Not all is dark in Pyongyang.

North Korea's Elites Are a Threat to Kim

Andrei Lankov is a professor of history at Kookmin University in Seoul and the author of "The Real North Korea: Life and Politics in the Failed Stalinist Utopia."
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Here's another myth about North Korea: The country is frequently described as "the world's last Stalinist state."

This is no longer the case. The North is now home to a large and growing private economy. Its existence is not officially recognized, but the regime has largely chosen not to enforce the Stalinist regulations banning almost all private economic activities. The resulting gray economy has clearly played a central role in the modest economic expansion of the last decade.

Though these changes have prompted a partial economic recovery -- largely eliminating outright starvation -- they have also had dangerous side effects. Left unchecked, they've encouraged corruption and levels of income inequality that are high even by Asian standards. In fashionable restaurants, crooked officials and Pyongyang's nouveau riche now splurge on $50 dinners -- about as much as the average rural family makes in a month.

Until the 1990s, it's true, virtually everything in North Korea belonged to the state. Even cobblers were government employees. (Admittedly, there were very few cobblers to be found on street corners; Stalinist economies are not known for their service industries.)

As one might expect, though, this command economy was a terribly inefficient economic actor, and for decades was kept afloat by foreign aid. The collapse of the Soviet Union, and consequent drying up of its assistance, threw the whole system into crisis.

North Korean leaders quickly understood that if it weren't for the unofficial economy, a grim situation would have grown much worse. Recent studies claim that North Koreans now derive three-quarters of their income from unofficial economic activities. Clamping down would risk widespread unrest.

The economics work for the authorities as well as semi-legitimate entrepreneurs. As the regime knows, many officials now make money off the system in the form of bribes and kickbacks.

Because it is still impossible to register a private company, for instance, many businessmen establish fake state corporations. One of my acquaintances used to run a bus company. He bought the buses and oversaw the operation, but his business was registered as part of the local government, and on paper he was merely a manager of this operation. In real life, he put a fixed amount into the public coffers while enjoying managerial autonomy and control over pay and profits.

At the same time, managers of genuine state enterprises are unable to get resources from the state, so they have to find raw materials on their own, pretty much as if they were private entrepreneurs. Creative accounting means that they can siphon off far more than they are nominally owed in salaries, significantly enriching themselves while keeping their factories operational -- at least, partly. Their superiors are happy to turn a blind eye to such activities for a fee.

Keeping this new elite of entrepreneurs and corrupt officials content has become a major preoccupation for the regime -- and a hard one to balance. Recent signs that China may be squeezing the border trade that has helped boost the underground economy must be worrying. However much Kim Jong Un may fear officials who amass too much power and wealth (witness the recent execution of his uncle Jang Song Thaek), he has to worry even more about depriving the Pyongyang elite of the perks to which they've become accustomed.

No one knows whether Kim can manage this balancing act in the long run -- or whether he's already been sidelined by regime figures unhappy with his stewardship. What's clear, though, is what one of my North Korean contacts said to me: State socialism "is as dead in North Korea as it is in China."

This is the second of three articles. Read part one here.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Andrei Lankov at andreilankov@gmail.com

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net