North Korean Economy Watch

The Impossible State: North Korea, Past and Future, Victor Cha, 2012, p116-118.

The third bad decision took place in the 1970s. It related to foreign debt. The DPRK continued the same trends of previous decade as economic resources were diverted to the military. Despite having half the population, North Korean military spending exceeded that of the South every year from 1968 to 1979. The buildup of this decade included increasing the size of the armed forces from 485,000 to 680,000, which was twice that of the ROK. By 1980, troop number stood at 720,000 and continued to swell, with the majority deployed along the thirty-eighth parallel with their sights set on the South. Special forces grew from 15,000(1970) to 41,000(1978)The military began Scud missile development, boosted its submarine and surface flee, and the air force grew to over 200 attack plane. The army added 2,500 armed personnel carriers, about 1,000 heavy tanks, and 6,000 or so artillery tubes and rocket launchers. Military doctrine was revamped to increase the speed, power, and lethality of attacks in combat, focusing on rapid advance advance and infiltration tactics. In spite of its relatively limited technological base, by 1992 the North had twice the number of tanks and artillery that U.S-ROK defenses had in the South.

Academic Lee Hy-Sang, who has written one of the best scholarly treatment of the North Korean economy, has noted that this obsession with aggrandizing the military was driven by ideology as much as it was by external security threats. Self-reliance required the strongest military one could muster. The net effect, however, was an increasingly reckless and irresponsible approach to the economy. In order to offset the strain of the military budget on the economy, the DPRK should have directed efforts at excavating coal and other mineral resources to trade for hard currency, which mighty then have been used to finance heavy industry development, and to address energy shortages. Instead, the government decided to engage in massive borrowing from foreign markets. At the times, it seemed like the right decision. Sino-American rapprochement and U.S.-Soviet detente transformed relations between the East and West, and in this wider political context Western European countries were willing to extend credit to countries like North Korea. More important, the North began looking over its its shoulder as the 1970s saw the gradual acceleration of South Korean growth and development of major heavy industries like the Pohang Steel Complex.

So, in 1972, Pyongyang borrowed $80 million from France to build a fertilizer plant. The following year they borrowed another $160 million, from the United Kingdom to build a cement factory. In 1974, they borrowed $400 million from countries including Japan for large-scale plant equipment. In fact, between 1970 and 1975, the North borrowed approximately $1.2 billion before foreign governments realized that Pyongyang could not service the debt, These numbers do not account for whatever else might have been provided to the North from Eastern bloc countries and China.Thus, in 1976, the debt market dried up for the North as precipitously as it had opened to them six years earlier. Trapped by it own self-reliance ideology, the North could not do things normal nations would, such as issue bonds to finance its debt. Today, North Korea’s external debt is estimated $12.5 billion and no one expects them to pay it off. An attempt was made to pay back some of this in 1990 and 1991, but the DPRK has long since defaulted on its long-term debt. Pyongyang has occasionally asked Russia and former Soviet satellites like Czech Republic to forgive the majority of the debt. In response, these countries have asked for North Korea to repay part of the debt through barter. Pyongyang asked Russia in 2007 to make a “high-level political decision” to forgive $8.8 billion in unpaid debt. In August 2010, Prague asked for zinc ore as repayment for an outstanding $10 million in unpaid loans from the Cold War when it provided Kim Il-sung with machinery and equipment. Pyongyang responded that it would provide four hundred tons of “heavenly ginseng root” worth some $500,000. Since annual consumption of the root in the country was barely two tons, this would have kept Czechs well-stocked with ginseng—which, among its many reported benefits, boasts of enhancing sexual vitality—for two hundred years. As unusual secondary market has emerged for North Korean debt that a few courageous investors have dared to enter. It sells DPRK debt paper at about 6 cents on the dollar, based on the bet not that Pyongyang would ever repay but that under a future unification scenario, South Korea would want to reestablish North Korean creditworthiness as it worked to gradually reintegrate the two systems. If Seoul were to take on this debt, it could repay it all, speculators hope, with only one week’s addition to its foreign exchange reserves. Even if Seoul were to pay off only a portion of the debt, speculators could make six to seven times what they have paid for North Korean paper.

This entry was posted on Wednesday, May 8th, 2013 at 3:23 pm and is filed under Debt, Finance, Fiscal & monetary policy, Military. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.