Food Price Inflation in North and South Korea

July 10, 2012 6:15 AM

For months the Lee Myung-bak government in South Korea has been hammered politically by rising food prices, undertaking various policy initiatives in response.  Last week the Maeil Business Newspaper reported that the country’s May food price inflation rate of 6.4 percent made it the third highest in the OECD, exceeded only by Chile (6.7 percent) and Iceland (6.6 percent).  The overall OECD average was 2.6 percent.

The same day, citing the DailyNK, the Korea Herald reported that as of June 14, north of the DMZ, a kilogram of rice cost 3,200 North Korean won in Pyongyang and 3,900 won in Hyesan, the country’s second largest city in North Korea’s northernmost region, representing increases of roughly 25 percent and 40 percent, respectively, from less than two months ago.

Admittedly, it is not an “apples to apples” comparison—the South Korean figure is calculated for a whole basket of food products, while the North Korean figures refer to a single grain. And one can conjure up reasons why the real price of food might increase more quickly in North Korea than in South Korea—the South Korean price figure presumably embodying to a much greater extent less price-volatile non-food components such as processing, packaging, and advertising, for example.

Nevertheless, the divergence in the inflation rates across the two countries is striking. In all likelihood, the main explanation is a significant divergence in the overall rate of inflation in the two countries—in other words, it may not be that the relative price of food is rising disproportionately faster in North Korea; all prices in North Korea are rising rapidly.  According to the OECD, South Korea’s core inflation rate (which excludes volatile food and energy prices) was 1.5 percent –actually a lower rate than the OECD average of 1.9 percent. (The South Korean government, which excludes a slightly different basket of goods from its core inflation calculation, put the figure at 1.6 percent.) Thus the divergence may be an implicit indicator of continuing problems with macroeconomic control in the North. It may also signal the North’s uneven integration into the world economy (imports are not effectively holding down local price increases). And it goes without saying that such rapidly increasing grain prices cannot be good for food security in North Korea.

There is good news, however.  The end of June has brought rain to the Korean peninsula that should allow planting for the fall harvest to proceed.  The Daily NK reports that the (South) Korean Rural Economics Institute, a government affliated research institute, is predicting that yields are likely to be down. I know what's at the top of Kim Jong-chol's playlist:

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Marcus Noland Senior Research Staff

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