They’re Not Brainwashed, They’re Just Miserable

What North Koreans really want.

This month, North Korea reportedly executed the Korean Workers' Party's economic policy director, Pak Nam Gi, for being a "bourgeois infiltrator" who ruined the country's economy. Upon his 2005 appointment to the position, a post akin to a finance minister, Pak had allegedly vowed to put an end to the "capitalist fantasy." But the 77-year-old technocrat's disastrous currency-reform program, launched Nov. 30, 2009, ended up damaging something very real: the informal market economy that today provides for most North Koreans' sustenance. The "reform" chopped two zeros off the currency, gave citizens only a brief window to exchange their wealth, and capped the amount of old bills that North Koreans could trade in at roughly $40.

So complete was the resulting economic chaos that it precipitated an unprecedented outpouring of civil disobedience. And though the sporadic protests appear to have been relatively small and uncoordinated, the reported prominence of octogenarian war veterans among the protesters was enough to unnerve the government. The fiasco was obviously self-inflicted and visibly inconsistent with the regime's tendency to attribute all ills that befall the country to foreign "hostile forces." Pyongyang bumped up the limit for currency exchanges and in February made a historically unparalleled apology to the public delivered by Pak and Premier Kim Yong Il. And because leader Kim Jong Il's favorite son and rumored successor, Kim Jong Un, was associated with the policy, someone had to pay. Pak was the scapegoat.

From the outside, the apology looks like a watershed moment for one of the world's most repressive regimes. Yet understanding how North Koreans actually assess these events is enormously difficult. In highly repressive states like North Korea, people engage in what social scientists call "preference falsification," or, more colloquially, "keeping your head down" -- suppressing the outward expression of their true feelings in favor of maintaining a facade of support. But two recent large-scale surveys of North Korean refugees conducted in China and South Korea suggest that privately held assessments of the regime are indeed highly negative. The surveys, of which I am a co-author, paint a picture of an atomized society where trust is scant and collective action negligible.

With the refugees having voted with their feet, it would of course be surprising if they did not hold the regime in low regard. But when we controlled for observable characteristics such as age, gender, occupation, and even life experiences such as receipt of food aid or arrest and detention, the refugees' views do not appear too different from our best statistical projection of those of the remaining resident population. In short, the surveys offer a unique glimpse into the Hermit Kingdom.

The roots of discontent with the economic situation date back to the 1990s, when a famine killed between 600,000 and 1 million people -- about 3 to 5 percent of the population. The once centrally planned North Korean economy marketized when the country's payment and food distribution system collapsed, but the regime was never comfortable with the resulting loss of control. Suddenly, new paths to wealth, status, and potential political influence opened as merchants of food, household items, radios, and even services such as bicycle repair began to appear. Perhaps out of fear, envy, or ideological antipathy, the regime has periodically tried to stamp out the market -- hence November's reckless currency reform.

The surveys' results suggest that the regime's discomfort might be well founded. Countries such as North Korea, where people routinely hide their true opinions, are prone to sudden, explosive political mobilizations like the ones that swept Eastern and Central Europe in the late 1980s. Those mobilizations happen when nascent expressions of discontent cascade -- each person who sticks their head above the parapet encourages another to do the same. And in North Korea, the market appears to be just such a semiautonomous zone of social communication (and potentially political organizing) beyond the state's reach.

Meanwhile, the state monopoly over information that once kept North Koreans in the dark about the true nature of their situation is fast crumbling, a victim to economic integration with China, improved telecommunications, and the erosion of control conferred by the socialist economic system. The survey responses depict a society that is increasingly bold about consuming foreign news at the same time that it becomes increasingly available.

In response to the threat of dissent, the regime has tightened its grip, for example by criminalizing economic activity not directly sanctioned by the central authorities. Significant numbers of North Koreans are detained in low-level penal facilities where abuse is ubiquitous. The vast majority receive no trials or formal legal proceedings before incarceration. The penal system is increasingly used as an instrument not only for intimidating traders and entrepreneurs but also for extortion, as officials extract bribes from market participants understandably eager to avoid being imprisoned. Employment in the establishment institutions of the party and state is increasingly sought -- not out of patriotism but because such positions provide a platform for economic predation on the general public.

These practices, however, might be backfiring if the goal is to keep the country's population quiet. The state's actions are widely regarded as unjust and appear to be contributing to the politicization of the country's people. Consumption of foreign news, participation in the market economy, and contact with the police (especially the political police) are associated with holding dissenting views -- and the tendency, however muted, to communicate them to one's peers. The currency reform disaster adds an exclamation point to trends that were already well under way.

That said, it is a large leap from privately held views to effective collective action. And without any civil society institutions to speak of, North Koreans might be incapable of channeling mass discontent into effective political action. There are no trade unions such as Solidarity in Poland, no churches to play the role that the Roman Catholic Church did in the "people power" revolution in the Philippines, and no forum of intellectuals such as the Civic Forum in Czechoslovakia.

So what are the lessons for North Korea's current rulers and their authoritarian counterparts elsewhere? Pervasive repression, ruthlessly applied, appears to work -- at least up to a point. However, viewed through the prism of veteran analyst Edward Luttwak's infamous formulation that dictators should set the marginal cost of repression equal to the marginal rent extracted from the population, it appears that the North Korean leadership has been overdoing it on repression for more than two generations. Having thoroughly degraded the society, the leadership is now devouring its own.

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Control That Capital

It is time for the IMF and the United States to fully support capital controls, an easy way to help ease crises in developing economies.

In a new study, staff members of the International Monetary Fund (IMF) endorse an idea to help mitigate the impact of economic crises in developing countries: capital controls. Before the 1997 Asian economic crisis, IMF staff thought controls -- really a macroeconomic policy to smooth the amount of money coming into and leaving an economy -- should be banned. Now, and particularly since the Great Recession, the IMF has changed its tune. Capital controls are a good idea -- and now is the time for the IMF and the United States to back them.

Capital flows -- basically, investment from one country into another -- can help developing countries grow. Many developing economies lack the savings and financial institutions to help finance and kick-start business activity. Money and investment from abroad can help fill that gap.

The more capital coming in, the more the developing country benefits, one would think. But it is a bit more complicated than that. Cross-border capital flows tend to be "pro-cyclical": too much money comes in when times are good, and too much money evaporates during a downturn. In the run-up to the 2007-2008 crisis, for instance, wealthy countries poured too much money, too fast, into developing economies. This led to asset bubbles in real estate and stock prices, as well as currency appreciation. When the crisis hit, investors yanked their funds and retreated to the "safe" haven of the United States.

Capital controls help smooth the inflows and outflows of capital and protect developing economies. Most controls target highly short-term capital flows, usually conducted for speculation rather than longer-term investment. For instance, before the crisis hit, Colombia required that a certain percentage of short-term capital be parked in the central bank for a year. And last November, Brazil put a 2 percent tax on speculative inflows.

The new IMF study finds that such capital controls helped buffer against some of the worst effects of the financial crisis in some developing countries, such as Colombia, Brazil, India, Thailand, and China. It thus endorses capital controls as part of the macroeconomic policy tool kit.

This is a sea change. For decades, the IMF (and the U.S. Treasury) had advocated for the free flow of money and capital to and from countries, regardless of their level of development, without restriction. But now, many economists view the premature lifting of regulations on capital flows in Asia as one of the problems that triggered the Asian financial crisis in 1997, as well as why much of Central and Eastern Europe have been so hurt by the current crisis. These events have led to a slow but diligent rethinking of the role of capital controls within the economics profession in general and the IMF in particular. The IMF study is a result of that rethinking.

This new consensus has come just in time. As higher-income countries have maintained low interest rates, capital is rapidly leaving for developing countries offering better rates of return. Countries like Brazil and China are now concerned about bubbles. Capital controls can play a role in helping them maintain financial stability.

But getting the economics right is only half the battle. Two things must happen to fully take advantage of the new consensus. First, the IMF has to practice what it preaches. It is one thing to have research staff discover that capital controls work. It is another to have IMF country programs advocate for capital controls. The IMF should also play a role in designing effective controls, which investors often figure out how to evade. Bolstering regulators and watchdogs is necessary.

Second, the United States must follow suit. Since 2003, U.S. trade and investment treaties have outlawed capital controls by developing-country trading partners by mandating the free flow of capital to and from a country, regardless of its level of development -- for instance, in trade deals with Chile, Peru, and Singapore. (In Singapore's and Chile's cases, the countries protested the capital-control bans, but ultimately agreed to the treaties.) Pending deals with Colombia and South Korea would also ban capital controls. Other higher-income countries and trade partners -- such as Canada, Japan, and the European Union -- grant countries the right to use the macroeconomic tool, or at least grant exemptions to prevent or mitigate crises.

The good news is that the United States is renegotiating a number of trade agreements in the process of passing them through Congress and as part of a new Trans-Pacific Partnership trade agreement. Washington should correct these agreements and allow for at least the temporary use of capital controls to prevent and mitigate financial crises.

The world has just learned the hard way that a crisis, no matter where it starts, can hurt everyone across the globe. To prevent another crisis, the United States and the IMF should ensure capital controls are part of every developing economy's tool kit.