Transcript Energy and Economy in North Korea

Energy and Economy in
North Korea
Nautilus Workshop on North Korean Energy
June 25-28, 2006
Stanford University, Palo Alto California
William B. Brown
Paying Respect to the Great
Leader: Kumgangsan Resort, 2005
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Outline
Introduction
Observations on State of Economy: Critical Position
Current Conditions: Underwater but rising
Data Issues: Worst in World
Energy Issues: Scarce but cheap energy
Development Policy Issues: Filling in Plan or Optimizing Growth?
Introduction
Information, Planned-Market Transition, Right Questions
 North Korea GDP 1980 version
 Chinese Energy & Economic Growth: 4x GDP, 2x Energy
use
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Observations on North Korean
Economy, 2006
 Critical Juncture Between Marx and Markets
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Central Planned System Broken
2002 Market Reforms only half done
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Result: Weak Productivity of labor, capital, resources
Impoverished people—among poorest in world
Policy: duel—reclaim control or allow markets
— Markets allowed but little private ownership
— Result is inflation, little output growth
 Similar to China about 1978
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Waiting for Next Steps—Private Farms, Private Capital
No labor market (slavery), no capital market
But money is corrupting control system
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Four Economies Side by Side
Arbitrage Weakens Boundaries
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State/Party Economy (35% of labor ?)
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Military/Security Economy (20% of labor ?)
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Elite Economy (.1% of labor ?)
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New Market Economy—overlaps others (45% of labor ?)
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Party Allocates Resources—NK money is meaningless
Slave like labor
Ration System—Rice W60 kg
NKW = 1/60 US$
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Own capital, enterprises
Rice is Free
Export enterprises—US dollar based
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US dollar, Chinese Yuan based
Rice price is irrelevant
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Money dominates, NKW, US$, RMB
Rice W700/kg
NKW = 1/3000 US$
Somewhat free labor—especially women
Arbitrage creates new wealth
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Four Economies
1 kilo rice = W700
1 kilo rice = W60
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Current Conditions: 2005/6
Improving but still underwater
 Apparent Positive Growth
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China trade, investment driven
Improved 2005 harvest, no famine
Improved electricity, coal output
Rapidly expanding market activity
 But Rising Tensions
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High inflation—widening fixed/market price gaps
State attempts to reimpose rations
Declining Western trade, investment
Remains Dependent on China, S. Korea
Very Little Investment, Rapid depreciation
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Price of Rice: 1995-2006
Widening gap
North Korea Rice Price: 1995-2006
Won per Kilogram
1400
1400
1200
1200
Market
1000
1000
800
800
600
600
400
400
200
200
Official
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0
1996
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1998
2000
2002
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2004
2006
NK Won Per US Dollar
A failing currency?
North Korea Won per US dollar: 1995-2006
3500
3500
3000
3000
2500
2500
Market
2000
2000
1500
1500
1000
1000
500
500
Official
0
0
1995
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1997
1999
2001
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2003
2005
North Korea Economic Data
Worst in World
 North Korea Releases
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Annual March Budget
Annual New Year’s Speeches, Editorials
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Anecdotal statements
 International
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Trade partner data
IOs—Census, Food, Health
NGOs--surveys
 South Korean interpretation
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Data Issues
Critical to positive intervention
 Planned Economy Creates Data
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NK has large collection effort
Doesn’t Publish data
Forbids Private, Foreign Access or Survey
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Purpose is Input/Output
 Unlike Developing Economies
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Little official data
Easy Access for NGOs
Purpose: Growth Issues, i.e. investment-consumption
balance
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Efficacy of policy: SK in 1960s
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South Korean North Korea Data
To good to be true?
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Bank of Korea GDP Data Best Available
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NIS data inserted into standard GDP framework
— Black Box
— Price and exchange rate problems
— Production based concept dominates
GDP Ξ Production Ξ Expenditure Ξ Income
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Production concept is closest to NK or planning purpose
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Question: “How much electricity needed for 7% GDP growth?”
Static I-O coefficients favored by planners
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GDP = Consumption + Investment + Government + net Exports
Guides fiscal, monetary, trade policy
Analysis of business cycle and economic growth
Question “Is $10 billion electric power investment optimal use of
Market economy focuses on Expenditure concept
capital? How financed? What fuel type? What is expected price of power,
fuel, interest rate, exchange rate.”
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Data Concerns
 Gets North Korea off the hook
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Economic engagement requires data
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Data needed for NK public as well as foreign
 Production concept leads to static
indicators—wrong analytical questions
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Leads to big fixed investment projects like KEDO &
hundreds of other failed investments
Misleads North Korean decision makers
Helps fill in Central Plan matrix
No analysis of prices, wages, interest rates, exchange
rates, balance of payments, debt etc.
 Accuracy is Not Known
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BoK North Korea GDP: 1990-2005:
SK Won basis
Percent Change
8
6
4
2
0
-2
-4
-6
-8
1990
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1992
1994
1996
1998
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2000
2002
2004
BoK North Korea GDP: 1990-2005:
US $ basis
Percent Change
20
10
0
-10
-20
-30
1990
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1992
1994
1996
1998
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2000
2002
2004
BoK North Korea GDP: 1990-2005:
SK Won and US$ basis
Percent Change
20
10
0
-10
-20
-30
1990
1992
1994
1996
1998
SK Won
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2000
US $
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2002
2004
Electric Power Output
Official versus BoK Data
Percent Change
30
25
20
15
10
5
0
-5
-10
-15
1990
1992
1994
1996
DPRK
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1998
2000
BOK (utilites)
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2002
2004
GDP and Electricity Change
BoK Data
Percent Change
8
6
4
2
0
-2
-4
-6
-8
-10
-12
1990
1992
1994
1996
1998
GDP
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2000
EP
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2002
2004
North Korea Energy Observations
 Economy is Energy Intensive
 2 times energy per output as S. Korea
 Coal and Hydropower Intensive, No oil
 Result of Japanese Colonial days
 Soviet heavy industry orientation
 Agriculture
 Chemical (coal) fertilizer
 Machinery
 Electric pumps/threshers—peak load problem
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Energy Mysteries
 Why did power output fall so far?
 Coal mines flood for lack of e. power
 E. Power plants shut for lack of coal
 What are coal reserves/resources?
 Pyongyang claims 11%/10% rise in coal, power last
year. Correct or no?
 E. Power shortage yet underused cap.
 Why not import fuel? Export minerals.
 Why not maintain power plants?
 Why no energy investment?
 Chinese oil, at what price? Why so dependent?
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Electricity Price Issues
Cheap price distorts decision making
 Electricity is scarce but cheap
 2002 price reform
 kWh W 0.035 to w 1.85
 2002 new: 1 kg rice = 4 kWh
 2006 rice inflation: 1 kg rice = 722 kWh
 Relative Cost of power:
 NK: 1 kg rice buys 722 kWh
 US: 1 kg rice buys 7 kWh
 Cheap power means wasteful use
 Not metered
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Development Questions:
Need Answers Before Investments
 Does economy need to be energy intensive?
 What is NK’s real comparative advantage?
 Is coal-based chemical technology obsolete?
 Why not import more oil, like rest of Asia?
 Does electrified irrigation/threshing system
make sense?
 Do big projects make sense? Transplants
don’t integrate with local economy.
 Electricity is in short supply, why is it cheap?
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Questions for Policy
 Does energy aid help:
 Central Planning Mechanism or
 Market development?
 “Market friendly Energy Aid”?
 Autonomous units
 Data distribution
 Profit making
 Can energy projects sell energy at reasonable
price?
 Can infrastructure aid wait for system reform?
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Best News
 North Korea is building a factory to produce
electric meters.
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