North Korea’s economic growth – from Pyongyang’s perspective

October 15th, 2018

By Benjamin Katzeff Silberstein

Has North Korea’s economy been growing under sanctions? That’s what an economist in Pyongyang claims. In a recent interview with Kyodo (published here by Japan Times), Ri Gi Song at Pyongyang’s Institute of Economics at the Academy of Social Sciences, claimed that North Korea’s GDP per capita grew by 3.7 percent in 2017, a year during which the country was virtually banned from selling its most crucial export goods, and faced very harsh conditions for importing crucial resources such as oil and fuel. When factoring in population growth, the GDP-growth-figure diminishes somewhat to 3.2% (see below), but it’s still firmly in the same range.

Strange as it may sound, it is possible to imagine that North Korea’s economy wouldn’t contract severely during a year of sanctions. GDP growth alone is a poor way of measuring long-run, sustained economic growth and progress. While it may sound counter-intuitive, the sanctions, while depressing the economy in certain ways, may have boosted it through other mechanisms. The ban on coal imports from North Korea, for example, may well have boosted certain industries, as this blog has covered in the past. Because exports have dwindled drastically, the price at which North Korean coal can sell – domestically as well as internationally – gets much, much lower than when it could be sold in greater quantities on a somewhat competitive market. So with lower prices for factors of production, industry could certainly experience growth in the short-run. But this would only be a temporary and meaningless boost, since the losses from unsold goods abroad would be much greater.

In other words, Ri may be partially right, but numbers are also likely inflated for political reasons. Here’s an excerpt from the interview, annotated with comments:

North Korea’s economy grew 3.7 percent in 2017, a professor of a think tank in Pyongyang said in brushing aside the view that the country has faced an economic contraction against a backdrop of international sanctions.

Even though North Korean economic data has become somewhat more public and plentiful in the past few years, there are still undeniable political imperatives in publishing data that makes the country appear resilient in the face of sanctions. After all, if sanctions aren’t “working” (whatever that may mean), what’s the point in keeping them? That, of course, doesn’t mean that such figures are accurate, wholly or partially.

Ri Gi Song, a professor of the Institute of Economics at the Academy of Social Sciences, said in a recent interview with Kyodo News that North Korea has achieved economic expansion without depending on other nations.

Well, he would say that, since that is how Juche is spoken. That doesn’t mean it comes from a place of literal belief; it’s simply what you say if you’re a North Korean economist speaking from your official position, and shouldn’t be read as an expression of delusion or the like.

Ri said gross domestic product totaled $30.70 billion in 2017, up from $29.60 billion in 2016. It is very rare for North Korea to disclose its GDP and also the first time that the country’s GDP data in the past two years have been unveiled.

But it is impossible to verify the accuracy of the figures, as the professor did not make public other economic indicators such as consumer spending, investment and inflation rate.

Although a report released by South Korea’s central bank showed in July that the North’s economy shrank 3.5 percent in 2017 from the previous year, Ri shrugged it off, saying Seoul’s calculation is “only an estimation.”

Ri is right that South Korea’s figures are only estimates, albeit careful ones based on models developed and refined (presumably) through years of experience. But the thing is, Ri’s official North Korean figures, too, are only an estimate. Even in the best of situations, no GDP-figure is exactly certain and precise. To calculate as vast of an “object” as a country’s economy, some assumptions inevitably have to be made. One of them is that various forms of reporting is generally accurate.

In the case of North Korea, however, this problem is incomparably worse than in open, democratic free market-economies. Let’s assume for a moment that the North Korean government genuinely is eager and willing to generate real, trustworthy and truthful economic statistics, which in many ways does seem to be the case. Even so, how do you generate accurate accounts reporting in an environment when the going principle for a long time has been that planning targets must be met regardless of actual conditions? And with so many different forms and models of enterprise in action throughout the country, seemingly with little but perhaps improving consistency across the board, how would it be reasonable to expect the North Korean government to be able to calculate a reasonable GDP-figure? That’s not even getting started on the investments-portion, a crucial variable to determine growth. Private investments into partially private enterprises is still technically illegal in North Korea, but there are many signs to suggest that it’s taking place on an increasingly substantive scale.

So, even if the North Korean government’s statistical authorities have all the right intentions, I don’t envy their working conditions one bit.

He said North Korea’s population grew to 25,287,000 last year from 25,159,000 in 2016. Based on the figures, the country’s per capita GDP stood at $1,214 last year, equivalent to that of Myanmar.

This means that the actual growth rate claimed by Ri, factoring in population growth, is 3.2%. This, however, still isn’t the “real” growth rate. To get those numbers, we’d need to factor in inflation, and no reliable numbers are available to let us do that. But on the face of it, judging by the price trends for foreign currency and rice through 2016–2017, inflation wasn’t visibly large or out of the ordinary. Even so, we simply don’t know.

In an attempt to overcome the negative impact of international economic sanctions, North Korea has “developed various technologies” under the spirit of “self-reliance,” Ri said, adding the nation has implemented measures to save the utilization of crude oil, for example.

This is certainly true to an extent. Just look at the masses of North Koreans purchasing solar panels for electricity rather than relying on scantly available government supplies of power. And as mentioned above, there is some sense in this argument, if interpreted in a slightly broader manner, that North Korea’s economy may have experienced some gains in efficiency from sanctions, as people are forced to find new, creative ways to get around increasingly tricky conditions. And industry may have gotten a boost from lower energy prices, as may other consumption, since citizens can theoretically spend more on other items if energy prices fall.

Still, this boost would only be marginal, and temporary at best. It certainly wouldn’t create 3.2 percent growth rates, although it might have contributed.

[…]

Ri acknowledged that North Korea has suffered food shortages, but emphasized that the heavy and light industries as well as the chemical sector have been growing and electric power conditions have been improving.

Amid a thaw in inter-Korean relations, Ri expressed hope for economic cooperation with the South.

Full article:
North Korea’s economy grew 3.7% in 2017, Pyongyang professor estimates
Japan Times/Kyodo
2018-10-13

At the end of the day, as Andray Abrahamian points out, neither North nor South Korea publishes their methodology for calculating North Korea’s growth rates, so all we can do is speculate about the assumptions that go into the models.

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Where do North Korea’s agricultural policy changes stand?

October 9th, 2018

By Benjamin Katzeff Silberstein

Over at NK News, Peter Ward recently published a highly interesting piece on Kim Jong-un’s official endorsement of agricultural policy changes. As Ward notes, one has to read beyond the carpet of propaganda-esque language to really see the subtle but significant changes in how official sources, at the highest level, talk about agricultural management:

Under the system that Kim Jong Un introduced in 2014, the sub-work team leader remains the line manager in charge of day-to-day operations. However, their team now usually consists of 15-20 people, though can sometimes be smaller where the land is better and farm more mechanized.

Kim emphasizes the sub-work team leader’s core role as a conduit for Party agricultural policy and the so-called “Juche Agricultural method.” The sub-work team leader must extol such methods and ensure that production tasks given to them by the party are carried out.

In Kim’s vision, the sub-work team leader is akin to an entrepreneur in charge of their staff: tasked with overcoming issues and implementing party directives in a creative and dynamic fashion in line with circumstances. The sub-work team manager is supposed to lead from the front – “up first in the morning and to bed latest at night.”

Much of this could arguably have been said about production leaders under old institutional arrangements in North Korea as well. Ward, however, points out a significant change:

One point that Kim makes that is revolutionary however, is that the state will take “a certain portion of grain [produced],” leaving “the rest to farmers whose distribution will be decided by the number of days they have worked – the amount they have earned.” This is the essence of the new system: farmers keep anything they harvest beyond their mandatory state quota (planning indicator), the state no longer just takes everything before providing a fixed ration.

Full article here:
Masters of the farm: North Korea’s new agricultural entrepreneurs
Peter Ward
NK News
2018-10-09

One crucial question that seems to remain, however, is around how the state sets its quotas. As Ward points out, farmers get to know ahead of time how much of their output they will get to keep, based on estimated harvests. In a recent dispatch, Daily NK said that no matter the actual production, the state takes its pre-set share in absolute terms even when actual production ends up being lower than anticipated. In other words, there’s still much room for predatory economic governance by the state, especially since the new system may still lack clear and transparent central guidelines by the state. In any case, the new system, judging by all available information, is a step towards greater efficiency.

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Grain yields appear to be down in North Korea this season

October 4th, 2018

Benjamin Katzeff Silberstein

At least judging from the trend at one farm:

September’s grain yield projection for the Ripsok Cooperative Farm in Mundok Country, South Pyongan Province, has been set at 60% of the estimate made earlier in the year.

North Korea habitually sets high grain production targets but in reality, the government actually expects to achieve 60%-70% of the projection. For example, last year the Ripsok Cooperative Farm set their grain production goal at 6000 tons, but achieved an actual yield of 3800 tons.

This year’s harvest is expected to reach only 3600 tons, representing an approximate 5% decline from last year.

Analysts have predicted a reduced grain harvest this year due to damage from the drought and typhoon that hit North Korea’s grain producing regions including South Pyongan and North and South Hwanghae provinces. However, this report marks the first internal acknowledgement of the country’s reduced grain yield.

“In the middle of September, cadres from the Rural Management Committee came out to check the crop yield and estimated that it will be less than last year’s,” a source in South Pyongan Province told Daily NK.

At the end of August and early September each year in South Pyongan Province, the Party’s district agriculture department cadres, collective farm advisers, and people’s committee agriculture managers tour the farms and determine expected grain yields. These estimates are conducted nationwide and the information is sent to the central government.

Ripsok Cooperative Farm is considered a highly productive farm with an annual planned grain production of 6000 tons, at a 7:3 ratio of rice to corn and other grains. Its continued operation involves approximately 5000 people, including farmers and household members.

However, when the Mundok County Party Committee members, Rural Management Committee and other cadres heard that the year’s harvest will be lower than last year’s, they were openly disappointed. Officials believe that natural disasters were a major cause, the source said.

Even if the production fails to reach its projected yield, the North Korean government buys back 30% of the grain based on its original planned output. Although the national price is 240 won per kilo, the market price is 5000 won per kilo, which means that the government basically buys the grain for free.

After the government buyback, seeds, grains and debts are repaid, and the remaining profit is distributed to the farmers.

“After considering the buyback from the government, as well as the storage of seeds and grain and debt repayment, the farmers who have worked so hard throughout the hot summer to prevent crop damage will receive a lot less than they did last year,” a separate source in South Pyongan Province reported.

This piece of information about how buyback figures are estimated is interesting. Though farming administration has become much more liberal (if you will), it doesn’t mean that the government has rolled back its heavy hand entirely in economic management. With reforms such as the household-responsibility system, the central basis for the government is increased efficiency, not necessary benevolence.

Full article:
Grain yield projection takes 5% hit at farm in South Pyongan Province
Jo Hyon
Daily NK
2018-10-05

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As farmers get to keep more of production, productivity increases, say sources in North Korea

October 4th, 2018

Benjamin Katzeff Silberstein

This Daily NK article isn’t yet available in English, but here’s the gist of it: right now harvest season is in swing and North Korea, and with the (seemingly) continuously expanding household responsibility system (포전담당제), labor productivity is increasing, according to some sources, because farmers are able to keep 70 percent of their own production. We still don’t know precisely how widespread the system is, but given its very public recognition in North Korean media such as Rodong Sinmun and some journals, it would be reasonable to assume that local administrators have a green light to go ahead with it if they wish, if it isn’t already fully implemented throughout the country. Daily NK:

북한 일부 지역에서 ‘포전담당제’ 도입에 따라 농민들의 근로의욕이 높아지고 있는 것으로 전해졌다. 특히 최근에는 모피나 가죽 등 군부대 지원 목적의 세외부담도 줄어들면서 농사일에 더욱 열성적으로 뛰어들려는 모습이 나타나고 있다는 전언이다.

평안남도 소식통은 4일 데일리NK와의 통화에서 “이제는 개인 포전제가 실시돼 그만큼 농사에 자기 땀을 바친다”며 “식량 걷이를 하면 열 중에 셋(30%)만 국가에 바치고 나머지 일곱(70%)은 자기가 처분하는 식이라 농사하는 사람들 생활이 폈다”고 전했다.

소식통은 “포전제를 실시한다는 말은 몇 년 전부터 나왔는데 실제로 실시된 것은 작년부터”라며 “비료는 돈이 들어가지만 퇴비는 움직이면 얼마든지 모을 수 있으니 오히려 이제는 노동자보다 농사꾼들이 더 부지런해졌다”고 말했다.

실제로 최근 들어 농사일에 나서는 주민들이 인분이나 짐승의 배설물 등 퇴비를 모으러 여기저기로 부지런히 움직이고 있다는 게 소식통의 이야기다.

포전담당제는 지난 2012년 김정은 북한 국무위원장의 ‘새로운 경제관리체계를 확립할 데 대하여’라는 담화 발표를 계기로 본격 도입됐다. 기존의 분조(分組)를 가족 단위로 쪼개 소규모 인원이 포전(圃田, 일정한 면적의 경작용 논밭)을 운영토록 해 생산량의 일정 비율만 국가에 바치고 나머지는 개인이 처분할 수 있도록 일부 자율성을 부여한 제도다.

현재 이 같은 제도는 북한 전역으로 확대되는 추세지만 전면 실시 및 정착 여부에 대해서는 여전히 회의적인 시선도 존재한다. 특히 북한 당국은 포전담당제의 성과가 뚜렷하게 입증되고 있다고 선전한 바 있으나, 현재로서는 해당 제도가 북한의 농업생산량 확대에 기여하고 있다는 뚜렷한 근거를 찾아보기 어렵다.

Full article:
“北 일부지역 농민들, ‘포전담당제’ 실시에 근로의욕 상승” (Farmers in some areas say that labor productivity has increased, thanks to the household-responsibility system)
Ha Yoon-ah
Daily NK
2018-10-04

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Russia wants sanctions on North Korea to ease

September 27th, 2018

Benjamin Katzeff Silberstein

I don’t think we have systematic, rigid data enough to prove that Russian sanctions implementation overall on North Korea has eased even though the Russian government’s line on easing international sanctions has gone on consistently for months. But still, it’s only logical that a government working for sanctions pressure to ease would at the very least make sanctions implementation oversight and rigor less of a priority. Wall Street Journal:

Mr. Pompeo used his opening address to swipe at permanent Security Council members Russia and China for violating U.N. sanctions involving the sale of petroleum products in excess of North Korea’s maximum 500,000-barrel allowance and for providing other forms of economic relief.

“The members of this Council must set the example on that effort, and we must all hold each other accountable,” Mr. Pompeo said, calling for an end of ship-to-ship transfers of petroleum products, linked to Chinese and Russian entities, and a halt to hosting of North Korean laborers, a reference to the thousands of workers who have been granted permission to work in Russia.

“This violates the spirit and the letter of the Security Council resolutions that we all agreed to uphold,” he told the Council.

Mr. Lavrov used his address to bash the U.S. and its allies for exerting excessive pressure on North Korea, saying it was unacceptable for sanctions to be used as a form of “collective punishment.”

Mr. Lavrov defended North Korea’s call for economic relief, saying Pyongyang has taken meaningful steps toward implementing its promise to give up its nuclear weapons and urged the U.N. Security Council to send a “positive signal” in return.

“Negotiations are a two-way street,” Mr. Lavrov said, adding that Russia would draft a proposal to allow certain economic projects in North Korea to be exempt from sanctions.

Mr. Lavrov said such projects would be in the interest of all parties and would ease the “extreme socioeconomic and humanitarian suffering” caused by the sweeping sanctions regime currently in place. He also took aim at the U.S. for implementing secondary sanctions, which he described as “illicit practices” that undermine the sovereignty of other nations.

It’ll be interesting to see what these economic projects are specifically. My bet is on infrastructure and railway renovations and possibly new construction,  or perhaps ones centering around the Rason port and special economic zone.

Full article:
Russia’s Lavrov Calls for U.N. to Ease North Korea Sanctions
Jessica Donati
Wall Street Journal
2018-09-27

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Moon: North Korea wants to join international financial institutions

September 26th, 2018

Benjamin Katzeff Silberstein

NK News reports some of the comments that Kim Jong-un made to Moon Jae-in on the topic:

Speaking at a discussion hosted by the Council on Foreign Relations (CFR), the Asia Society Policy Institute, and Korea Society, Moon said Seoul plans to support the DPRK’s national economic development should sanctions be lifted following “substantive denuclearization.”

“South Korea intends to take the initiative in putting its weight behind the North Korean economic development, including in the construction of infrastructure,” the South Korean President said. “I believe that will also provide fresh vitality and growth for the South Korean economy.”

The South Korean President said, however, that there would be “a number of limitations” should Seoul work to help Pyongyang’s national economic development, stressing the necessity for support from international financial institutions.

“I think international funds supporting North Korea’s infrastructure will need to be created,” Moon added. “Other international agencies including the WB (World Bank), the World Economic Forum, and the Asian Development Bank should aid North Korea.”

Pyongyang is willing to accept support from international organizations, Moon said, including the International Monetary Fund (IMF).

“I’ve confirmed that the North Korean side has the will to engage in reform and opening by joining several international organizations such as IMF and World Bank,” he said.

South Korean finance minister Kim Dong-yeon in May announced that Seoul was seeking shortcuts to allow North Korea to receive funding and support from International Financial Institutions (IFIs), including the European Bank for Reconstruction and Development (EBRD).

Full article:

North Korea wants to join IMF and World Bank, pursue economic reform: Moon
Dagyum Ji
NK News
2018-09-26

As I’ve written about elsewhere, North Korea joining the IMF and/or the World Bank would entail a number of structural reforms that should, at least in theory, improve the health of the economy. The requirements to improve transparency in economic data would also be crucial, not just for those outside of North Korea interested in its economic situation, but also for the North Korean government itself, which likely does not have a very full picture of many of the most important economic indicators in the economy.

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Power supply in North Korea in the age of markets

September 26th, 2018

By Benjamin Katzeff Silberstein

A couple of days ago, Daily NK ran an interesting interview with a Pyongsong resident about the conditions of electricity supply in the increasingly market-based North Korean system. Pyongsong, readers may recall, is a crucial logistics hub in North Korea’s market system. People can travel there for trading activities without having to go through the often laborious process of getting a travel permit to Pyongyang, while still reaping the benefits of Pyongyang’s large demand and comparatively wealthy consumers. It sits right on the way to Pyongyang from Sinuiju, North Korea’s main connecting city for trade with China. In 2009, in one of Kim Jong-il’s more blatant anti-market measures, a large wholesale market in Pyongsong was closed down. Several major markets, however, operate in the city and it remains a significant hub for market trade.

The Daily NK interview tells us several interesting things about the way electricity supply functions in North Korea today. Below are a few clips, with added annotation.

The foundation for North Korea’s policy on electricity clearly states that electricity is the driving force behind the people’s economy and it needs to be developed ahead of other sectors so that industry and agriculture can not only exercise their capabilities, but also strengthen national defense.

In theory, electricity should be supplied to state-owned enterprises and other productive units of the central plan according to their needs, basically for free. This creates massively distorted incentives – soft budget constraints, if you will – since enterprises have no reason not to overestimate and over-use electricity. In practice, today, however, with North Korea’s lagging electricity production, in combination with increasing autonomy for state enterprises, it seems that many or most have to pay for whatever electricity they use in the production process.

According to North Korean defectors, some hydroelectric power plants generate power, but most of the-small to-medium sized plants are unable to produce power because the facilities are too old.

It is said that Pyongyang’s power situation has improved but a resident of Pyongsong, South Pyongan Province with whom Daily NK recently met in China said that the power situation in provincial cities remains unsatisfactory.

As is often the case, the situation, like Daily NK points out, is far better in Pyongyang. There, electricity supply appears to have increased as sanctions on coal exports bite, since coal prices have gone down enough for power plants to use more of it.

Daily NK (DNK): Compared to a month or two ago, has the power situation improved?

Pyongsong Resident (PR): Until 2015, electricity was supplied in the evening for two to three hours per day but it was gradually cut off. Since 2017, electricity is only supplied on holidays or when there’s an important news report.

The timing mentioned here is interesting, since there’s little else to suggest that North Korea’s economic situation drastically declined in any significant way specifically in 2015. Rather, it may be a question of increased competition and a higher opportunity cost of supplying residents with electricity essentially free of charge. As enterprises are increasingly free to control their own operations, and source production inputs more freely from institutions such as power plants, the opportunity cost for the state (loosely used here) in providing ordinary residents with electricity increases increases.

[…]

DNK: Can you buy electricity?

PR: If there’s an important occasion like a wedding, people can ask the distribution department and pay them to use electricity. Until a few years ago, you had to have a personal connection or pay a bribe to use electricity, but these days you can pay 50,000 won and they will supply the electricity at the time you want. In some areas, there’s only one power supply line, so if one household buys electricity, other neighbours are happy because they get to use the electricity for free. The authorities are using the national electricity infrastructure to line their own pockets.

A well-known pattern from other parts of the North Korean economy: what starts out as mere corruption soon turns into an institutionalized mechanism in the system, more or less.

DNK: How do party cadres use electricity?

PR: State factory cadres, state security officials and police plug a separate power line into state enterprises and secretly send electricity to their own homes.

Despite the vast changes over the past few years in how the North Korean economy operates, it’s still highly advantageous for several reasons to be a party member and/or state official. Often, not least to gain favors within the market economy.

Since the central government no longer supplies electricity, people are using solar power for television and other leisure activities. About 80-90% of households have already installed their own solar panels. A panel costs US $30 to 80 dollars depending on the size.

The 80–90% figure may not be numerically accurate,  but the vast increase of solar panel use in North Korea over the past few years is well documented, not least by foreign travelers. In any case, though solar panels may not be the most technologically efficient or cheap way to generate power for individual household use, in the case of North Korea, it’s an interesting example of how behavior to cope with shortages lead to more viable, sustainable supply methods, as the state’s electricity supply was usually unreliable and spotty at best for the past few decades.

Full article here:
Pyongsong resident sheds light on persistent regional power supply issues
Mun Dong Hui
Daily NK
2018-09-24

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The economic side of the Moon-Kim summit

September 21st, 2018

By Benjamin Katzeff Silberstein

The economic aspect has been continuously front-and-center throughout the Moon-Kim summit in Pyongyang (September 19–20). From a diplomatic standpoint, this is not all that surprising. Moon and Kim are pursuing what appears to be a rather classical Sunshine 2.0 pattern, with roughly the same contents as the predecessor. As Yonhap reports:

Earlier in the day, the leaders of South and North Korea agreed to work together for balanced economic development on the Korean Peninsula.

South Korean President Moon Jae-in and North Korean leader Kim Jong-un agreed to break ground on a joint project to connect railways and roads across their border this year and vowed diverse cooperative projects to deepen their friendly ties and foster a reconciliatory mood.

The agreements were reached during summit talks held in Pyongyang between Moon and Kim.

“We will prepare for (inter-Korean economic cooperation) in a calm and orderly manner,” Finance Minister Kim Dong-yeon said in a meeting with reporters here.

“But inter-Korean economic projects can gather speed if circumstances improve,” he said.

The minister said any inter-Korean economic projects should need support from the international community, and there are still many things to be done in advance.

The latest agreement came months after the leaders reached a deal during their April summit to modernize and eventually connect rail and road systems across their divided border.

Field surveys have been carried out to examine the state of some sections of the North’s rail and road networks, but the process has not moved fast enough, apparently due to stringent sanctions imposed on the North for its nuclear program.

Railways and infrastructure are both less politically touchy than outright trade, and potentially mutually beneficial, even though the south will carry the economic burden:

“The South and the North agreed to explore practical measures aimed at increasing exchange and cooperation and seeking balanced development,” read a joint statement they signed after the summit.

“The two agreed to hold a ground-breaking ceremony this year for connecting railways and roads running along their eastern and western coasts,” it also stated.

The decision came months after the leaders reached a deal during their April summit to modernize and eventually connect rail and road systems across their divided border. The Seoul government has set aside nearly 300 billion won for next year to carry out those projects.

Field surveys have been carried out to examine the state of some sections of the North’s rail and road networks, but the process has not been fast enough, apparently because of global sanctions on the North.

The second point of the Pyongyang Declaration promises more economic cooperation for “balanced” growth, and vows to reopen projects such as the Kumgangsan tourism zone, and the Kaesong Industrial Park, according to Moon, “when conditions allow“. Here’s an English-language full-text version of the declaration. A particularly interesting but understudied point is 2.3, on ecological cooperation.

Kim Jong-un’s forestry interest has been a recurring theme throughout his tenure, and as this blog has covered, he’s spoken about the problems associated with excessive tree-felling – the root cause of which is North Korea’s planning failures of the 1990s – in more honest terms than his father did. At the very least, there’s been strong hints of both pragmatism and understanding of North Korea’s structural problems in the way that Kim has talked about the forestry issue (and many others too for that matter). Indeed, the Korea Forest Service chief accompanied Moon to Pyongyang, and he hopes to get to work soon following the summit:

“Forests surrounding populous urban areas were heavily destroyed, but forests in less populated regions were well-preserved,” Kim Jae-hyun said in a meeting with reporters at a government complex in Daejeon. “I saw enough hope.”

He was speaking after accompanying South Korean President Moon Jae-in’s visit to North Korea from Tuesday to Thursday.

As the first step, Kim said the Korea Forest Service will explore ways to create tree nurseries in much-destroyed regions.

“The North Korean side wants large-scale tree nurseries, but it would be more practical to start with small nurseries in regions suffering from deforestation the most,” he said.

In regard to disease and insect control efforts, the official said the use of machinery could be limited as the North is under U.N. sanctions for its missile and nuclear tests, while pesticides are allowed.

“I think (the disease and insect control measures) should start immediately to build trust between the two Koreas,” he said.

The forest expert said his North Korea visit as part of the official entourage showed Moon’s “willingness” to pursue inter-Korean cooperation in the forest sector.

“Looking down from an airplane along the western coastline, North Korea’s forests were very impressive,” Kim said. “There were few trees on hills near Pyongyang, while trees were well-maintained on the way from Sunan Airport to Baekhwawon guesthouse.”

Mountains near Yalu River on the North Korean border with China were denuded, but Mount Paekdu showed off all colors of beautiful trees, he said.

Moon and Kim aren’t the only ones who have talked about economic cooperation. The mayor for Busan, South Korea’s second most populated city, for example, has announced projects that his city will spearhead. Yonhap again:

Busan’s envisioned projects, unveiled in time for President Moon Jae-in’s historic visit to North Korea, call for boosting the city’s cooperation with the North in the fields of fisheries trade and processing, modernization of fishing vessels and equipment, shipbuilding, exhibitions and conventions and smart city technology, the city said.

The city will push to invite North Korean filmmakers and actors to the Busan International Film Festival and hold an inter-Korean film festival.

Nikkei Asian Review also reports that the Moon government has put pressure on Samsung and its head, Lee Jae-yong, to present a large-scale investment plan for North Korea. Samsung has manufactured TV:s in North Korea before, but this time around, the company hasn’t appeared as eager as its other chaebol-counterparts to draft up implementable blueprints for investments up north. Politically, it makes sense. Samsung’s PR hasn’t exactly been superb as of late, with the arrest and later release from prison of its CEO relating to corruption charges tied to the Choi Soon-sil/Park Geun-hye-scandal.

South Korea’s main steelmaker Posco is also hoping for opportunities following the summit:

The executive was part of the business delegation that accompanied President Moon Jae-in on his trip to North Korea earlier this week. Choi and other businessmen discussed various inter-Korean economic cooperation projects that can be pursued going forward if conditions are right.

“It will be a big opportunity not only for POSCO but for the steel industry as a whole,” Choi said. “I think POSCO will be able to find chances for growth.”

The company recently created a new task force to prepare for potential business opportunities in North Korea. POSCO Daewoo, POSCO Engineering & Construction Co. and POSCO Chemtech Co. are participating in the task force.

The steelmaker said it wants to play a key role in railroad and other infrastructure projects in line with the changes in the geopolitical environment in Northeast Asia.

My five cents on what all this entails for the North Korean economy:

Of course, as of yet, nothing. Most of the plans and visions are routinely accompanied by the caveat “when conditions allow”. The infrastructure plans may be able to go ahead even with sanctions in place, at least the rhetoric from the Moon administration, and the timetable for breaking ground on the railway connections before this year is over, seems to suggest so. I’m no expert on the judicial side of the sanctions, but it’s hard to imagine that this will be fully uncontroversial from that standpoint.

In any case, North Korea is in dire need of infrastructure improvements and if they are extensive enough, they should hopefully not just connect South and North Korea with Russia and China for cheaper freight, but also make domestic goods transportation simpler and more efficient, with positive impacts for the markets and private manufacturing in the country.

On re-opening Kaesong, things are a bit more complicated. In its nature, Kaesong is a manufacturing zone mostly cut off from the rest of North Korea. Sure, the incomes of the workers did enter the North Korean economy, and arguably, the fact that South Korean consumer goods could to some extent enter North Korean markets through Kaesong spurred competition for more high-quality goods on the North Korean market as well. But Kaesong is hardly the only, and perhaps not even the main route through which such products enter the country. These are also pretty weak arguments when you look at the entire economic picture.

The problem with Kaesong isn’t so much what it was/is/will be, but the missed opportunities. The hope with special economic zones tends to be that institutional frameworks that are tried there first can later spill over into the rest of the country. In the case of North Korea, the arrangement made pretty sure that that didn’t happen, at least from what we can tell. Had inputs been sourced from North Korea, that could also have spurred wider economic growth, at least in some regions. In theory, there are lots of opportunities for synergy and cooperation between South Korean companies and smaller North Korean ones, not just the state. If the goal is economic development in North Korea more broadly, and not just economic profit on the southern side and incomes for the north, there are lots of models that carry far greater potential.

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Explaining North Korea’s exchange rate stability: it’s all about the companies

September 13th, 2018

By Benjamin Katzeff Silberstein and Peter Ward 

The stability of the market exchange rate for won-to-US dollars has been one of the most puzzling features of the economy over the past few years, and particularly so during the so-called period of “maximum pressure” and heavy sanctions by the international community. The market exchange has not once moved out of its ordinary – also remarkably stabile – territory over the past few years, as the following graph shows with clarity:

Won for USD-rates on the markets, 2009–September 2018. Data source: Daily NK. Graph: NK Econ Watch.

Thus far, to my knowledge, there have been two main, potential explanations:

(1) Maximum pressure is not having a meaningful impact on the North Korean economy as a whole. Even though it can’t export coal, minerals or textiles under current sanctions, its main sources for foreign currency revenue, the sanctions aren’t being enforced strictly enough to impact the economy as a whole, and foreign currency keeps flowing into the economy.

This explanation is pretty easy to dismiss offhand, since we know with more or less certainty that North Korea’s exports of these goods have plunged as Chinese sanctions enforcement has been fairly strict since the late summer/early fall of last year, even though it’s waxed and waned as it always does.

(2) The second explanation, most notably put forward by Bill Brown, is that Pyongyang is much better at monetary policy management than they’re given credit for. Chiefly (but not solely) through decreasing the amount of won in circulation, by giving state-owned enterprises (SOEs) smaller loans and credits in won, the government is able to keep the exchange rate stabile.

Speaking with my friend and colleague Peter Ward, a researcher of North Korean economic policy under Kim Jong-un and avid reader of North Korean economics journals, he explained a third possibility, partially in line with the latter hypothesis posed above. Ward visited North Korea twice in the past year, and was able to confirm many of the economic policy developments he had first detected in the literature from Pyongyang.

In short, Ward’s explanation is as follows: the main holders and users of foreign exchange in North Korea are not individual citizens, but state-owned enterprises, which legally (since 2013) use foreign exchange in transactions amongst themselves. The quantities of foreign exchange held by SOEs make them, and not the foreign currency markets that individual citizens access and use, the main determinant of the market exchange rate for foreign currency. Therefore, most of the foreign currency in circulation has been there for several years, not entering or exiting monetary circulation.

I asked Ward to share some of his thoughts with the readers of North Korean Economy Watch. Below is a brief Q&A of sorts.

Benjamin Katzeff Silberstein (BKS): first, when did this practice of SOEs trading in foreign currency become common and legally permissive?

Peter Ward (PW): probably around early 2013. This is when the “policy to make domestic production and exports one” came into force. The idea is to align domestic input prices for manufacturing, and consumer goods prices, with prevailing prices on international markets. This is literally what North Korean economics literature says that they aim to do, despite ostensibly being a socialist system in theory.

BKS: How is the FX-market price in North Korea determined? And where do the FX-market for SOEs and that for private citizens intersect?

PW: We don’t know, but one could imagine that there are major foreign exchange markets in North Korea – regional markets, both markets on the ground, so to speak, and between enterprises within regions. How does the center know the prevailing price? The regional price department of the regional People’s Committee price office and market management office (they may either be separate or the same) probably simply calls the local People’s Committee, who supposedly gathers this information from the local market management offices. At any rate, there’s reporting of the prevailing local exchange rate throughout the system.

Major enterprises will also know how much their inputs costs in foreign exchange, and a sense of how much their products would sell for on the world market. In that way, they’re able to assess the costs of their inputs in the world market (or at least China), and know how much they need to charge to make a profit or break even.

The market for individual citizens and SOEs intersect at several levels. SOEs likely source much of their inputs from wholesale markets, and from domestic private traders. They also obtain some of their foreign exchange from loans from private individuals. Private citizens can legally lend money to SOEs, but investments in SOEs by private citizens also happen, though they’re technically not legal, and both these investments and loans probably happen quite often in foreign exchange.

So the market price equilibrium happens through all these conduits, and as on any market, it is determined by countless instances of bargaining between traders, SOEs, and to a proportionally smaller extent, private citizens.

BKS: so where is the FX coming from, to begin with?

PW: if most inter-enterprise contracts and transactions are denominated in foreign currency, they’d be insulated from any sudden, exogenous trade shocks, such as sanctions. They’re still trading amongst themselves with whatever FX-holdings they have. For all intents and purposes, foreign currency inside North Korea is the principal legal tender – that’s what’s likely used for all major transactions inside the country, so exogenous shocks such as sanctions, from the outside, don’t necessarily impact the market price for foreign currency inside the country.

BKS: Is it likely, in your view and judging from your observations in North Korea, that the government maintains a price ceiling on the market exchange rate?

PW: Yes, it is. The government maintains price ceilings on a range of commodities, at least that’s what people inside the country say. They probably have an informal peg to the RMB, since China is their principal trade partner. It looks like it, but we don’t know for sure if they do. One possibility is that have significant cash reserves of RMB…

BKS: is it possible that China is simply helping North Korea keep the won stabile, by simply funneling RMB in?

PW: that’s certainly a possibility. The North Korean government keep a very close eye on the exchange rate, both in terms of physical cash in circulation and deposits in bank accounts, which SOEs have – both domestic and foreign currency bank accounts. They’ll keep a tight control over domestic currency-denominated loans to SOEs – that’s certainly one way of doing it. State banks will probably be encouraged to denominate such loans in foreign currency.

The government can also keep a pretty tight rope around money in circulation, since enterprises now have their own individual accounting system. The central government isn’t constantly borrowing money from the central bank to pump into SOEs, so the amount of money created by the central bank to lend to SOEs has gone down a lot.

That, at least partially, explains how the government manages to keep domestic currency circulation down. It doesn’t look like they’re printing much money overall, I saw bills from the pre-2009 currency re-denomination being used as late as July this year. And the highest denomination of North Korean won in circulation is the 5,000 won note, which has a market value of around 60 US cents, hardly appropriate for anything more groceries.

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North Koreans are getting paid deposits on banking, scholar says

September 12th, 2018

By Benjamin Katzeff Silberstein

Daily NK recently reported on a conference in Seoul, where one scholar working on the North Korean economic system, Jung Eun Lee, said that there’s at least anecdotal evidence to suggest that some North Koreans, who have (bravely) chosen to deposit money in regular banks, are actually getting paid interest on their deposits:

Another researcher at the press conference stated that system-wide, market-friendly reforms have occurred in the financial sector following Kim’s rise to power. North Korea under Kim Jong Un has been implementing a policy where “idle currency” is absorbed into the official economy. The policy is significant because it shows that the state is partially adopting capitalist practices.

“The North Korean authorities are emphasizing bank credit and releasing articles saying that ‘banks do not ask about the state of [customers’] ownership or the source of their deposit balance,” said Jung Eun Lee, another research fellow at KINU. “There are more and more North Koreans who say they have received both the principal and interest from their money deposited in North Korean banks.”

“What is more interesting is that the North Korea’s Central Bank launched a domestic electronic payment card called the Jongsong Card in 2015, and the number of stores accepting the card is increasing […] The use of electronic payment cards is increasing in Pyongyang and their use is expanding because [consumers] benefit by being able to prevent exposure of their identities, and are not burdened by the need to accept change during their financial transactions,” Jung concluded.

Full article:
Increasing autonomy for North Korean enterprises
Ha Yoon Ah
Daily NK
2018-09-10

There is likely much more happening under the surface in North Korean financial development than what reaches the audience in South Korea in the rest of the world. (See, for example, Peter Ward’s recent twitter-thread on financing of state-owned enterprise operations). If this assessment is true – that North Koreans have, in sizable numbers, been receiving interest on their deposits, it’s pretty significant. I’m not fully sure it’s a new development, but given the backdrop of the past few years – not least the currency revaluation in 2009 – it would mean that the official banking system has been able to gain some hard-earned trust back from at least a portion of citizens.

Now, it’s entirely possible that people are primarily depositing money for other reasons than savings. For example, with the payment cards that have popped up in recent years, people by definition have to deposit their cash with state-owned banks to use these cards, which many may do simply out of convenience. And then, the deposits earn interest as a nice side-effect. It’s certainly notable if more North Koreans trust that state-owned banks won’t confiscate the hard-earned cash that they choose to deposit, but it might not be a revolutionary development.

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