Energy and Economy in North Korea
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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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William B. Brown
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
State/Party Economy (35% of labor ?)
Military/Security Economy (20% of labor ?)
Elite Economy (.1% of labor ?)
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
0
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?
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
•
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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