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  • Darren Lindeman

How North Korea can develop it's economy in a decade.

Updated: Apr 30




The Democratic People’s Republic of North Korea, or North Korea is a highly centralized social political communist regime. The country, founded in 1948 adhered to the principles of the Soviet model its economic development, such as through the use of five-year plans and the use of the economic linear optimization model. Politically it also featured many similarities with Stalinism, including a cult of personality, collectivisation of agriculture and rapid industrialization. The general tenant of the Soviet model resides in The Theory of the Productive Forces, which infers that general technical progress should lead to developments in society.


Despite relative successes in the North Korean economy throughout the 60s and 70s, systematic issues began to arise in the economy during the country’s transition from extensive to intensive economic development. The shortage of skilled labour, energy, arable land and transportation significantly impeded long-term growth and resulted in consistent failure to meet planning objectives. The economic shortfalls and its causes were perceivably similar to that of the Soviet Union’s, which itself faced problems with a non-innovative economy, a high dependency on exporting primary resources and corruptive practices.


By the 80s and 90s however, increasing defence spending, the dissolution of the Soviet Union, poor transportation infrastructure, natural disasters led to the collapse of the North Korean economy. Within the span of several years between the late 80s and early 90s, the North Korean GDP contracted on a basis of around twenty five percent. The economic collapse coincided with a famine which further killed an upper bound estimate of 3.5 million people. The economic decline which accelerated in the 80s led to a continuation of stagnation within the North Korean economy. By 2018, it was estimated that North Korea had a nominal GDP of 32.1 Billion USD.


On the other hand, South Korea had a nominal GDP of 1.69 trillion USD, which is 50 times greater than that of the North’s. Besides a lack of GDP growth, North Korea’s economy is physically debilitated due to factors relating to infrastructure and the lack of energy. Despite China’s economic growth providing a source of trade, investment and financial backing into the country, North Korea’s economy is still hindered by transnational sanctions. These include the United Nations Security Council Resolution 2094, which imposes sanctions on money transfers, resolution 2371, which banned the export of Gold and rare earth materials, and resolution 2397, which limited crude oil and energy imports, amongst other things.


Despite North Korea's economic ailings as opposed to China's economic development, North Korea is not a member of the One Belt One Road initiative. China has recently as of 2018 been heavily investing in Eurasia or the Silk Road Economic Belt (SREB) and the Maritime Silk Road (MSR). The objective for the One Road One Belt (OROB) was to establish the free flow of economic resources and improve allocation of resources. Countries may likely see OBOR as a means to focus on real assets and infrastructure so as to improve their economies and access to external markets. North Korea may see that OBOR investment is a good framework for it's future economic development.


Energy infrastructure, the major problem.


According to an article by Nautilius institute for security ‘reliable supplies of fuels to maintain and build North Korea’s economy, has changed little in the past few years. 'The DPRK’s energy sector needs are huge. According to the article, North Korea's energy problem is not a concentrated issue but one with very much the entire energy supply chain. These include obtaining fuel for power generation, under capitalized power plants, poor electrical transmission and having an efficient end user electrical delivery. According to EPSIS  (Electrical power statistics and information system) North Korea’s gross energy output index has a total score of 190, while the South has a score of 5281. A table from the Nautilius institute shows the energy supply and demand position below. 

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(Energy balance in the DPRK for 2010, Nautilus institute).

Energy insecurity is a major problem in North Korea and will undermine most if not all major capital investments into the country's productive capacities. These include electrical or industries which require energy intensive machinery. Because energy insecurity is endemic this makes choosing the right energy initiative more difficult because of the range of logistical problems and its consequential effect when choosing one project over another. Lack of clarity of information regarding North Korea’s state of infastructure is also another barrier to understanding the state’s energy priorities.


According to 38 North of the U.S Korea institute SAIS 'There is a wide range of options for the international community to provide significant energy assistance to North Korea, from immediate, low-risk, often low-cost steps such as human capacity-building, local pilot projects with humanitarian or economic components, and direct fuels provision, to more substantial national projects such as power system redevelopment, to even more wide-ranging possibilities involving regional cooperation.' These include assistance for policy and legal reforms to stimulate and sustain energy sector reconstruction.


Reform of energy pricing practices, development of energy markets, and capacity-building for careful planning that would allow aid to be based on need and rational objectives are all critical areas for assistance. Additional measures could include training for all energy sector actors, strengthening and developing regulatory agencies and educational/research institutions in the DPRK, and involving the international business community in energy sector investments and technology transfer.


Exports and sources of revenue.


Like other OBOR countries however North Korea has a strong primary resource and in particular metal and minerals deposits. According to an article by 2012 Mineral yearbook Asia Pacific Area report(2012), "According to Asia Times Online, North Korea has deposits of about 20 Million tons of rare-earth metals (REMs) in the eastern and western parts of country but does not have the technology to explore the REM resource nor to manufacture rare-earth-based products. "North Korea would likely need international assistance through joint projects to explore the REM resources and to produce and (or) possibly export REMs".


 According to 38 North SAIS, "Because of the mineral industry's significance to the country's economy, the Government of North Korea is likely to continue working to attract international investment in the country's mineral sector. The increasing international demand for minerals, especially the demand from China and Russia, is expected to stimulate North Korea's production of mineral commodities, such as coal, iron ore, magnesite, molybdenum, nickel, sand, and zinc."

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Bloomberg , Forbes and multiple news media’s also reported North Korea may have potentially a 6 trillion-dollar worth of rare earth resources as it is reported by the North Korea Resources Institute in Seoul.


According to Lee Yoon Sok (in the same report) a researcher at the Korea institute of finance ‘North Korea could use its minerals as collateral to get funding to develop its economy. However, at its current state North Korea’s mine operation rate remains very low as of 2018. According to Nautilus it is likely that the average operation rates of all existing mining facilities are below 30 percent of capacity in 2011 due to restricted financial assistance and the deteriorating infrastructure of the mining facilities. The energy shortage is also one of the main obstacles hampering North Korean mineral production and especially the poor conditions of the power grid. As a result, almost all of North Korean mines suffer from a lack of electric power.


Aside from metals and minerals North Korea has a cheaper labor wage against its immediate neighbors. According to Bloomberg an average worker in the Kaesong Special Economic Zone earns about 100 U.S dollars a month.  Given Kaesong is a special economic zone it is possible that workers in the special economic region may likely earn more than their interior or Northern counter parts. According to the site TradingEconomics, China's "minimum wages in China (in average) increased to 2420 CNY/Month in 2018 from 2300 CNY/Month in 2017". According to the same site China's average wages in manufacturing "increased to 64452 CNY/Year in 2017 from 59470 CNY/Year in 2016."


South Korea on the other hand has a manufacturing wage much higher than the North. "Wages in Manufacturing in South Korea increased to 4562783 KRW/Month in the first quarter of 2018 from 3877934 KRW/Month in the fourth quarter of 2017." By multiplying the rate of U.S.D to Korean Won at the rate of 0.00093, the average manufacturing wage in South Korea is 4257.1 USD. Therefore, it can be seen that North Korea's labor wage are relatively minuscule to both South Korea and that of China.  Growing North Korea's economy may factor in China's economic miracle initiatives in the 90s and 2000s. "Chinas rapid growth in industrial output has owed much to the impacts of globalization, in particular, the influx of foreign capital.


Exploiting low-cost labor has been described in literature as one of the key motivations for foreign direct investment (FDI) into China''. (Wang, Mei 2009) North Korea however at its current infrastructure state is likely more deliberated then that of China's during the 90s and the country neither has the domestic means, external funds or political symmetry to heavily redevelop its failing infastructure. With respect to China it is also important that China's industry has focused on de industrialization of low value-added processes. According to the wall street journal. China is at a crossroads as it works to maintain its cost advantage and core low-cost production base while also building the more complex capabilities that are required for advanced manufacturing.


The economic growth momentum that China gained by opening markets and enacting reforms has weakened, and that China needs breakthroughs to spur a new round of economic growth. Technology and innovation industries are also the basis for China's new economic plans into 2025. According to TradingeEconomics China's industrial production remained at consistent levels from 2016 to 2018 highlighting lack of growth as opposed to GDP growth in other economic segments, especially to service industries. This lack of industrial production could be partly attributable to the downsizing of state enterprises whom may not be profitable or are following in efficient procedures. De investment in industrial production and other physical oriented production may lead to outsourcing abroad maybe as part of OBOR.


Developing North Korea's labor-intensive industries include outsourcing labor to create manufacturing goods. As China’s economy is developing so does its preference for trade and also imports. China may also seek to be a capital-intensive nation as opposed to being a nation with cheap manufacturing wages. North Korea could be on the positive receiving end of China’s economic transition for its 2025 roadmap.  Average manufacturing demand would likely rise consistently for the fore coming years to adjust to credit and general economic spending and growth in Chinese consumer markets. However North Korean industrial and transportation networks are still in poor conditions as of 2018. Developing labor intensive industries is there for a priority which requires building critical infrastructure and supporting industries.


Because North Korea has low industrial capabilities it may be required that foreign firms donate or transfer their heavy assets from abroad to factories and sites in North Korea as foreign firms did in China in the 90s and 2000s. This however requires a reliable transportation network which would also be used to transfer and export goods and supporting business networks in general. North Korea has been known to export garments and textiles, low value added electronic goods and other related labor-intensive items. North Korea has also operated Rason special economic zones and the Kaesong industrial region in the South. Special economic zones should consider the free flow of trade and factors of production and also should be supplied with auxiliary industries which provide services related to the economic zones.


Tourism and gambling.


Tourism and entertainment may be a  major factor for economic growth and a method for obtaining hard currency. North Korea has traditionally used tourism as a means for income in the past. According to the Chinese National Tourism Association, North Korea had 237400 thousand Chinese outbound tourist to the state in 2012. To get a hint of the general size of this industry if we assume that tourist spending in the state would be an average of atleast 100 USD per day (which is approximately the average daily tourist spend in the Fillipines in 2018), and that tourist stay on average for two days this would translate to a spending of atleast 47480000 or forty seven million four hundred and eighty thousand U.S dollars per year on Chinese tourists alone in 2012.


North Korea has been active in promotion tourism into the country in the past.  The country has developed the Masikryong Ski resort , numerous hotels and cultural and leisure sites around the country. There is also specifically the opportunity to promote gambling in the region. The gambling industry has been most active in South and South East Asia, including Singapore, Manilla, Cambodia and most famously Macau. There is however in comparison no gambling concentrations in North or North East Asia, where there are in geographic proximity three major possible gambling demographic sources including Japan, Russia, China and South Korea.

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(The regional Casnos, Kinibiz 2018). 


North Korea can benefit from a flexible political attitude towards establishing the casino industry in the region. The state can also benefit from its comparative advantages in construction and managing leisure sites which has been a feature in its previous tourism initiatives. Macau has benefited from the liberalization of gambling in the region in the 21st century which spurred further multiple and multi national capital investments into the region with casino operators including Galaxy, MGM, and Sands China. 


The People's republic of China would also see well that the development of a gambling industry in the state would feature a lower capital flight risk unlike in Macau as funds may be used to collateralize or further improve bilateral trade and investments. Given the market appetite for appetite for gambling in Asia, North Korea would see well that developing the gambling industry could do well for its economic development and especially if the trend can catch on to multi national visitors.

 

The Key problem. Politics. 


Although it is easy to point out North Korea's problems, it is likely that the real difficulty is in fixing the countries internal economic problems. As North Korea is ramping up its international efforts for multinational collaboration and removal of sanctions as opposed to its previous policies, it now is at a strategic cross road to rebuild its economy. However, a major lingering concern is the issue of trust of the North Korean government.


North Korea is a state which has developed extensively a poor track record to dealing with foreign corporations and these including turning their backs on contracts, non-payment of procured services and downright theft of capital or assets held in North Korea. According to an article by Al Jazeera "For the North Korean government, always hungry for hard currency, such ideas (of capital export) are anathema to its goals; and neither the central government nor North Korean companies can stand to see money flowing out of North Korea into the pockets of already "rich foreigners".


North Koreans do not see profit repatriation as a business commitment that foreign companies should pocket. Fundamentally; this practice would likely deter most foreign investments if not all major contract." To rebuild North Korea's international credibility for the invitation of international foreign direct investments therefore requires the DPRK to commit to create a legal and executive agency to protect foreign investments in the country. This is much more a political issue with regard to the national or regional authority due to the centralized political structure in the North Korean state.


North Korea should see that its economy and foreign investment is a major underlying social economic concern, which implicates its geo political security and therefore sees appreciation of foreign direct investments as a critical resource to protect as well as the country’s reputation for business practices. The state may also consider developing an entirely new economic bureau and supporting ministries to develop foreign investment objectives in the state.


This requires a form of cultural literacy in understanding fair trade and modern business practices to that of other countries. Beyond the formalism of having an effective economic management policy there is also the political issues with the country itself. These may include corruption, fear of foreign markets, lack of consistent national agendas and political factionalism. In this case, The North Korea government should be aware that it has to unify itself and its economic agent to an overarching economic agenda.  


A major point of concern is to establish collateral for business activities for foreign investments. North Korea may require to set up a network of business and financing collateral protocols and particularly to Chinese state institutions. Collateral and therefore economic insecurity would persuade that the North Korean state fixate on its social economic objectives and reduce the chance that internal players deviate from an agreed economic framework.


Development paths. 

There is a major cross road circumstance towards developing North Korea's energy and transportation infrastructure to enable further economic developments. These include circumstances to the scope of economic developing and whether there should be a largely centralized state approach or a series of independent and possibly grass root projects. There is also the question of allocation of funds and whether to invest in mining industries or special economic zones and their infrastructure.  


An idealized version of economic development may likely include both centralized investments and smaller micro projects. Centralized investments may be fixated on improving firstly the ability to extract and transport metals and minerals to China and develop the infrastructures for these projects. This is given because of China's previous trading relationship with North Korea which partly includes importing coal and metals. A more far sighted or out of bound option is to create a mutual aid fund which would focus on building infrastructure and economic industries so to enable a radical pace of growth.


The fund may collect North Korea's long-term resources and export potential and then contractual them to acquire funds from different parties, including financial institutions and governments. If North Korea can consistently improve its ability to generate revenue for foreign investors they may be able to pool substantial investments and future revenue into one framework or system of fund distribution.


A different approach to economic liberalization. 


Unlike market liberalization focus in the people's republic of China it is likely that North Korea would prefer a highly focused institutional perspective to economic development and growth. This is given that there is an ability to lower priority on free market policies then on successful management and administration of export , fund generating projects for imports and also electrical and transportation infrastructure. 


Instead of market liberalization the economic emphasis for management could be based on efficiency and flexibility of state institutions which manage the major economic projects in the aforementioned three comparative opportunities..  North Korea's sensitivity to foreign interference in it's political landscape would likely see that internal market forces play a lower role then that of a centralized ability to manage trans national economic partners and also internal economic and social agents via their entrenched security policies.


Economic development would likely see an initiative to improve the legitimacy of the North Korea Worker's party and the leadership with regard to the status quo in economic development. Noting that the North Korean state at it's current form were from a series of mismanagement and lack of provisions for economic recovery , there would likely be a political initiative to use central planning to improve aggregate supply and domestic industries to eventually be self sustaining. 




Reference list;


Hong Kong development council. Belt and road basics. Acessable at; https://beltandroad.hktdc.com/en/belt-and-road-basics

Hippel & Hayes 2018. Energy insecurity in the DPRK, linkages to regional energy security and nuclear weapon issue.  Accessible at; https://nautilus.org/napsnet/napsnet-special-reports/energy-insecurity-in-the-dprk-linkages-to-regional-energy-security-and-the-nuclear-weapons-issue/

Hippel, Bruce & Hayes. 2011. Transforming the DPRK through energy sector development. An Online Journal for North Korean Affairs. Special report 11 ~ 3.  Available at; https://www.38north.org/wp-content/uploads/2011/03/38NorthSR_11-3_EnergySectorDev2.pdf

J, LEE. 2018. These maps show hot to unlock North Korea’s economy?  Available at; https://www.bloomberg.com/news/articles/2018-06-03/these-maps-show-how-to-unlock-north-korea-s-economy

Wang & Mei 2012. Dynamics of labor intensive clusters, relying on labor costs or cultivating innovation? Available at; http://www.oit.org/wcmsp5/groups/public/---dgreports/---inst/documents/publication/wcms_193157.pdf

A Lankov. 2015Foreign direct investment in North Korea. https://www.aljazeera.com/indepth/opinion/2015/12/foreign-indirect-investment-north-korea-151210110219878.html

Mines Bereau, 2012. Minerals Yearbook: Area Reports, International Review. Ministry of Interior. 

A New Paradigm in Tourism development in North Korea (2017)  Tourism travel and research association. Advancing tourism research globally. 12. 

Kong 2014. The regional casinos. Availabe at: http://www.kinibiz.com/story/issues/75843/the-regional-casinos.html

#North Korea #NKeconomy #CommunistEconomy

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