A Kim in his counting house

A POWERFUL army usually depends on a strong economy. Not in North Korea. Per head, the country has more soldiers than any other: 1.2m out of a population of 25m. As well as a huge conventional arsenal, it also has a dozen nuclear warheads and spends perhaps $3 billion a year on a nuclear programme that involves rocket launches and nuclear tests—the latest took place last week, the fourth since 2006. Yet the performance of the economy over the past four decades has been little sprightlier than that of the Great Leader, Kim Il Sung, since he was embalmed in 1994.

North Korea suppresses most economic data. But as far as we know, from the 1950s to the 1970s its economy outgrew capitalist South Korea, as a Stalinist state marshalled all resources towards production. Today the North’s per capita GDP is only one-40th of the South’s—a wretched $600 a year or so, by UN estimates. The blame rests squarely with the Kim dynasty’s ruinous policies. Yet the regime of Kim Jong Un, the third Kim on the throne, pays no penalty for the people’s suffering. Rather, it funnels money to itself, the elites and the nuclear programme.

In a recent paper for South Korea’s Asan Institute, Nicholas Eberstadt of the American Enterprise Institute in Washington, DC tries to estimate the scale of North Korea’s economic catastrophe. Given the paucity of data, Mr Eberstadt used “mirror statistics”: estimates of the country’s trade divined from other countries’ records. He then made adjustments for population growth and inflation. It is no straight proxy for output, but useful nonetheless.

Mr Eberstadt found that North Korea’s per-capita exports last year were no higher than at their peak in the late 1970s, while per-capita imports were two-fifths lower. North Korea’s economic underperformance is remarkable for a country that is neither a failed state nor at war, he says.

What went wrong? The collapse of the Soviet Union, upon which the North had long relied for cheap machinery and oil, certainly hit it hard in the 1990s. Weakened by bad weather, centrally run agricultural production collapsed in the 1990s, leading to a famine in which hundreds of thousands of people died. International sanctions in response to North Korea’s nuclear bomb-testing have also hurt.

But the biggest problem, Mr Eberstadt argues, is that North Korea has the worst business environment of any functioning state: worse even than Cuba, Venezuela or Zimbabwe. It has no property rights or rule of law, no legal private trade and a currency prone to confiscation: in 2009 the government wiped out small traders’ savings by declaring old banknotes invalid and swapping only a few for new ones.

A striking feature of the North’s economic decline is the quantities of foreign aid that accompanied it. North Korea has a long history of shaking down donors—first the Soviet Union, then, after 1991, America and South Korea, and most recently China. The total amount of transfers is impossible to quantify. But Mr Eberstadt estimates the sum from the North’s two biggest historical backers, Russia and China, by taking its balance of trade deficits with each of them as an approximation of net resource flows into the North—assuming that the surplus is a debt that will not be repaid. That surplus amounts to $45 billion, in today’s money, between 1960 and 2013.

The money seems to have helped the Kims live like god-kings and still have enough left over to pay the army, the secret police and various suppliers of nuclear materials. Yet Rüdiger Frank, an economist at the University of Vienna, thinks that increased supplies of hard currency may also have helped the informal markets for food and basic supplies that burgeoned as a response to the famine. These black markets are the single most benign transformation in North Korea in the past few years. Most North Koreans now depend on them for their livelihoods. The state usually turns a blind eye, since its central planning system, which is supposed to apportion goods, has broken down. Besides, the elites demand their cut.

Some see in such markets the seeds of deeper economic reform. And Mr Kim seems keener than his father to promise prosperity to his people, and even a modicum of leisure. North Korea’s capital, Pyongyang, now boasts a dolphinarium and a water park, and even a ski resort to its east. As high rises go up, the capital’s fashionable sip espressos in upmarket bars.

Yet the regime’s old habits are unchanged. Anecdotal evidence suggests that the state is squeezing the donju, North Korea’s new successful class of traders. According to DailyNK, a news source with informants in the North, donju are worried that they will be forced to hand over hard-currency savings to make up for the “massive dollar bomb”—ie, the expensive nuclear test—that was detonated last week.

In the absence of direction from the top, there are limits to how much can change. A new policy that seems to have been quietly rolled out from 2013 allowed farmers to retain 30% of a new production target, plus any excess over the target, to sell on informal markets. Yet local officials are not distributing the promised shares, perhaps to make up a shortfall at co-operatives, according to a report by Radio Free Asia.

Meanwhile, the few foreign investors brave enough to enter North Korea must contend with an unpredictable and predatory state. In November the biggest such, Orascom, an Egyptian telecoms company that set up the North’s first 3G mobile network, said that it thought it had lost control of its joint venture, and has not been able to repatriate its profits.

China remains North Korea’s lifeline. Most products for sale in the North’s informal markets are from China. Last year North Korea sold over $1 billion of minerals to China, chiefly coal. As China’s economy slows and the price of coal falls, the North will suffer. But the regime has a solution: putting its scant resources into military power. This serves as a “battering-ram for international extortion”, as Mr Eberstadt puts it. Alas, it seems to work.