North Korean Economy Watch

Picture above from Marcus Noland

Marcus Noland writes at his new blog that the DPRK’s attack on Yonpyong triggered a depreciation of the North Korean Won:

A common trope among North Korea watchers is that North Korea has the asymmetric capacity to inflict damage on South Korea. By raising tensions, North Korea can disrupt South Korea’s financial and foreign exchange markets and even deter foreign investment. North Korea, by contrast, is immune from the consequences of such actions because of its authoritarian system and closed economy,

While this argument has some intuitive plausibility, past nuclear and missile tests do not appear to have generated long-lasting effects. In the recent case of the Yeonpyeong shelling, however, the North Korean provocation appears to have boomeranged, tanking the North, not the South, Korean market.

The episode points to a basic problem confronting the North Korean economy: the high level of financial repression (and economic repression more broadly) contributes to thin, underdeveloped markets that are more prone to panics and wild swings in prices.  The disastrous currency reform has already primed market participants to be wary of the domestic currency, and macroeconomic instability in its wake has not helped either. The North Korean leadership may not be swayed by such considerations but we are doubtful that the leadership can be entirely sanguine either: exchange rate movements of this magnitude have implications across a range of markets, including the cost of imported food, and thus affect core supporters as well as the general population. North Korea’s provocations appear to be doing more damage to its own economy than to South Korea’s, no doubt one reason for the current push from Pyongyang to re-engage.

The data Noland lays out here paints an compelling picture. It would be interesting to think about the chain of causality in this model so we can be certain that the relationship between the won’s depreciation and the shelling of Yonyong is not merely coincidental.  Theories anyone?

There is a paper in here for an ambitious researcher.  I would like to know more about the DPRK’s domestic monetary policy; how the currency black market works in relationship with official fiscal and monetary policy; movements in the domestic price level; and the effects of the won’s depreciation on food imports (-?) and total exports (+?).

Pictured above are Kim Jong-il’s two birthplaces. On the left is Vyatskoye, Khabarovsk Krai, Russia, where Kim Il-sung was reportedly stationed with the Red Army and where Kim Jong-il is believed to have actually been born.  Learn more here.  On the right is Kim Jong-il’s official birthplace southeast of Mt. Paektu and the nearby “Jong-il Peak”.  Both images via Google Earth.

But although Kim’s birthday is supposed to usher in a period of celebration, by most accounts times are tough in the DPRK.  According to the Associated Press (via Washington Post):

But this year many North Koreans are hungry, and a brutal winter is threatening the early spring harvest. The country is coping with natural disasters: foot-and-mouth disease has devastated its livestock and heavy flooding swamped precious farmland last year. There is also the ever-present tension with neighboring South Korea; conservative lawmakers in the South planned to mark Kim’s birthday Wednesday by floating balloons filled with anti-Kim propaganda across the border.

…

North Korean diplomats have been asking for food aid when meeting officials in foreign countries, a South Korean intelligence official said. North Korea’s food shortage is grave, and the North is likely looking to stockpile food to distribute to citizens next year, said the official, who spoke on condition of anonymity because he wasn’t authorized to talk to reporters.

The North has also reached out to the U.N. World Food Program, saying it needs help because of the severe winter and a bad vegetable harvest. On Monday, the United Nations said it had begun a new assessment of North Korea’s food needs and planned more than 300,000 tons of humanitarian assistance.

These signals seem to point to skimpy holiday gift distributions to everyone outside Pyongyang and senior party/military leaders. However, with the rise of markets, these gifts have meant less and less over the years.

Though according to KCNA, the North Koreans are in a celebratory mood nonetheless.  Pyongyang held a rally, a figure skating competition (with Japanese participation), a synchronized swimming  show (Footsteps was played), Kimjongilia flower exhibition, an art show, and a photography exhibition all in celebration of Kim’s birthday.

The AFP also reported on some other activities highlighted by the official North Korean media:

Aircraft delivered gifts on eight islands in the Yellow Sea as part of an annual handout of candy, chewing gum and cookies to all children, the agency reported.

Spring has even come early to the leader’s claimed birthplace at Mount Paekdu on the border with China, the agency said Monday, and a solar halo appeared above Jong-Il Peak there.

Although times are tough for the vast majority of North Koreans, I still see the DPRK as relatively stable, so maybe Kim and his supporters have something to celebrate after all.

Here is additional coverage of KJI’s birthday:
Hankyoreh
AFP
BBC
Daily NK
Donga Ilbo
Yonhap
New York Times
KCNA: Natural wonders

There have been several news reports this week that Pyongyang has gotten smaller as periphery areas were transferred to another province.  I was a little confused by this news because I first read about it back in July 2010.

But anyhow, since there are not any good maps out there of the reapportionment, I will post this one I made on Google Earth:

The red and green areas combined represent Pyongyang’s boundaries up until the change.  The red areas, kangnam-gun, Junghwa-gun, Sangwon-gun, and the Sungho district, are all now counties (gun, 군 ) in North Hwanghae province.

Update (2/25/2011): The Daily NK writes about this as well.

To read speculation as to why these changes were made, check out the stories below:

N. Korea halves Pyongyang in size in apparent economic bids: sources
Yonhap
Sam Kim
2/14/2011

Pyongyang Downsized
Choson Ilbo
2/15/2011

According to the Daily NK:

Overall average prices in North Korea have doubled since the end of last year.

Sources say that the reason behind the price rises is insufficient supplies within North Korea coupled to the effect of relatively strict crackdowns on the smuggling of goods in from China.

Rice is now reportedly 2,000 won per kilo (as of the 11th). Late last year it was between 900 and 1,000 won.

In late January, rice even reportedly reached 3,000 won in some areas. A source explained why, “There were rumors that state rice stores were empty, because even those people who are targeted for state distribution didn’t get any food in late January in some areas.” So, he went on, “Around that time, wholesalers colluded to fixed the price at 3,000 won.”

Thereafter, the source said, “Now, rice has dropped to around 2,000won,” explaining that, “When the price went up, the supply increased, so the price was amended again.” According to the latest research by The Daily NK, rice is now selling for 2,000 won in Pyongyang and Shinuiju, while in Nampo it is 1,900 won and 1,800 won in Hyesan..

Corn, which generally costs half as much as rice, now sells for between 1,000 and 1,200 won, which is exactly double the price at the end of last year. Pork, which sold for 3,500 won per kilo in December last year, now goes for 6,500 won.

Sugar is even worse, having tripled: late last year it was 1,700 won per kilo, but has now reached more than 5,000 won. Red chilli pepper powder has also gone up from 7,000 won per kilo to 15,000 won.

Even though the North Korean authorities emphasized improving light industrial and agricultural production in the New Year’s Common Editorial, in reality the country is experiencing serious inflation due to a lack of goods in the markets. Therefore, it seems inevitable that people’s lives will get harder.

Read the full story here:
Inflation on the Rise in 2011
Daily NK
By Park Jun Hyeong
2/13/2011

Three items popped up on my radar this afternoon so in the interest of time I thought I would post them all together.  All three are worth checking out:

—

Status and Future of the North Korean Minerals Sector
The DPRK Energy and Minerals Experts Working Group Project  at the Nautilus Institute
Edward Yoon
Download paper here (PDF)

The minerals industry is of great importance to the economy of the Democratic People’s  Republic of Korea (DPRK), accounting for about 15.2% of its exports in 2005. (Chung, Woo Jin 2007, p. 3). In particular, the iron and coal mining industries have been priority industries for DPRK economic development since the 1970s (Korea Mining Promotional Corporation report, 2005). Minerals industries in the DPRK have been played prominent roles in North Korean National exports as shown in Table 1, below.  The DPRK holds the great bulk of the total known minerals deposits on the Korean peninsula. It is estimated that some 200 of the minerals found in the DPRK have economic values. The value of North Korea’s known minerals deposits was estimated to be nearly thirty times of that of South Korea’s as of 2005.

Mining industries are very important to the DPRK. The mining subsector of the DPRK’s industry accounted 8.3% of the North Korean GDP and about 15.9% of total export revenues in 2005. The minerals production sector in North Korea has, however, been struggling because of poor central planning and a lack of modern technology and equipment, as well as a shortage of electricity. For these reasons, North Korea needs to rebuild its production lines by obtaining proper equipment and technology (ibid, p.14).  As a result of the problems noted, minerals production in the DPRK has declined sharply in the past two decades.  It is estimated that production in 2002 was between one third and one half in comparison with output data obtained during 1989 (ibid, p. 12, and private source, 2010). In the decade from 1997 to 2007, DPRK  authorities have allowed foreign investors to participate in selected mining projects.  The  Government plans to continue its effort to consolidate heavy industries, and at the same time to develop light industries.

—

KPA Journal Vol.2, No. 1
Joseph Bermudez, military analyst for Jane’s Intelligence Review and author of The Armed Forces of North Korea, has published the next issue of his very fascinating KPA Journal.  Topics include: Wartime underwater bridges, KPA involvement in Burundi, Kim Ok Biography (Michael Madden), Type-63 107mm MRL.

The full issue can be downloaded here (PDF) and past issues can be downloaded at the journal’s home page.

—

CIA Assesses Flooding in the DPRK
CIA analysts studied data on major floods due to rainfall in North Korea since 1996 in order to devise a framework for evaluating the significance of such floods and their likely consequences for North Korean agriculture.  The analysts identified four principal variables:  the intensity of the rainfall, the location of the rainfall, the time of year, and damage to non-agricultural infrastructure.

“Rainfall intensity and geography of flooding appear to be key variables with the most impact,” their report (pdf) said. “Critical periods in the agricultural growth cycle — for sowing, growing, and harvesting — and the scope and severity of infrastructure damage are compounding variables that can magnify the impact of major floods in key food producing areas.”

All four elements were present in 1996 and 2007, when flooding produced the most severe agricultural impact.  But using the methodology described, analysts judge that the cumulative impact of two instances of heavy rain in 2010 “has been relatively low.”

FAS has posted a copy of the paper here (PDF)

Punjiman Tideland
In November of last year, the North Koreans announced that they had dammed up the Punjiman Tideland (bay) in Ongjin County to expand the quantity of arable land, build fish farms, and extract sea salt.  Here is a picture of the project on from DPRK television:

Thanks to a friend for translation help.

According to KCNA:

November 9 (KCNA) –The project for reclaiming Punjiman Tideland in Ongjin County of South Hwanghae Province was completed.

The reclaimed tideland is the country’s another asset of eternal value created in its western coastal area thanks to President Kim Il Sung’s great idea of remaking the nature and under the wise leadership of Kim Jong Il.

The reclamation of hundreds of hectares of tideland will help achieve an advance in the nation’s agricultural development and the improvement of the standard of people’s living.

A ceremony for its completion took place on Nov. 9.

KCNA does not offer much information on the project.  Here is a rough sketch of the project on Google Earth:

Before on top. After on bottom.

The area in yellow represents expanded farm land.  The area in red represents new fish farms.  The area in white represents a new salt farm.

According to Google Earth the width of the bay (east-west) is approximately 3.74km (2.33 miles).  The bay is  1.98km (1.23 miles) tall (North South)–so appx. 3.7 sq km. I did not grow up in the agriculture business, so I have no idea what the project is capable of producing. If any readers are qualified to make those calculations, I would be happy to hear them.

Chongdan County Land Reclamation
On December 28, 2010, the  DPRK held a ground breaking ceremony for the Ryongmae Island (룡매도) land reclamation project on the coast of Chongdan County in the Haeju Bay.  The scale of the project is enormous.  The surface area of the reclamation project is larger than the city of Haeju.  Below are pictures from North Korean television and Google Earth:

There is not much information on this project in KCNA either.  From Top to bottom, the project is nearly 20km (12 miles) long. Although the groundbreaking was in December, the project has been in the works for some time.  Development of the project was first announced in 1998.  The Project is supposed to be completed by 2012. According to KCNA:

Pyongyang, July 10 (KCNA) — More than 26,600 hectares have been reclaimed from the sea on the western coast and are now ready for agriculture. This was the result of a nationwide win-soil-from-the-sea campaign launched a decade ago to gain additional agricultural land. From Pidan island at the northwestern tip of Korea at the mouth of Amnok River to the middle of west coast Rimhan-ri of Phanmun county sea walls have been erected to bring tidal flats into active agricultural use and thus create new highly intensive granaries. More than 100 islands and islets have been linked with the mainland to reduce the length of coastline by more than 500 kilometres, thus pushing the coastline 12 kilometres offshore. In the newly-reclaimed land, dozens of reservoirs and many salterns, fish-culture ponds and chemical-fibre producing centres, as well as the state and cooperative farms and workteams, have come into being. The drive to reclaim tidal flats, initiated by the DPRK government and the Workers’ Party of Korea, reached a high-water mark in the 1980s. More and more sea walls were erected to link one peninsula with another and islands with the mainland. To take a few examples, a dozens-of-kilometre-long dike connecting the Tasa islet in Yomju county and Rihwa-ri, Cholsan county to create a new granary of 8,800 hectares, Taegye islet, 68-km long dikes across the sea off Haeju connecting Kumhak, Chongdan county and Ryongmae islet to create new areas of agricultural use covering 2,500 hectares, 5,200 hectares in Kangryong, 3,300 hectares in Kumsong, 3,200 hectares in Unryul, 2,600 hectares in Kwaksan and 1,000 hectares in Chongsu islet. The lands thus won from the sea are equivalent to the total arable land of five counties.

UPDATE 1: According to KCNA (2011-8-13):

A tideland reclamation project has made progress around Rongmae Islet, opposite to the Haeju Bay on the south coast. The islet belongs to South Hwanghae Province.

Since the project was launched in January, the South Hwanghae Provincial Tideland Reclamation Complex moved about 250 000 cubic meters of earth and laid some 76 000 square meters of stones to build up a 2 100 meter-long embankment on the sea.

It was very cold when the project started. But the complex pushed ahead with it, overcoming difficulties.

It has also applied new reclamation methods suitable to geographical condition of the area.

Recent heavy rainfalls severed roads and bridges there. The builders are working on rebuilding them, while carrying on the project as scheduled through tunneling and blasting.

When the project is finished, a new arable land as large as that of a county will appear on the tideland.

UPDATE 2: According to KCNA (2011-8-15), the DPRK claimed that it did not fire on South Korea but was detonating explosives for this project.

Institute for Far Eastern Studies (IFES)
NK Brief No. 11-02-07
2/7/2011

Evaluations of North Korea’s grain output for 2010, and predictions for 2011, varied considerably between international organizations and South Korean agricultural experts. A recent report from the Korea Institute for National Unification (KINU) evaluating North Korea’s economy for 2010 and examining the outlook for 2011 revealed that the World Food Program (WFP) and the UN Food and Agriculture Organization (FAO) estimated a 3.1 percent growth in North Korea’s 2010 grain production over the previous year, at 5.53 million tons. Based on this estimate, the two international organizations stated, “Because North Korea used more fertilizer than in the previous year, and an improved fuel situation [allowed] the use of more agricultural equipment, harvest conditions have improved.”

These international organizations believe that North Korea’s 24.43 million residents need an annual total of 5.35 million tons of grain, estimating that 4.25 tons (148kg per person) are needed for food while an additional 1.1 million tons are needed to seed future crops, for use in industrial manufacturing, and for livestock feed. Therefore, it was predicted that North Korea’s domestic production will fall 870,000 tons short in 2011. Since Pyongyang is expected to be able to import 330,000 tons of grain this year, it will be left with a 540,000 ton grain deficit.

On the other hand, the (South) Korea Rural Economic Institute and experts from other South Korean agricultural research institutions believe that unfavorable weather conditions in 2010, just like those seen in the South, as well as flooding in North Korea meant that grain production fell off last year, especially since the adverse weather and low temperatures struck during prime growing seasons. Therefore, South Korean agricultural experts estimate that North Korean grain production for 2010 was about 200,000 tons less than the year prior. Increased fertilizer distribution accounted for an additional 100,000 tons, but the damage from flooding cost the North the same in crops, and the shortage of assistance meant an additional 200,000 ton shortage.

South Korea’s Rural Development Association estimates North Korea’s 2009/2010 crop yield at 4.11 million tons, and predicts the 2010/2011 yield will drop to 3.9 million tons. South Korean experts also predict that even with international aid and continuing private-sector grain exports to North Korea, Pyongyang will fall 1 million tons short of grain this year. Not only that, the chances that the North’s grain situation will grow even more severe are significant. Rising international grain prices will heavily burden Pyongyang, and while food prices in North Korea’s traditional markets appear stable following the fall harvest, they have risen steadily, and as the lean season approaches, there is a high likelihood that prices will skyrocket soon.

KINU predicts that if there isn’t any significant domestic political upheaval or any serious clashes with other countries in 2011, North Korea’s industrial sector may be able to boost production. As long as international sanctions continue to be enforced against North Korea, Pyongyang’s reliance on China will continue, but that the forced efforts at self-sufficiency and indigenous development are unsustainable.

UPDATE 2: KCNA posted its second food “CYA” story on March 16th:

A UN special rapporteur for food issue on Mar. 8 expressed concern about worldwide food price rise.

The rapporteur said that the world is facing the same serious food crisis as in 2008 amid the rise of food prices for eight months on end, adding that this is attributable not only to the natural disasters but to speculation in the financial field.

UPDATE 1: I offered a rhetorical analysis.  Haggard has some data.

ORIGINAL POST: Here is the article from KCNA:

Pyongyang, February 7 (KCNA) — Price of foodstuff is skyrocketing worldwide, sparking serious concern.

The monthly world foodstuff price indices have gone up 3.4 percent in the period from December last year to January this year, said FAO of the United Nations on Feb. 3 quoting a survey data.

This is an all-time high since 1990 when foodstuff price survey kicked off. The price of foodstuff is expected to continue to soar in the coming months.

It is true that global food prices are rising.  Here it seems the North Korean government is both warning its people and deflecting blame for the problem.  Although few North Koreans will have access to the FAO report, KCNA is careful to highlight the foreign source (not Pyongyang). Of course making the announcement will set off a wave of hoarding in the DPRK leading food prices to increase even more.

Despite its claims, the DPRK government does have the power to improve food prices for the North Korean people.  The DPRK could shore up confidence in market institutions; give farmers greater individual incentives rather than emphasizing collective farming; make it easier for food shipments to travel internally, and ease border crossings for food shipments from China.

Marcus Noland and Stephan Haggard recently posted data on food price increases in the DPRK.

*”CYA” is “Cover your ass” (‘arse’ for our British friends).

According to the Choson Ilbo:

The most important dates for North Koreans born since the 1970s are the birthdays of former leader Kim Il-sung on April 15 and present leader Kim Jong-il on Feb. 16. North Koreans may forget their parents’ birthdays but they always remember the leaders’, because that is when gifts of food and other daily necessities are doled out and a festive mood prevails throughout the country.

But now, due to international sanctions and the spread of grassroots capitalism, the traditional “gift politics” may be coming to an end as the regime can no longer afford to dole out grace and favor.

Gift Packages

The candy and cakes that were doled out on Kim Il-sung’s birthday were traditionally much better quality than those available in ordinary shops. Nylon and tetron fabric were also distributed, much more highly prized than the normally available synthetic cotton, mixed-spun or vinalon fabrics that shrink in the wash. Parents who can barely afford to clothe their children have no choice but to be grateful to Kim Il-sung.

On the two birthdays, a bottle of liquor, five eggs, two day’s supply of milled rice, 1-2 kg of meat, and cigarettes are distributed to every household. These are precious commodities not normally available to everyone. Thanks to these gift packages, the birthdays of Kim Il-sung and Kim Jong-il have long become established as major holidays.

The elite of the Workers Party are given luxurious houses, luxury cars like Mercedes and Swiss-made Omega gold watches. Quality wristwatches are given to ordinary people who have distinguished themselves meritorious and are preserved as heirlooms.

Economic Changes

But amid a food shortage and international sanctions, the regime is having to rethink the practice. And markets are booming there now despite the regime’s attempt to suppress them, so North Koreans can buy Chinese-made candies and cakes and other necessities without much difficulties. This makes the leaders’ birthday gifts look not so special any more.

The quality of gifts is also falling year by year. Senior officials, unable to live on gifts and official supplies alone, enrich themselves through corruption. An increasing number of officials secretly hoard hundreds of thousands of dollars, and it is therefore natural that the leader’s gifts lose their luster.

January 8 was the birthday of Kim Jong-il’s son and heir Jong-un. Although there had been rumors that the regime would designate Kim junior’s birthday as a national holiday and hold lavish celebrations, it passed quietly.

The North designated Kim Jong-il’s birthday as a national holiday quite a few years after he made an official debut in 1974. It was also only when his power base was cemented that he began to dole out gifts to celebrate his birthday. While Kim Il-sung was alive, he gave gifts only to close associates as a gesture of courtesy to his father. So long as Kim Jong-il is alive, therefore, chances are that there will be no gifts to the public or nationwide celebrations on Jong-un’s birthday.

This story is reported every year for the leader’s birthday. Here is a link to previous posts on this topic.

Read the full story here:
N.Korean Regime’s ‘Gift Politics’ Starts to Lose Its Luster
Choson Ilbo
2/2/2011

According to the Choson Ilbo:

The price of rice and foreign currency exchange rate in North Korea have both dropped drastically in a matter of a week, according to Radio Free Asia.

The radio station reported Saturday that rice in Hyesan, Yanggang Province was selling for 2,000 won per kg as of Friday, down from 3,300 won or nearly 40 percent from six days earlier. The Chinese yuan was trading for 400 North Korean won, down from 520.

A local source said that various rumors had prompted merchants to stockpile rice and then suddenly release it. The source also added that the rice requisitioned for the military, a key cause of recent price increases, is being siphoned off and sold, bringing the price down.

Read the full story here:
Rice Prices in N.Korea Plunge 40%
Choson Ilbo
1/31/2011