North Korea’s Resource
Headache
By Andray Abrahamian
& Geoffrey See , May 1, 2012
(DO –
As Marcus Noland will make
a point, to which I also agree, it was not a best choice of framework to see or analyze resource
extraction, both current and potential, in the North thru the lens of resource
curse.
It is because there is
not really correlation, not to mention causation – resource
curse by definition should involve correlation between the abundance of oil, gas and mineral resources and low economic growth and
human development. The North was or still is said to be on the brink of collapse,
lacking its ability to revive its economy and leaving its people starving, well
before China looked to the natural resources the North is sitting. More to the point,
such extraction will unlikely worsen the desperate food situation.
In economic terms, the
North, the author pointed out, has few of sellable products. Labor will remain
cheap without regard to resource extraction.
In political terms,
come on.
In social terms, to
me, it is interesting. A more marketization will make the country more isolated.
Though interesting, the discussion on resource curse does not usually include
the issue of social terms.)
(conclusion – the tapping of North Korea’s
rich mineral and fossil fuel wealth, retards social change, as opposed to
heralding some great reform. This paradox can be analyzed under the framework
of resource curse)
North Korea’s moribund economy is one that most
observers would like to see marketized and internationalized. This is often considered
an end in itself, wherein such transformations would expose the country to
irresistible forces of social and political reform. Indeed, there’s evidence
that changes in
(economic causes - Netherland)
The idea of a resource
curse was developed in the 1980s, as economists noted that countries,
particularly post-colonial ones, with large reserves of natural resources were
often not developing as successfully as they potentially could. Sometimes,
problems stem from economic causes, such as those faced by the Netherlands
in the 1960s and ’70s, after huge reserves of natural gas were discovered in
the North Sea. The export of this fossil fuel put tremendous strains on the
economy’s manufactured goods, by driving up the exchange rate and making
exports more expensive. Furthermore, human resources are drawn away from
export-oriented industries, further eroding the competitiveness of the
manufacturing sector. These economic pressures came to be known as “Dutch
disease.”
(political causes- Nigeria)
There are also
political consequences associated with a resource boom. When there’s a lack of
manufacturing to begin with, a country’s elites are incentivized to fight
for control over the resource base, rather than producing wealth by other
means. It’s easier for them to distribute resource wealth to secure their own
positions and enrich their political allies. Nigeria is an
oft-cited example of this.
(going around resource curse – Norway)
Both the economic and
political pressures brought by control of a valuable resource can be mitigated
in a variety of ways, including good governance through strong institutions. Norway is an example,
with its oil revenues parked in a sovereign wealth fund, which is only
allowed to invest overseas. This prevents pork-barrel spending and limits the
inflationary impact of resources. Distribution of oil wealth is also
heavily regulated.
(N. Korea is resource rich country, though no detailed
info available about how rich it is)
North Korea, by all
accounts, is rich in valuable natural resources, particularly coal, iron ore,
gold ore, zinc ore, copper ore, limestone and graphite. North Korea is a
statistics abyss, however, leaving a lot of guesswork for economists who keep
an eye on the country. South Korea’s estimates put the North’s mineral resources figure
at over $6 trillion.
(Pyongyang boost efforts to bring in foreign
investments)
There’s growing
interest in exploiting these resources for export through joint ventures. There
are more trade fairs in Pyongyang than ever before, and last autumn, Rason became the first city outside of the capital to
host an international trade fair. North Korean investment officers we have
worked with on economics and business training have been incredibly busy
sending delegations out on investment roadshows, and two major organizations
were set up in the last two years to bring in investments.
(Most of that foreign investment is Chinese; China’s
ever-greater ownership of North Korean resources )
Most of that foreign
investment is Chinese, of course, and Chinese companies have redoubled their
focus on securing North Korea’s underground wealth over the last several years.
For those willing and able to navigate a very trying business environment, the
combination of cheap labor and accessible resources can potentially pay large
dividends.
According to KOTRA, China’s trade with North Korea has tripled since 2005.
Recent data suggests North Korea’s trade deficit with China has improved on the
back of natural resources: A joint Yonhap-IBK Economic Research Institute study
concluded that China imported 8.42 million tons of minerals from North Korea
from January to September last year, worth $852 million. This was triple
the amount imported during the same period of 2010.
(the North and the South, both are aware of China’s
ever-greater ownership of North Korean resources, currently having no way out
of it)
Some North
Koreans have expressed wariness over the country’s increasing dependence on
China. Nevertheless, since North Korea is unable to revive its transportation
network, energy supplies, or manufacturing base on its own,
the country appears to have little choice. Seoul, incidentally, is also
concerned about China’s ever-greater ownership of North Korean resources, but
not enough to overcome internal divisions over approaches to North Korea
(to reduce reliance on China, Pyongyang gives
much authority to investment agencies to help reach out foreign capital)
The new leadership
recognizes that it can’t rely forever on exhortations to sacrifice for the
stake of security and must find a way to deliver economic results. This
requires foreign currency, and therefore sellable products, of which North Korea
has few. North Korea’s growing interest in exploiting resources through joint
ventures can be seen in the radically increased authority that investment
agencies have been endowed with compared to their predecessors 3 to 4 years
ago, as well as in the investment pitches they’ve made to investors abroad.
(ineffective, inefficient, and self-defeating
internal competition for foreign investment)
New investment laws,
whether well-drafted or not, and public pronouncements in favor of investments,
whether supported by effective actions or not, make clear the government’s
intentions. Over the last few years there have been multiple organizations
competing for investments, suggesting a certain degree of competition at the
apex of North Korean society. Cross-agency communication is notoriously bad in
North Korea. Indeed, part of the country’s philosophy of centralized rule means
that organizations share information upward, while remaining stovepiped from
parallel organizations. Different investment agencies appear to have had
different patrons and belong to different patronage networks. North Korean government
officials have described the competition for investments as “intense.”
As many agencies take
a cut of the investments they bring in, the blurred lines between
profit-seeking and regulatory responsibilities, combined with some degree of
competition with rival organizations, means that a development strategy based
on foreign investments could degenerate into rent-seeking by rival patronage
networks if the process is managed poorly.
(the two main agencies dealing with investment)
Recent reports from
North Korea indicate that the two main agencies dealing with investment are in
greater contact with each other. The Joint Venture and Investment Committee
and the Daepung Investment Group operate under new investment laws
passed in 2010 and amended in January this year. These laws are North Korea’s
attempt to clarify the legal status of joint ventures along the lines of
China’s own investment laws. Unifying competing institutions and revising legal
codes are both positive signs.
(a lack of rule of law, property rights,
transparency; commercial activities take place outside of the legal framework)
However, it remains to
be seen how the relationship between JVIC and Daepung will develop. Discussions
with North Koreans indicate that understanding of the rule of law and property
rights remains weak, that transparency is a major issue, and that much
commercial activity takes place outside of the legal framework put down on
paper. This exposes business people without the right connections and backing
to arbitrary penalties.
(North Korea will struggle to avoid the trap,
both in economic and political terms)
If managing resources
and overcoming the so-called curse is a matter of concerted, institutional
commitment and the corresponding development of effective economic
institutions, North Korea will struggle to avoid the trap, both in economic and
political terms. Pyongyang will increase trade and exports, but resources could
go to supporting different – sometimes overlapping, sometimes competing – groups of elites. The issues with rule of law and
competition at the top of society, combined with large payouts from mining
joint ventures, could actually lead to a “resource-driven equilibrium.”
Marketization without good governance could result in a stagnant and isolated
economy, much like Burma over the last decade, as broad-based economic
development is ignored while a narrow elite is enriched and existing power
structures are strengthened by resource wealth.
We use the term
marketization to mean both the reduction of controls over State-Owned Enterprises
as well as a relaxation of restrictions on smaller business people or the
informal markets. The commanding heights of the economy will be firmly in
control of various groups of elites. Lower down, trade and market activity
might be tolerated. Yet at the same time, the additional wealth at the top can
be invested in apparatuses of control. While living standards will improve
marginally, Burma’s situation over the past decade shows that this isn’t enough
to sustain broad-base economic development.
(the third causes – in social terms. Resource extraction involving a more
marketized economy would leave the country more isolated)
North Korea’s system
has shown resilience to the encroachment of unofficial sources of news and
information that have been growing since the mid-1990s. A more
marketized economy with greater engagement with the outside world may
allow more outside information in, yet paradoxically serve to bolster,
rather than erode, this resilience. We might see a more internationally
engaged economy, but one that’s still harnessed to maintain the social and
political structures essentially as they are.
That marketization will
naturally lead to other positive social and political changes in North Korea is
too often assumed, and not questioned enough. Natural resources will provide
more income for North Koreans. Nonetheless, we need to be prepared for the
possibility that resource-fueled growth can lead to equilibrium where the
economy is marketized, broader economic development remains a pipedream, and
existing political structures that dominate North Korean society today are
reinforced.
Andray Abrahamian is
an Executive Director at Choson Exchange (www.chosonexchange.org), a
Singapore-based non-profit focused on economics, business and legal knowledge
exchange with North Koreans, and a lecturer at the University of Ulsan.
Geoffrey See is a Managing Director of Choson Exchange.
The Resource Curse
Comes to North Korea
by Marcus Noland | May 17th, 2012
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 $6trillion. 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
