Market Analysis

Kim Jong Un—Warlord or Economic Reformer?

While we can’t know for sure why Kim Jong Un is talking tougher, evidence strongly suggests he’s building political cover for economic reforms.

As North Korean sabre rattling escalated in recent weeks, I spent a fair bit of time trying to figure out Kim Jong Un’s game. Was he trying to scare world leaders into restarting the Six-Party Talks and lifting some sanctions? Was he, as new buddy Dennis Rodman claimed, trying to goad President Obama into calling him up? Or was he testing new South Korean President Park Geun-hye?

Monday, though, it got a lot clearer. One day after Kim and Workers Party leaders declared nuclear weapons “the nation’s life,” vowing not to surrender them even for “billions of dollars,” Kim tapped a new Premier: Pak Pong Ju, the closest thing North Korea has to an economic reformer. And then it hit me: I believe Kim is trying to build political cover for a few market-oriented changes. (Not that I’m excusing him—the North Korean regime is overall vile, in my view.)

To understand the connection between the announcement and nuclear hawkishness, let’s rewind a bit. Last September, according to South Korean reports, Kim tried his hand at economic reforms. For the first time, farmers were permitted to sell anywhere from 30% to 50% of their harvest ... for a profit. Before, collectivist farmers were allowed to keep what they needed to feed their family, but the rest of the harvest went to the state, which would redistribute it (badly) nationwide. But farmers weren’t producing enough to feed the entire nation—or, at any rate, feed the entire nation once Workers Party and military officials took their outsized share. Hence the changes, based on the belief farmers would produce more if they had something to gain.

Well, needless to say, acknowledging and enabling profit motive is the antithesis of paternalistic communism, and the change wasn’t popular with Workers Party and military hardliners—they understand repressed citizens who start making money tend to feel less reliant on the state, and more self-reliance destabilizes the regime’s control. According to South Korean intelligence, even the mere possibility of these reforms sparked a small uprising among hardliners, who didn’t want Kim wresting economic control from the military. Kim won that round, reshuffling his cabinet in July and reportedly purging former army chief Ri Yong Ho (rumors Ri was ousted amid a firefight that killed 20-plus North Korean soldiers abound, but are unconfirmed), but opposition persisted. By December, South Korean intelligence reported Kim was losing his grip on the Workers Party and military, with high-ranking officials in each deeming his reforms “unrealistic” and signs he was “running wild.” Kim reportedly responded by traveling with a cadre of bodyguards and keeping armored cars outside his house at all times—essentially living in fear of a coup.

That’s no way for a dictator to live—Kim had to reassert his authority. So, he launched a rocket—and unlike previous rocket launches, it wasn’t a dud, which seemingly gave him a bit more credibility with military leaders. The kid wasn’t focused on economic tomfoolery any more—he was restoring North Korea’s military might!

But Kim didn’t stop there—he needed lots more political capital to strengthen his position. So, among other things, he matched the US and South Korea’s annual military exercises with some war games of his own (which, it seems, were more Photoshop than reality), called off the 1953 armistice, ordered several underground nuclear tests, declared a “state of war” with the South and threatened to wipe the US off the map. And to shore up support among the North Korean people, he assured the masses it was all to protect them from an imminent US or South Korean attack. You know, typical insecure dictator shenanigans.

And then, with sufficient political cover, he elevated Pak—a former Premier his late father, Kim Jong Il, purged in 2007 for being too capitalist. During his first Premiership, Pak spearheaded North Korea’s small market economy and tried to give businesses some freedom to set wages and prices. Party officials were on board for a while, but because state-owned firms dominated most of the economy, a two-speed system emerged, and some social unrest followed. The reforms, rather than communism, were blamed for the troubles, and when Pak proposed overhauling the entire nation’s wage system with a US-style market-oriented model, he was tossed.

Lucky for him, he was merely reassigned to run a factory outside Pyongyang—a much better fate than former Finance Minister Pak Nam Gi, who was executed by firing squad in 2010 for the capitol offense of “embracing the South Korean economic model.” Reassignment gave Pak Pong Ju a chance for rehabilitation, and by 2010, when North Korea was reeling from an ill-advised attempt at currency “reform” (an anti-capitalist move), the regime thawed toward Pak’s pragmatic approach, and he was back in Kim Jong Il’s good graces. That allowed him to re-cement his relationship with Jang Song Taek, Kim Jong Un’s uncle and key political backer (and, according to many reports, the real power behind the throne), which made Pak the easy pick for Premier. (Though for good measure, the next day, Kim announced the Yongbyon nuclear reactor will reopen, with all production going towards weapon creation—the first time North Korea’s acknowledged Yongbyon’s purpose is more nefarious than power generation.)

Not that we should expect huge capitalistic changes in the North. Longtime observers say Pak’s primary inspiration is China’s state-directed faux-capitalism—an improvement from North Korea’s paternalistic system, but not a free economy. More importantly—and unfortunately—it’s a model Kim likely believes will allow him to keep a firm grip on power, just as Chinese officials have—it won’t force political reform the way a free market would.

Still, any moves toward a more market-oriented system likely improve quality of life for North Koreans, however incrementally—if nothing else, food would likely become a little less scarce as farmers produce more and sell their harvest freely. In a place as dark and backwards as North Korea, every little thing counts.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.