North Korean Economy Watch

From the Daily NK:

“The North’s adoption of partial open door policy has resulted in the rapid spread of western culture into the society, which could trigger the collapse of socialist ideology and regime. So, as part of efforts to prevent the collapse, the North adopted a series of amendments to its criminal laws,” explained Choi.

“In March 2008, North Korea introduced another amendment according to which individuals charged with drug possession are to be sentenced to death by shooting because drug use has been increasing among people suffering from the lack of basic necessities and medicine despite the state’s strict drug control,” said Choi.

According to the 2004 amendment, North Korea sentences those charged with drug manufacturing to two to five years in the labor reeducation camp (Article 216), those with drug use to up to two years in the labor-training corps (Article 217), and those with drug trafficking and sales to either up to five years in the labor camp (Article 218).

“The amendment of March 2008 further stiffened penalties against drug offenders. Individuals found to be possessing more than 300 grams of drug are to be sentenced to death penalty,” Choi said, “In addition, North Korea which did not have sufficient legal grounds to punish individuals involved with new types of offenses including making international phone calls, possessing copies of foreign pictures and smuggling now appears to have strengthened legal punishment against them.”

The passage of these statutes is probably as close as the DPRK government will get to admitting that markets for recreational drug use are firmly established.  Stiffening drug laws will make no difference to the dissipation of the state’s socialist ideology, but North Korea’s drug cartels will certainly benefit.

The Economics of Cartels

In a competitive market, it is difficult to maintain a cartel.  Cartels work by restricting output to raise prices.  The problem is that once everyone in the cartel has done so, each individual member has an incentive to sell more than his quota to capture those artificially high profits.  After everyone figures out how to do this, the cartel falls apart and prices return to their competitive equilibrium.

So how can cartel members be relied on to maintain their production quotas and not cheat/sabotage each other?  Many times this is done by group acquiescence to government statutes and regulations.  Restrictions on prices, services, quality standards…these can all be used to protect incumbent firms by driving up costs for smaller competitors, and what’s more, the government pays for the enforcement.

And now for the conspiracy theory 

If there is not already a cartel of “companies” or families seeking to corner the DPRK drug market, there soon will be.  Stiffening criminal penalties for drug production simply raises the costs of small-scale producers and distributors, forcing them out of the market because they cannot afford protection/bribes.  This helps the big guys, who can afford these services, to maintain their price premium.

No doubt the groups coming to dominate the drug trade had representatives involved in making sure these statutes were changed (meaning they are now sufficiently politically connected to protect themselves).  What will be the effects on crime?  Well, if the cartel members keep to their agreements, crime could drop, and police would only be used to break up non-cartel operations.

Small-scale producers will respond by shifting into “high quality, low volume” drugs (much like in prohibition when smugglers carried liquor over beer and wine). 

Thoughtful comments appreciated. 

Read the full story here:
North Korea Has Introduced Amendments to Its Criminal Codes to Save the Regime from Falling Apart
Daily NK
Yang Jung A
5/13/2008

Andrei Lankov is the first in the media to construct a narrative which details the series of decisions that have led to North Korea’s current food crunch.

From his article:

Merely a year ago, North Korean leaders were optimistic. The good harvest of 2005 persuaded them that food shortages were behind them, and that North Korean agriculture had begun to recover. The 2005 harvest was merely 4.6 million tons, well below the 5.2 million tons which are necessary to keep the entire population alive. Still, it was clearly an improvement.

Lankov’s assertion that 5.2 million tons of grain are needed to sustain the DPRK population comes from the UN.  Recent work by Marcus Noland estimates that this number is closer to 4.6, although exact figuress are not possible because the actual size of the DPRK population is unknown.

In addition, for a decade South Korean administrations have maintained their Sunshine policy of unilateral concessions and unconditional food aid. Since 2000, about 450,000 tonnes of food have bee delivered to North Korean granaries from the South every year, free of charge. Its distribution was almost unmonitored. Pyongyang leaders came to believe that such aid would continue for the foreseeable future. Additionally, increasing Chinese involvement with North Korea, while not necessarily welcomed by Pyongyang, was seen as a sign that additional food would be coming - and Chinese shipments were roughly equal to those of South Korea. Finally, the basic agreement with the US on the nuclear issue was perceived in Pyongyang as a sign of Washington’s willingness to pay generously for rather minor concessions.

As noted by many besides Lankov (here), this good fortune prompted the DPRK government to reimpose elements of the planned economy which failed long ago: 

In 2005, authorities claimed that the public distribution system would be completely revived, and banned private trade in grain. This ban was generally ignored and eventually failed, but subsequent moves were more successful. In late 2006, authorities banned male vendors from the country’s marketplaces. In 2007, women under 50 years old were also prohibited from engaging in business in markets. The assumption is that every able-bodied North Korean should go where he or she belongs, specifically to the state-run factories of the Stalinist economy.

The government also staged some campaigns against semi-legal private businesses that had been tacitly tolerated since the late 1990s. After 2005, authorities successfully cracked down on the trafficking, smuggling and illegal labor migration occurring on the border with China. There was also a remarkable increase in the volume of anti-market rhetoric in the official Pyongyang propaganda.

The economic problems they were attempting to achieve at home through these policies, however, were only the first of several shocks to hit the DPRK economy in the last year: 

1. Low harvest numbers

First of all, the 2007 harvest was a failure. It was estimated at only 3.8 million tons, well short of the critical 5.2 million ton benchmark [and Noland’s 4.6 benchmark]. As usual, floods were officially blamed (as if the impoverished North does not share the same small peninsula with the prosperous South, where no signs of food shortage have been seen in decades).

2. Drop in aid from South Korea

The presidential elections of December 2007 led to a change of leadership in Seoul. The new government, led by right-of-the-center pragmatist Lee Myong-bak, said that the era of unconditional concessions to the North was over.

3. International food prices rising

The situation was aggravated by the explosive rise of international food prices. The North Korean press has reported the trend widely obviously in an attempt to,place the blame for the current crisis on factors clearly beyond the government’s control. On April 20, Nodong Sinmun, the major official daily newspaper, ran an article that described food supply difficulties worldwide and mentioned a dramatic increase on food custom duties in “certain countries”.

4. Cold shoulder from China

The worldwide price hike means that the amount of food coming to North Korea via foreign aid channels is likely to decrease. China, preoccupied with the Summer Olympic Games in August, and increasingly annoyed by North Korean antics, is not too willing to help the North out of its trouble which, as some people in Beijing believe, were brought on Pyongyang by its own stubborn resistance to the Chinese reform model.

So what is Lankov’s prediction?

In North Korea, the domestic food situation is deteriorating fast. The sudden hike in food prices seems to be a sign of deepening crisis. There were reports about farmers who refuse to toil the state-owned fields, stating that they are too weak to work (but still willing to work on their private plots). There are rumors of villagers starving to death even though observers believe the food shortage has not yet developed into a famine. If the shortage of fertilizer damages this year’s harvest, a famine may develop by the end of this year.

The political consequences are unclear. Knowledge about the situation inside North Korea remains grossly inadequate. If the past is an indication, however, nothing of great political significance will happen if a few thousand fresh graves appear in the hills of North Hamgyong province. In all probability, Kim Jong-il’s government will use its time-tested tactics: the political elite and the best units of the army will receive full rations; the residents of major cities, police and common soldiers will get barely enough to survive; and the “politically unreliable”, largely villagers from the remote northwest, will be left to their sorry fate.

There is hope the government will momentarily halt its counter-offensive against free market economics, and will ease its border controls to allow more people to China - but even such moderate measures are unlikely. Isolated revolts are possible, but the government seems to be supremely confident. After all, the disorganized, isolated population, deprived of any opportunities to organize or even communicate between themselves, is not capable of challenging the system.

Read the full story here:
North Korea stoic in the face of famine
Asia Times
Andrei Lankov
4/30/2008

Daily NK
Lee Sung Jin
11/25/2007

A source inside North Korea reported on the 22nd of November that all sorts of crime are rampant in Hoiryeong of North Hamkyung Province, and locals, especially women are so afraid that they dare not go outside at night.

The source said, “At meetings of people’s units, locals received instructions not to go out late at night and women were especially advised to get back home not too late.” The source added, “Most crimes are committed by soldiers who have been posted to Hoiryeong for construction work.

Since early this year, the North Korean authorities have been carrying out apartment building construction and road expansion work in Hoiryeong under the project named “Embellishing Mother’s Hometown.” Hoiryeong is known as the birthplace of Kim Jong Suk, Kim Jong Il’s mother.

This year celebrates the 90th anniversary of Kim Jong Suk’s birth, and many construction projects are being proceeded under the slogan, ‘‘Let’s invite our benevolent general to Hoiryeong.’’ Last year in November, a mosaic mural depicting Kim Il Sung and Kim Jong Il was installed in both Poongsan-ri and Daedeuk-ri in Hoiryeong.

Early May, the nation’s new prime minister Kim Yong Il visited Hoiryeong by train. His train was loaded with glass and cement, and the minister delivered the construction material to Hoiryeong’s people’s committee, leaving a message saying, “Hoiryeong is the birthplace of Kim Jong Suk. Clean up and embellish the entire city.”

As the authorities started carrying out the extensive construction work in Hoiryeong, it needed more labor power. Starting with last month, the state began to bring construction units of the People’s Army into the city for the expansion and pavement works of the road between Hoiryeong-Chongjin. It is the solders of these construction units who are responsible for ongoing violent crimes such as rape and plunder occurring in Hoiryeong

The source said, “Ever since those soldiers came to Hoiryeong, the city has been afflicted with many incidents and crime, all of which concern the city’s party committee to great extents.” The source said, “Even though October is the harvest season, there is not enough corn left for harvest in many cornfields around construction sites.”

What is worse, many households are being sacked by the soldiers, and local residents cannot leave home empty even for a moment, the source said.

The city’s party committee is casting suspicion on the soldiers. However, it cannot recklessly push for an investigation against the soldiers because the committee lacks hard evidence and the army has gotten too powerful over the years.

“A few days ago, there was an incident where a soldier broke into a house, raped a twenty-two-year old woman, and ran away,” the source said. “In order to protect themselves from the soldiers, each community has placed a guard at its people’s unit guard post twenty-four hours a day, seven days a week, and made sure that the guard reports to the People’s Safety Agency in case an incident takes place.”

Individuals who go to a night market and females who get back home from the market late at night are particularly vulnerable. The Safety Agency of Hoiryeong has decided to increase the number of patrols and ordered the locals to organize their own securities in their areas, the source said.

A defector who came to the South in 2006 said, “People used to admire the People’s Army. Nowadays, the Army is treated as a gang of thieves.” The defector said, “The army behaves highhandedly, and there are always conflicts in the areas around army bases.”