North Korea's criminal economy

The North Korean economy is a total basket case, so how does it make its money? By printing fake dollars and smuggling drugs, says Simon Wilson

How poor is North Korea?

Poorer than even the nations of sub-Saharan Africa. In the 53 years since the Korean War ended in stalemate, North Korea has survived as a kind of Stalinist time capsule. Even as the Soviet Union fell apart and China embraced market reform, North Korea under dictator Kim Il Sung, and since his death in 1994, Kim's son Kim Jong-Il has remained wedded to Stalinist central planning and an extreme nationalistic ideology of self-reliance (known as Juche') that is perversely self-defeating. The result has been horrible. While South Korea has risen to become the archetypal Asian Tiger, North Korea has spiralled into misery. It is rich in natural resources, such as iron ore. But traditional industries mining, chemicals and textiles are in ruins, the countryside littered with abandoned factories. Since 2002, Pyongyang has tinkered with limited market reforms, but these have largely backfired, pushing up prices for basic goods without creating new industries. North Korea's 22 million citizens endure a GDP per head of just $800 a year.

What about the humanitarian situation?

In the 1990s, when the handouts of cash, oil and food from Moscow dried up and the economy ground to a halt, the North's poor land resources agriculture accounts for only about a third of North Korea's economy hit it hard. In a few years, two to three million people people starved to death. More recently, the numbers of people dying of starvation have fallen back, although some sources report a new upsurge in deaths since spring 2006.

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How has the regime survived?

Through an odious mix of brutality and calculation. Kim Jong-Il, who fosters the same quasi-religious cult of personality that his father did, has continued his father's strategy of viciously repressing all dissent: an estimated 200,000 political prisoners are currently in jail. Kim is backed by a huge army of between one million and 1.2 million and a secret police service some 150,000 strong. Yet life isn't awful for everyone: while rural peasants are reduced to eating grass in an attempt to survive, the ruling class lives in comfort. Kim himself reportedly spends $650,000 a year on Hennessy VSOP cognac and has his sushi flown in from Japan. His home entertainment is provided by a library of 20,000 films and by The Pleasure Brigade, a troupe of young women he likes to have dance naked.

How is such luxury funded?

Pyongyang operates a lucrative trade in weapons, mainly missile parts, but much of its cash comes from an extraordinary range of state-sponsored crime: counterfeiting, extortion, money laundering, currency forgery, and kidnapping. According to The Times's journalist Richard Lloyd Parry, North Korea's official crime spree dates back at least to the 1970s, when its diplomats who were based in Scandinavia were routinely reselling tax-free alcohol and cigarettes. But these days the scale of the country's revenue-raising crime wave has ballooned. According to US security sources, North Korean factories produce 41 billion counterfeit cigarettes a year, for sale in China, Japan and the United States. This trade in low-quality fakes is probably North Korea's biggest export.

Is it just cigarettes they're exporting?

Far from it. The smuggling of hard drugs has long been used as a tool by the North to boost its sagging economy. In 2003, Australian authorities caught a North Korean ship trying to smuggle 150kg of heroin into the country with officials of the ruling Korean Workers Party aboard. The country is reckoned to be the biggest source of heroin entering Japan, and in the 1990s it diversified into crystal methamphetamine (shabu') now the most popular drug throughout Japan, South Korea and southeast Asia. In addition, diplomats have been frequently smuggling everything from gold to ivory and Pyongyang's currency counterfeiters have become world experts at forging the United States hundred dollar bill (see the box below).

Can such an economy have a future?

Almost certainly not. Most analysts believe that a united Korea is highly likely within a few decades. In the medium term, much depends on how South Korea reacts, and in particular how China reacts to Pyongyang's nuclear test a fortnight ago. Many foreign observers were taken aback by Beijing's harsh attack on North Korea and its quick agreement to limited UN sanctions. But in reality, both Beijing and Seoul are fearful not just of Pyongyang's nuclear capability, but of an all-out collapse in the North that could send millions of refugees northwards into China and southwards into South Korea. For that reason, both governments seem likely to continue their policy of engagement and sharply increasing (legitimate) trade with North Korea.

North Korea: An extraordinary talent for faking money

As high-level defectors fled to the West in the late 1990s, evidence amassed that Pyongyang has been counterfeiting currency since the 1970s, seeing fake US dollars as the perfect way to fund operations against South Korea. North Korea's finest counterfeiters have become so good at copying the $100 bill that US intelligence dubs them supernotes'. They feature perfect engraved images, the same high-tech ink as the genuine article, and are printed on the precise same mix of 75% cotton and 25% linen. But the end could be nigh. From next year the US will produce a new $100 bill that will be much harder to fake: the technology needed to produce it will cost hundreds of millions of dollars real ones.