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Being a North Korea 1 percenter just got dangerous

Tuesday, 17 Dec 2013 | 2:21 PM ET
Kim Jung Un
Ed Jones | AFP | GettyImages
Kim Jung Un

While the recent execution of the uncle of North Korea's ruler suggests power consolidation inside a nuclear-armed nation, a deeper look also reveals an insecure leader who feels threatened by the growing power of the North's economic elite.

Many outsiders regard North Korea as a nation in a state of perpetual, widespread famine. The country sealed its borders to the outside world 60 years ago, and glimpses inside the hyper-secretive country are rare. But not all North Koreans are starving—and its economy is far from isolated.

Through revenue-generating business ventures that often are managed by military and political leaders, North Korean state trading companies have generated millions for North Korean dictator Kim Jong Un and the nation's ruling class. While the North's 99 percent search for food scraps, its "1 percent"—through private enterprise, ironically—has become increasingly wealthy.

Being a North Korea 1 percenter just got dangerous
CNBC.com senior editor Ted Kemp says following the execution of North Korea's number two in command, the country's elite are becoming increasingly nervous.

Even in a communist country like the North, there's an entrepreneurial hierarchy. And among the state trading firms, Jang Song Thaek amassed and managed one of the largest and most influential group of state trading companies in North Korea. With high-ranking connections from the military to the North Korean Cabinet to the ruling Kim dynasty, Jang was the North's ultimate influence man before he was executed last week.

"Jang was like a prince maker," said John Park, northeast Asia security specialist at the Harvard Kennedy School. "In North Korea, it's a parallel existence between the 1 percent and 99 percent. And Jang's execution was about managing the power of the 1 percent," Park said. "He built the North Korean equivalent of a North Korean business empire."

With Jang's execution, Kim Jong Un now faces a delicate balancing act between ferreting out his uncle Jang's collaborators—while not entirely dismantling the cash cow of state firms Jang built. Weeding out Jang's network is a short-term fix. "Medium-, long-term, you've cut off this machine and that's almost like a self-inflicted wound," Park said.

And the purge is far from over.

"North Korea has ordered home almost all their agents in China, suggesting that they will be examined and at least some will be purged," said Bruce Bennett, senior defense analyst at the RAND Corp.

And unlike previous purges that protected the North's most inner circle, the current North Korean leader—in his early 30s and just two years into power—is digging deeper. "Even the central group is being disrupted in ways that had never been done before," Bennett said. "You have to wonder if Kim Jong Un is being immature."

(Read more: North Korea's most coveted snack)

How to make friends in North Korea

People watch television news showing Jang Song-thaek in court before his execution on December 12, 2013, at the rail station in Seoul on December 13, 2013.
Woohae Cho | AFP | Getty Images
People watch television news showing Jang Song-thaek in court before his execution on December 12, 2013, at the rail station in Seoul on December 13, 2013.

Jang was executed, reportedly by machine-gun firing squad, after being convicted of treason.

At 67, Jang had achieved much more than an ordinary bureaucrat, who dutifully towed the regime line. He had the vision and ambition to pinpoint the North's growing weakness—lack of economic reform. Jang tapped into that vulnerability to the regime's advantage, and according to charges filed against him, ultimately for his own benefit.

What was it about Jang that bred such loyalty and strong feelings?

Based on previously aired footage of military parades and children dancing methodically, it can be difficult to imagine North Koreans with emotional depth. But inside the North, allegiances beyond those to the "Dear Leader" have been maturing for years.

Again life in the North, especially among the elite, is dynamic. When the former North Korean leader Kim Jon Il died two years ago, there was a power shift. And his wife's brother Jang was right there to offer solace—and a position in one of his state trading firms—to those who had fallen out of favor. "Jang was good at rehabilitating them," Park said. Inside North Korea and during his travels to China, Jang proved a master at cultivating relationships and loyalties.

Amiable and politically savvy, Jang parlayed his encyclopedic knowledge of the North's power infrastructure to his advantage. These skills combined helped him ascend the ranks of North Korea's elite. "He gave rise to this phenomenon of monetization of political relationships," said Park.

The rare public nature of Jang's purge—televised nationally—shows how widespread and threatening his influence had become. On Monday, North Korea erased Jang from its Web archives.

In the end, based on charges against him, Jang may have shifted his chief priority to amassing his own wealth over catering to the Kim family, as the indictment suggests.

An alarming charge against Jang emerged.

According to the indictment, "Not only was Jang amassing power in the military, party and indirectly in the state, but he was plotting an outright coup," Stephan Haggard wrote in a recent blog post on the Peterson Institute for International Economics website.

"Even more interesting is how he (Jang) was expected to do it: he hoped to exploit a deterioration in the economy to ultimately become premier," Haggard wrote.

(Read more: Inside North Korea's not so isolated, free-enterprise economy)

Is North Korea finally collapsing?

A father and daughter on a bicycle in Rajin, North Korea.
Mark Edward Harris | Getty Images
A father and daughter on a bicycle in Rajin, North Korea.

North Korean leader Kim now hopes to oust Jang's circle without crushing the network of revenue-generating state trading firms. In 2011, trade between North Korea and China reached nearly $6 billion, Harvard's Park estimates.

The bulk of those funds on the North Korean side landed in the hands of Jang, the regime and the rest of the north's 1 percent. Millions in the North need international food aid, according to the United Nations. Its 1 percent, meanwhile, has access to luxuries including cognac, household appliances and Mercedes-Benzes. They're jetting to Europe on commercial flights directly in and out of the capital Pyongyang. Travelers and defectors report sightings of obesity in the North.

Among the potential, global risks going forward, Korea watchers say, is Kim turning to illicit activities such as the sale of weapons of mass destruction to fill the North's coffers.

Kim also may dip into his personal wealth to generate income. According to one report, Kim sold an undisclosed amount of gold within the last couple of days, said Bennett. Kim also could tap into his family fortune—more than $4 billion in overseas bank accounts—largely amassed by his late father.

What North Korea purge means for its neighbors
Andrew Gilholm, Senior Analyst for China and Korea at Control Risks, says Jang Song-thaek's execution will increase uncertainty in China over Kim Jong-un's leadership.

And more dramatic fallout from the purge is likely within weeks—not months. Senior officials who suspect they'll be purged and executed may be trying to defect. And any defection would trigger the leak of sensitive details about North Korean operations.

"Apparently Pyongyang is in a shutdown—people who do not live in the city are not being allowed in, and the police security personnel are working the streets," said Bennett.

At the moment, the regime remains intact. "We don't see any visible crumbling at this stage," Bennett said. Kim, however, has had a much more turbulent two years compared to his father's 18-year reign.

"If you wrote this a script, the director would tell you to rewrite," Park said. "It's so implausible."

—By CNBC's Heesun Wee. Follow her on Twitter @heesunwee.

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