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North Korea: Witness to Transformation

Slave to the Blog: Economic Priorities Edition

by | December 6th, 2013 | 07:00 am
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Today, we report on a few interesting bits of economic news and analysis that are revealing of regime priorities. Not surprisingly, they also highlight a reoccurring theme of this blog: the regime’s current policies are foregoing massive social welfare gains that it could reap from relatively simple changes.

First, if you missed it we provided a brief overview of the World Food Program/Food and Agriculture assessment earlier this week. It contained bits of good news mixed with bad. Although the harvest is up about 5% from last year, this improvement will not necessarily translate into improved food access at the household level. The reason: ongoing weaknesses in the Public Distribution System and the reticence of the government to import adequate grain on commercial terms. Moreover, the assessment found no hints of agricultural sector reform despite recurrent claims of pilot experiments and policy changes around the corner.

In other news, Scott Snyder at the Council on Foreign Relations has hit upon one way of calculating the costs of North Korea’s nuclear program that is as good as any such estimate.  First, he draws on a calculation by Yonsei’s Doowon Lee that is similar to the exercise Marc Noland did a few weeks ago.  What would trade patterns and volumes look like if North Korea were a “normal country,” more fully integrated with South Korea? Such a prospect would require progress on denuclearization, so the foregone trade can be interpreted as an opportunity cost of the byungjin line of maintaining nuclear weapons. Snyder extrapolates very recent China-DPRK trade—which has flattened somewhat—and compares it to an estimate by authorities in Jilin that trade with North Korea could increase by as much as 13% a year if the country reformed. The bottom line of his analysis is that maintaining nuclear weapons and avoiding serious reform could cost the DPRK over $100 billion in foregone trade with China and South Korea through 2020.

I though this was high, but I ran the calculation by Marc Noland and he pointed out that this number is roughly consistent with earlier CGE modeling results he did with Sherman Robinson as well as the gravity model results reported in Avoiding the Apocalypse. In fact Noland pointed out that the gains from “anti-byungjin line”–economic reform and denuclearization–could be even higher. Snyder works off a base where North-South trade is artificially low, and he calculates trade gains from two partners (albeit the most important ones under a liberalization scenario). Noland’s model shows that trade with Japan would rise substantially as well.

Dong-a Ilbo highlights another glaring waste of economic potential: the incredible sums spent on idolization of the leadership during the transition. According to estimates from unnamed sources, Dong-a claims that the regime spent $200 million on 3,200 eternal life towers, 400 mosaic murals and massive statues of Kim Il Sung and Kim Jong Il at Mansudae. In addition, the regime poured about $300 million dollars into white elephant projects like the Masik ski resort, water parks, riding grounds and ranches aimed at publicizing the elite’s commitment to the masses. Again, we can’t vouch for these amounts and they sound high given the incredibly low wages in North Korea; some of these projects are labor- as well as material-intensive and they don’t look demanding of imported inputs. But the projects are not trivial in size or opportunity cost; the bronzes at Mansudae are 23 meters high.

Finally, Yonho Kim at 38North provides a nice overview of the dramatic growth of cellphone use in North Korea. Everyone has been citing this 2 million number coming out of Orascom corporate reports and press releases, and summarized in a nice table by Kim reproduced below.

But as Kim points out, these numbers almost certainly makes no sense. If you take out children, elderly dependents and the military—who are not going to be carrying cellphones—you could get estimates of one in eight to ten North Koreans owning a cellphone. Given that phones can cost between $170 and $700 each and GDP per capita is somewhere between five and six dollars a day, this seems implausible.

Kim’s explanation? First, a significant number of these cell phones have probably been distributed by the Party, government and military organs for official use, hardly an indicator of the growth of civil society. Second, Kim argues that the North Korean nouveau riche are gaming the government’s pricing strategy. Contracts permit users a number of free minutes, but then charge exorbitant fees for additional time. The result: despite the high phone prices, it may be rational to buy multiple handsets. Some unknown share of these 2 million are wealthy individuals with multiple phones designed to maximize minutes. The spread of cell phones in North Korea is ultimately a good thing and we hope it takes off. But the pricing of the cellphones suggests an odd mix of government and private elite interests: the government provides cellphones for official purposes and sells them to raise revenue from a relatively small elite that enjoys the privilege. Even China is a awash in handsets and plans that appeal to a lower-income clientele.

All of these accounts are either modest or should be about their point estimates: the costs of the nuclear program; the money spent on white elephants; the number of citizens outside the government actually using cellphones. But the magnitudes are less important than the common thread: the immense social losses associated with the way the regime governs the country.