Tag Archive | "development"

Engaging the Koreas on the UN’s Sustainable Development Goals

By Andray Abrahamian

Wait! I know that isn’t a sexy title. But the Sustainable Development Goals (SDGs) are a set of 17 goals for 2030, adopted in 2015, that are supposed to guide policy decisions. They provide a framework that shapes development decisions at the government level and creates space for non-state actors to push for their goals. This is true in the Koreas, also.

The UN’s Economic and Social Commission for Asia Pacific recently held its third multi-stakeholder forum on the SDGs in in the sub-region of Northeast Asia. The meeting, in Vladivostok, certainly highlighted a curious region to be coordinating development goals: the six member states comprise a landlocked state of 3 million people, the biggest country in the world by landmass, the biggest by population, the most developed country in Asia, and the two Koreas. There are a range of social and political systems at work in these states. Historical conflicts abound.

The stakeholding states all made presentations on progress at the workshop, including the two Koreas.

The DPRK reported recognizing all 17 SDGs and has incorporated goals into their political system. This took roughly two years. In August 2018, the DPRK government created a National Task Force, chaired by the Vice Prime Minister and Chairman of Supreme People’s Assembly. The Deputy Director General of the Central Bureau of Statistics is the Vice Chair: the Central Bureau of Statistics is seen as vital for development effort: the North Koreans understand that a lack of capacity in information gathering and processing is an issue. They are attempting to measure and report progress using a 2012 Nutrition Survey, 2014 Reproductive Health Survey, 2014 Demographic Health Survey and 2015 Malaria survey.

Under the 17 goals, the UN laid 169 targets and 232 indicators. North Korea has simplified this down to 95 targets and 130 indicators. Alleviation of poverty, economic growth and sci-tech are priorities. In particular, zero hunger, an end to all stunting and malnutrition and self-sufficiency in food are goals. They also seek increased productivity and improvements in land and soil quality. They are pushing for the development of stockbreeding to increase sources of animal protein.

Granted, there are systemic issues the North Koreans will have to address to really tackle some of these issues: improving soil quality and productivity will require a transformation of how the agricultural sector is run, for example. Yet North Korea does have a history of signing up to some types of international agreements and attempting to implement them.

The ROK has 122 targets under the 17 SDGs. Coordination exists amongst ministries, with the Ministry of Foreign Affairs (MOFA), the Ministry of Environment (MOE) and the National Statistical Office (taking leading roles. According to the ROK presentation at the forum, the country currently ranks 18th out of 162 reporting nations at hitting their SDG goals, but there are still major failures. There is some way to go on gender issues and CO2 emissions, amongst other things.

South Korea is of course more responsive than North Korea. In fact, of all the countries in the sub-region, the ROK is the most keenly aware of and interested in meeting benchmarks set by developed countries: Seoul always seems to have an eye on OECD countries and seeks to compete with them.

Still, in both countries, national goals and the commitment to the SDGs provide opportunities for civil society actors to engage.

In South Korea, NGOs can lobby the corporate sector and the government to provide support on key issues relate to the SDGs. With the corporate sector, this might be related to corporate social responsibility programs, but it can also be about convincing companies that it is in their interest to tap into, say, unused labor capacity of disabled people. The SDGs can provide a framework under which governments, the private sector and NGOs can cooperate. The easy-to-grasp branding of the 17 goals can also help with simplifying issues for the general public, creating awareness on a range of issues.

In North Korea, the SDGs could also have an impact, particularly if there is a change in the sanctions environment that currently inhibits engagement. It should be possible for foreign civil society organizations to bring together ministries and the fledgling corporate sector to cooperate on projects, so long as they can be shown to fit into the 95 targets the DPRK has chosen and create wins for all the stakeholders. For example, production of menstrual cups in-country with consultation from a foreign social enterprise, could be argued to tackle SDGs 1 (no poverty), 3 (good health and well-being) and 5 (gender equality) by providing employment for production of a product that helps women be healthier, more comfortable and ultimately able to work more effectively.

The SDGs are ambitious and aspirational, and there is plenty of branding, bluster and propaganda by both governments and corporations alike about the SDGs. Nonetheless, both Koreas clearly take them seriously. For organizations looking to improve conditions on any issues from women’s rights to renewable energy, opportunities exist.

Andray Abrahamian is a Non-Resident Fellow at the Korea Economic Institute and Visiting Scholar at George Mason University Korea and Senior Adjunct Fellow at Pacific Forum. The views expressed here are the author’s alone.

Photo from sinano1000s photostream on flickr Creative Commons.

Posted in North Korea, slider, South KoreaComments (0)

Kim’s post-Singapore Economy—Something from Nothing Isn’t Working

By William B. Brown

Presently, the imperialists are relentlessly clinging to ideological and cultural infiltration maneuvers to destroy our socialist system. … Even though currently everything is in short supply and a penny of fund is so precious…The road to revolution … is absolutely not an easy road. Without the conviction of optimism … one cannot overcome mounting difficulties and will be easily bent by a trivial trial. 

– Rodong Sinmun, November 28, 2018.

“Our greatest duty today is to build a powerful economy. We must boldly wage war to increase production and creativity,”

– Nodong Sinmun editorial, December 18, 2018

Washington pundits seem to think Kim Jong-un has won the higher ground in a zero-sum game against the United States, with time on North Korea’s side. It might be true, but I suspect this perspective would come as a surprise to the conflicted young marshal whose Worker’s Party is voicing tough times even as he promises prosperity.  Not that he is ready to cave on de-nuclearization, but he might be having nightmares of a disgruntled Party reeling from tough sanctions that are aggravating a broken command economy that still lingers and undergirds the entire political system.  Use of money, including lots of US dollars, and private incentives are improving economic performance, but are likely threatening the structure of the state and the livelihood of millions of workers who remain on the old rations-based system.

An example comes from Daily North Korea which last month cited Party stalwarts, policemen, teachers and others in rural provinces leaving their jobs to work in markets, the latter causing consternation among parents concerned about leaderless classrooms.  The problem is quite evident.  Policemen and teachers are among the millions of workers still in the planned or rationed economy system.  As in a conscript army, or in slavery, money isn’t supposed to be important as long as essential goods and services are distributed by ration via state authorities who make procurements through the central planning mechanism.

A school teacher is in the educated elite, and well thought of, but her income is small potatoes, literally.  Fifteen kilograms of rice a month and a few potatoes, sufficient for her family perhaps, but only 3-5,000 won per month in cash. This might be adequate for some clothes in the education department’s low-priced ration store but won’t even buy a cup of coffee in the new markets that have sprouted all over.  With 8,200 won needed to buy one US dollar, and two US dollars needed to ride a taxi, probably one driven by an entrepreneurial soldier, a school teacher or similarly paid policeman can hardly participate in the growing market economy, unless they neglect their official jobs and work privately for real pay.

Estimates of private earnings vary but construction day workers, for example, are reported to earn about 20 Chinese yuan a day (or about $3.00), enough for an occasional taxi or cell phone payment.  And in a non-state textile factory that exports its product, a worker can legally earn 30,000 won per month, or about $40, but without the state rations. The socialist part of this bifurcated system has never worked well but has lingered on in North Korea even decades after a major famine pushed perhaps half the population off rations and into a poorly regulated and often illegal market economy, using all kind of monies as currency.  Now it is that economy that is growing as the state economy falters, no doubt troubling the regime’s stalwart Marist-Leninists. Loyal and ambitious party officials, and the military, as well as school teachers and policemen, must be fuming when they can’t afford $100 cell phones even as the children of lowly merchants flaunt theirs in Pyongyang streets.

Without data it is hard to get an accurate sense of how well or poorly the aggregate North Korean economy is fairing right now.  It doesn’t appear to be progressing in the way Kim promised last April, just before meeting President Trump, but neither is it collapsing in any obvious way.  Partner country trade data, although clearly biased to reflect official compliance with sanctions, would indicate the UN sanctions are very tough, with most countries showing no trade and the lone significant partner, China, showing imports from North Korea down 89 percent in the year through October.  Official exports to North Korea were down 37 percent over the same period with Chinese surpluses, North Korea deficits, running steady at about $200 million a month.  And even this excludes capped but otherwise not sanctioned crude oil that China apparently gives North Korea. [i]  Despite the large trade deficit, price data shows the monetary system to be stable, suggesting large inflows of services incomes, transfers, or much larger smuggled or otherwise off the books North Korean exports than imports. (Note—much of the anecdotal reporting on smuggled products are of imports to North Korea, not exports.)  And, a much bigger headache for Kim, likely extremely tight domestic monetary and fiscal conditions that are holding the won closely pegged to the U.S. dollar.

Still, the price stability as shown in reports from defectors and others is impressive. Imported fuels, especially gasoline, are very expensive but generally stable and fuels seem to be in high demand from a growing private transportation sector. Food prices are stable despite what South Korea estimates as a 3.4 percent drop in grain production this year – rice up 0.5 percent but corn down 10 percent, due to poor weather and lack of fertilizer, some of which is normally imported.[ii]  The International Food Organization also separately estimates a poor harvest, saying North Korea needed 647,000 tons of imported food in the 2018 crop year (Nov ‘17-Oct ‘18), compared to 457,000 tons needed in 2017.  How much of that need has been fulfilled is not known but there is little sign of grain exports to North Korea from the many countries that report such data to the UN.

Consumer goods and grain still find their way across the border from China, paid for with Chinese yuan or US dollars. These purchases despite stiff Chinese sanctions on imports from North Korea that should be drying up the Korean supply of foreign cash. Here, Chinese crude oil no doubt helps Mr. Kim. Beyond the fuel itself, government-owned Ponghua refinery (known officially as Ponghua chemical)  sells refined products in the domestic private market, sucking up currency that can help manage price levels.  Premier Pak Pong Ju publicly visited Chinese-supplied Ponghua, just a few weeks ago, interesting given the theme of self-reliance in the face of “imperialists’” sanctions (presumably including China.) [iii]

So, what is Kim thinking, promising economic advancement while dangerously raising popular expectations and toys with new summits with Moon, Trump, Abe, and Putin?  The economy is still first, at least according to a Nodong Shinmun editorial on 18 December and there are no hints of renewed militarism or nuclear tests. [iv]  And there are some hopeful signs of economic reform, reforms that would improve private property rights, especially for family farming and productive capital that could put North Korea on a Chinese reform track.  North Korean visitors to China and Vietnam, for instance, are studying such reforms and, according to some sources, are using the officially censored “reform” terminology.  And private activity even in real estate is expanding rapidly with urban entrepreneurs building private houses in the countryside, on collective land.  Simple but huge changes in electricity pricing might be coming, which would bring great economic value but devastate fixed-income state workers.

Kim’s public messaging remains stridently conservative, tending to cycle between three legendary North Korea themes—the country can prosper by working harder, working smarter through science and technology, or by increasing self-reliance, that is “don’t buy Chinese goods”.[v]  [vi]All might fit in the “something for nothing” school of economic policymaking, or in the economist’s narrative of asking for a “free lunch”.  Achieving growth by doing nothing different than one’s father or grandfather would require some magic.

So, Kim spent the summer months after Singapore visiting industrial and service facilities around the country, challenging their management to work harder and smarter in turning out goods for the public, and castigating poor management performance.  These continue but the propaganda program now has turned somewhat from the “work harder” emphasis to the “work smarter through science and technology” approach, long the favorite soundbite of socialist dictators struggling to resist capitalist incentives.  And, increasingly, the woes of the world’s “blockade” on pitiful poor Pyongyang are being advertised as pressing the country to move even further to self-reliance, and as likely excuses for delayed prosperity.  And instead of foreign investment, highlighted during the Singapore and Moon summits, the country’s own scientists now are being challenged to invent technology, the absence of which is seen as the reason behind North Korea’s poverty. [vii]

While nothing in these messages really differ from those during Kim’s father and grandfather’s rule, there does seem to be a new willingness to admit to the dire poverty of North Korea and, by implication, the failures of these long-held approaches. An optimist might even think this is all setting the stage for major new reforms that could provide the proverbial free lunch. A North Korean scholar, for instance, recently provided Nikkei News and Associated Press with an estimate of the country’s GDP in 2017, $30.704 billion, up from $24.998 billion in 2013 and $29,595 billion in 2016.  The genesis of the figures is a mystery as North Korea publishes no supporting information or data, not even NK won based information.  The scholar’s immediate intention was probably to try to generate a more positive story of GDP growth, a rise of 3.7 percent in 2017, instead of a 3.5 percent fall as estimated by South Korea’s Bank of Korea.  But the level of GDP growth is improbable.

“Live our own way” is the mantra proclaimed last week by the All Korea Worker’s Party Seminar in Pyongyang, echoing Kim’s father, Kim Jong-il.  Is that the message the young marshal wants to give his absentee teachers and policemen? Maybe not.[viii]

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.


[i] Chinese Customs, as provided through Global Trade Atlas.

[ii] Yonhap in English 0219 GMT 18 Dec 18

[iii] KCNA in English 0954 GMT 12 Dec 18

[iv] Hankyoreh Online in English 0802 GMT 18 Dec 18

[v] KCNA in English 1454 GMT 13 Dec 18

[vi] Rodong Sinmun in Korean 0611 GMT 05 Dec 18

[vii] Rodong Sinmun in Korean 06 Dec 18

[viii] KCNA in English 1454 GMT 13 Dec 18

Image from Wikimedia Commons via Flickr account of Russavia

Posted in Economics, North Korea, sliderComments (0)

Hold Your Dollars! The Right, and Wrong, Ways to Engage North Korea

By William Brown

South Korea is abuzz with talk of big economic projects in North Korea, like railroads, electric transmission lines, and gas and oil pipelines, a remarkable change just since September when a huge nuclear blast shook the peninsula, forcing everyone to take notice of Kim Jong-un’s growing arsenal. Even some Americans are joining the big business optimism.  Not much talk though from the Europeans, Japanese and Chinese; their businessmen and politicians were badly burned years ago by failed North Korea investments. And Korean companies seem wary that Seoul will weigh in on them to push unrealistic and ultimately unprofitable investments.  It’s easy to forget the communist country’s “Opening before Reform” in the 1970s that turned into a disastrous bankruptcy of Pyongyang’s financial institutions, even the central bank.  And tough economic sanctions, a virtual prohibition of trade, remain in force as attention turns to how engagement might proceed should Kim do what he says and end his nuclear weapons program.

This is a tricky proposition, one that requires a kind of thinking rarely applied to North Korea—a combination of muscular security policy and developmental economics. We can’t force the outcome, but we need to provide encouragement to both denuclearization and economic reform, and penalties if Pyongyang reneges.  A tough combination but, in my view, possible and well worth the chance.

The tempting, and likely wrong approach would be to again try to buy away the nuclear program, giving Pyongyang what we think it wants in return for dismantlement. Big projects, such as the 1990s KEDO nuclear power deal, or large sums of money, as in several South Korean ventures and U.S. offers, always seem to be the preferred way to do this, even though it is not clear to me why North Koreans should be enamored with South Korean chaebols, and trains, crisscrossing the country on the way to China.  These have failed in the past because such gifts don’t meet the test of sustainable commercial viability in the target economy, creating distortions and disappointments when they inevitably fail. Moreover, the “buy it” approach is to pretend the nuclear weapons are the source of the problem, not the symptom.  As Kim wrote Donald Trump in his invitation to meet, the real problem is American, and world-wide, hostility to North Korea’s system. Trump might have answered that the hostility is real and that it is embedded in our view of Marxist-Leninism, which still controls and impoverishes the North Korean people.  More gifts to the state will strengthen the system, creating more disappointments and more reasons for Kim to hold nuclear weapons.  To break this cycle, our reengagement needs to work the two issues simultaneously; end the weapons program and end the failed economic system.

No doubt this will be difficult, but if it seems impossible it may be due to lack of understanding of the enormous pressure now being applied to Kim and the miserable condition of his command economy, pulled apart by market forces and foreign currencies that have invaded North Korea.  Kim took his first ever trip to Beijing in March just as North Korean trade with China was plummeting, with exports down about 90 percent from year-earlier levels and vital imports plunging more than half.  And upon returning, just in April, Kim gave a speech to his Party leadership that indicates he wants to put full priority on the economy, letting nothing get in the way. Kim’s verbiage might be dismissed by many, but it, together with highly positive statements about the Moon and Trump summits, two more quick trips to China, and a sharp decline in anti-U.S. propaganda, have given North Koreans a big boost in optimism that economic life will soon turn for the better.  It seems Kim has staked his future to this promise and will be desperate to succeed, even as sanctions remain in place.  Reform policies, aided but not controlled by outside forces, may be the only way this can happen, and Kim probably knows it.

Given this opportunity, what should we do and what should we not do?  Here is a short list, just for starters. The actual process will take years but several key decisions, made by Pyongyang within a few months, could set them off in a very good direction.

  1. We need to engage North Korean policymakers and technocrats on economic development, not just nuclear disarmament. Conversations might include big foreign investment projects, but these should not drive the conversation. Instead North Korea needs to learn to begin macroeconomic reforms—creation of a viable money and banking system that induces the buildup of domestic savings—and microeconomic reforms, creation of property rights and a single price system that bridges the enormous gap between state dictated and market prices, wages, interest rates, and exchange rates. Success will depend on Pyongyang’s willingness to reform; there is little we can make them do but there is a lot we can do, both the U.S. and South Korea, should they begin to make the right decisions.  Backing a new won currency, for instance.  But without these reforms, big projects are bound to fail as they have before.  And if Pyongyang resolutely fails to make progress, there is plenty more maximum pressure that can be applied to get them to the right place.
  2. An early “give” to Pyongyang could be U.S. actions to again remove Trading With the Enemy Act penalties that force a veto of any North Korean attempt to join the WTO, the IMF, and the World Bank. Washington could even offer to mentor Pyongyang through the long reform process it would take to join the WTO, and thus gain normal trade access to the whole world.
  3. An early “ask” should be advancement of Kim’s earlier pilot projects to shrink and then end the collective farm system and return the country to family based farms, as in China and as in North Korea before the Korean War. Family farms everywhere are enormously more productive, releasing labor for industry and with more production, ending the malnutrition that still pervades the country. Studies show that land reform, forced by the U.S. occupation army in Japan, Taiwan, and South Korea following World War II, may have been the single most important factor behind those countries’ huge economic successes.
  4. Several “rules of engagement” could be employed that guide all economic and financial engagements with North Korea. For instance, as required by the ILO, any pay for North Korean work must go directly to the workers themselves, not through the government or state enterprises’ ration, or payment in-kind, systems. Probably about half North Koreans work for pay but the other half, including all government workers, most professionals, workers in state enterprises, and most party officials, work for rations, supplementing those meager offerings with secondary work in markets, a most in-efficient system.
  5. Another rule should be to only use the market exchange rate for won, stable in recent years at about 8,000 won per dollar, and not the 130 won per dollar official rate. And more generally, employ all possible efforts to use markets instead of official state procurements.
  6. Reopening the Kaesong Industrial Zone might be considered if the above rules are employed, most importantly that workers are paid directly. This was promised at the original opening fifteen years ago but never implemented. Instead, a cruel and demeaning “Choco Pie” economy developed. Significant funds should be allocated to a check system so that workers could be sure of obtaining their full earnings.  If successful, the U.S. might offer to bring Kaesong made products into the KORUS, a huge inducement to further success.  Wages would circulate in the Kaesong local economy affecting hundreds of thousands of people, generating a significant source of market oriented economic growth.

The rules of engagement should also include negative policies, things that should not occur. Most importantly, this should include no commodity aid, except in a famine.  Commodity aid, in the tens of billions of dollars, has distorted North Korea’s economy over past decades, eliminating its capacity to export. (If imports are free, exports are not needed, and thus are not produced.)  Commodity aid, moreover, disadvantages domestic producers, most importantly, farmers.  The temptation to offload excess South Korean rice, or American corn, on the North Korean market should, most emphatically be resisted.  Even special needs products provided by World Food Program and other donor organizations should be questioned, since local farmers and merchants should be able to provide the same.

Likewise, foreign investment, except when an equity stake can be ensured, should be minimized until North Korea can get a new money and banking system in order. Otherwise, foreign money will either drive out domestic investment (a “carpet bagger” effect) or, more likely, domestic investors will drive out the foreign investors.  But true equity deals, where ownership rights are allowed not just for foreigners, but to North Koreans as well, should be promoted as the legal system evolves.  The latter, the North Korean people, in this new system will be the owners, not the Worker’s Party and not foreign carpetbaggers or international banks.  For Kim, this might be a hard sell but, given the alternatives, maybe not impossible.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.

Posted in North Korea, sliderComments (0)

The Dilemma of Humanitarian Work in North Korea

By Mark Tokola

The McClatchy news service carried an article on March 1 titled “Global charity stops medical grants to North Korea over doubts about use of aid.” The article described a decision by The Global Fund to stop providing malaria and tuberculosis aid to North Korea because of concerns that the assistance was being diverted by the North Korean regime instead of being given to North Koreans who need it. The story highlights a dilemma long faced by humanitarian organizations who attempt to provide assistance to North Korea: does the humanitarian value of the assistance outweigh the burden of the conditions imposed by the North Korean government and the risks that the government will divert it only to benefit the Army or party loyalists?

There is no easy answer.  Different humanitarian organizations have come to different conclusions: some have stuck it out in North Korea and done their best to see that their aid reaches its intended recipients.  Others have given up and pulled out. The ones who have stayed and continued to provide assistance argue that it doesn’t matter if the North Korean regime takes the credit, or even if it decides who receives the assistance — saving a life is saving a life, whether it is a poor villager or a Party loyalist or a North Korean soldier. Apart from the ethical imperative of helping whoever they can, there is the practical consideration that preventing the spread of infectious diseases (such as multi-drug resistant tuberculosis) benefits everyone, including South Koreans, Chinese, and others who may be in the path of an epidemic. There is also a hopeful assumption that providing assistance can create international goodwill, even among regime stalwarts, easing tensions and reducing the risk of conflict.

Organizations that have given up on North Korea argue that if their mandate is to provide aid to those who need it most, and if the North Korean government makes it impossible to do so, then they have little choice other than to refocus their efforts on countries in which they can have more control over their efforts. As a concrete example, it has been reported by some organizations that the North Korean government would not allow them to provide help to anyone who could not produce a government identification card and the cards were withheld from populations not favored by the government. Allowing the government to screen who and who could not receive assistance was an unacceptable condition. According to the McClatchy article, the situation may even have been worse regarding Global Fund assistance.  Their concern was that North Korea was diverting and selling their medical supplies, earning a profit for the regime without benefiting the North Korean people.

The root of the humanitarian dilemma is that the North Korean government is prepared to hold its own people hostage. Are international humanitarian organizations prepared to stand by and allow North Korean people to die of disease or malnutrition?,The awful implication is that the North Korean government is prepared to do exactly that by placing a higher priority on funding its nuclear weapons program instead of adequately funding its clinics or modernizing its agricultural sector. Whether to give in to such hostage taking by the North Korean regime is a difficult decision, particularly for organizations whose purpose is to alleviate suffering.

Mark Tokola is the Vice President of the Korea Economic Institute of America. The views expressed here are his own.

Photo from the European Commission DG ECHO’s photostream on flickr Creative

Posted in North Korea, sliderComments (0)

Drought in North Korea — What Should Be the Response?

By Robert R. King

Just a few days ago, the UN Food and Agriculture Organization (FAO) issued a report that North Korea is facing its worst drought in 16 years.  The report, prepared by the FAO in cooperation with the European Union’s Joint Research Center, concludes that the period April through June of this year was particularly dry, which has delayed planting and stunted plant growth in key crop-growing areas.  Food security in the DPRK has been precarious since the famine of the late 1990s and early 2000s, and now the UN agency is warning that “cereal output may decrease significantly.”

The other shoe that has yet to drop this year are floods.  North Korea frequently faces late summer monsoon rains and occasional typhoon rains in September that complicate farm production.  Because North Korean government policies limit private farming on good farm land in the flatter bottomlands, farmers end up over-cultivating hillsides.  Then when the late-summer rains come, they can accelerate the runoff, causing devastating damage to the hillsides through erosion.

The late August 2016 floods along the Tumen River on the northern DPRK border with China and Russia were caused by Typhoon Lionrock.  In North Korea, the floods killed over 500 people, left over 100,000 homeless, and did major damage to farmland in the area.  Flooding such as this is an all too common occurrence, and exacerbates existing food scarcity.

Unfortunately, food shortages in the North are not unusual.  Even in an average year, the country has to stretch to meet the food needs of its 25 million people.  The government provides only limited resources for agricultural inputs and equipment, farming methods are not the most modern or effective, and central planning generates further inefficiencies.  Some improvements have been made in recent years with better farming practices that reward individual efforts to encourage greater efficiency, but shortages are still serious.

In the 1980s, annual grain production (principally rice and corn) averaged around 8 million tons.  During the famine (1996-2003), annual production averaged 3 million tons, with some years considerably lower.  For the last five years, it has averaged just below 5 million tons.  Furthermore, gaps between regions and a poor transportation system make it difficult to adjust for regional differences.

The suffering of the North Korean people is certainly not their own fault.  They have little, if any, ability to influence the decisions of the tyrants that control their fate.  The food shortages are the responsibility of the regime.

In fact, the regime provides ample food and luxuries for the elite in Pyongyang, and the military leadership and elite military units will have sufficient food.  Resources that could provide much-needed inputs for agricultural production will be spent for nuclear and missile development and maintaining the military, and of course the supply of luxuries will continue to flow to the privileged.

Certainly UN agencies will appeal to member states to help North Korea. However, humanitarian assistance from the UN, particularly the World Food Program, will likely be difficult to secure.  There are great demands on UN humanitarian resources in other parts of the world right now, and in recent years special appeals to provide aid to the North Koreans have secured only limited help.  North Korea has lavished resources on missile and nuclear capabilities, despite the urgent humanitarian needs of its own people and the condemnation of its military actions by the UN Security Council.  Thus, aid to North Korea will be a particularly difficult case to make to elected political leaders.

In addition, the U.S. government is unlikely to be responsive.  A sharply divided Congress, preoccupied with healthcare, taxation, and other divisive domestic issues, will find it very difficult to support humanitarian aid to a country which has announced that its nuclear and missile programs are aimed at Washington.  Furthermore, the Trump Administration has indicated its intent to significantly cut back on all U.S. foreign assistance.

The new government of the Republic of Korea is likely to give the most serious consideration to the humanitarian needs of the North.  These suffering Koreans are their cousins, and many Koreans in the South have roots in the North.  In fact, Seoul has put forward an initial proposal for engagement with Pyongyang.  Based on previous experience, the North will likely expect to be paid to engage, and in the past humanitarian aid has been a place to start.

Another avenue for assistance in coping with the effects of drought is private humanitarian groups.  A good number of them are American Non-Governmental Organizations (NGOs), which have a good record and experience in aiding the North.  Unfortunately, these NGOs face serious difficulties raising funds.  These groups are well-organized and managed, do extremely good work, and have dedicated and compassionate leaders.  The DPRK, however, has become such an international pariah because of its nuclear and missile programs, its periodic provocations, and crude verbal outbursts that large and small donors alike are reluctant to be involved.

In considering a possible response by governments, international organizations, and private non-profit organizations to the growing signs of an impending food shortage in the DPRK, two considerations are important.

First, they must assess the need for help.  Our satellite imagery is remarkable, and we can make reasonable estimates about the extent of the need from afar.  But on-the-ground assessment is essential to determine the reality.  What crops and which regions are most affected?  What steps is Pyongyang taking to deal with this problem?  What are the transportation issues?  Does the North have the capacity to move aid from ports to affected areas?

Second, agreements must be reached to allow on-the-ground monitoring by designated representatives of the country or organization providing the aid.  In the past, South Korean and international organizations delivered food aid to the border or to the ports, and Pyongyang determined where the aid was sent.  Some was apparently sold on the black market and the payments may have helped fund the military. Other funds subsidized the lifestyles of the rich and infamous.  If aid is provided, foreign donors and the international community need to be assured that humanitarian assistance is going to those most in need.

The longsuffering North Korean people have limited alternatives for humanitarian help.  Unfortunately, the bad decisions and self-destructive policies of its own leadership, over which they have little or no control, make it very difficult to find help for them.

Robert R. King is a Non-Resident Fellow at the Korea Economic Institute of America.   He is former U.S. Special Envoy for North Korea Human Rights.  The views expressed here are his own.

Photo from (stephan)’s photostream on flickr Creative Commons.

Posted in North Korea, sliderComments (1)

Deepening South Korea’s Relations with the Middle East

This is the sixth in a series of blogs looking at South Korea’s foreign relations in the run up to the next Korean administration taking office on May 10. The series also includes blogs on relations with North Korea, the United StatesChina, Japan, Russia, the European UnionASEANAfrica, and Latin America

By Juho Choi

The active relationship between South Korea and the Middle East Area is relatively young. Since South Korea established its government after the Korean War, most exchanges with Middle East nations had been based on oil and overseas construction. While there is significant geographic distance and cultural differences, the relationship has evolved significantly in recent years.

Korea’s active economic ties with the Middle East go back many years as Korean companies have often looked to the region for construction projects. However, ties have grown closer in the 21st century. As oil prices soared, many oil-supplying nations needed additional oil-related facilities and social infrastructure.

Middle East Blog Table

Out of the top 10 countries where Korea has construction work, 6 are in the Middle East including the top 4 countries. Under the two former presidents (Lee Myung Bak and Park Geun Hye), ties with Middle East nations were significantly expanded. Both presidents toured the Middle East and signed hundreds of memorandum of understanding (MOU) in various fields. In fact, some of them led to contracts such as plant building and operation contracts, including ones in the UAE for a $20 billion deal to build four nuclear power plants and $49.4 billion contract to operate the plants over 60 years.

Lifting sanctions on Iran also helped Korea’s economy advance and brought hundreds of millions of dollars in contracts. Daelim Industrial landed a $2 billion deal with the Esfahan Oil Refining Company and Hyundai Heavy Industries clinched a $700 million deal to build 10 ships for Iran’s state-owned shipping companies. Also, Turkey, which is called a brother nation in Korea, signed a $3 billion contract with SK E&C to construct the world’s longest suspension bridge.

In addition to economic ties, cultural exchanges have dramatically increased. According to Korea Customs statistics, Korean confectionery exports to UAE and Saudi Arabia have risen 60.8 percent and 141.8 percent, respectively, compared with 2011. The popularity of Hallyu (K-Wave) is also remarkable. Starting with the success of ‘Dae Jang Geum’ which recorded a 90 percent rating in Iran, many Korean TV shows have aired successfully in the Middle East. The growing popularity of K-pop is also considerable. The first music and culture convention ‘KCON Abu Dhabi 2016’ was a huge success with 8,000 fans and many idol groups have had concerts in the Middle East. State level effort also has continued to share cultural value in depth. Two Korean Cultural Center are running in the Egypt and Abu Dhabi and different events has been offered by Korean embassies around the Middle East.

This K-Wave trend has led to a boost in tourism. According to the Korea Tourism Organization (KTO), the number of tourists from the Middle East has soared over the past few years. In 2016, nearly 200,000 tourists from the Middle East visited South Korea, double the number of tourists in 2011.

Beyond cultural exchange, South Korea has also contributed to keeping peace in the Middle East. The Cheong-hae naval unit has been deployed for international maritime security and to counter the spread of terrorism. They also carried out an operation called ‘Dawn of Gulf of Aden’ which was successfully rescued 21 crew members of a Korean ship hijacked by Somali pirates. In addition to the Cheong-hae unit, the Dong-Myung unit has been engaged in rebuilding in Lebanon and the Ake unit has helped to train soldiers of the Persian Gulf state in UAE.

However, several obstacles such as fluctuating oil prices, unstable regional security, cultural, and religious difference still remain. In particular, armed conflict and unstable political situations in the Middle East need worldwide cooperation and focus to move forward. Considering Korea’s growing interest in the regions, it’s possible to play an important role by cooperating with Middle East nations in depth. According to Korea Institute for International Economic Policy (KIEP), many oil-supplying nations are promoting economic diversification for falling oil prices, it will lead to increased investment in non-oil based industries such as medical care, tourism, finance and others. South Korea has mainly enhanced its business tie with Middle East in construction and resource related industries. South Korea is also endeavoring to follow this diversification especially medical care. However, Korea should diversify investment in accordance with this phenomenon and prepare the post-oil era with the Middle East to greet the real ‘Second Middle East Boom’

Juho Choi is an intern at the Korea Economic Institute of America and a student of the Dong-A University in Busan. The views expressed here are the author’s alone.

Photo from Gordon’s photostream on flickr Creative Commons.

Posted in slider, South KoreaComments (10)

Samsung’s Troubles Demonstrates How Different North and South Korea Really Are

By Troy Stangarone

North Korea and South Korea are different, but sometimes it takes a crisis in each country to draw those differences out. In many ways, the flooding in North Korea in September and the recent crisis at Samsung help to illustrate how different the two countries have become since they were divided after the Second World War.

For a North Korean living in the flood ravaged north of the country, life was already perilous before floods damaged or destroyed 35,500 homes. Now, with the onset of winter approaching, life has become even more perilous. In contrast, the crisis around Samsung, South Korea’s star economic performer, will not place the lives of South Koreans in anywhere near as perilous a fate. Instead, Samsung faces a reputational crisis as a result of a flaw in the Galaxy Note 7 that has led some phones to catch on fire.

For many countries, while challenging, the domestic resources would be available to deal with a calamity similar to the floods in North Korea. For those nations lacking in the resources, international aid would be available to help deal with the needs of those short of food and housing.  North Koreans are not as fortunate. The state does not have the capacity to deal with the challenge, and while international organizations such as the World Food Program, UNICEF, and Save the Children have made appeals for aid totaling $28 million to help some 600,000 in need of assistance. Years of food shortages from a state that is more interested in developing nuclear weapons than ensuring that its citizens are cared for have made international donors less willing to help. To date only a quarter of the $28 million has been raised.

In contrast, South Korea’s Samsung Electronics is also facing its own onset of difficulties. After turning around two years of declining profits in the first half of the year, the troubles of the Galaxy Note 7 have shaken Samsung. After an initial recall, replacement phones have also reportedly caught on fire. In an effort to prevent the damage from spreading and protect Samsung’s reputation, the decision was made to permanently discontinue the Note 7. Initially Samsung revised its quarterly operating profit down by $2.3 billion, but in its recent quarterly statement the figure had grown to a $4 billion net decline in the 3rd quarter profit.  Some analyst expect the recall to cost Samsung anywhere from $6.2 billion to $17 billion.

What makes these two crises so interesting is not just that Samsung’s loss, and, by extension actual profits, will significantly exceed the sum of international aid requested for North Korea, but that the losses of one South Korean company represent such a significant portion of the estimated GDP of North Korea itself. The CIA estimates that North Korea’s GDP is approximately $40 billion, on a purchasing power parity basis. That makes Samsung’s initial revision of its quarterly profit a little less than 6 percent of North Korea’s GDP. Its actual decline in reported 3rd quarter profit, $4 billion, represents 10 percent of North Korea’s estimated GDP. If the ultimate loss rises to the $17 billion estimate it would represent 42.5 percent of North Korea’s GDP.

In essence, South Korea’s economy is now so much larger than North Korea’s that the failure of a single product at one company is much greater than the resources Pyongyang needs to address the recent flooding and a significant portion the productive output of the North Korean economy itself. In a sense, the Note 7’s failure represents a stark contrast to the real catastrophe in terms of lives and wellbeing that North Korea’s economic and political choices have had for its people.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from the European Commission DG ECHO’s photostream on flickr Creative Commons.

Posted in North Korea, slider, South KoreaComments (0)

South Korea’s Overseas Peacekeeping Activities – Part II: The Implications for South Korea

By Hojun Song

On July 26, 2016, the Republic of Korea (ROK) Army held a send-off ceremony for deployment of the 18th rotation of the Dongmyeong Unit. This contingent will depart for the United Nations peacekeeping operation (PKO) in Lebanon in early August, renewing its record as South Korea’s longest overseas peacekeeping mission. The Dongmyeong Unit represents South Korea’s growing role in international peacekeeping, where it is now the 12th largest donor to the United Nations peacekeeping budget and has dispatched some 13,500 troops to 18 United Nations PKO missions as of 2015.

Despite the expected costs, most South Koreans are supportive of South Korea’s involvement in overseas peacekeeping missions. In 2010 and 2011, the Jeju Peace Institute (JPI) conducted poll, which showed that 65.1 percent and 64.6 percent of survey participants, respectively, were supportive of South Korean overseas military deployment to United Nations PKO missions. Regarding the results, a JPI research fellow Seong-woo Yi stated that South Koreans generally support contributing to the international community. More recent views of overseas peacekeeping activities remain positive. According to surveys conducted by Hankook Research Ltd. in 2015 and 2016, respectively 75.5 percent and 74 percent of respondents supported the overseas deployment of the ROK Armed Forces.

Peacekeeping Table

Moreover, peacekeeping activities bring various fruitful benefits to South Korea. First, South Korea’s peacekeeping activities enhance its reputation among the international community. South Koreans are proud of the fact that South Korea, which was once a beneficiary of international assistance and has now become a donor country, contributes to world peace. In 2014, the then Secretary of National Defense of the Philippines, Voltaire Gazmin, conferred on the Araw unit a “Bakas Parangel” award, which is a special recognition given to individuals or agencies who demonstrate remarkable courage and heroic deeds during a time of natural disaster.

Second, South Korean troops deployed overseas can provide immediate protection to South Koreans in the foreign countries in times of emergency such as civil war or a terrorist attack. For example, the Cheonghae unit which operates in the waters of Somalia conducted evacuation operations for South Koreans in Libya during the Libyan revolution in 2011 and the Libyan civil war in 2014. In 2015, the Cheonghae unit also evacuated South Koreans in Yemen when the conflict between government forces and Houthi rebels deteriorated. On the other hand, the Hanbit unit in South Sudan conducted a rescue operation for South Korean NGO workers threatened by South Sudanese armed robbers in 2013.

Third, South Korea’s overseas military deployments give the ROK Armed Forces opportunities to have field experience and improve its warfighting capability. The deployment to the UAE allowed the Akh unit chances to enhance its operational capability in an environment with desert terrain and high temperatures. The UAE was also a better location for parachute training than South Korea due to its sunny weather. Another benefit for the Akh unit to use the high-tech training facilities such as a high-priced virtual reality combat system which the UAE had purchased from the U.S. defense industry firms. The anti-pirate operations of the Cheonghae unit were also helpful in improving the ROK navy’s actual combat capability.

Fourth, South Korea’s military cooperative activities promote the national interest through increased bilateral cooperation with a partner states. The deployment of the Akh unit enhanced the diplomatic relations between South Korea and the UAE, which provides 14 percent of South Korea’s oil imports and is the second largest importer of South Korean goods in the Middle East. The Akh unit may also have had a positive role in the UAE choosing South Korea for a $20 billion contract to build four nuclear power plants in Abu Dhabi. Similarly, South Korean firms won a $31.5 million contract of operational consulting of a new Erbil airport and a $3.5 billion package deal of oilfield and social overhead capital development in Basra as the Zaytun division was deployed in Iraq over 4 years. Likewise, as the Hanbit unit won the hearts of local South Sudanese through civil affairs operations, it is expected to be positive for South Korean firms looking to engage in business once the security situation is stabilized.

Lastly, South Korea’s contributions to peacekeeping activities are also believed to have the benefit of building good will with states in the event of a second Korean War or another crisis where there may be a need for foreign governments to provide military support to South Korea. On the previously mentioned poll conducted by Hankook Research Ltd in July 2016, 85.6 percent of respondents expected that South Korea’s overseas military deployment will lead to more military support from other countries in time of emergency.

Admittedly, there are some criticisms from South Koreans regarding the overseas deployment of the ROK Armed Forces. As the security condition in Lebanon and South Sudan has recently deteriorated, South Koreans are more concerned about security of their soldiers deployed overseas. Also, a recent slow-down in economic growth in South Korea might make public opinion less favorable to continuing to pay for peacekeeping activities on foreign soil. However, considering the active public support and possible benefits, the balance sheet seems favorable to the deployment.

South Korea continues to show consistent support overseas peacekeeping activities, as all existing dispatches were extended with strong support from the National Assembly. With support from both the South Korean public and policy makers, South Korean soldiers deployed overseas will continue to represent South Korea and promote universal values for the world peace and prosperity.

Hojun Song is an intern with the Korea Economic Institute and a graduate student at the Fletcher School of Law and Diplomacy at Tufts University.

Photo from Expert Infantry’s photostream on flickr Creative Commons.

Posted in slider, South KoreaComments (0)

Unfriending North Korea…With South Korea’s Help

By Jenna Gibson

On June 16, Uganda officially kicked North Korea to the curb, asking approximately 60 DPRK troops and state security officials to leave the country. Uganda was playing host to the North Koreans as part of a military exchange program – the UN recently reported that the North Koreans were providing police training to their Ugandan counterparts, including lessons on the use of AK-47s and pistols.

Why kick them all out now? It may be yet another sign that South Korean President Park Geun-Hye’s so-called Summit Diplomacy is working.

According to 38 North, South Korea described President Park’s recent international trips as “part of diplomatic efforts to enlist the international community to the effort to bring about change in North Korea on all fronts.”

Uganda is a perfect example of the strategy’s success. Ugandan President Yoweri Museveni first promised to cut military ties with the DPRK after his summit meeting with President Park. During her visit to Uganda, which was the first visit by a South Korean president to the African nation since 1963, President Park also signed 10 agreements to cooperate on defense, health, rural development and communications technology.

While South Korea has long invested in development aid in sub-Saharan Africa, the timing of this visit and Uganda’s subsequent split with Pyongyang is noteworthy, in part because it is hardly the first country that has recently given preference to Seoul after a visit from the Korean president.

In fact, Park’s 2016 itinerary almost reads like the most recent UN General Assembly vote on North Korean human rights. Uganda – abstain. Ethiopia – abstain. Kenya – abstain. Iran – no. It seems clear that President Park’s administration is focusing on those who still support North Korea, whether actively or by staying silent.

Take Iran, for example. In one of the most high-profile diplomatic moves of her administration, Park recently travelled to Tehran for the first bilateral summit between South Korea and Iran since the two countries established diplomatic relations in 1962.

Iran has long been seen as a friend to North Korea, purchasing arms and backing the Kim regime in the international sphere. In 2002, U.S. President George W. Bush famously linked the two as part of the “axis of evil,” along with Iraq. To see Iranian President Hassan Rouhani stand next to a South Korean President and declare his opposition to nuclear development on the Korean peninsula is no less than a sea change.

 In a recent KEI podcast that examined the historic trip, Iran expert Alex Vatanka clearly saw an opportunity for South Korea to make inroads with Iran.

“Much of what Iran has done in recent years in terms of outreach to certain countries around the world was driven by an almost ideological desire to as they would put it, challenge the global system,” Vatanka said. “Rouhani is very different. This Iranian president’s view, and why he was elected in 2013, is those countries are great, but they actually have nothing to offer us. They can’t contribute to the most important thing we are trying to fix, which is the Iranian economy.”

South Korea, in contrast, has much to offer Iran economically. In fact, Park Geun-hye left Tehran with promises to triple trade between the two countries from $6 billion to $18 billion annually. Using this leverage to her advantage, Park has been able to turn a former DPRK ally away from Pyongyang.

Across the world, the pattern may be repeating itself again in Cuba. Earlier this month, Foreign Minister Yun Byung-se visited Havana, despite a lack of formal ties between the two countries. Cuba has long supported its fellow communist country, making this visit particularly key for Seoul. “For an exceptionally long 75 minutes, our talks were very friendly, serious and candid,” Yun told South Korean reporters after the meeting. “We had a broad exchange of views on bilateral, regional and global issues.”

This strategy is hardly limited to high-level visits, though. Seoul has announced they will provide $1.5 billion in development assistance to Vietnam from 2016-2020, for example. And the South Korean administration has been working to turn Myanmar away from the North with infrastructure projects and trade deals since the country began opening to the international community in 2011.

These moves have not gone unnoticed in Pyongyang. In response to Park’s recent trip, the DPRK sent Kim Yong Nam, the country’s nominal head of state, to Africa as well. There, he met with leaders from nine countries, including Chad, Gabon, Congo, Burundi and Mali. Another high-level official visited Vietnam and Laos in June.

“Pyongyang tries to maintain positive relations where it can, with countries less closely tied with its rivals,” John Grisafi, NK News director of intelligence, said in a recent NK News article. If South Korea can continue to narrow the list of countries willing to side with Pyongyang, they may be able to successfully remove what remains of North Korea’s room to maneuver in the international sphere.

And it seems like that’s exactly what Seoul is doing. It’s too soon to tell how widespread and long-lasting these shifts will be. But for now, it seems North Korea’s isolation may finally be cemented, allowing sanctions to take their full effect.

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Korea.net’s photostream on flickr Creative Commons.

Posted in Korea Abroad, North Korea, slider, South KoreaComments (0)

South Korea’s June 9 Surprise: Economic History Worth Replicating in North Korea

By William Brown

September, 1961 was not a happy time in South Korea, at least according to the US Intelligence Community.  See how CIA described the dismal situation soon after junta commander Park Chung-hee’s coup d’état, in a declassified National Intelligence Estimate.

“The greatest threat to South Korea, at least in the near term, comes from within South Korea. The country lacks a sense of national purpose and faces both tremendous economic problems and a brittle political situation. The military junta seeks to provide the drive and stability which was lacking in the previous civilian government but is subject to internal factionalism and lacks general public support in confronting these enormous problems. … U.S. aid will probably succeed in preventing economic collapse. However, even under the most favorable circumstances, progress will be slow and South Korea will continue to require large-scale foreign aid for the indefinite future if it is to remain an independent nation allied with the West.”[i]  

The longer-term threat was North Korea, seen then as a vibrant economic entity, pu­­­lling the frustrated South into the communist orbit.   

“One thing seems fairly clear; both the South Korean people and the leadership face many disappointments, frustrations, and failures in the years ahead.  In such a situation, the desire for economic progress and for an end to hopeless temporizing, rising interest in unification, and continued enticements offered by the [more prosperous] North Korean regime could lead to some movement in the south toward an accommodation with the north.” 

National Intelligence Estimate 14-2/42-61, 12 September, 1961.[ii]

Within months, South Korea had set forth on what now must be seen as one of the world’s most remarkable economic and political development paths. And within about a dozen years, North Korea would default on foreign credits and begin a long decline into famine.

Not known for its prescience in such matters—just eleven years earlier the brand new CIA had boldly said China would not enter the then flaming Korean War[iii] — this pessimistic Estimate may have served as a useful warning to the Kennedy Administration which went on to put some of its best minds together to change the nature of U.S. assistance to Seoul.  Instead of commodities aid—free food—that was ruining South Korean agriculture, the aid program focused on fixing the overvalued monetary system and developing exports. Who did this and why would be a good topic for historians to revisit and our countries to honor. But I’d like to look at the take-off from the perspective of peering back into the past with an eye toward the future. How did this intelligence forecast turn out so incredibly wrong, and wonderfully so? And what can we learn in order to convince North Korea to make a similar about-face.

An excellent new book, The Korean Economy: From a Miraculous Past to a Sustainable Future, by Eichengreen, Lim, Park, and Perkins[iv], provides what is probably the school view of South Korea’s remarkable turnaround.  In looking for an up-to-date book for my ­Georgetown University course on the two Korean economies, I was pleased to discover this work, not the least because it includes a chapter on North Korea. But I must say I was disappointed in reading what it has to say about what caused the economic take-off. This is not to say that they might not be right; it just doesn’t fit with my pre-conception and I’d like to see a new, more full, academic discussion.  Perhaps objective economists in South Korea, that is academics not predisposed to punish Park for his authoritarian rule, can help with this.

At its essence this is a chicken and egg discussion.  Eichengreen and others say that it was Park’s shifting the economy from import substitution to export-led industry that allowed savings and investment to blossom, raising the productivity of Korean workers.  Exports, from a subsistence-level economy, were possible only because foreign aid provided the surplus needed to attract investment.  The pull from abroad thus lifted the economy.

In contrast, I have thought it was reforms to the money and banking system that provided incentives to save, even out of very low incomes, that created an exportable surplus which then pulled in the foreign investment that jump-started the economy. In other words, an outward push from inside Korea provided the lift.  Foreign aid was less important. An arcane, perhaps, but I think important distinction, especially as we look towards North Korea’s current predicament and to its penchant for nationalist self-reliance.

My view stems from a personal memory—admittedly a dangerous source of analytical vigor. I was a young American boy living in Kwangju, capital of South Chulla province, during this time—fortunately, my Presbyterian missionary parents had not read the secret CIA document. Early one rainy season morning in 1962, my mother got me up to search our neighboring American doctor’s house for a stash of hwan cash. The doctor and his family were away but had rung up (that is the way the old phone system worked) to say he had a bunch of South Korean money that needed to be turned in; he just couldn’t remember exactly where it was, probably in his library. Exciting in a way I’ll never forget, I found the stash of cash, in cut-away books just like you see in spy novels. The bigger story, of course, and unknown to us at the time, was the change to the monetary system and to Korea’s economy that this currency reform signaled.  The initial phase was not completely successful; apparently not enough new won notes had been secretly printed in England and brought by ship to Korea, but within months the new cash had taken hold.  So if I was to make a point estimate, June 9, 1962 was the day that made modern South Korea. It should be a holiday. Everyone was given a few days to take their hwan money, at least up to a pretty high limit, and go down to the Cheil bank and exchange it for newly printed won notes at a 10-to-one ratio; after that hwan would be useless.  Larger amounts of money had to be deposited for a year at a high interest rate but most of the hwan was converted and prices changed accordingly.  And to encourage the public to deposit and save their new won, something like 20 percent annual interest rates were offered.  Even in days before calculators, I remember figuring out how fast the money would grow and how soon I could be a millionaire—forgetting the problem of inflation that this new policy was meant to address.

I wasn’t the only one thinking this way and very quickly South Koreans shifted from being just about the worst savers in the world to being the best. Poor people stopped spending on weddings and funerals and instead saved money, and the banks used these saved resources to lend to farmers to buy small tractors, assembled from kits made in Japan, revolutionizing agricultural productivity.

The tractor that replaced the cow. Park’s Memorial Museum, Seoul

Elimination of U.S. food aid, and government support to higher agricultural prices, as well as subsequent deals with Japan and the World Bank helped, but the driving force was a decent money and banking system that gave the right incentives to the Korean public to save and invest in the future. At least that is the way I have remembered and taught the story.

Textile workers support exports. Park’s Memorial Museum, Seoul

Eichengreen and the other authors, however, use the data to paint a slightly different picture.

“Domestic savings remained in the single digits (share of GDP) in the first half of the 1960s, the takeoff period. … The most dramatic change was, in fact, the rapid growth in exports. Exports at constant prices grew by 35 percent per annum from the end of 1963 to the end of 1969.[v]

The data shown in their text, however, are at five-year intervals so I question the interpretation of the leads and the lags.  Looking at annual household savings data, (graphic below) it seems that the savings growth kicked-in in 1962 and 1963, simultaneously with the money change and a year before exports began their upward spiral from a tiny base.[vi] Admittedly 5 percent household savings are not much but it is the change from nothing that arguably sparked Korea’s real revolution.

Household Savings Graph

As I say, a chicken and eggs argument. If my memory serves, it was human hair (wigs), plywood, and leather goods that started the export push, not products that required foreign investment.  But clearly Eichengreen is right about what happens next; general and soon-to-be “president for life” Park got on the export bandwagon and the rest is history. Export growth soared giving the economy a huge boost even as savings and investment rates rose, allowing the import of capital goods for South Korean industry.  Park’s most controversial policy was then to shift from light industrial exports, especially textiles and footwear, to heavy and chemical industry, despite what appeared to World Bank and U.S. economists as a comparative advantage in labor intensive products.  By now it would be hard to argue that Park wasn’t correct but, whatever the case, on the basis of this surge in investment, South Korea’s comparative advantage has shifted, for the time being, to heavy industry.  I say for the time being since China looms as a tough competitor in all of these products and is investing even more heavily than did Korea.  Another important step, as is hinted at in the old NIE, was Park’s creation of an objective and expert Economic Planning Board that supervised the creation and publication of data that his and subsequent governments could use as the road map and guide for economic policy making (and which makes possible our current analysis of what caused the economic takeoff).  The U.S. role was critical as well.  Despite missteps with respect to aid, the U.S., soon after liberation from Japan, had supervised the fundamental change in Korea from a tenant based agricultural economy to a capitalist one with massive land reform giving land to the tenants, and, of course, by providing the security shield that protected the country from the Communists.  While initially skeptical of the currency reform—U.S. officials had not been notified in advance even though the U.S. was financing about half of the South Korean budget—U.S. balance of payments support that followed allowed the new won to achieve credibility.

But the real genius of the Park administration, it seems to me, was those early courageous and risky steps in changing the money and using the change to create a sound currency and a high-interest banking system that encouraged savings and that recognized the high returns on capital if used only in high productivity endeavors.  Now seen as a textbook solution to be sure but one that must have been complicated and risky for the generals to manage. Subsequent Seoul governments have relied too much on banking and not enough on more efficient direct capital markets—stocks and bonds—but all of that is a different story, well told in Eichengreen.

The parallels to North Korea today are interesting and I would hope officials and scholars in Pyongyang are carefully studying Park’s success.  I say carefully since they tried something similar to the South Korean currency reform in 2009 but bungled it badly.   On paper what is known as the 2009 currency redenomination must have looked similar but with critical differences. Citizens were told to change about a third of their cash into a redenominated currency of the same name at a 100-1 ratio. That ratio doesn’t matter but the fact that only a small share of cash could be converted, and the absence of a name change, are important.  North Koreans immediately saw most of their money devalued by 99 percent over the span of a few days and naturally associate that disaster with the North Korean won notes.  It isn’t clear what was supposed to happen with their bank accounts but these were artificial anyway since cash can’t be withdrawn from a bank except with special permission—maybe like a 401k that never matures—and that policy has not changed.  By sharply reducing the money supply, the move might have been designed to bring black market prices down close to the fixed ration price levels and end the arbitrage that was and continues to destroy the planned, fixed price, economy.  That didn’t work since market prices immediately soared, leading to an even larger gap between official and market prices.

Whatever the reasons for the redenomination, it backfired—even strongly socialist PRC commentators called this a theft of the people’s money.  The Kim Jong-il government executed the party finance chief and, a first, offered an apology to the public.  But once done such a deal cannot be undone and North Korean won quickly became essentially worthless, with foreign money, U.S. dollars and RMB, seeping into the circulation in large amounts. Pyongyang by now has stabilized the won at prices significantly above the pre-2009 level but the foreign money circulates without impediment, an astonishing development in a so-called Marxist and “self-reliant” economy.  To hire a taxi, you now need something like two U.S. dollars.  To buy an apartment, you need $30,000 US.

In these respects, the situation now is probably not so different than South Korea in 1961.  At least a market now exists and the command economy seems to have lost some of its sting.  Entrepreneurs make dollars buying and selling in the street markets, and former (maybe current) officials and military officers might be hoping to make it big, using their government connections and licensing abilities to make millions of dollars by building apartment buildings and selling the flats, carefully keeping enough dollar cash handy to pay off the authorities.

In fact, it is interesting to think that the 1961 NIE might work well today, simply exchanging “North” for “South” Korea. Land reform that gives farmers’ ownership rights; stopping the inflow of disrupting foreign aid that discourages export development; and an export push all are within the capabilities of even a sanction-limited Pyongyang government. But most important is creating a money and banking system that allows the North Korean people to do their own saving and investing.  If Kim Jong-un wanted to link such a policy to his grandfather, all of this could be placed in a “juche” nationalist and self-reliance context.  Clearly, against the advice of many non-Koreans, Park Chung- hee managed to change South Korea from a beggar, aid-dependent country to a self-reliant lending and aid giving powerful and well-liked country.  One would think the young Kim would like to do the same. But before any of this can work, he needs to fix his rapidly dollarizing monetary system and adopt capitalist tools to raise savings and create private incentives to invest in the future. A decent bank and a decently positive real interest rate would do wonders.  And like Park, Kim might be able to use a little American and Japanese help to get this done.

So, where is the briefing book that we can give the young General that will properly explain what he needs to do?  I’m pretty sure the junta leader’s daughter can give the lecture.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photos courtesy of the author.

[i]  http://www.foia.cia.gov/sites/default/files/document_conversions/89801/DOC_0000661631.pdf

[ii]  ibid

[iv]  Barry Eichengreen, Wonhyuk Lim, Yung Chul Park, Dwight Perkins; The Korean Economy: From a Miraculous Past to a Sustainable Future,  Harvard Press, 2015

[v] Ibid. p. 64.

[vi] http://kosis.kr/eng/statisticsList/statisticsList_01List.jsp?vwcd=MT_ETITLE&parentId=L#SubCont

Posted in Economics, North Korea, slider, South KoreaComments (0)

About The Peninsula

The Peninsula blog is a project of the Korea Economic Institute. It is designed to provide a wide ranging forum for discussion of the foreign policy, economic, and social issues that impact the Korean peninsula. The views expressed on The Peninsula are those of the authors alone, and should not be taken to represent the views of either the editors or the Korea Economic Institute. For questions, comments, or to submit a post to The Peninsula, please contact us at ts@keia.org.