How to Succeed in Business in North Korea
International sanctions can't compete
against the ingenuity of North Korean entrepreneurs.
Two more rounds of United Nations sanctions against
North Korea have been passed since the beginning of August, with restrictions
or total bans on North Korean exports of iron, coal, lead, seafood, textiles,
and labor, and on North Korean oil imports. The hope is these measures will
bring North Korea to its knees, or at least to the negotiating table.
That’s fanciful. While North Korea will undoubtedly feel some pain, an
economic collapse from sanctions is not going to happen, because the North
Korean economy has evolved to withstand — and even thrive under — precisely
such hardships.
It would be going too far to suggest that North Korea is booming under
sanctions — there is extensive malnutrition, especially outside of Pyongyang,
much of the internal transportation network is nonfunctional, and the famous
satellite images of North Korea at night suggest that electricity remains a
luxury in the countryside. Yet, according to the South Korean
central bank North Korea’s formal economy grew at 3.9 percent
last year, Pyongyang is experiencing a building boom, and North Korea somehow
funds its current account deficit with China every year.
This is partly because, despite its international reputation as the Hermit
Kingdom, North Korea is not actually that isolated. North Korea has long been a
political pariah, engaging in provocative acts that undermine its position in
the international community, but economically it has survived by plugging
itself into the global economy in creative ways, and in building surprisingly
strong trade networks with the outside world. North Koreans, from the bottom of
society to the very top, are some of the more capable entrepreneurs in the
world.
As a consequence of the great famine of the 1990s, when society was brought
to the point of collapse and citizens were left to fend for themselves, North
Korea has developed into a country where everyone is essentially out to make
money by almost any means necessary to survive. Nearly every organization in
the country — whether government or private — is a revenue-generator in some
way and has evolved to evade sanctions, the North Korean government, the
Chinese government, or all three.
At the top, the central state firms that are the target of U.N. sanctions
because of their involvement in selling weapons overseas, and in bringing in
components for the country’s weapons of mass destruction programs, have
developed sophisticated methods of evading sanctions, including networks of
ever-changing front companies with fake registrations, multiple bank accounts,
and vague or misleading documentation.
North Korea’s diplomatic outposts around the world have become the
locations for front companies and brokers for clandestine businessmen and shady
deals. Perhaps most importantly, they have managed the impressive feat of
getting non-North Koreans to evade sanctions for them. Foreign companies manage
nearly all buying and selling and handle the logistical chain around the world
up to the North Korean border, so that the North Korean role is impossible to
track without extensive investigations. North Koreans themselves are left only
with the task of figuring out how to transfer money and pick up or send off the
goods at the border.
At the bottom, North Koreans have built up small private, unregistered
businesses, buying and selling wares in private marketplaces and engaging in
their own foreign trade, largely
with China and South Korea.
At the
bottom, North Koreans have built up small private, unregistered businesses,
buying and selling wares in private marketplaces and engaging in their own
foreign trade, largely with China and South Korea.
In North
Korea, everything is for sale, including status as a state company: Because
North Korea continues to ban private enterprise, private companies masquerade
as state-owned companies, with the original owner being hired as a manager by
the cooperating state official, and thereby gain political protection for a fee
and a cut of the profits.
North Koreans also have built strong smuggling networks, with the tacit
consent of North Koreans and Chinese, businesses and government officials
alike. Together, they have developed a range of means of getting goods across
the China-North Korea border. Boats cross the Yalu and Tumen rivers in the
summer, and trucks drive across the ice in the winter, as paid-off border
guards look the other way. At sea, Chinese smugglers meet their North Korean
partners in international waters to make exchanges. These smuggling networks
operate with the tacit consent of North Koreans and Chinese, businesses and
government officials alike. One smuggler we talked to had an agreement with local
Chinese officials to allow a percentage of his goods to be captured during
periodic smuggling crackdowns, so as to allow him to continue to operate, and
the officials to meet the quotas imposed by their superiors. Meanwhile,
otherwise legitimate traders regularly conceal smuggled items in legitimate
shipments through checkpoints, in hopes that the illicit goods can make up for
the prohibitively high costs of doing business in North Korea.
Ironically, the networks behind smuggling between North Korea and China are
efficient because North Korea is, formally, such an economic
basket case. Based on research I conducted with Yaohui Wang at the University
of Kansas, much of North Korea’s trade in minerals, textiles, and seafood was
already being smuggled, even before the imposition of sanctions on those goods.
This is largely because of the political and legal deficiencies that have long
hampered North Korean markets. Many traders prefer smuggling, regardless of any
sanctions, because it allows them to minimize the impact of North Korea’s
political instability. The North Korean government has always been prone to
sudden and damaging policy reversals — the 2009 currency reform, in which North
Korean won were overnight made worthless, is an example. But Kim Jong Un, with
his extensive purges of potentially disloyal officials and constant reshuffling
of trade and border security personnel, has intensified Pyongyang’s
capriciousness.
In our research, we found that traders smuggled seafood because it would
spoil if they actually waited to go through the border checkpoint, clear
customs, and deal with corrupt North Korean bureaucrats. Traders smuggled
minerals (North Korea’s main formal export until recently) because the state
companies with access to minerals were not always authorized by the North
Korean government to sell it. Traders smuggled food and prescription medicine
into North Korea to willing buyers because the North Korean government
controlled and limited the population’s access to food and medicine. They smuggled
gold out of the country into China because North Korean businessmen and
officials wanted to build up foreign reserves in case they needed to flee the
country at short notice. And this smuggling is extensive. One trader told us
that he estimated 70 percent of the trade through Dandong, the main Chinese
city on the North Korean border, was smuggled.
Perhaps the most surprising thing about all of this is that North Korean
business activity succeeds despite the North Korean government, not because of
it, and yet the North Korean government has found a way to profit from
activities it officially tries to suppress. To do business in North Korea,
regardless of legality, requires paying off officials with bribes and a cut of
the profits in order to ensure political protection. Those officials, who have
to exploit their positions and engage in side businesses to survive themselves,
in turn pay off their own superiors, and so on up the chain to Kim and his
associates.
As a result, in addition to having adapted to get around sanctions, the
North Korean government has revenue streams outside of those closed off by
sanctions. There are political consequences for how North Korea’s economy has
developed: Kim could be willing to engage in behavior that provokes sanctions
in part because he is confident that his income will not entirely dry up, and
that North Koreans will find ways to survive no matter how tight sanctions get.
North Korea is adaptable, but not infinitely so, and China has taken some
steps to make it more difficult for North Korea to get around sanctions.
Hundreds of North Korean trading companies have set up shop in the border
region of China as a way of dealing with their Chinese counterparts without the
hassle of being in North Korea. China’s recent move to end China-North Korea
joint ventures, encourage Chinese firms to leave North Korea, and kick out
North Korean firms from China, if enforced, has the effect of ending this ploy
to get around North Korean dysfunction.
While Chinese border officials have generally been blase about smuggling
into North Korea, and even smuggling into China as long as the smugglers don’t
try to move drugs or weapons, this laxity can always end. Reports from Chinese
businessmen in the past month indicate that smuggling networks, and the private
North Korean markets that they supply, are struggling as China has cracked down
on all trade, at least temporarily.
But given how robust the trade networks are, it would take both China and
Russia cutting off formal trade entirely across their respective borders and
physically guarding the entire land border (including in mountainous areas) to
stop smugglers — plus patrolling their waters to ensure that ships did not
enter or leave North Korea with cargo. In short, it would require an embargo.
While China has gone further than ever before in punishing North Korea with
the latest rounds of sanctions, its goal with sanctions is not to push North
Korea to collapse but to signal displeasure with North Korea’s path and to
bring the wayward country back to talks. In our research, we found little love
for the North Korean regime from Chinese businesspeople and government
officials on the ground in the border area. But those grassroots feelings make
little difference to Beijing. Cutting off North Korea entirely would require a
genuine strategic change from China’s central leadership, which has so far not
been forthcoming.
