Pulling The Plug

By Gordon Bock

It was a dubious honor, even for the most hard-line of Communist nations. But after months of negotiations, North Korea, the xenophobic workers' state run by Communist Leader Kim Il Sung, was publicly declared by capitalist bankers to be in default on its foreign debt. Reason: the Pyongyang government's failure to make payments on $770 million in obligations to two syndicates representing 140 banks. Other countries in the past have halted payment of debt but struck deals with foreign lenders, earning more favorable terms and fresh credits. In North Korea's case, says one European banker, "nobody in their right minds will now lend money to them."

The default came after nine months of talks in London finally fizzled. North Korea has owed most of the money, which it used mainly to buy grain and heavy equipment and to build bridges and roads, since the early 1970s. The country has never repaid any principal; indeed, on several occasions, it also suspended debt repayments, only to work out more favorable terms with Japanese and Western creditors. But for the past three years, Pyongyang has refused even to meet interest charges. For a time it looked as if the banks and the North Koreans might work out another agreement. The deal fell apart, however, when Pyongyang's negotiators demanded $200 million in new credits and the banks broke off the talks.

The debt debacle could hardly come at a worse time for Pyongyang. Reports filtering back from visiting academics and investment experts depict a country mired in an economic morass. Although precise numbers are hard to obtain, the per capita gross national product for the nation's 20 million people is believed to be $900, far less than South Korea's $2,274. The North's GNP rose last year by 1% to 4%, to about $20 billion, compared with a 12.5% increase, to about $95 billion, in the South. While South Korea pumps out Hyundai * automobiles and Daewoo computer equipment, some North Koreans drive trucks that burn wood for fuel and toil over equally outmoded factory equipment. Food is rationed.

These debilities are unlikely to disappear anytime soon. Much of North Korea's economic backwardness stems from the country's imposing military buildup aimed at the prosperous South. Pyongyang is estimated to spend about 25% of its GNP annually on arms -- one of the highest proportions in the world. One result: North Korea is so broke that even China and the Soviet Union, Kim's two strongest military allies, have delayed oil shipments to the country because Pyongyang has been slow to pay its bills. Western observers also feel that North Korea's plight will never improve so long as the Kim regime holds to its doctrine of Juche, an ideology of extreme self-reliance that basically rejects cooperation with foreigners. Juche is closely associated with Kim himself, who has ruled the country since 1948.

The latest default could make life more austere in Kim's kingdom. Lawyers representing the creditor banks are already scouting for North Korean assets to seize, including reserves believed to be stashed in bank accounts in Switzerland, Austria, West Germany and elsewhere. There is speculation too that the creditors could try to intercept the shipments of gold, worth about $27 million each, that Pyongyang sells each month through the London bullion market. Juche, in other words, could encompass even harder times ahead.

With reporting by Yukinori Ishikawa/Tokyo and Christopher Redman/Paris