Expert: cash shortage could undermine Kim Jong Un’s succession

You won’t find a more authoritative open-source study of North Korea’s police state than the one Ken Gause did for the Committee for Human Rights in North Korea. When it comes to North Korea’s internal security, kremlinology, and command systems, Gause earns a great deal of respect among North Korea watchers. So when Ken Gause tells Yonhap that Kim Jong Un “has not fully consolidated his power,” and is at risk of failing to do so “in a couple of years” because of a lack of hard currency, I pay attention to that. Gause explains:

“The royal economy, which is part of the economy surrounding the Kim family, is losing money. They can’t bring in as much money. He’s having to spend about twice as much money than his father did to buy support within the regime,” Gause said. “He doesn’t have the resources to be able to consolidate his power and buy relationships.”

Power struggles, which have been frozen in place since Kim’s execution of his uncle Jang Song-thaek, could thaw out in one to two years, and if those power struggles happen, Kim no longer has the regent structure around to protect him, the expert said.

“He is now directly exposed to those power struggles and he can be undermined by that. Not toppled, not coup, but marginalized and turned into a puppet. I think that would happen within the next two to five years. I really think he needs to do this within the next couple of years,” Gause said.

The economic problem is one of three things Kim must address to consolidate the power he inherited from his father, Kim Jong-il, who died in late 2011, the expert said. The two other tasks are to purge potential adversaries and bring in people and to make progress in defense systems, such as the missile and nuclear programs. [Yonhap]

Gause, who is generally supportive of the regime-“engagement” view of which I’m a skeptic, thinks this financial desperation explains why Pyongyang is “largely maintaining its charm offensive toward South Korea” and refraining from greater provocations. I could cite some counterexamples: the 2012 missile test, the 2013 nuke test, the 2013 closure of Kaesong, the 2014 cyberattacks on Sony and the South Korean nuclear power plants, and the escalating threats against the leaflet balloons. Still, this doesn’t necessarily refute Gause’s theory, if you believe that the point of those provocations was to extort money and sanctions relief from South Korea and the United States.

I would love to believe that Gause is right about this, and that Kim Jong Un is a softer target for financial sanctions than even I had believed. That is why I feel such a sense of duty to question it. The main problem I have with Gause’s theory is that the regime isn’t spending like it’s desperate. North Korea’s known spending on imported luxury goods has tripled since Kim Jong Un came to power. Foreign observers have noted the recent building boom in Pyongyang, including new bank towers, leisure facilities that are far out of reach for most North Koreans, and a crash program to build new housing (pun not intended). Pyongyang has increased its defense spending by 16% in the last five years, to more than $10 billion. As we used to say in South Dakota, you can’t eat like a sparrow and shit like a goose. (Not for long, anyway.)

What can we tell about North Korea’s (legal) income sources? Along the border with China, the signs are more mixed. Anna Fifield’s recent report from the Chinese side of the border suggests that import commerce is brisk, although the statistics tell a somewhat different story. On the other hand, exports are soft, with China’s refusal to accept North Korean coal shipments being a particular danger. The critical mining sector is showing signs of distress as a result.

Of course, governments have been known to spend beyond their means. In America, we can sustain that by printing bonds. Mindful of the rather slow market for North Korean government securities lately, I can only suppose that if Kim Jong Un is spending beyond his means, he’s sustaining that by selling gold, or (more likely) by drawing on his offshore cash reserves, which could be enough to sustain him for years. That would make this a particularly opportune time to trap those reserves abroad by blocking them out of the financial system.

Wondering about the basis for Gause’s conclusion, I emailed him, and he kindly agreed to let me print his comments.

While it is true that the KJU regime has opened up the taps to provide goods to the elites, the amount of funding the regime is bringing in through Kim family channels (Office 39, etc…) is shrinking. Events that used to be punctuated with gifts, for example, have given way to expressions of appreciation. The average elite (director level or above) in the past could expect on average around $20K in luxury goods from the SL each year. No more, the largess gravy train has come to an end.

At some point, KJU’s ability to keep up with the rising expectations and the requirements for largess in the regime could hamper his ability to consolidate his power. This is in part, I believe, driving the regime’s prolonged charm campaign. Reinvigorating the people’s economy would free up resources and give Kim more flexibility in running the regime.

Gause adds the enticing news that he has written a book about this topic, which is currently with the editors, and should be published in time to put it on your summer reading list. The book will have a chapter devoted to Pyongyang’s royal-court economy, “[b]ased on extensive interviews over the last [two] years in the region,” including with North Koreans with inside knowledge of the system. Still, Gause concedes that one cannot achieve 100% clarity in studying such an opaque system.

I look forward to reading Gause’s book and will reserve judgment until I do. For now, however, the signs suggest to me that the North Korean regime has more revenue than it did a few years ago. That means that Kim Jong Un has more freedom to make decisions that threaten us and his people. That wouldn’t be happening if the Obama Administration had showed some leadership among its allies, and made a serious effort to enforce financial sanctions on North Korea. Gause is probably right about the fact that Kim Jong Un’s consolidation of power is still very unfinished. We continue to read reports of officials being purged, replaced, and promoted. That means that the window of opportunity has not yet closed.