Energy and Economy in North Korea Nautilus Workshop

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 10/3/2020 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? William B. Brown

Introduction Information, Planned-Market Transition, Right Questions o o North Korea GDP 1980 version Chinese Energy & Economic Growth: 4 x GDP, 2 x Energy use 10/3/2020 William B. Brown

Observations on North Korean Economy, 2006 q Critical Juncture Between Marx and Markets • • Central Planned System Broken 2002 Market Reforms only half done — — • • • q Markets allowed but little private ownership Result is inflation, little output growth Result: Weak Productivity of labor, capital, resources Impoverished people—among poorest in world Policy: duel—reclaim control or allow markets Similar to China about 1978 • • • 10/3/2020 Waiting for Next Steps—Private Farms, Private Capital No labor market (slavery), no capital market But money is corrupting control system William B. Brown

Four Economies Side by Side Arbitrage Weakens Boundaries q State/Party Economy (35% of labor ? ) • • q Military/Security Economy (20% of labor ? ) • • • q Own capital, enterprises Rice is Free Export enterprises—US dollar based Elite Economy (. 1% of labor ? ) • • q Party Allocates Resources—NK money is meaningless Slave like labor Ration System—Rice W 60 kg NKW = 1/60 US$ US dollar, Chinese Yuan based Rice price is irrelevant New Market Economy—overlaps others (45% of labor ? ) • • • 10/3/2020 Money dominates, NKW, US$, RMB Rice W 700/kg NKW = 1/3000 US$ Somewhat free labor—especially women Arbitrage creates new wealth William B. Brown

Four Economies 1 kilo rice = W 700 1 kilo rice = W 60 10/3/2020 William B. Brown

Current Conditions: 2005/6 Improving but still underwater o Apparent Positive Growth • • o China trade, investment driven Improved 2005 harvest, no famine Improved electricity, coal output Rapidly expanding market activity But Rising Tensions • • • 10/3/2020 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 William B. Brown

Price of Rice: 1995 -2006 Widening gap Market Official 10/3/2020 William B. Brown

NK Won Per US Dollar A failing currency? Market Official 10/3/2020 William B. Brown

North Korea Economic Data Worst in World o North Korea Releases • Annual March Budget Annual New Year’s Speeches, Editorials • Anecdotal statements • o International • • • o Trade partner data IOs—Census, Food, Health NGOs--surveys South Korean interpretation 10/3/2020 William B. Brown

Data Issues Critical to positive intervention o Planned Economy Creates Data • NK has large collection effort Doesn’t Publish data Forbids Private, Foreign Access or Survey • Purpose is Input/Output • • o Unlike Developing Economies • • 10/3/2020 Little official data Easy Access for NGOs Purpose: Growth Issues, i. e. investment-consumption balance Efficacy of policy: SK in 1960 s William B. Brown

South Korean North Korea Data To good to be true? o Bank of Korea GDP Data Best Available • o 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 • Production concept is closest to NK or planning purpose — — • Market economy focuses on Expenditure concept — — 10/3/2020 Question: “How much electricity needed for 7% GDP growth? ” Static I-O coefficients favored by planners 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 capital? How financed? What fuel type? What is expected price of power, fuel, interest rate, exchange rate. ” William B. Brown

Data Concerns o o Gets North Korea off the hook • Economic engagement requires data • Data needed for NK public as well as foreign Production concept leads to static indicators —wrong analytical questions • • Leads to big fixed investment projects like KEDO & hundreds of other failed investments Misleads North Korean decision makers � � o Helps fill in Central Plan matrix No analysis of prices, wages, interest rates, exchange rates, balance of payments, debt etc. Accuracy is Not Known 10/3/2020 William B. Brown

Bo. K North Korea GDP: 1990 -2005: SK Won basis 10/3/2020 William B. Brown

Bo. K North Korea GDP: 1990 -2005: US $ basis 10/3/2020 William B. Brown

Bo. K North Korea GDP: 1990 -2005: SK Won and US$ basis 10/3/2020 William B. Brown

Electric Power Output Official versus Bo. K Data 10/3/2020 William B. Brown

GDP and Electricity Change Bo. K Data 10/3/2020 William B. Brown

North Korea Energy Observations o o Economy is Energy Intensive n 2 times energy per output as S. Korea n Coal and Hydropower Intensive, No oil Result of Japanese Colonial days n n Soviet heavy industry orientation Agriculture o o o 10/3/2020 Chemical (coal) fertilizer Machinery Electric pumps/threshers—peak load problem William B. Brown

Energy Mysteries o o o Why did power output fall so far? n Coal mines flood for lack of e. power n 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. n Why not import fuel? Export minerals. n Why not maintain power plants? Why no energy investment? Chinese oil, at what price? Why so dependent? 10/3/2020 William B. Brown

Electricity Price Issues Cheap price distorts decision making o o Electricity is scarce but cheap 2002 price reform n n n o Relative Cost of power: n n o o k. Wh W 0. 035 to w 1. 85 2002 new: 1 kg rice = 4 k. Wh 2006 rice inflation: 1 kg rice = 722 k. Wh NK: 1 kg rice buys 722 k. Wh US: 1 kg rice buys 7 k. Wh Cheap power means wasteful use Not metered 10/3/2020 William B. Brown

Development Questions: Need Answers Before Investments o Does economy need to be energy intensive? n o o o 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? 10/3/2020 William B. Brown

Questions for Policy o Does energy aid help: n n o “Market friendly Energy Aid”? n n n o o Central Planning Mechanism or Market development? Autonomous units Data distribution Profit making Can energy projects sell energy at reasonable price? Can infrastructure aid wait for system reform? 10/3/2020 William B. Brown

Best News o North Korea is building a factory to produce electric meters. 10/3/2020 William B. Brown