How Kim Affords His Nukes.(World Affairs)(Kim Jong-Il)

Byline: Takashi Yokota

The myth of a failing economy.

North Korea, with its malnourished populace, frequent famines and obsolete conventional weapons, is as famous for its poverty as it is for its provocations. That has many observers now wondering how a country that can barely afford to keep the lights on can foot the bill for a missile and nuclear-weapons program.

Part of the explanation lies in the Stalinist nation's "military-first" policy, under which the Army gets to pocket a huge chunk of the national income--up to 40 percent, according to Marcus Noland, a North Korea expert at the Peterson Institute for International Economics.

The other answer is that, contrary to conventional wisdom, North Korea isn't broke--and its economy has been moving away from collapse in recent years-. The Hermit Kingdom may not be getting rich--the CIA estimates its GDP at roughly $40 billion, ranking 96th in the world. But it's not failing either, and for the past decade, its economy has grown at an average rate of about 1.5 percent a year, according to South Korean statistics. While Seoul estimates that the North's GDP shrank by 2.3 percent last year, some analysts say it actually expanded, arguing that South Korea's recent figures on the North are deflated for political purposes.

To understand how the Dear Leader has managed this, you must first drop a few of the myths surrounding his country. First, the North Koreans haven't been living in caves for the past two decades, nor is their economy de-industrializing, as is sometimes reported. Instead, with help from Beijing, Pyongyang has revamped its outdated infrastructure in recent years and repaired the mining facilities that were battered by massive floods during the mid-'90s. It now aims to shift from recovery to growth, with a focus on steel production, mining and light-industrial manufacturing.

Second, the North doesn't have to rely on the black market to support itself. True, Pyongyang has sold missiles to Iran, Syria and Pakistan, and annual revenue from such exports is roughly $100 million, but analysts say that other illicit activities like drug trafficking and counterfeiting add very little to that sum. According to a former U.S. diplomat in East Asia who asked not to be named discussing sensitive intelligence, during the Bush years Washington investigated the oft-heard counterfeiting accusations, and found that the notes in question had actually been produced privately by former Chinese military officials, in China. "The Treasury Department couldn't find a single shred of hard evidence pointing to North Korean production of counterfeit money," the American says.