Aug. 17 DPRK Daily

http://in.reuters.com/article/2012/08/17/korea-politics-idINL4E8JH1F320120817

S.Korean presidential candidate vows unconditional aid for North

Reuters. 8/17/12 By Jane Chung

  

SEOUL, Aug 17 (Reuters) - Moon Jae-in, the most popular South Korean opposition presidential candidate, said on Friday that if elected this year he would offer no strings attached economic aid to North Korea in a radical departure from current policy that has seen ties between the two states frozen.

  

Moon, 59, a former human rights lawyer and confidant of ex-president Roh Moo-hyun whose policies of openness to the North were overturned by conservative President Lee Myung-bak, said that engagement was key to moving beyond the current stalemate between the two states, which remain technically at war.

  

"I would like to handle North Korea issues comprehensively. The current Lee Myung-bak administration has certain preconditions to resume talks with Pyongyang, saying we will not respond to the North unless it gives up its nuclear ambition. However, such approach makes both sides hard to take a step further," Moon told journalists at a briefing.

  

There have been signs recently that North Korea's new ruler Kim Jong-un is more willing to open up than his father who he succeeded in December in a bid to revive the impoverished country's ailing economy, which is fraction of the size of the South's.

  

http://www.piie.com/blogs/nk/?p=7148

Rare Earth Mania

Peterson Institute for International Economics. 8/17/12 By Marcus Noland

Rare earth metals have been in the news quite a bit due to growing concerns about China’s ability to exploit its market dominance in the production of these important inputs to electronics.  Leonid Petrov recently created a stir with a piece in the Asia Times titled “Rare Earths Bankroll North Korea’s Future” which argued that the country’s rare earth deposits could allow North Korean leader Kim Jong-un to enrich the country without reforming and that South Korea is cooperating with North Korea to exploit its rare earth deposits.  Petrov envisions a future in which “The export of rare earth metals will replenish the state coffers; stimulate the loyalty of the elites to Kim Jong-Un’s autocratic rule; and secure the growth of consumption among the ordinary people,” nicely encapsulates the resource curse issue that I addressed in an earlier post.  Petrov concludes that “Although the political regime will remain dictatorial, the idea of unification with the South by war or absorption will soon become meaningless. The purges of political elites and the mass starving of ordinary people in North Korea will cease. Gradually the level of prosperity in the two halves of the divided Korea will start equalizing, opening more opportunities for greater exchange and cooperation.”

Having already been asked by one journalist to comment on the story, I asked my colleague Gary Hufbauer, who has been following the rare earth metals story for some time for a reaction. He struck a somewhat more skeptical note, observing that the processing technology for rare earths metals is “extremely complicated” with only China, Japan, and a few places in Europe having processing plants.  So while North Korea might have substantial deposits, it will probably be several years before it can acquire the processing technology.  Meanwhile, any shipments will be exported as relatively low value ore and probably require complementary investments in the dilapidated transportation infrastructure.

And until that occurs, it might be a little early to celebrate Rare Earth….

http://english.yonhapnews.co.kr/northkorea/2012/08/17/26/0401000000AEN20120817000200315F.HTML

N. Korea may own 48 nuclear weapons by 2015: report

Yonhap News Agency. 8/17/12 By Lee Chi-dong

WASHINGTON, Aug. 16 (Yonhap) -- North Korea may build up to 48 nuclear weapons, both based on plutonium and uranium, by 2015 or 2016 unless negotiations and other proper measures are implemented to head off such a potential threat, a U.S. think tank report said Thursday.

The Institute for Science and International Security (ISIS) admitted the difficulty in obtaining accurate information on the secretive communist nation's nuclear capability.

It used scientific and statistical data to estimate Pyongyang's nuclear weapons arsenal under various scenarios.

If North Korea operates only one centrifuge plant, it is projected to have 28-39 nuclear weapons by the end of 2016, or an increase of 16 weapons since the end of 2011, according to the report.

The 40-page report was co-authored by David Albright, head of the Washington-headquartered ISIS, and Christina Walrond, a research associate.

"If North Korea has two centrifuge plants, however, it could produce a much larger quantity of WGU (weapons-grade uranium). It could have 37-48 nuclear weapons, or an increase of 25 weapons, most of which would be produced in 2015 and 2016," they said.

North Korea has worked on a plutonium-based nuclear program for decades and it conducted underground nuclear tests in 2006 and 2009.

The international community suspects Pyongyang is now pushing for another method -- uranium enrichment.

In a report published earlier this week, based on satellite imagery, the ISIS said it expects North Korea to complete the construction of a new light-water reactor at Yongbyon as early as in the latter half of 2013.

North Korea is widely believed to have six to 18 plutonium-based nuclear weapons.

"North Korea is not thought to be currently making weapon-grade plutonium," Albright and Walrond said, adding it could resume such production in 2015 and 2016.

They stressed talks remain a useful way to cap North Korea's uranium enrichment program and block the use of the light-water reactor (LWR) to make weapons-grade plutonium.

"If negotiations resume, the issue of the experimental LWR should be taken up," they said.

http://www.dailynk.com/english/read.php?cataId=nk00100&num=9693

Jang Meets Top Chinese Leaders

Daily NK. 8/17/12 By Hwang Chang Hyun

Entering the final leg of his official visit to China, Jang Sung Taek had individual face-to-face talks with both President Hu Jintao and Premier Wen Jiabao in Beijing earlier today.

According to the Chinese state media, Jang thanked President Hu for making time for the meeting despite China's impending 18th Party Congress (which is scheduled for this October). He also conveyed warm greetings from "the supreme leader of the Chosun Workers' Party, state and People's Army, Marshal Kim Jong Eun."

For his part, Hu is said to have offered Jang congratulations on the successful completion of the 3rd meeting of the DPRK-China Joint Guidance Committee for the joint development of the Rasun and Hwanggeumpyong-Wihwa Island Special Economic Zones, before conveying "words of consolation on the behalf of the Communist Party, Chinese government and people for the considerable loss of life and damage to property caused by recent flooding in some regions."

Hu also expressed his pleasure at Jang's visit, commending him on his contribution to the development of Sino-North Korean relations.

In their later meeting, Wen Jiabao also commented on the recent flooding before adding that he hoped Jang's visit would lead to a major step forward in bilateral relations.

Jang's visit has been heavily focused on economic issues, including not only the 3rd meeting of the DPRK-China Joint Guidance Committee on the 14th but also visits to Jilin Province and Liaoning Province on the 15th and 16th to discuss support for North Korean development with local leaders.

He also met on Thursday with Wang Jiarui, the head of the Communist Party of China's International Department.

"Jang hailed efforts by the Chinese side to develop the zones. He said the DPRK is willing to make joint efforts with China to firmly implement the important consensus reached by both leaders so as to lift the traditional DPRK-China friendship to a new height," a report carried by the state-run Xinhua today explained, adding, "The two sides also exchanged views on their domestic situations and other issues of common concern."

http://www.reuters.com/article/2012/08/18/us-korea-north-china-idUSBRE87H01F20120818

China's Wen urges North Korea to let the market help revamp economy

Reuters. 8/18/12

(Reuters) - Premier Wen Jiabao encouraged North Korea to allow "market mechanisms" help revamp its economy, state media said on Saturday, and laid down other pre-conditions as China tries to wean its impoverished ally off its dependence on Chinese aid.

Wen's comments followed his meeting with Jang Song-thaek, the powerful uncle of North Korean leader Kim Jong-un, in Beijing on Friday. Jang is the highest-profile North Korean official to visit China since Kim power in December 2011.

As well as allowing freer rein to market forces, the Chinese premier also recommended Pyongyang encourage economic growth by improving laws and regulations, encouraging business investment and reforming its customs services.

China's President Hu Jintao also met Jang in a clear show of support for the North and its new leadership. Jang is seen as the driving force behind reforms that the isolated and destitute North is believed to be trying and for which it desperately needs Chinese backing.

Beijing has had difficulty managing the relationship with North Korea, which it views as a strategically critical buffer between itself and U.S. military forces in South Korea.

But North Korea is often more cantankerous than China would like, in particular towards South Korea, even though the economic relationship between China and South Korea is far more important. Bilateral ties are also not always smooth.

In May, North Korea seized a number of Chinese fishermen and boats in the Yellow Sea and demanded 1.2 million yuan for their release.

China has expressed unhappiness with North Korea's nuclear weapons program, particularly with nuclear tests that have been conducted near the Chinese border, and is quietly lobbying against future tests.

Beijing has supported international sanctions against the North in the past, and has also occasionally cut off economic aid, including critical oil shipments, but the desperate state of the North's economy has limited its leverage in Pyongyang.

Experts and government sources who spoke to Reuters say China cannot go too far with such sanctions for fear of destabilizing the regime entirely, prompting a flow of refugees across the border into China.

China and North Korea have moved to intensify economic cooperation through development zones in Rason on the North's east coast, and in the border area of Hwanggumphyong.

So far North Korea has received around $300 million in non-financial direct investment from about 100 Chinese companies, mainly in the food, medicine, electronics, mining, light industry, chemicals and textile sectors.

China's exports to North Korea rose 20.6 percent last year to $2.28 billion from 2010, while imports plunged 81.4 percent to $147.4 million, according to Chinese customs figures.

Those numbers are dwarfed by trade with South Korea, China's third-largest trading partner.

Transparency, Conflict Minerals and Natural Resources: Debating Sections 1502 and 1504 of the Dodd-Frank Act at Brookings December 2011

Transparency, Conflict Minerals and Natural Resources: Debating Sections 1502 and 1504 of the Dodd-Frank Act

http://www.brookings.edu/research/opinions/2011/12/20-debating-dodd-frank-kaufmann

Opinion | December 20, 2011

Daniel Kaufmann, Senior Fellow, Global Economy and Development

Veronika Penciakova, Research Analyst and Data Specialist

DO- a general overview of Section 1502 and Section 1504

Editor's Note: On December 13, Brookings and Global Witness hosted The Transparency, Conflict Minerals and Natural Resources: What You Don't Know About Dodd-Frank, an event examining Sections 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The agenda and full transcript can be found here.

With a focus on conflict minerals and natural resource transparency, Sections 1504 and 1502 of the Dodd-Frank Wall Street Financial Reform Act are unrelated to the U.S. banking system. Yet they have stirred up controversy. As is often the case with provisions that aim at changing the rules of the game, Sections 1502 and 1504 have pitted stakeholders that support their passage and full implementation against the interests of those that wish to water them down or greatly delay their implementation. Last Tuesday, Brookings and Global Witness hosted an event at the National Press Club to examine the debate surrounding these two provisions.

Representative Jim McDermott kicked off the event by explaining that passing Sections 1502 and 1504 is only half the battle. The eventual effectiveness of these provisions largely depends on how the final rules are written and implemented. If well implemented, they could contribute to increased transparency, empower citizens to capture the gains from natural resource wealth and deny financing to dangerous armed groups in the Democratic Republic of Congo and the surrounding countries. However, if opponents of these rules succeed in sufficiently watering them down, many of these gains will not be attained. With this in mind, panelists and participants from civil society, the private sector, financial sector and think tanks discussed the benefits, potential costs and implementation challenges of Sections 1502 and 1504.

The first part of the discussion, moderated by Simon Taylor from Global Witness, focused on the costs and benefits of Section 1504, which requires U.S. companies in extractive industries to report project-level payments made to foreign governments. Isabel Munilla from Publish What You Pay (PWYP) emphasized that with detailed information, citizens, civil society organizations and NGOs will be able to monitor corporate and government interactions, hold both groups accountable, and ensure that natural resource wealth contributes positively to local development and livelihoods. Daniel Kaufmann pointed out that data and research from around the world suggests that in the long run, with increased transparency and accountability, citizens could see up to a 300 percent development dividend from improved governance – i.e. their incomes per capita could triple.

Bennett Freeman from Calvert Investments suggested that transparent companies attract more investors because disclosure clarifies investment risks. And Laurel Green from Rio Tinto also supported implementation of these disclosure reforms, pointing out that such transparency can be a competitive advantage since firms can provide host governments with clear evidence of how they contribute to government revenues and communities. Yet not all companies may view such transparency reforms to their advantage. From an economic incentive standpoint, Kaufmann highlighted that, as with practically every rule, Section 1504 also means that there will be winners and losers. Companies that focus on efficiency and innovation stand to benefit, while those that derive gains from rent-seeking, monopolistic behavior or tax avoidance would have an interest in maintaining an opaque status quo.

Some large companies and industry associations that are opposed to the disclosure rule in Section 1504, such as Shell and the American Petroleum Institute, have suggested that project level disclosure will be very costly, position publicly traded firms at a competitive disadvantage, and possibly face in-country discrimination in places with lack of disclosure. There was discussion suggesting that these claims may be exaggerated during the panel. The reality is that companies already have systems in place to track revenues and payments. In fact, even though Section 1504 is not under implementation yet, some large corporations— like Rio Tinto, Statoil and Newmont Mining, among others— already disclose payments in every country of operation. Further, as reported by some companies that are already disclosing, there does not appear to be compelling evidence that companies will face major penalties by non-transparent governments.

Some companies are also concerned that competitors could use disclosed information to their advantage. First, the information that should be disclosed does not appear to fall under the proprietary trade secrets category. Furthermore, since the rules cover all companies listed on the U.S. stock exchange, major companies like Shell, Exxon and BP are covered, as are some state-owned ones, like Petrobras and Petrochina. Last, and not least, disclosure requirements along the lines of Section 1504 are already being drafted in the European Union, and consideration of similar rules is also taking place in South Korea and Hong Kong, which would widen the network of companies covered and further level the playing field. If anything, firms listed in the U.S. can get a head start on those companies not yet covered by disclosure requirements.

Since it will be virtually impossible to roll back Section 1504 on transparency in natural resources as well as difficult for companies to oppose transparency from a public relations perspective, the strategy by companies opposed to disclosure has been to lobby for watering down the eventual rules issued by the Securities and Exchange Commission and to delay the effective implementation of the rules. The most important component in watering down such provisions would be to make disclosure a requirement merely at the aggregate country-level rather than at the project-level. This loss of this crucial detail would greatly reduce the impact of the measure. All the panelists during this session, including those from the private sector, argued in favor of detailed project-level disclosure.

In the second session, panelists and participants discussed Section 1502, which requires companies that source minerals from Congo-DRC and adjacent countries to disclose whether they use conflict minerals. The rule relies on the adverse reputational impact of such disclosure rather than mandating penalties for actually sourcing minerals from conflict-afflicted regions where militias may be benefitting from this trade. No reputable company wants their product associated with armed conflict, human rights violations, slavery and rape. Yet again there are some companies that support these reforms, while others oppose them.

Corinna Gilfillan from Global Witness, Delly Sesete from CREDDHO in the DRC, and several participants in the audience from the DRC region emphasized that although Section 1502 will not itself end conflict in Congo, it could hold companies accountable for sourcing from mines controlled by militias. The U.N. Group of Experts on Congo has already found that since the signing of the Dodd-Frank bill, there has been a reduction in the portion of mined minerals that is funding the conflict. By denying financing to the armed groups that perpetuate violence in the region, the provision can contribute to increased stability and improved human rights.

As with Section 1504, some companies are claiming that implementation costs associated with conflict minerals in Section 1502 will be very high. There are numerous estimates of these costs, ranging from the SEC’s estimate of $71.2 million to the National Association of Manufacturers’ (NAM) estimate of $9-$16 billion. Recent estimates produced independently by the Claigan Environmental consulting firm and presented by Bruce Calder during this panel suggest that costs to the industry are expected to be less than $815 million.

In fact, some proactive companies (both domestic and foreign) are already showing that tracking supply chains is both practically and financial feasible.  Sandy Merber from General Electric and Tim Mohin from AMD discussed how pooling industry resources could help offset individual firm costs. The Electronics Industry Citizenship Coalition and the Global e-Sustainability Initiative have partnered with firms to develop the "Conflict Free Smelters Program", which allows companies performing due diligence to trace their mineral supply chain down to the smelters who are certified as being either conflict free or not. Efforts are being made to now certify smelters in the DRC region under this program to help preserve access to the international markets for impoverished artisanal miners. Yet the companies that have already taken the lead in tracking the supply chain are a minority, and thus they are bearing a disproportionate share of the cost for so doing. Once the rules are issued and regulations implemented, this cost would be spread among a larger universe of firms.

There are concerns among some in the DRC that Section 1502 will have negative unintended consequences on citizens in the region. They suggest that the disclosure requirements are driving firms out of the DRC, citing falling mineral trade as evidence. Yet Section 1502, which has not yet even been implemented, cannot solely be blamed. Since April 2010, when the DRC-government-imposed six-month minerals embargo ended, trade in minerals has been on the rise. Sesete argued that much of the talk of unintended consequences was akin to fear mongering. He and others have pointed out that the mineral trade in that region is a relatively recent activity and citizens had (and continue to have) other sources to support their livelihoods. Further, he emphasized that the benefits of increased security and reduced violence and instability are too great to dismiss Section 1502 outright.

In the end, as pointed out by Mark Taylor from FAFO, the ability of Sections 1502 and 1504 to achieve their goals depends heavily on effective implementation. The final rules on these two provisions have yet to be released by the SEC. Therefore, the uncertainty surrounding the final rules has contributed to speculations on the cost (both to companies and countries) of implementation. The sooner these regulations come out and the clearer the standards they set are, the greater chance these provisions will have in maximizing the benefits to global transparency, accountability and governance.

As Senator Ben Cardin reminded the audience during his closing presentation, the importance of Sections 1502 and 1504 transcends U.S. companies and Central Africa. Indeed, while the SEC should carefully weigh potential benefits and costs in the implementation of Section 1502 and 1504, the balance should be in favor of transparency.

And the importance of leadership should not be ignored: these specific disclosures in Dodd-Frank will signal that the U.S. is taking the lead globally on these important aspects, potentially nudging other key financial centers to do likewise and thus benefitting governance, security and human rights in many corners of the world.

can ever the resource curse come to North Korea? - Marcus Noland, Andray Abrahamian, and DOng

http://the-diplomat.com/new-leaders-forum/2012/05/01/north-korea%E2%80%99s-resource-headache/

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.

http://www.piie.com/blogs/nk/?p=6077

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

The Issues of Contention in Interpreting and Implementing Section 1504 of Dodd-Frank Act

http://www.earthrights.org/legal/sec-schedules-vote-transparency-rules?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EarthRightsInternational+%28EarthRights+International%29&utm_content=Google+Reader

SEC schedules vote on transparency rules

Tue, 2012-07-03 14:47

After more than a year of delays, the Securities and Exchange Commission (SEC) announced this Monday that a vote will be held on August 22 to adopt final rules for Section 1504 of the Dodd-Frank Act.

When the Dodd-Frank Act was enacted in July, 2010, Congress gave the SEC 270 days to issue rules for Section 1504.  Those rules are now more than one year overdue; in May, ERI filed a lawsuit on behalf of Oxfam America -- a key backer of Section 1504 -- to compel the SEC to promptly finalize the rules.  

While this is the first time the SEC has actually scheduled a date for a vote, it has repeatedly published -- and missed -- self-imposed deadlines to finalize the rules. While we hope the vote will proceed as scheduled next month, our lawsuit on behalf of Oxfam will continue until a rule is actually adopted.

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https://docs.google.com/document/d/1Z2QD2UVcek0c_QWwHSQxjSZ50nUg-zSb0ZaJvs9SVcw/edit
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The Contentious Issues in Section 1504
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SEC keeps delaying issuing final rules on Conflict Mineral Section of Dodd-Frank Act

Use of ‘Conflict Minerals’ Gets More Scrutiny From U.S.

By EDWARD WYATT , March 19, 2012

WASHINGTON — An iPhone can do a lot of things. But can it arm Congolese rebels?

That is the question being debated by a battalion of lobbyists from electronics makers, mining companies and international aid organizations that has descended on the Securities and Exchange Commission in recent months seeking to influence the drafting of a Dodd-Frank regulation that has nothing to do with the financial crisis.

(DO- seriously? It could have something to do with financial crisis. The use of conflict mineral affect reputation; the reputational risk is among the information investors are interested in having access to; financial crisis in part resulted from a lack of information that helps investors assess the business-associated risk )

Tacked onto the end of that encyclopedic digest of financial reform is an odd provision.  It requires publicly traded companies whose products use certain minerals commonly mined in strife-torn areas of Central Africa to report to shareholders and the S.E.C. whether their mineral supply comes from the Democratic Republic of Congo.

The measure is aimed at cutting off the brutal militia groups that have often taken over the mining and sale of so-called conflict minerals to finance their military aims. Just about every company affected by the law says they support it, but many business groups have also been pushing aggressively to put wiggle room in the restrictions, calling for lengthy phase-in periods, exemptions for minimal use of the minerals and loose definitions of what types of uses are covered.

Nearly every consumer product that includes electronic parts uses a derivative of one of the four minerals: columbite-tantalite, which when refined is used in palm-size cellphones and giant turbines; cassiterite, an important source of the tin used in coffee cans and circuit boards; wolframite, used to produce tungsten for light bulbs and machine tools; and gold, commonly used as an electronic conductor (and, of course, jewelry).

Given their broad application, the minerals have been a primary target of humanitarian groups concerned about genocide, sexual violence, child soldiers and other issues that have been common outgrowths of conflicts in Central Africa.

“We don’t think you need to have people being killed in order to have these metals in our cellphones,” said Corinna Gilfillan, who heads the United States office of Global Witness, which has worked on the issue for several years.

But manufacturers question the effectiveness — not to mention the practicality and expense — of tracing every scrap of refined metal back to its original hole in the ground.

“The challenge is that conflict minerals are a symptom,” said Rick Goss, vice president for environment and sustainability at the Information Technology Industry Council, a trade group. “The entrenched powers in these countries have plenty of other means to raise money. Simply cutting off one source of revenue to a warlord or military rulers is not going to stop the genocide.”

The Dodd-Frank law on conflict minerals is already having an effect in Eastern Congo, damping or halting production at many mines even before the disclosure regulations for companies are in place.

“It is causing, I would say, a sort of embargo on traders and diggers in Eastern Congo,” Serge Tshamala, an official at the Embassy of the Democratic Republic of Congo. “The longer it takes the S.E.C. to come up with guidelines, the worse it is for our people.” Mr. Tshamala and other Congo government officials met with the agency’s staff members in June, urging them to speed completion of the regulations.

The agency is moving slowly, however. The Dodd-Frank law set an April 2011 deadline for completion of the rules.

After proposing regulations in December 2010, the agency took comments for 30 days, and received so many suggestions that it extended the period by a month.

After missing the April deadline, the agency in October conducted a roundtable for its commissioners to hear directly from manufacturers, mining companies, advocacy groups and institutional investors. This month, Mary L. Schapiro, the agency’s chairwoman, said the agency hoped to complete the process “in the next couple of months.”

The commission already has decided to include a phase-in period to allow companies time to build networks to trace their mineral supply. But an exemption for use of trace amounts of the metals is unlikely, Ms. Shapiro said.

As Bennett Freeman, a senior vice president for sustainability research and policy at Calvert Investments put it during the roundtable last year, a very small amount of gold is used as a conductor in a cellphone, “but when one takes into account the fact that there were 1.6 billion cellphones sold globally last year, that adds up to be a very significant volume of that particular metal.”

Still undecided — and the subject of more than 100 meetings between lobbyists and S.E.C. officials since the rule was proposed — is just how the commission will decide who is covered by the conflict minerals requirement. The law says that the minerals must be “necessary to the functionality or production of a product manufactured by” a company.

Simple as it seems, that definition gives rise to a tangle of questions. Is mining “manufacturing”? Is a coffee can made with tin “necessary to the functionality” of the coffee being sold?

The hair-splitting answers to those questions will be the basis on which the law could be challenged in court, and it is that prospect that accounts for much of the agency’s deliberate progress in fashioning the rules.

Administrative law requires an agency like the S.E.C. to conduct a cost-benefit analysis of rules. Last year, a federal appeals court cited insufficient cost-benefit research in striking down one of the agency’s new regulations, and S.E.C. insiders say that decision has the agency operating in perpetual fear of a repeat occurrence.

DO- Business Roundtable v. SEC, 647 F. 3d 1144 (D.C. Cir. 2011)

There is little agreement on what it will cost companies to comply. The agency estimates companies will have to spend $71 million to comply with its regulations. The National Association of Manufacturers estimates the regulations will cost $9 billion to $16 billion.

Whatever the answer, part of the burden would fall on a given company’s supply chain — companies, that is, that are very likely not to be covered by the regulation’s reporting requirements, which cover only publicly traded companies.

Irma Villarreal, chief securities counsel for Kraft Foods, said during the S.E.C. roundtable that Kraft produced 40,000 distinct products and used 100,000 suppliers, creating a Herculean task of auditing supply chains for conflict minerals.

Nonprofit groups that support the new regulation say a growing number of companies — Intel, Motorola and Hewlett-Packard among them, according to the Enough Project, a nongovernmental organization that works against genocide and crimes against humanity — have already made significant steps to inspect and adjust their supply lines to avoid tainted sources of conflict minerals.

“Our hope,” said Darren Fenwick, a senior manager of government affairs for the Enough Project, “is that the rule is strong enough that companies in industries that aren’t doing anything will start to feel the pressure in their supply chains.”