Category: North Korea Economic Forum

On October 2nd, GWIKs were joined by experts David von Hippel, Nautilus Institute Senior Associate, Dan Wertz Program Manager at the National Committee on North Korea (NCNK), and Celeste Arrington Korea Foundation Associate Professor of Political Science and International Affairs at George Washington University to discuss the significance of oil supply and demand in North Korea’s economy and infrastructure. In analyzing this key sector that makes up a fundamental part of North Korea’s energy consumption, we also gain a glimpse of how North Korea is able to cope with a multitude of sanctions imposed by the United Nations in addition to understanding the link between North Korea’s energy insecurity and its nuclear weapons program.

Von Hippel, our guest speaker for the presentation, begins by outlining the history of North Korea’s oil supply sector and how it has managed to maintain its energy consumption despite multilateral challenges. From the 1990’s North Korea obtained a majority of its oil supply from China and the USSR, going as far as to use up to three times as much energy consumption than China during that period up until the fall of the Soviet Union. That collapse of the USSR saw North Korea losing a large sector of its oil supply and forcing it to engage with the international market, where oil prices were far more expensive. This results in a stronger dependence on China for its oil-importing, which by the 2000s, would stabilize North Korea to a degree. However, the United Nations has recently, since 2014, imposed economic sanctions on North Korea, limiting the number of imports and exports of resources, which has in turned, pivoted the northern part of the peninsula towards “off the book” or illegal smuggling of oil from other countries, including China who no longer reports imports or exports regarding North Korea to the security council. Often in exchange for oil, North Korea provides external sources of oil import with money, labor, or weapons.

It’s worth noting that while North Korea does maintain a domestic source of oil supply, the production of its own oil is neglected in favor of importation, likely due to economic costs, aging infrastructure, and past failures to work collaboratively with outside assistance to amplify production. The DPRK currently has two known major oil refineries at their disposal: one located in the northeast in Pong Hwal, that is connected to the pipeline China uses to send crude oil to North Korea, and one located in the northeast in Sonbong, which is an older and smaller plant but has the potential for expansion in the future. Another notable location of interest is Nampo, the port experts claim to be the access point for many of North Korea’s “off the book” oil imports. Nampo also maintains a nearby refinery that is specifically producing oil for the country’s military purposes.

Sanctions and negotiations tied to North Korea have often revolved around its nuclear program, as North Korea is heavily dependent on energy conservation not only for its operations and way of life but also, as expert, Dan Wertz mentions, “energy use serves as a key emblem to North Korea’s self-presentation.” If one were to take note of North Korea’s coat of arms, they would immediately see the hydroelectrical plant front and center that is located near the Chinese border, close to the pipeline mentioned previously. In negotiating the de-escalation of its nuclear weapon program, North Korea generally bargains for increases and upgrades to its energy system. It should also be noted that North Korea is not incredibly behind, as the northern part of the peninsula has made bounds not only in the use of nuclear energy but also in cybersecurity and hacking. It’s electrical infrastructure, however, is lacking, and aging, which has forced the many North Korean consumers to take matters into their own hands. Much of North Korea’s energy grid is regulated by political needs rather than on a market basis, leaving Pyongyang and military innovation the predominant source of energy consumption. Even still, restrictions and limitations on how energy can be used even by North Korea’s high class, has pushed much of its citizens towards alternative ways of energy consumption, such as the use of solar panels, bribing military officials, or perhaps the most concerning: biomass production. This includes utilizing wood, coal, and natural sources as fuel, but also comes at the cost of heavy deforestation and soil degradation, another challenge posed to North Koreans at the bottom who are already coping with stack hardships.

All of this has led to an increasing amount of illegal smuggling which continues to provide North Korea the energy it needs, to mitigate the impact of the UN’s sanctions and allow North Korea to continue expanding its nuclear weapon program. In considering solutions to this issue, Von Hippel suggested that a multi-faceted, coordinated approach on all levels was required, and that particularly, the United States should temper its expectations and step by step process of providing resources to accommodate North Korea’s energy insecurity in exchange for denuclearization. Ultimately, the two issues are coupled together, and without a continuous energy solution there cannot be a sufficient and continuous nuclear weapons solution.

On December 17th, GWIKS hosted a special North Korea Economic Forum, discussing North Korea’s financial reform measures in the face of economic crisis and international sanctions. Moderated by Assistant Director Yonho Kim, Guest Speaker Dr. Moon-Soo Yang join GWIKS to break down North Korea’s financial evolutions and adaptations through a series of challenges.

The traditional financial system of North consists of a Monobank universal banking system. This is composed mainly of the Chosun Central Bank and the Chosun Trade Bank, in addition to the Foreign Exchange Bank and Joint Venture Bank.

After the financial crisis of the 1990’s, a number of changes came about in response to a dwindling economy. First, was the paralysis of the financial system and the destruction of money circulation. In the traditional system, the Central Bank provided funds to State-run Firms who would provide funds to the Residents of the country where the money would circulate between residents, the general market, and the State-run stores where the funds would cycle back to the Central Bank. Due to the degree of the economic hardships to follow, the circulation of monetary funds was changed, as the State-Run stores could not provide the daily necessities needed for Residents, forcing them to spend funds in the general market, thus cutting off the Banks monetary system. Citizens started to avoid depositing funds into banks because they did not have the money to retain them or give them back.

Second, there was the development of private finance. Private finance, an informal financial market to the socialist system, was popularized to offset the paralysis of the public finance and marketization during the crisis. Instead of obtaining their monetary funds from the government, residents, state-owned firms, and cooperations who participated in the private market received funds from wealthy individuals, called “donju”, and private banks. These exchanges were separated into three markets, (1) Personal-to-personal finance, (2) Individual-to-Company finance, and (3) Bank-to-Business finance.

A combination of both circumstances lead to the instability of Market Prices and Exchange rates, as inflation began to increase as a result of the money produced from the private sector, despite the fact that economic hardship of the public sector left the state with no funds at all, minimizing the value of the North Korea won year after year in its global market value.

The Kim Jung-Un era would bring about a number of key ‘financial reform’ measures to deal with these issues. The first revision would focus on changes in the banking sector. This took shape in the form of revising banking legislation through the Central Bank Act and Commercial Bank Act; reorganizing the banking structure with the introduction of a two-tier banking system with commercial banks; the reorganization of the roles that banks play in the public market as the middle man between the state and residents in accordance to new legislation; and the introduction of news systems and profit systems to help monitor the way banks operate of time as well as making banks independent.

Second, there was a revision to the enterprise sector, permitting State-run firms the liberty to obtain loans from individuals as well as the ability to open cash accounts and foreign currency accounts for residents. The local sector saw adjustments that help to regulate the expenditures of funds as well as self-sustainment. This came through the establishment of a regional budget payment system and the introduction of local budget systems in accordance with the 2012 Local Budget Act that was passed. The commercial sector saw reforms in accordance with new legislation as well, which helped restore the monetary cycle back to state-run stores by matching the state-run prices to the prices found on the market to stimulate the state economy. Perhaps the biggest change to come was measures introduced to the residents of North Korea. Resident were incentivized to participate in the domestic market by depositing money into North Korean banks and spending money in the commercial market with the introduction of two new bank cards: the pre-paid card in 2010 and the debit card in 2015.

These financial ‘reforms’ to come out of the Kim Jong-Un era strengthened the link between national finance and banking systems. The expectation of these reforms was that it would not only restore monetary circulation in North Korea but also stimulate the recovery of the public financial system and reduce the burden of financial expenditures by the central government by providing middle-men and infrastructure for self-sustainability. In reality, the final outcome of these reforms will be dependent on whether the individual economic variables (banks, firms, residents, Donju, etc.) will work as the state intends as a part of their efforts of indirect control of the economy or if they will find other ways to maneuver the government to sustain themselves. Additionally, there are still issues within the North Korean economy that are still unsolved due to institutional limitations that restrict the degree by which the government can implement new changes to correct them. A general distrust of the state bank system is still prevalent in North Korea, and the government is still working to re-establish that trust as time progresses.

On November 16th, 2020, the GW Institute for Korean Studies (GWIKS) hosted the North Korea Economic Forum Panel Discussion on “The Pandemic’s Impact on North Korea: Leadership Dynamics, Markets and Public Health.” Three experts from Korea and three experts the US joined to discuss the pandemic’s impact on North Korea’s domestic politics, public health and economics. Moderated by Celeste Arrington, Korea Foundation Associate Professor of Political Science and International Affairs at George Washington University, one professional from each Korea and the US touched on the three main topics: leadership dynamics, markets, and public health.  

The discussion began with Mr. Ken Gause, Director of Adversary Analytics Program of CNA Corporation, sharing his analysis on Kim Jung-eun’s leadership and the pandemic’s impact on the political power dynamics. Kim’s leadership has been unique in style compared to his father, Kim Jung-il. The difference is visible within the inner power circle: he is more comfortable delegating authority, increasing role of women, and reviving former decision-making structures while keeping the final decision-making power to himself. Nevertheless, the admission of the failure of the five-year plan and apology for the shooting of the South Korean presents the difference in leadership style compared to his predecessors. Under the circumstances that we respect his standards, there is hope that Kim’s unique power calculus and leadership will provide more opportunities to engage with North Korea.

Adding on to Mr. Gause’s analysis, Dr. Eunjung Lim, Associate Professor of the International Studies Division at Kongju National University, talked the stability in Kim’s leadership. This year North Korea suffered the pandemic and a devastating typhoon in the summer. On a personal level, there were multiple conspiracies on Kim’s health, his sister, etc. Nevertheless, at the 75^th Anniversary of ruling Worker’s Party celebration the spectacular parade showcased the pride of North Korea and their leader Kim Jung-eun. Ms. Lim argues that this proves the stability of Kim’s leadership. Moreover, his authority to implement loyalty cleanse and possession of nuclear power helps him maintain the stability in his leadership. Closing her talk, Dr. Lim mentioned that she hopes the Moon administration and the Korea’s president-elect in 2022 will be able to work with Washington in finding a strategy to build positive relationship with North Korea.

Shifting to the next topic, Dr. William Brown, Principal of the Northeast Asia Economics and Intelligence Advisory, began his presentation on North Korean economy. North Korea whether they have pandemic or not has been under great strain. In addition to Kim’s failure on the five year development plan, issues of weak labor production, trade, extreme monetary policy that negatively impacts the government, and the pandemic lockdown are no good to the North Korea’s economy. If, however, the government makes reforms and opens the markets, North Korea will be able to benefit from the mass engagement from foreign investors.

Dr. Eul-Chul Lim, Director of ICNK Center at the Institute for Far Eastern Studies at Kyungnam University, began his talk by providing four factors that he applies when analyzing North Korea’s economy: trade volume between China and North Korea, foreign exchange rate, price and inflation rate, and defector’s experience. Due to the pandemic the tourism industry and the manufacturing industry have been hit hard. Moreover, smuggling which has significant contribution on North Korea’s trade has also halted because of COVID-19. Ironically, the fx-rate and the price for food such as rice have not fluctuated in great amount due to active engagement of the government. In other words, North Korea’s economy is upholding its stability in certain fields be forcing downward stability in its market.

Dr. Jiho Cha, Senior Lecturer at the University of Manchester, then talked on how these political and economic impact of the pandemic has transformed North Korea’s public health sector. North Korea who does not have the best medical supplies, has been able to uphold its resiliency against the pandemic by declaring lock down and supporting the community doctors to take extensive measures on examine people its people. These measures, unfortunately, could also be a vulnerability to North Korea by stimulating informal health markets to expand, creating market instability, and destructing the food security.

Dr. Kee Park, Director of Korea Health Policy Project at the Harvard Medical School also agreed that we the pandemic and the lock down policies have created various issues on North Korea such as disruption on the supply chain for medical supplies and unequal access to medical service. Dr. Park claimed that this pandemic should role out a as an opportunity for reset in North Korean. This reset needs to be a comprehensive approach, including a sanction relief, stable multi-lateral approach, and unprecedented level of medical, political, and economic assistance will be required.

While the question of whether North Korea has COVID-19 cases or not remains unanswered, we can all agree that the pandemic has had massive influence North Korea. The US, China, and South Korea, each struggle with their own domestic issues, and yet, we should not give up on our hope in that the these countries and North Korea would engage in finding a common goal to resolve the prolonging issues that we have today.