A Hidden Economic Message Behind North Korea’s Satellite Launch?

Via Frontera, interesting commentary that Pyongyang’s recent nuclear tests and satellite launch have little to do with antagonizing the South – or the West  – but rather they point to a high-stakes internal struggle that aims to loosen the military’s grip on an increasingly market-oriented economy:

IN THE FACE of growing international condemnation, this week North Korea conducted its fourth nuclear test since 2006 and launched a satellite in swift succession.

Pyongyang has claimed that a hydrogen bomb was tested — a fact that many international observers and nuclear weapons specialists have disputed.  But if the claims are false, why would the country make assertions that risk either a draconian international response or loss of credibility? And why trigger a fourth nuclear test when the last one, conducted in 2013, created much uncertainty about North Korea’s real capabilities?  Nuclear ambiguity has served Pyongyang well over the years, which begs a further question: why risk changing that status quo?

The world has far more questions than answers about these two seismic events. In fact, the question of paramount importance, and that everyone should be asking, is “why now?”

Taken in isolation, this week’s developments might easily be construed as the same stale posturing and bellicose rhetoric from a regime that the world loves to mock.  But the events are intimately linked – and not just to each other. They are the latest in a chain of events that began in 2011, when Kim Jong Un ascended to the role of North Korea’s Supreme Leader.  Crucially, this week’s test, and the alleged execution of army chief of staff General Ri Yong-gil,  are clear indicators that significant change is afoot within the Democratic People’s Republic of Korea.

The Most Important Meeting In 36 Years

One of your correspondents was in Pyongyang last week, which proved to be an exceptionally busy time in the North Korean capital.  Wu Dawei, China’s special envoy for the North Korean nuclear issue, also paid a visit just days before the nuclear test and satellite launch. At the same time, officials were gathered for a Joint Meeting of the Central Committee of the Workers’ Party of Korea (WPK) and the Korean People’s Army (KPA) Committee. This is in essence a preparatory forum for an extremely rare occasion: the 7th Congress of the Workers’ Party. The Congress was last held 36 years ago.

Kim Jong Un’s comments at the Joint Meeting were significant – and unprecedented. The army, he said, “must head only in the direction that the Supreme Leader points.” He hinted at changes that are afoot to the government and military structure. The Joint Meeting provides “important momentum” for the Congress, where the changes will be discussed and ratified. According to Kim, “the whole of the party and our military must put up a struggle to exterminate the practices of seeking privileges, misuse of authority, abuse of power and bureaucratism” – and strengthen Party ideology.

These statements, coupled with the nuclear tests and satellite launch all in a matter of days, were shortly followed by the news that North Korea had executed General Ri on accusations of corruption and “factional conspiracy.” Put together, these events have set the stage for a strong endorsement of change and of Kim Jong Un’s aspirations to economically transform and develop the country.

Gorilla in The Kitchen

The most contentious of the leadership’s challenges is the military’s position of supremacy. Think of the North Korean army as the 800-pound gorilla in the DPRK kitchen, holding the cookie jar. The army controls much of the country’s natural resources and assets. Release of these assets might ultimately bring a surge of economic development.

Accorded the role as defender of the state and sovereign security, the military has long been an obstacle to structural change and real economic reform. The balance of power between Party and the military has been a delicate and thorny topic for the leadership, given the primacy acceded by the previous leaders. This new shift – in essence, to establish power of the Party over the military – goes a long way to explaining the leadership’s push on nuclear and missile technological developments.


In short, if Kim Jong-un can demonstrate to the people that his government has the capabilities to assure and defend sovereign security through technological advances, then the opaque requirement for such a monolithic and omnipotent military machine is no longer justified.

This critical move requires the leadership to successfully redirect policy away from that of Songun, or “Military First,” to a new “Country First” ethos.  And that transition needs to be accommodated and actually supported by the military if it is to be successful.

Shadow Markets

So what changes are occurring in North Korea to support the theory that such transformations are afoot?

The first is shadow markets. They range from shadow trading to shadow employment, shadow financing (not banking), shadow housing and shadow property. While they have been around since the mid-1990s, their growth has accelerated since 2011 and are now an integral, although still somewhat hidden, aspect of the North Korean economy.

The shadow employment market, tentatively and quietly approved by the leadership since 2013, has grown exponentially and is a major income generator for many citizens, which in turn has encouraged broader economic growth.


Privately-funded and owned enterprises employ and pay workers a monthly salary, offer overtime rates, generate profit and enrich owners, essentially stimulating the emergence of a middle class while providing a livelihood and disposable income to ordinary working-class citizens. Yes, people in the DPRK actually have paying jobs!

Most outsiders are also surprised to hear that Pyongyang has an active property market. The growth in this market, which is open for It’s open for ‘domestic businesses,’ is evident throughout the city’s central districts, with a number of high-rise blocks and even commercial buildings being built. Large construction cranes are now a dominant feature throughout the city skyline.

While the government has actively facilitated these shadow markets, it has not publicly acknowledged their existence.  In fact, the government is increasingly actively involved in the shadow economy through the creation of additional public housing. We recently visited one project in the suburbs of Pyongyang that is expected to house 60,000 units once completed.  Those housing units, like many others in the Pyongyang city center, will likely be bought and sold in a secondary market.  The regime has not publicly acknowledged the existence of this rapidly-growing ‘shadow’ economy, but is supporting it in active (though tightly controlled) fashion.

Given the large and increasing amount of ‘shadow’ economic activity in the DPRK, the fact that this growth remains unacknowledged by outside observers almost beggars belief.  Economic activity within the DPRK is by and large not acknowledged, recognized or understood by the Western powers. For those who have seen this development first-hand (which we acknowledge is limited to a handful of foreign visitors), it seems imponderable that conventional Western media and governments continue to dismiss this growth.  In our opinion, the only plausible reasons for this disconnect are a willful refusal to investigate the facts, or a conscious decision to ignore them.


Outsiders inevitably expect to hear surreal news from the DPRK.  Western media outlets habitually paint it as a farcical banana republic.  Even for the objective observer (an unfortunately rare breed when it comes to North Korea), the task of separating reality from perception is not an easy one.  It is our stated position that the execution of Ri Yong-gil, and this week’s nuclear and satellite tests, were meant for an internal audience and that any external reaction from foreign powers will be considered a largely irrelevant side effect.

In summary, we have drawn the following conclusions after this week’s events:

First, and most importantly, this week’s tests signal to the general populace that their national security is intact.  The Party knows that it is critical to maintain public support amidst an internal power struggle.

Second, these events will strengthen the Party’s hand over the military. The nuclear test and satellite launch were confirmed to have been conducted by the military, but were done at the behest of the Party and the leadership. As the Party seeks to enhance the economic reforms that were previously mentioned, it will be critically important to wrest control of many resources from the DPRK military.  All indications are that the Party wishes to accelerate those reforms, and therefore the military poses a potential obstacle that must be dealt with.

We believe that the stage is now being set for a direct challenge to the military’s dominance on critical areas and sectors that must be liberated if greater economic restructuring is to be effective.  Furthermore, it is highly probable that the leadership will implement personnel reductions in the military within the next few yearsbring much-needed reductions to its bloated defense budget.  Until this realignment is attained, the leadership’s economic reform and growth strategy will always be hamstrung.

In such context, this week’s displays of military and security capabilities were not intended as a show of force for a Western (or South Korean) audience. Instead, they are the means to an end — in effect, a significant realignment of the balance of power between the Party and the military, and the acceleration of economic development.  The leadership is aware that they have reached the natural limitations of controlled and measured economic progress. The only way to continue its program is to force structural change.

And this starts to answer the ultimate question – “why now.” The nuclear tests, the satellite launch, the execution – these are all important steps taken in preparation for the 7th Congress Meeting, and what increasingly appears to be an irreversible push for economic reform.

This entry was posted on Friday, February 12th, 2016 at 6:33 am and is filed under North Korea.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.