North Korean Economy Watch

UPDATE: Here is a photo of the fireworks show. 

April 15 is the biggest holiday in North Korea–it is Kim Il sung’s birthday.  I thought this would be a good opportunity to post some good old fashioned communist propaganda which I found on the Korean Friendship Association web page.  

The film is called Always Together, and it is in Russian, which gives it that socialist je ne sais qua.  Another important thing to note is that although the film appears to be about Kim Il sung it is really about Kim Jong il and how is is the legitimate successor to his father. 

Those interested in North Korean propaganda will be surprised to see how many classic propaganda images are taken from this video.

Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9.

Marcus Noland, co author of The North Korean Famine and Senior Fellow at the Peterson Institute of International Economics, wrote a short policy piece in the Asia Pacific Bulletin calling for more effective sanctions on North Korea to deter Pyongyang’s belligerence:

Regrettably, toothless trade restrictions have provided inadequate to deter Pyongyang ex ante, and the world is now faced with dealing with the situation ex post.  Willingness to impose a comprehensive set of sanctions–trade, aid, travel, energy assistance, and finance–might reign in reckless North Kean behavior before another provocation fundamentally destabilizes the situation in Northeast Asia. (Noland, 2009)

The Asia Pacific Bulletin article draws from a thorough empirical study Noland conducted on the (non) impact of UN sanctions on North Korea’s trade. “The (Non-) Impact of UN Sanctions on North Korea” can be downloaded here.  Here is the abstract:

Before North Korea conducted an underground nuclear test on October 9, 2006, it was widely believed that such an event would have cataclysmic diplomatic ramifications in Asia. Based on a visual inspection of the data and statistical models, this study finds that, although the UN Security Council imposed economic sanctions against the export of heavy arms and luxury goods to North Korea within one week of Pyongyang’s nuclear test, the imposition of these sanctions has had no perceptible effect on North Korea’s trade with the country’s two largest partners, China and South Korea.
policy implications:

1. North Korea appears to have calculated correctly that the direct penalties to its foreign trade for establishing itself as a nuclear power would be modest (or, alternatively, Pyongyang put such a high value on demonstrating the country’s nuclear capability that it outweighed the downside risks, however large). Presumably this experience will condition the reactions of North Korean policymakers in the future—making deterrence with respect to this issue and other sources of conflict more difficult.

2. Despite pre-test diplomatic warnings not to test, the post-test behavior of public and private sector actors in China and South Korea has been accepting of North Korea’s nuclear status. Thus if such warnings are to be heeded in the future, they must embody credible threats of penalty, be much more enthusiastically implemented, and be more broadly targeted.

Though I have tremendous respect for Dr. Noland’s work, I am fairly skeptical about the ability of economic santions to change the DPRK’s policies or behavior.  Carrots and sticks are essential tools for any diplomatic negotiation, but China, the DPRK’s strongest political ally and largest trading partner is simply not interested in implementing rigid economic restrictions vis a vis North Korea (for many rational reasons).  Given the uncanny ability of the North Korean elite to remain in power despite severe economic problems, I am afraid that any achievable sanctions regime would only make life more difficult for “ordinary” North Koreans with little possibility of delivering changes at the top.

Wednesday 4 March, 14:00 – 17:30
KVK The Hague, Randstadzaal
Koningskade 30, 2596 AA  Den Haag

This event is sponsored by GPI Consultancy (see previous posts here).

Speakers include:

Willem Lobbes, boardmember of the Dutch Korean Tradeclub, Director of Lobbes Insurance Consultants

Representative of the DPRK Embassy in Bern, Switzerland

Egbert Wissink, CEO of NovolinQ BV

Professor Evert Jacobsen, University of Wageningen

Kees van Galen, CEO VNC Asia Travel
 
Paul Tjia, Director of GPI Consultancy

The AGENDA can be found here (PDF).

The REGISTRATION FORM can be downloaded here.

On Friday, the DPRK announced it is rescinding the 1991 Agreement on Reconciliation with South Korea (h/t to Nautilus Institute).  The document is brief—so it is worth a read.

Among all of the stipulations in the document, the media has focused on the appendix in which the DPRK agreed to respect the NLL (the de facto, but disputed, maritime border in the West Sea).  The DPRK’s actions have led some analysts to predict that the DPRK will resort to staging provocations along the border in the near future.

Why the drastic policy change?  Well, we are talking about North Korean policy making here, so in a sense unpredictable changes in foreign policy should be…predictable.

Although the DPRK claims it is taking this action in response to South Korea’s ‘hostile policy,’ (which is what Pyongyang euphemistically calls South Korea’s decision to end unconditional financial and economic subsidies), some have speculated that Pyongyang is experincing a bit of a power struggle.  Others believe the DPRK is merely raising tensions to get the attention of the new Obama administration which has been so busy with domestic issues that it has not yet named a North Korea envoy. If this is merely a play for more financial assistance from both South Korea and the US, then the use of provocative language and tactics is rational on the part of the DPRK as they have generally yielded results in the past.

Of course, as with any sequential game, players do adjust to adversarial strategies.  For now, South Korea is simply ignoring the DPRK’s complaints.  Financial markets also seem unimpressed:

“Market participants are sick and tired of the North’s rah rah … investors remain pretty much unmoved now,” said Y.S. Rhoo, an analyst at Hyundai Securities.

Major ratings agencies said they saw no reason to adjust their view on South Korea following the threats.

And according to Reuters:

Credit ratings agencies played down the impact on South Korea’s ratings of Friday’s threat by North Korea to scrap all key agreements with the South, calling the remarks yet more diplomatic manoeuvring.

“We have tolerance for both positive and negative news flow out of North Korea up to a certain limit,” James McCormack, Head of Asia-Pacific Sovereign Ratings at Fitch Ratings, said by telephone from Hong Kong.

“But I think what we’ve seen today is probably within the tolerance band,” he added.

Kim Eng Tan, a sovereign ratings official at Standard & Poor’s Ratings, also predicted little immediate impact on South Korean ratings from the North Korean remarks.

“Unless things develop to the point where there is a real threat to security or stability on the Korean peninsula, we are unlikely to change our assessment of the South Korean government’s creditworthiness as a result of this declaration,” he said in an email to Reuters.

Fitch has an A-plus sovereign rating on South Korea with a negative outlook while S&P has an A rating with a stable outlook. They have said security concerns regarding North Korea are among the main constraints on South Korean ratings. 

If this is true, then the South Korean government is not under any pressure from financial markets to resolve the situation quickly…which is not good news for the DPRK.  Could it be that the DPRK is now unable to credibly project itself as a threat to the South?  

What an interesting scenario that would be.

See also: DPRK Studies, One Free Korea, and the Economist. 

UPDATE: The full statement in KCNA:

DPRK to Scrap All Points Agreed with S. Korea over Political and Military Issues
 
Pyongyang, January 30 (KCNA) — The Committee for the Peaceful Reunification of Korea issued a statement Friday in connection with the situation on the Korean Peninsula growing tenser as the days go by due to the south Korean conservative authorities’ reckless moves to escalate the confrontation with the DPRK.

Citing facts to prove that the Lee Myung Bak group, far from reflecting on the treacheries of pushing the north-south relations to a serious crisis, shamelessly is challenging the north, raising a hue and cry over the “threat from the north” and “adherence to principle,” the statement said:

The inter-Korean relations have reached such pass that there is neither way to improve them nor hope to bring them on track. The confrontation between the north and the south in the political and military fields has been put to such extremes that the inter-Korean relations have reached the brink of a war.

The group of traitors has already reduced all the agreements reached between the north and the south in the past to dead documents.

Under such situation it is self-evident that there is no need for the DPRK to remain bound to those north-south agreements.

The statement vehemently denounced on behalf of all the Koreans the Lee group for having pushed the inter-Korean relations to the brink of a war through its moves to escalate the confrontation with the DPRK in gross violation of the inter-Korean agreements.

In view of the prevailing situation the statement solemnly clarified as follows:

First, all the agreed points concerning the issue of putting an end to the political and military confrontation between the north and the south will be nullified.

Second, the Agreement on Reconciliation, Non-aggression, Cooperation and Exchange between the North and the South and the points on the military boundary line in the West Sea stipulated in its appendix will be nullified.

Holding the Lee Myung Bak group wholly accountable for the present grave situation to which the inter-Korean relations have been pushed, the statement continued:

Never to be condoned are the crimes the Lee group has committed against the nation and reunification by bedeviling overnight the inter-Korean relations that had favorably developed amidst the support and encouragement of all the Koreans and ruthlessly scrapping the inter-Korean agreements.

The Lee group seems to wait for something, calling for “adhering to the principle” but it will only face a heavier blow and shameful destruction.

Read more on this story below:
North Korea Ramps Up Rhetoric Against Seoul
Wall Street Journal
Evan Ramstad
1/30/2009

North Korea, trying to jolt Obama, warns South
Reuters
Jonathan Thatcher
1/30/2009

North Korea Scrapping Accords With South Korea
New York Times
Choe Sang-hun
1/29/2009

NKorea ditches nonaggression pact with SKorea
AP (Via Washington Post)
Jae-Soon Chang
1/30/2009

Ratings agencies play down North Korea remarks
Reuters
Yoo Choonsik
1/30/2009

Power struggle suspected in N. Korea
Washington Times
Andrew Salmon
1/31/2009

For a good laugh, check out The Onion’s latest (well researched) “story” from North Korea (h/t to Rich at www.Asiabizblog.com for this one).

My favorite line: “The People’s Great and Harmonious Moon Hand of Kim Jong il will be the largest moon hand pedestal ever constructed”

I am told the English subtitles and the Korean voice-over actually come pretty close to matching.

The Onion recently published this piece as well.

2008 Working Papers   
 
WPS 08-9: Alliance of “Tooth and Lips” or Marriage of Convenience? The Origins and Development of the Sino-North Korean Alliance, 1946-1958, by Shen Zhi-Hua, traces the development of Sino-North Korean relations and challenges the “tooth and lips” myth often purported as the basis of their alliance.
 
WPS 08-8: Dependence and Mistrust: North Korea’s Relations with Moscow and the Evolution of Juche, by Kathryn Weathersby, Ph.D., discusses North Korea’s diplomatic history with the former Soviet Union and the Soviet Communist Party, identifying key events which catalyzed the deterioration of the Soviet-North Korean alliance.
 
WPS 08-7: Ending the Korean War: Considerations on the Role of History, by Kathryn Weathersby, Ph.D., argues that as the complex task of constructing a peace regime on the Korean peninsula begins, constant confrontation with historical inquiry, which undercuts the natural tendency to simplify and distort the past into national myths that hinder reconciliation, will be necessary.
 
WPS 08-6: Japan and North Korea: The Long and Twisted Path towards Normalcy, by Gavan McCormack, Ph.D., discusses the diplomatic history of North Korea-Japan relations, including the tensions over the issue of Japanese abductees.
 
WPS 08-4: How Korea Could Become a Regional Power in Northeast Asia: Building a Northeast Asian Triad, by Im Hyug Baeg, Ph.D., presents strategies for increasing South Korea’s soft power and smart power around Asia in order to close the power gap with its Northeast Asia neighbors, China and Japan.
 
WPS 08-3: Necessary Enemies: Anti-Americanism, Juche Ideology, and the Tortuous Path to Normalization, by Charles Armstrong, Ph.D., chronicles the development of U.S.-DPRK relations from 1942 to the present, including such contentious issues as the USS Pueblo Incident and North Korea’s nuclear ambitions.
 
WPS 08-2: In Pursuit of Peaceful Development in Northeast Asia: China, the Tumen River Development Project and Sino-Korean Relations, by Carla P. Freeman, Ph.D., examines the changing dynamics of China’s relations with both North and South Korea, as well as with ethnic-Korean populations within China, and the implications of these complex relationships for East Asian regional security and cooperation.
 
WPS 08-1: Korea: An Important Part of India’s Look East Policy, by Walter Andersen, Ph.D., presents a multi-faceted look at growing India-Korea cooperation, including the strengthening of institutional mechanisms for increased trade and investment, and key opportunities and obstacles for increasing strategic cooperation.
 
Find more about USKI’s Working Paper Series here.

Writing in the Daily NK, guest author “Benji” and an astute reader offer us this little glimpse of economic rationality in North Korean culture.

Commenting on the photo above, “Benji” notes:

“A North Korean soldier in front of an amazing view from [Mt. Pektu].  Minutes later, he was to offer me one of his cigarettes.”  

An astute reader made the following comment:

“The cigarette from the Soldier probably wasn’t the kind offer it seemed to be. North Koreans use cigarettes as currency. When they see a western tourist they offer their substandard north korean cigarettes in the hope of receiving western thus more valuable ones in exchange, or if they are especially lucky chinese Double Hapiness“

The pictures and story are worth reading here:
Sacred and Stunning Mountain, Baekdu
Daily NK
“Benji”
1/22/2009

Quoting from Yonhap:

The latest drawings for pay outs of North Korea’s government bonds have taken place in Pyongyang, the country’s state-run television broadcaster said Friday.

The (North) Korean Central TV, monitored in Seoul, reported that the latest winners of the “People’s Life Bonds” were announced this week.

From July-November 2003, the North Korean government sold 10-year bonds worth 500 (US$3.50), 1000, and 5000 North Korean won, saying it would repay lottery winners by multiplying the original payment rather than paying interest.

It was the first bond that North Korea has issued.

According to reports then, the cash-short communist regime aggressively marketed the bonds, praising buyers as “patriots” helping to funnel private money into the buildup of the national economy.

First-place winners get 50 times the face value of the bond, with second-place winners receiving 25 times, third with 10 times, fourth with five times, six with triple and seventh with double.

Drawings were reported to be held once or twice a year.

The sixth round of drawings took place in January 2008, with thirteen 5000-won bond holders declared winners, as well as eight 1000-won bond holders and 10 holders of 500-won bonds.

For this week’s event, seven winners were drawn for each denomination, the TV report said.

Here is a link to an IFES article on the last round (round six) of bond payments, which were announced in January 2008.  Round five took place in January 2006.

Read the full article here:
N. Korea holds latest lottery for gov’t bond repayment
Yonhap
12/26/2008

Quoting from The Nation:

“North Korea had a little boost this year, due largely to its farm, mine and electricity and gas sectors,” the Hyundai Research Institute (HRI) said in its 2009 report on the communist nation’s economy.

North Korea’s farm production increased by 7.5 per cent, from 4.01 million tonnes in 2007 to 4.31 million tonnes forecast for 2008, according to South Korea’s Rural Development Administration (RDA).

“This year, North Korea’s weather conditions have enabled modest harvest growth,” said Ha Un-Gu, a researcher at RDA.

The delivery of energy aid from the United States, China and Russia was cited by the HRI report as a boost for North Korea’s gas and electricity sectors.

In 2008, North Korean trade with China has grown at a pace strong enough to offset its shrinking trade with Thailand. “So North Korea is forecast to post a record trade volume of 3 billion US dollars in 2008,” the HRI said.

However, North Korea’s 2012 target is becoming elusive, as the country’s trade volume is forecast to slide back from its peak of 3 billion dollars in 2008.

Liquidity problems of key trading partners China and Thailand will make it hard for them to maintain their economic ties with North Korea.

North Korea’s business ties with China were forecast to undergo a particularly steep decline, the HRI said.

North Korea’s trade volume with China increased by 25 per cent to 1.19 billion dollars during the January to June period in 2008, compared to same period in 2007, according to Shin Jeong-Seung, the South Korean ambassador to China.

Download the study (PDF in Korean) here.

Read the full article here:
North Korea’s economy is forecast to resume its slide
The Nation
12/27/2008

As we have previously discussed, North Korean human rights groups are sending leaflets across the DMZ in balloons.  Dr. Petrov provides a link to what is written on these brochures, which can be read in Korean here.

I have aso put the flyer into a PDF which you can download here.

Here is the gist in English:

1st section: Starts off saying that FFNK intends to set the facts straight; that the people in the DPRK need to know the truth.  Key messages: the hunger and the poverty in DPRK is not due to SK or US but due to the habitual negligence and selfishness of Kim Jong il (They say “devil-like KJI”) and that the DPRK government was the puppet government of the Soviet Union, adding that a September 25, 1945 document containing the verification of this fact was released publicly in 1993.

2nd section: Titled, “The Truth about the 6.25 war (Korean reference to the Korean war),” states that it was in fact the DPRK who attacked the south.  In march 1949, Kim il Sung went to Moscow and “begged” Stalin for permission to attack the South to unify Korea under the socialist flag. After KIS’s 48th attempt, Stalin gave his consent in early February 1950 and Kim attacked on 6.25.1950. The leaflet stresses that this info has been verified by the US and Russia.

3rd section: Titled, “The Reason for the Fall of DPRK,” claims it wil be due to KIS and KJI depleting natural resources and exploiting the people as their personal banks and slaves. The leaflet claims that they disguise their greed/exploitation by pretending/lying that they are also the sons of the people and that what is good for the party is also good for the people.  A direct quote states: “While the NK people were starving, KJI dined like a king with meals prepared by his Japanese chef,”and that the DPRK is the only country in the world where laws are embodied by a man.  This section also lists many economic and social statistics that contrast the DPRK and RoK. Another direct quote: “In other words, KIS and KJI have made you a mindless drone/slave of the modern age mentally, physically and through your hunger. KJI is solely responsible for this atrocity/disaster.”

4th section: Titled, “What Kind of Human is KJI? Here’s the Truth (they use the Korean word for ‘human’ rather than ‘person’.” His birthday is actually 1941.2.16 but was changed to 1942 to coincide with the year his father came to power. His birthplace is not Mt. Baektu a hospital in the Soviet Union. When “Yura” graduated from his middle school, he announced that he was ‘issued’ a Korean name and would henceforth be called JI. His Siblings: unconfirmed older sister, younger brother “Shura,” who drowned while playing with JI in a river, younger sister kim kyung hyui. Wife: officially married to Kim Young Sook, but separated. He lived with a former movie actress Song Hae Rim, who gave him Kim Jong Nam, but when she committed adultery, he exiled her to Moscow.  She died in 2002. His next wife, Ko Young Hui, gave him 3 kids, but she died 2004.  Kim has probably lived with tens of women. The leaflet asks “are these the actions of the face of the respectable/high-minded communist country, the innocent, modest and loving leader of the people?”