Archive for the ‘Economic reform’ Category

What real estate investments in Pyongyang tells us about the North Korean economy

Tuesday, October 30th, 2018

By Benjamin Katzeff Silberstein

A few days ago, Daily NK reported that apartment prices in Pyongyang have fallen by significant proportions over the last few months. They first wrote about it in Korean last week:

평양 소식통은 26일 데일리NK와의 통화에서 “평양에서 아파트 가격이 많이 눅어(떨어)졌는데, 이상하게도 아파트 건설은 줄어들지 않고 오히려 늘고 있다”면서 “중심 구역뿐만이 아니라 낙랑구역이나 서성구역 등 외곽 지역에서도 많이 올라가고 있는데, 내가 본 것만 7개다”고 말했다.

소식통은 이어 “돈주(신흥부유층)가 돈 내고 건설해서 팔아먹는데 창전거리나 려명거리에 있는 아파트처럼 멋지게 올라가고 있다”면서 “아파트 건설은 보통 20~30명의 군인이 동원돼 건설 중이며 30층짜리 아파트도 있고 종류가 다양하다”고 덧붙였다.

이달 초 본지는 올해 6월까지 20∼30만 달러(이하 면적 230㎡)를 유지해왔던 평양의 중심지역인 중구역 및 대동강 주변 아파트 가격이 8월에 5만 달러 이상 하락한 것으로 파악됐다고 보도한 바 있다.

이처럼 아파트 가격의 폭락에도 불구하고 아파트를 건설하는 데는 신규 아파트의 경우 고가로 거래되기 때문에 투자가치가 있다고 판단하는 것으로 분석된다.

본지가 지난 4월 입수한 탑식 아파트 경제 타산서(북한식 공사 손익계산서)를 조사한 결과 40세대가 사용할 수 있는 아파트(한국의 빌라, 총 12층 기준)를 건설할 때 약 23만 달러(약 2억 4000만 원)의 수익을 내는 것으로 나타났다. (▶관련 기사 바로 가기 : 경제타산서 입수…”40세대 아파트 건설·분양시 23만달러 수익”)

또한 지난 10년간 아파트 가격이 지속 상승, 돈주들에게 많은 부를 안겨준 점도 한몫 하는 것으로 보인다. 아울러 한반도 평화 분위기 속에 향후 대북제재가 해제되면 다시 아파트 가격이 상승할 것이라는 기대 심리도 작용한 것으로 관측된다.

And in English here, yesterday:

Despite the fall in North Korean real estate prices, apartment construction has not slowed down, report sources in the country.

“The prices of apartments in Pyongyang have fallen a lot, but strangely the construction of apartments has continued and even increased,” said a Pyongyang-based source on October 26. “There’s apartment construction going on in central Pyongyang and in the city’s suburbs, like the Rakrang and Sosong districts. I’ve seen seven apartment construction sites myself.”

A separate source in Pyongyang added, “The donju (nouveau riche) are financially supporting these apartment construction projects and then selling the apartments to buyers. There are really nice ones being constructed, similar to those in Changchon Street and Ryomyong Street. Twenty to thirty soldiers are usually mobilized to build them. There are 30-story apartments and others of varying heights.”

Daily NK reported earlier this month that the price of apartments in central Pyongyang, including in Jung district and those near the Taedong River, had fallen from a high of 200-300,000 dollars in June this year to around 50,000 dollars in August.

However, local investors still appear keen to build the apartments because they can be sold for significant profits.

According to an analysis of a North Korean construction profit-and-loss statement Daily NK obtained in April, apartments that can house 40 families (around 12-stories tall; similar to South Korean “villas”) can make a profit of around US $230,000 US dollars (around 240 million South Korean won) [from rent].

The continued rise in apartment prices over the past 10 years has helped the donju accumulate a lot of wealth, which appears to be one factor in the continued construction of apartments. And as tensions on the Korean Peninsula have dissipated, there may also be the expectation among investors in the country that international sanctions will be lifted, which would again lead to a rise in apartment prices.

Full article/source:
Apartment construction remains steady despite fall in real estate prices
Moon Dong Hui
Daily NK
2018-10-30

The dynamics at play here tells us something very interesting and important about the current state of North Korea’s economic system. For all the developments and changes over the past couple of decades, and particularly under Kim Jong-un, basic functions of a regular market economy, such as formal channels for investments, through which people can see their savings grow in value (or shrink, in bad times). In North Korea, however, private investments technically remain illegal. Housing is one area where they’ve become standard practice and more or less regularized, despite the judicial murkiness of it all.

So when housing prices decline, what are people going to do, if they don’t want to keep their money laying around passively? Keep putting them into housing. After all, a lower profit is better than no profit. This dynamic can’t last forever, but as of now, the fact that investment opportunities are still relatively few may be keeping a bubble alive that already burst.

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Two Koreas start railway inspections

Sunday, October 21st, 2018

Benjamin Katzeff Silberstein

South and North Korea are likely to start their joint on-site inspection as early as this week for a project to modernize and re-link railways across their border, government officials said Sunday.

At high-level talks last week, the two Koreas agreed to begin field surveys of the western Gyeongui railway in late October and the Donghae railway along their east coast in November.

“The Koreas are known to be discussing ways to conduct the inspection (on the North section) of the Gyeongui line starting late this week,” a government official said.

“The schedule is flexible, depending on consultations between the government and the United Nations Command (UNC) over the passage of the Military Demarcation Line,” he added.

In August, the Koreas failed to carry out a joint railway field survey as the U.S.-led UNC did not approve the plan, citing “procedural” problems, a move widely seen as U.S. objection to the inter-Korean railway project on the basis that it might hamper sanctions.

“As far as I’m concerned, Seoul’s consultations with Pyongyang as well as the UNC are smoothly under way,” the official said.

If launched, the joint inspection will involve the test operation of a train on the railway linking Seoul to the North’s northwestern city of Sinuiju.

After that, the Koreas will check the eastern railway on the North’s side that connects Mout Kumgang to its northeastern North Hamgyong province.

South and North Korea are looking to hold a ground-breaking ceremony for work on the rail and road systems along the eastern and western regions either in late November or early December.

Meanwhile, the two Koreas plan to hold working-level talks starting this week to implement agreements of the inter-Korean summit held in Pyongyang last month.

Full article/source:
Koreas to start joint inspection of western railway as early as this week
Yonhap News
2018-10-21

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China-NK trade dropped by 59.2% January–September of 2018, says China

Saturday, October 13th, 2018

Benjamin Katzeff Silberstein

Global Times reports Chinese customs figures:

China has consistently complied with UN’s resolutions on North Korea and bilateral trade tumbled 59.2 percent year-on-year from January to September, said an official with the General Administration of Customs (GAC) on Friday.

The value of China’s trade with North Korea was 11.11 billion yuan ($1.61 billion) in the first three quarters, according to data released by the GAC.

During the same period, China’s export volume to North Korea was 10.11 billion yuan, down 40.8 percent on a yearly basis and imports stood at 1 billion yuan, down 90.1 percent year-on-year, the GAC data showed.

The implementation of the Security Council’s decision is an obligation that all UN members should fulfill, said Li Kuiwen, an official with the GAC.

Li noted that “China’s customs has consistently carried out the relevant resolutions of the Security Council in a comprehensive, accurate, serious and strict manner.”

China’s trade volume with North Korea in the January-to-August period fell 57.8 percent from a year earlier to $1.51 billion, the GAC said on September 23.

Article source:
China-North Korea trade drops 59.2% in January-September period: customs
Global Times
2018-10-13

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Where do North Korea’s agricultural policy changes stand?

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

Thursday, 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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Moon: North Korea wants to join international financial institutions

Wednesday, 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

Wednesday, 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

Friday, 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

Thursday, 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

Wednesday, 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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