Nice job on Sony. But now what?

Source: KCNA VIA KNS/AFP/Getty Images

The High Price of Hacking

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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There is little doubt that President Barack Obama meant business when he said the U.S. would respond to North Korea's hacking of Sony Pictures Entertainment computers. It’s unclear whether or not Monday’s shutdown of the North Korean Internet was part of that response. Regardless, Kim Jong Un’s regime may soon have cause to regret its assault on Hollywood.

Little known to the outside world, Kim has, in the past year, quietly embarked on a path of Chinese-style liberalizing reforms, one that his father Kim Jong Il had been reluctant to tread. In agriculture, some partially private farming has begun. In industry, a spate of changes has given state-appointed factory managers the freedom to hire and fire, buy supplies and sell finished goods on the market. Unofficial but surprisingly powerful, the private economy in North Korea is no longer harassed by the authorities.

All these changes are welcome. Yet they cannot gather momentum without a large infusion of capital. Unlike during his father’s time, Kim Jong Un’s North Korea needs investment as a matter of economic and political survival.

Where is the money to come from? In the past, the answer would have been China. But even as it has looked to the Chinese model to reform its economy, North Korea has been going out of its way to distance itself from Beijing. Its third nuclear test, conducted in February 2013, reportedly infuriated Chinese President Xi Jinping. In December 2013, Kim Jong Un had his uncle Jang Song Thaek executed -- in part because of Jang’s overly intimate ties with China.

Until now, Chinese leaders have had little choice but to tolerate such provocations. China has never had a particularly positive view of North Korea, but it preferred a stable buffer nation on its borders to the prospect of a reunified peninsula allied with the U.S. 

Even before the Sony hacking, there were signs that Chinese patience was running out. About a year ago, Beijing quietly decided to freeze all major Chinese investment in North Korean infrastructure. Anyone who visits the Sino-North Korean borderlands can see the results: Projects everywhere sit half-finished. Construction has suddenly stopped on the Chinese half of a large new bridge meant to link the city of Dandong with the North Korean city of Sinuiju. A forest of power masts has been erected in the North Korean special economic zone of Rason -- but no power cables link them, as intended, to the Chinese electricity grid.

There’s other evidence of a crisis in relations as well. Chinese property in North Korea has been subject to confiscation, official exchanges have dropped significantly, and North Korean state media have run a number of thinly veiled attacks on China and its policy on the Korean peninsula. In recent months, Chinese media have also become remarkably critical of Pyongyang.

Why would the North Koreans deliberately push China away? One reason may be because the larger country nearly monopolizes the North’s foreign trade (more than 80 percent of North Korea’s trade is with China). North Korean leaders naturally fear such economic leverage might be used to gain political influence.

Unfortunately for North Korea, however, there are no alternative sponsors in sight: Expectations that Russians or Japanese might assume the role, widespread in Pyongyang, are utterly unrealistic. And with the fallout from the Sony hacking affair, improvements in relations with the West look even more unlikely.

Obama has asked China for help in curtailing the North’s cyberwar efforts. That’s a tricky subject for the Chinese, who run their own cyber-army that has been accused of hacking into U.S. corporations. But at a minimum, China is highly unlikely to relax its investment ban on North Korea.

Perhaps that won’t immediately doom Kim’s reform efforts. The costs of the Sony hack, however, look to be higher than Pyongyang expected.  

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