Energy and Economy in North Korea

1
Energy and Economy in North Korea

• Nautilus Workshop on North Korean Energy
• June 25-28, 2006
• Stanford University, Palo Alto California
• William B. Brown

2
Paying Respect to the Great Leader Kumgangsan
Resort, 2005
3
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?

4
IntroductionInformation, Planned-Market
Transition, Right Questions

• North Korea GDP 1980 version
• Chinese Energy Economic Growth 4x GDP, 2x
  Energy use

5
Observations on North Korean Economy, 2006

• Critical Juncture Between Marx and Markets
• Central Planned System Broken
• 2002 Market Reforms only half done
• Markets allowed but little private ownership
• Result is inflation, little output growth
• Result Weak Productivity of labor, capital,
  resources
• Impoverished peopleamong poorest in world
• Policy duelreclaim control or allow markets
• Similar to China about 1978
• Waiting for Next StepsPrivate Farms, Private
  Capital
• No labor market (slavery), no capital market
• But money is corrupting control system

6
Four Economies Side by SideArbitrage Weakens
Boundaries

• State/Party Economy (35 of labor ?)
• Party Allocates ResourcesNK money is meaningless
• Slave like labor
• Ration SystemRice W60 kg
• NKW 1/60 US
• Military/Security Economy (20 of labor ?)
• Own capital, enterprises
• Rice is Free
• Export enterprisesUS dollar based
• Elite Economy (.1 of labor ?)
• US dollar, Chinese Yuan based
• Rice price is irrelevant
• New Market Economyoverlaps others (45 of labor
  ?)
• Money dominates, NKW, US, RMB
• Rice W700/kg
• NKW 1/3000 US
• Somewhat free laborespecially women
• Arbitrage creates new wealth

7
Four Economies
1 kilo rice W700
1 kilo rice W60
8
Current Conditions 2005/6Improving but still
underwater

• Apparent Positive Growth
• China trade, investment driven
• Improved 2005 harvest, no famine
• Improved electricity, coal output
• Rapidly expanding market activity
• But Rising Tensions
• High inflationwidening fixed/market price gaps
• State attempts to reimpose rations
• Declining Western trade, investment
• Remains Dependent on China, S. Korea
• Very Little Investment, Rapid depreciation

9
Price of Rice 1995-2006Widening gap
Market
Official
10
NK Won Per US DollarA failing currency?
Market
Official
11
North Korea Economic DataWorst in World

• North Korea Releases
• Annual March Budget
• Annual New Years Speeches, Editorials
• Anecdotal statements
• International
• Trade partner data
• IOsCensus, Food, Health
• NGOs--surveys
• South Korean interpretation

12
Data IssuesCritical to positive intervention

• Planned Economy Creates Data
• NK has large collection effort
• Doesnt Publish data
• Forbids Private, Foreign Access or Survey
• Purpose is Input/Output
• Unlike Developing Economies
• Little official data
• Easy Access for NGOs
• Purpose Growth Issues, i.e. investment-consumptio
  n balance
• Efficacy of policy SK in 1960s

13
South Korean North Korea DataTo good to be true?

• Bank of Korea GDP Data Best Available
• NIS data inserted into standard GDP framework
• Black Box
• Price and exchange rate problems
• Production based concept dominates
• GDP ? Production ? Expenditure ? Income
• Production concept is closest to NK or planning
  purpose
• Question How much electricity needed for 7
  GDP growth?
• Static I-O coefficients favored by planners
• Market economy focuses on Expenditure concept
• 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.

14
Data Concerns

• Gets North Korea off the hook
• Economic engagement requires data
• Data needed for NK public as well as foreign
• Production concept leads to static
  indicatorswrong analytical questions
• 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

15
BoK North Korea GDP 1990-2005 SK Won basis
16
BoK North Korea GDP 1990-2005 US basis
17
BoK North Korea GDP 1990-2005 SK Won and US
basis
18
Electric Power OutputOfficial versus BoK Data
19
GDP and Electricity ChangeBoK Data
20
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/thresherspeak load problem

21
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?

22
Electricity Price IssuesCheap 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

23
Development QuestionsNeed Answers Before
Investments

• Does economy need to be energy intensive?
• What is NKs 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 dont
  integrate with local economy.
• Electricity is in short supply, why is it cheap?

24
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?

25
Best News

• North Korea is building a factory to produce
  electric meters.