The Resource Curse Comes to North Korea

May 17, 2012 6:45 AM

Roughly once every few months some news story or report crosses my desk touting the value of North Korea’s mineral deposits.  Back in 2009, the Swiss firm Quintermina stated that the country had the world’s second largest reserves of magnesite.  A Goldman Sachs report put the sub-soil riches in at $6 trillion. Earlier this month it was the Choson Sinbo, perhaps not the most unbiased of sources, flogging North Korea’s mineral deposits.  Kim Jong-un got into the act, recently warning against “developing underground resources at random or creating disorder in their development.” And where mineral riches go, the resource curse is soon to follow. Andray Abrahamian and Geoffrey See should be credited with penning the first piece predicting its imminent arrival in North Korea.

I am tempted to dismiss all of this with “they wish.”  You see, to have a resource curse, well, you actually need commercially extractable resources, and while North Korea no doubt has a lot of resources in the ground, actual production has lagged.

So what exactly is the resource curse? In the 1950s, Argentinean economist Raul Prebisch argued that commodities were subject to a long-term secular decline in their terms of trade relative to manufactures. Post-colonial resource producers would be consigned to be the “hewers of wood and drawers of water” for the rich industrialized countries. Whether this hypothesis is correct is an empirical matter, and a quick glance at the gas pump, much less advanced statistical analysis, suggests that it probably is not.  Another possibility is that it is not the secular trend in prices that counts, it is the instability of export revenues that is the culprit, discouraging saving and investment, complicating macroeconomic policy management and generally encouraging a boom-bust mentality. Again, the statistical support for the proposition has been found wanting. Yet another possibility is the so-called the “Dutch disease” phenomenon. Named for the discovery of natural gas in the North Sea off the coast of the Netherlands in the 1970s, Dutch disease refers to the tendency of the real exchange rate to appreciate following the discovery of a valuable commodity or during commodity price booms rendering traditional industries internationally uncompetitive.  While Dutch disease complicates exchange rate management, it is unlikely to represent the whole explanation for the underperformance of commodity exporters, it is probably not the primary channel through which natural resource abundance could negatively affect economic performance. Rather, the primary channel through which resource endowments affect economic performance is through its impact on institutions and political development.

Resource producers tend to be undemocratic, though plenty of exceptions exist—Canada, Norway, and Botswana, just to name a few. In resource-abundant rentier states, the positive effect of high incomes on personal well-being has to be set against potentially destabilizing concerns about distribution: the absence of any transcendently rational or objective ground for determining who receives a share of the rents could potentially manifest itself in dissatisfaction. Authoritarianism may emerge as an understandable, though regrettable, response of a political leadership confronting a potentially aggrieved populace. The existence of rents can act as an emollient through multiple channels. The existence of rents may absolve governments from taxation and as a consequence relieve pressure for accountability. Rents may also furnish governments with revenues for patronage, often taking the form of generous public-sector employment. More subtly, commodity-derived rents can enable governments to co-opt social space, in effect creating oxymoronic state-sponsored non-governmental organizations (NGOs) and undercutting the formation of social groups genuinely autonomous of the state. A third channel through which rents may impede democracy would be by financing the development and maintenance of institutions of internal repression.

Symbiotically, the existence of commodity-derived rents increases the value of control of the state and intensifies incentives to contest political power. In the extreme, control of the resources themselves may fuel rebellion or prolong violent civil conflict, the most obvious examples being alluvial “conflict” or “blood” diamonds in the horrific civil wars of Sierra Leone and Liberia. More recently trade in “conflict minerals” such as tin, tantalite, tungsten, and gold, have been used to fund armed conflict in the Eastern Congo and surrounding regions. And while most contemporary examples of this phenomenon are found in sub-Saharan Africa, the problem is not limited to this region: it is claimed that illicit emerald mining, for instance, has helped finance the long insurgency in Colombia. Burma is another example.

So what does all of this mean for North Korea, at least potentially? It’s got plenty of problems with governance even without a resource windfall. The conventional wisdom is if a country has “good institutions” (e.g. Canada, Norway) when the resource riches begin rolling in, then the country can manage the windfall politically.  But if a country has weak or corrupt institutions, then the influx of resource wealth may actually worsen the situation socially and politically. Richard Pomfret has written an interesting paper on these issues as they relate to the countries of Central Asia, which with their Soviet legacies, may approximate North Korea in certain ways.  Those are not auspicious examples as Pomfret documents and the citizens of those countries can attest.

Comments

Aidan Foster-Carter

Brilliant piece. So resource curse is not singular but plural: it can take several forms. Mongolia is another case to watch here.

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