Kim’s magic numbers

Kim Byung-yeon
The author is an economics professor at Seoul National University.

There are some figures we should note to better understand North Korean leader Kim Jong-un’s priorities as they are essential for the sustainability of his regime and direction of denuclearization.

The first figure is a date — Dec. 31, 2019 — which Kim set as a deadline for Washington to meet after his summit with U.S. President Donald Trump achieved nothing in Hanoi earlier this year. Kim threatened to seek “a new path” if the U.S. government showed no change in its strict approach to denuclearization.

Kim may want to use the deadline as leverage in a stalemated negotiation with the U.S. Pyongyang suggested that it entered denuclearization talks to have international sanctions removed. It decided to set a time limit in order to win back the upper hand in talks. It might have counted on Washington to deliver an alternative option by the year-end by suggesting it can resume nuclear and inter-continental ballistic missile tests, which can hardly work favorably for Trump in his bid for a second term in the election next November.
North Korea fired various types of short-range missiles to show off its technology and to put pressure on Washington. But the United States can not be moved by those kinds of threats. If the situation goes back to the war-like tensions of late 2017, Trump will likely lose his bid for re-election whereas Kim would have to worry about the viability of his regime. Therefore, Washington has been shrugging off the missile provocations. As a result, Pyongyang instead vented its anger at Seoul for being ignored by the United States. Its violent rhetoric suggests its frustration and desperation.

A second set of figures: 1 kilogram of North Korean rice is valued at 5,000 won ($4.20). Sanctions are aimed at hurting trade and hard foreign currency revenues for North Korea, but the damage spills over into the markets. According to trade data, North Korea imports about 200,000 to 300,000 tons of rice a year. The imports could be two times or three times bigger when counting in smuggled products. Imports will have fallen in the face of sanctions and scarce foreign currency reserve, which means that less food is available for the retail market. People can’t afford food as before due to their reduced incomes. North Koreans, who were used to three meals a day, may have to settle for meager victuals. They will become more disgruntled with their government.

Rice prices in North Korea remain at the pre-sanction level of around 5,000 won. It may be because both supply and demand have come down by similar levels or sanctions have not destabilized the economy to the extent of affecting a staple food. Or the country may be buoyed by aid from its friendly neighbors, China, Russia and Vietnam. But food shortages are bound to occur if foreign aid stops while sanctions hurt foreign exchange reserves and domestic incomes.

Third, there are foreign reserves, whose exact number cannot be identified by North Korean authorities or even Kim. The regime has long lost control over its foreign reserves as state institutions and enterprises manage their coffers separately. The military, party, government and local governments — as well as enterprises under their jurisdiction — are on their own to earn hard currency. Before the sanctions, the power elite built wealth through kickbacks from trade permits. Individuals were able to accumulate their own wealth through overseas work, smuggling and commercial activities. Everyone in North Korea, including Kim himself, may be keeping a separate set of books for foreign currencies. No one can estimate their cumulative value.

International sanctions naturally reduce foreign reserves. From 2018 to the first half of this year, North Korea incurred a trade deficit of more than $4 billion. When counting in illicit trade and other means of foreign revenues, North Korea may have seen around a $1 billion deficit in its foreign exchange account a year. According to a recent report by North Korea experts, its foreign exchange reserves were estimated at between $2.5 billion and $5.8 billion by the end of 2018. Under current sanctions, those reserves would be depleted by 2021 or 2024.
Government coffers in foreign reserves may not last that long. The regime cannot easily seize privately held foreign reserves as it could face a public backlash for nationalizing private assets. Much of the foreign money also could be stashed away overseas.

Kim may have set a year-end deadline for a breakthrough in denuclearization talks in fear of an upswing in food prices and a shortage of foreign reserves. Washington sees denuclearization in the context of “sanction science.” It is Pyongyang that should come up with a new “calculation” in future negotiations. Otherwise, nothing will be gained even if another round of summit talks is held within the year.
Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Sept. 25, Page 31