean officials have said they sought to lift only the sanctions affecting the civilian economy. The two leaders ended the meeting without an agreement, and negotiations have stalled since then.
While the North Korean test this week was most likely a demonstration of a conventional weapons system, it suggested that Mr. Kim might resume nuclear and missile tests that he has suspended since November 2017. Earlier this month, he said the United States had until the end of the year to present a new proposal that would lift sanctions on the North.
In the meantime, Mr. Kim’s failure to secure sanctions relief has raised the question of how his supporters will respond.
Even before the latest sanctions, monthly wages for the party and military elite were scarcely more than those of ordinary North Koreans. To supplement their state-provided income, they siphoned money from export industries and collected bribes from North Koreans seeking permission to work abroad or smuggle goods from China. Now, that income is drying up.
Adding to the officers’ humiliation, the sanctions have reduced their rations and forced their wives to help make ends meet as traders in the markets, defectors and economists say.
The struggles of the elite are a problem for Mr. Kim because he has staked his legacy not just on nuclear weapons but on making North Korea a “great socialist economic power.”
“The sanctions make it difficult for Kim Jong-un to execute the visions he has of bringing life into the economy once and for all,” said Benjamin Katzeff Silberstein, a fellow at the Philadelphia-based Foreign Policy Research Institute and editor of North Korean Economy Watch.
Though Mr. Kim still appears to be firmly in power, he could be threatened by unrest among the elites.
“His biggest worry is that sanctions are squeezing the money flow for the elites, testing their loyalty,” said Joo Sung-ha, a North Korean defector who monitors the North as a journalist based in Seoul. “Losing the uniformed elites’ support means losing the bedrock of his rule.”
Who’s Holding North Korea Together?
The line between North Korea’s centrally planned economy and its private sector has blurred since a devastating famine in the 1990s left the government unable to provide its citizens with sufficient food. Though millions are still employed in collective farms, state-run factories and other state-assigned jobs, many of these workers make up for the shortfall by cultivating their own patches of farmland and trading goods in the markets.
The sanctions restrict the North Korean government from importing the raw materials, parts and equipment needed for state-run enterprises. Privately financed imports of consumer goods are less affected, reinforcing the markets’ role as “a key stabilizer of the North Korean economy,” wrote Lee Seong-ryeol, an analyst at the National Assembly Research Service in Seoul, in a recent paper.
The markets have also created a new class of private entrepreneurs known as donju. With the help of the elite, who provide access to labor and other resources, the donju have taken over state-run mines, farms, factories and fishing fleets and helped finance a building boom in Pyongyang, the capital. The two groups are believed to split the profits.
“The state power and the up-and-coming capitalists have formed a symbiotic relationship, creating a web of corruption throughout the North Korean society,” said Hwang Jin-hoon, a North Korea expert at Korea Development Bank in Seoul, in a recent paper.
Along with corruption, these changes have given rise to a culture of consumerism and scenes of prosperity: sports cars, cellphones, fancy coffee shops and high-rise apartment buildings in Pyongyang. They have also raised North Koreans’ economic expectations, even as sanctions draw tighter.
“It gives them hope,” Andrew Kim, former head of the C.I.A.’s Korea Mission Center, told a Stanford University audience in February. “It is not a good idea for Chairman Kim to walk back and ask his people to abandon hope at this point.”
Is the Party Over?
Despite introducing some limited market-friendly reforms, Mr. Kim has not abandoned the centrally planned economic system, which would undermine the legitimacy of the Kim dynasty that has ruled North Korea since its founding, experts say. Instead, he has focused on reviving state-controlled factories and collective farms and increasing domestic production.
His approach has enjoyed some success: Recent visitors to Pyongyang reported seeing more snacks, canned foods and other domestically produced goods on store shelves. Kang Mi-jin, a defector who monitors the economy for the Seoul-based website Daily NK, said she had counted more than 10 domestic brands of instant noodles.
But the state and market systems “are incompatible, given the different prices and wages each comes up with, so that strength in one often means weakness in the other,” said William Brown, a former C.I.A. analyst who follows the North Korean economy.
That is apparent in the northeastern town of Musan, once the center of North Korea’s iron-ore production, where many donju investors have gone bankrupt since export routes were closed, said Mr. Ishimaru, the Japanese journalist. The miners, meanwhile, have been foraging for herbs to sell in the markets.
For now, there is no sign that the economy is reaching a breaking point, according to defectors in touch with their relatives in the North. The prices of rice, corn and fuel remain stable, and the won is holding steady against the American dollar and Chinese renminbi. North Korea also continues to conduct trade through illicit ship-to-ship transfers.
But apartment prices in Pyongyang are declining, and the growing trade deficit with China is depleting North Korea’s foreign currency reserves. That lack of cash could put the government in a bind this summer, when the impact of what United Nations officials called the country’s worst harvest in more than a decade is most likely to be felt.
“What he really wants, and needs, is dollars,” Mr. Brown said, referring to Mr. Kim’s attempt to get the sanctions lifted at the Vietnam meeting. “So he tossed the dice for a big win and lost his bet. I’m pretty sure he will be back for more negotiations soon.”
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