North Korean Economy Watch

Stephen Haggard and Marcus Noland published a piece focusing on North Korea’s economic integration.  Download it here: petersoninstitute.pdf

Although not the focus of the piece, here is an excerpt:

A first corollary of the injunction to avoid top-down approaches is that any collective development assistance must be extended in support of economic reform. Experience throughout the developing world demonstrates that assistance will have only marginal effects and may even have negative consequences if not coupled with policy changes. It is not simply that aid sustains the regime; since aid is fungible, even purely humanitarian aid will have that effect. The problem is that too much aid can delay or even undermine the reform process. Whatever the multilateral mechanism that ultimately emerges, it should encourage reform and economic opening in the North.

A second corollary of the injunction against top-down approaches is the importance of engaging the private sector: through trade, foreign direct investment, private capital flows (including remittances), and sheer expertise. Economic rehabilitation will require investment in social overhead capital, which will be led primarily by the public sector. But if North Korea is to evolve toward a self-sustaining market-oriented economy, private-sector involvement will be crucial. Participation of foreign firms means that projects are subject to the market test of profitability, and it encourages North Korean authorities to think of economic engagement in terms of joint gain rather than as political tribute.

(and)

North Korea is in need of depoliticized technical assistance for a whole panoply of issues running from the mundane but critical, such as developing meaningful national statistical capabilities, through basic agricultural and health technologies, to social infrastructure of a modern economy. This infrastructure includes policy mechanisms to manage macroeconomic policy, including through reform of the central bank; specify property rights and resolve commercial disputes; regulate markets, including financial markets as they emerge; establish and implement international trade and investment policies; and so on.

Read the full paper here:
A Security and Peace Mechanism for Northeast Asia: The Economic Dimension
Staphen Haggard and Marcus Noland
Peterson Institute Policy Brief
April 2008

UPDATE 2: On March 6, 2008 the CIA World Fact Book on North Korea was updated. Yonhap reports that the CIA’s estimate of North Korean GDP in 2007 (adjusted for PPP) is unchanged from 2006 at $40 billion and that per-capital GDP has increased from $1,800 to $1,900.  But the story also reports that the CIA has estimated an increase in North Korea’s population–23,301,725 in 2007, up from 23,113,019 in 2006.

So my quesiton is this…

If GDP is unchanged, how do you increase per capita GDP without reducing the population numbers?

On a side note…one of my former economics professors used to say, “Stalin increased per capita GDP in the Soviet Union by reducing the denominator.”

Update 1: From Dr. Petrov:
Per-capita GNI at $368 to $389 seems to be right [from the revised estimate below]. It’s approximately 1/3 of the Soviet figure by the time it collapsed (around $1000 per-capita). These days North Koreans still live poorer than people in the USSR.

Original Post: Yonhap reports that Lee Jong-suk, former Minister of Unification and senior fellow at the Sejong Institute, claims that the South Korean Bank of Korea has radically overestimated North Korea’s Gross National Income and military spending.

In August, the Bank of Korea (BOK) announced that North Korea’s nominal gross national income (GNI) amounted to US$25.6 billion in 2005, about 35 times smaller than South Korea’s. GNI refers to a nation’s gross domestic product plus its trade loss or gain arising from changes in trade. The bank also estimated North Korea’s per-capita GNI at $1,108 that year, about 17 times smaller than that of its rival South Korea.

The U.S. Central Intelligence Agency’s (CIA’s) latest estimate of North Korea’s nominal GNI is $40 billion.

“If the BOK statistics are true, North Korea’s per-capita GNI represents two thirds of China’s $1,736, and nearly double Vietnam’s $616,” Lee said in a monthly magazine published Friday by the institute in the southern suburbs of Seoul. “Nobody would believe it if someone said North Korea is two times wealthier than Vietnam that is close to resolving its food problems,” Lee said.

The bank used a “wrong method” of employing South Korea’s price and value-added rate information in calculating North Korea’s GNI, the expert said. One dollar is about 150 North Korean won and about 950 South Korean won.

Lee said he commissioned financial experts to calculate North Korea’s GNI using “a method generally used by countries over the world” while in office. “North Korea’s GNI came to $8.4 to 8.9 billion with a per-capita GNI at $368 to $389 based on the 2005 foreign currency market rate,” he said, adding the estimates better reflect North Korea’s economic reality.

North Korea’s defense spending would be around $2.1 to $2.6 billion, not $5 billion, when the same calculation method is used, he said.

Read all of the stories here:
N. Korea’s GDP estimated at $40 billion: CIA
Yonhap
3/12/2008 

N. Korean economy overestimated says expert
Yonhap
3/8/2007

Ecerpt from the Korea Times
Jung Sung-ki
2/5/2008

The U.S. government is preparing to ship a second batch of 54,000 tons of fuel to North Korea this month, a U.S.-funded radio station reported Tuesday.

Radio Free Asia (RFA) said the U.S. State Department was scheduled to report the shipment plan to Congress in the coming days.

Under a multinational nuclear deal reached in February last year, South Korea, the United States, China and Russia promised to provide 50,000 tons of oil in turn to the poverty-stricken North. Washington sent the first batch of 46,000 tons of fuel to the North last October, while other nations have fulfilled their pledges.

Japan, another participant at the six-party talks, refused to participate in the aid plan due to a dispute with the North over Japanese citizens kidnapped by North Korean agents in the past.

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-1-10-1
1/10/2008

The net worth of inter-Korean exchanges totaled 1,797,890,000 USD in 2007, up 33% from the 1.35 billion USD in the previous year. Exchanges between the two Koreas began in 1989, and topped one billion dollars for the first time in 2005. The almost 1.8 billion dollars in trade recorded in 2007 is the highest to date, and is equal to 65 percent of North Korea’s non-Korean trade volume of 2.996 billion USD in 2006.

Inter-Korean commercial trade was worth 1,431,170,000 USD, 54 percent higher than the 928 million USD in 2006, while non-commercial trade fell 13 percent, from 421,660,000 dollars in 2006 to only 366,720,000 dollars last year. Overall, commercial trade made up over 80 percent of cross-border exchanges, proving that inter-Korean exchanges continue to grow based on commercial transactions. Commercial trade growth was centered around the mining and fishery sectors (52 percent) and increased production in the Kaesong Industrial Complex (48 percent). Textiles and other goods processed on commission also grew by 30 percent.

Additional manufacturing by companies entering the KIC, as well as the installment of equipment used to increase output by those manufacturers already established in the first phase of the complex, saw a great jump last year. Additionally, South Korea loaned the North 80 million USD for equipment, cloth, soap, polyester fibers, synthetic leather, and other materials to be used in light industry, while the North repayed 2.4 million USD (3 percent) of the loan by delivering 1,000 tons of zinc. This was the first example of the North repaying funds to the South, and shows opportunities for the two Koreas to fulfill each other’s needs and carry out friendly economic cooperation in the future.

With increases in domestic use and export of Bukhan Mountain’s minerals and timber, improvements in communications, customs, and transport issues at the KIC and a growing number of companies moving into the complex leading to an increase in production and manufacturing activity, inter-Korean exchanges are expected to continue to grow in the future.

In the 1980s Pepsi went on sale in the Soviet Union [as did eventually Coke].  Since the hard currency needed to buy the syrup was scarce, the Soviets traded it for Vodka (which they presumably had plenty of)–At least this is what I was able to piece together when I visited the USSR as a teenager.

Yonhap (January 4, 2008) reports that North Korea has adopted the same basic strategy to repay its external debts.  This is a positive move on the part of the North because it is the first time the North has made an effort at repaying its external bills.

(excerpt from Yonhap)  The South-North Korea Exchanges and Cooperation Support Association said 500 tons of North Korean-produced zinc, worth about US$1.2 million, arrived in the port of Incheon on Thursday and was unloaded on Friday. It was the second repayment by the communist country for economic assistance provided by Seoul.

Although the amount agreed upon by both countries for 2007 has been paid in full, the installment represents only 3 percent of the North’s total debt to South Korea [appx. USD$80 million]. Pyongyang had agreed to pay Seoul with $2.4 million worth of mineral ore to reimburse it for aid.

[…]reportedly mark[ing] the first time the North has redeemed any of its debt.

Yonhap
12/28/2007

The total output of a South Korea-built industrial complex in North Korea’s border town of Kaesong totaled over US$180 million this year, shooting up 150 percent from a year ago, Seoul’s Unification Ministry said on Friday.

“The total production by businesses at the Kaesong industrial complex recorded an estimated $185 million this year, up about 150 percent from $74 million last year,” the ministry said in a press release.

Korea Times
Yoon Won-sup
12/9/2007

South Korea will provide 5,100 tons of steel plates to North Korea on Dec. 17 in a six-party deal that involves the provision of energy or alternatives to North Korea in exchange for the North’s disablement of its nuclear facilities by year’s-end, government officials said Sunday.

U.S. President George W. Bush sent a personal letter to North Korean leader Kim Jong-il last week urging him to keep his word on the disablement and declaration by Dec. 31.

The shipment is the first alternative to oil sent to the North under the agreement, although participants in the six-way talks have been taking turns to provide 50,000 tons of heavy fuel oil to the North every month recently.

Yonhap
12/8/2007

A ship carrying 1,400 tons of tangerines will leave Sunday for North Korea from a port on this southern island of South Korea to help promote peace and reconciliation between the two Korean states, island officials said Saturday.

They said that the tangerines grown by local farmers have been loaded onto a 3,500-ton ship, which will set sail for the North on Sunday afternoon. With crews including three South Koreans, the Panama-registered ship will arrive at Nampo, a western port town of North Korea, Tuesday, they said.

This is the first batch of 10,000 tons of tangerines that will be sent to the North this year. The officials said that the remainder will be delivered by the end of January next year at the latest.

They said that Jeju Island has sent 36,488 tons of tangerines and 17,100 tons of carrots to the North since 1998. It was humanitarian aid designed to promote peace and co-existence between the two Koreas, which remain technically at war after the 1950-53 Korean War ended in a truce instead of a peace treaty.

Yonhap
11/7/2007

Bilateral trade between the two Koreas increased by 23 percent in the first 10 months of the year due mainly to an increase in shipments of goods produced at the South Korea-built industrial complex in the communist North, the Unification Ministry said Wednesday.

The two-way trade volume jumped to nearly US$1.44 billion in the January-October period, up from $1.16 billion from a year earlier, according to the ministry.

“The rise mainly comes from a 48 percent increase in the amount of goods shipped from Kaesong,” a ministry official said, adding trade in some other areas, such as minerals and fisheries, increased by nearly 50 percent year-on-year.

Exchanges in non-commercial areas, however, dropped by 18 percent, according to the ministry official.

Seoul hopes cross-border trade will continue to increase over the coming years as the sides are about to launch a second development plan to expand the Kaesong industrial complex, where about two dozen South Korean companies are currently employing some 10,000 North Korean workers.

The joint industrial complex is expected to house over 2,000 South Koreans businesses and employ as many as 500,000 North Koreans when it is fully developed by a target year of 2012.

President Roh Moo-hyun and North Korean leader Kim Jong-il have also agreed to develop the North’s western Haeju area as a special economic district in the second-ever inter-Korean summit held in the North Korean capital of Pyongyang early last month.

Yonhap
10/19/2007

South Korea has spent nearly 4 trillion won (US$4.36 billion) over the last six years to provide rice and fertilizer to North Korea, the Ministry of Agriculture and Forestry said Friday.

In a report forwarded to lawmakers for this year’s parliamentary audit, the ministry said Seoul spent 3.33 trillion won to send 2.2 million tons of rice to Pyongyang from 2002 to August of this year.

It said 400,000 tons of rice were shipped every year from 2002 to 2004, while 500,000 tons were shipped in 2005. Numbers dropped to 100,000 tons last year after Pyongyang fired off rockets and exploded a nuclear device.

This year, 400,000 tons have been sent to make up for poor harvest in the North.

Of the total, 2.1 million tons of rice were sent as low interest, long-term loans to be paid back in 20 years after a grace period of 10 years.

The ministry said 620 billion won were spent to send about 2 million tons of fertilizer to the North in the cited period.

Opposition lawmakers claimed the government had diverted 2.18 trillion won from the country’s grain management special account to provide North Korea with agricultural support.

“The grain account is aimed at helping local farmers. but the government is using it to supplement the inter-Korean cooperation fund,” said Rep. Hong Moon-pyo of the conservative Grand National Party.

He said that because it will take some time to recover the money, any shortcomings in the grain fund will have to come from the regular account and that will create a burden for taxpayers.

The government asked lawmakers to approve 909.6 billion won for next year’s inter-Korean cooperation fund. This year, the fund amounts to 870.4 billion won.

The money will be used to send 500,000 tons of rice and 400,000 tons of fertilizer to North Korea.