Tag Archive | "money"

Why the United States Won’t Provide Financial Aid to North Korea

By Troy Stangarone

In trying to sell Kim Jong-un on giving up his nuclear program, the United States and South Korea have tried to entice North Korea with the promise of a better economic future. As part of this push, the Trump administration has suggested that the U.S. private sector, along with China, South Korea, and Japan, will provide financial assistance to North Korea. However, it has also been made clear that no U.S. tax dollars will be used as an economic inducement for North Korea.

While the refusal to provide aid is in line with President Donald Trump’s desire to ensure that greater costs are born by other states, there is a practical reason why the United States will not provide significant aid to North Korea. The administration is limited in its ability to provide economic assistance.

When Congress legislates sanctions on foreign countries, it generally includes a provision in the legislation that allows an administration to waive the sanctions if it determines that doing so in the national interest. Most of the U.S. sanctions on North Korea contain national interest waivers, but in most cases they do not to apply to the prohibitions on providing aid to the regime in Pyongyang.

In recent years, Congress has inserted specific language into the annual appropriations legislation explicitly forbidding the use of funds for North Korea. These restrictions include credits, loans, or guarantees by the Export-Import Bank. While there are exceptions for humanitarian aid and some other circumstances, it is unlikely that Congress will change course and remove the prohibitions in the near future.

While the administration could request Congress grant it an exception to the prohibitions on aid or to remove them permanently, it would also need to persuade Congress to appropriate the necessary funds. Doing so could be challenging. If the United States intends to provide security assurances to the North Korean regime through a treaty in the U.S. Senate, as has been suggested by Secretary Pompeo, persuading Congress to also waive sanctions on aid will be dependent upon progress on the nuclear issue, and perhaps other issues. Even if the administration can secure an agreement with North Korea on the nuclear issue that would gain the support of two-thirds of the Senate that would be needed for passage of a treaty, Congress may be reluctant to appropriate funds for North Korea if progress is not made on issues that could include North Korea’s chemical and biological weapons programs, its cyber activities, and human rights.

The history of the Agreed Framework suggests that even if Congress agrees to appropriate funds there will be limits. As part of the Agreed Framework, the United States committed to providing 500,000 metric tons of heavy fuel oil a year until a light water reactor was completed. The Clinton administration had promised Congress that the costs would not exceed $30 million a year, and when they did the needed extra funds were not forthcoming. In the case of the Agreed Framework, the funds were designed to serve as a bridge to a new energy resource for North Korea. While it is reasonable to expect that if a deal is struck Congress might appropriate funds for dismantlement of North Korea’s nuclear program, funding that is focused on economic development as opposed to dismantlement is unlikely.

Practically speaking, the Trump administration does not have the authority to provide economic assistance to North Korea and is unlikely to seek it from Congress. It goes against Trump’s broader philosophy and is something Congress would most likely be reluctant to provide. While North Korea will need assistance in developing its economy, there is unlikely to be political support in the United States in the near future for economic aid for North Korea.

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 by Pictures of Money on flickr Creative Commons.

Posted in Economics, Inter-Korean, North Korea, sliderComments (0)

Borkers at the São Paulo Stock Exchange (Bovespa).

Provoking the Market: Investors More Worried about Washington’s Response than Pyongyang’s Provocations

By Kyle Ferrier

Analysts have attributed recent market downturns to North Korean provocations, but investors seem to be reacting more negatively to responses from the Trump administration.

Prior to North Korea’s sixth nuclear test on Sunday, Kim Jong-un was cited as a key contributor to recent developments in global markets. The fall in the value of the dollar and the strengthening of the euro and gold this summer have at least been somewhat linked to North Korean provocations. For the dollar and the euro, North Korea is at most exacerbating these trends, not causing them. Since the end of last year, the dollar has been in general decline and the value of the euro has steadily grown. This is primarily driven by looser monetary and fiscal policy in Europe as the Federal Reserve plans to unwind its balance sheet and the White House faces hurdles in its tax reform and infrastructure initiatives. It is harder, however, to argue Pyongyang has played an equally minor role in higher gold prices. Yet, movements in the price of gold and South Korea’s KOSPI stock index this year suggests investors are more concerned with uncertainty stemming from the Trump administration’s approach to North Korea.

Graph of the price of gold, March to September 2017

Graph of the price of gold, March to September 2017

The conventional wisdom has been that the financial impact of North Korean provocations in South Korea decreases over time. My analysis of North Korea’s nuclear tests, long-range rocket launches, and military provocations along the DMZ through February 2016 (after its second “satellite launch” attempt) found this line of thinking applied to nuclear tests, but could not fully explain the other two categories. It is more accurate to state that the impact of North Korean provocations on markets in Seoul depends on whether a given event is viewed to be outside the context of normal geopolitical developments. That the financial impact of North Korean provocations generally diminished merely illustrated investors had been through similar events and their bottom line was minimally affected. It was not necessarily an indicator of future reactions, particularly as circumstances surrounding each provocation can change dramatically.

KOSPI stock index, March to September 2017

KOSPI stock index, March to September 2017

Significant drops in the KOSPI corresponding with North Korean provocations in January and February last year raised concerns that markets were reacting to Pyongyang at levels not seen since the shelling of Yeonpyeong island in 2010, but these can be chalked up to coincidence rather than cause. These concerns were renewed later last year in the aftermath of North Korea’s fifth nuclear test on September 9. Many news outlets linked the 1.25 percent drop in the KOSPI that day to the test, but this was also coincidence and not cause. Of the 1.25 percent drop, only around 0.07 percent occurred after news first broke of the nuclear test at 9:45am. The fall in the KOSPI as well as the won was much more likely linked to Samsung’s Galaxy Note 7 woes as well as a slowdown in global markets. Thus, from 2010 through the end of 2016, North Korean provocations had a negligible impact on markets in Seoul.

The KOSPI’s reaction to the North’s latest nuclear test is the clearest indication that this trend has ended in 2017. On September 4, the first trading day after the test, the KOSPI opened 1.73 percent lower. Though some of these losses were gained back, it was down 1.19 percent by the end of trading. Unlike the previous test last year, the sixth nuclear test is most likely to blame for this drop. The only other instance of a notable drop in the KOSPI caused by a provocation was in response to the July 4 ICBM, though its impact was minimal: The KOSPI closed 0.58 percent lower that day and took five days to recover. The ICBM launch on July 28 saw almost no change in the KOSPI or the value of the won. And, the August 29 ballistic missile that flew over Japan was only met with a 0.23 drop, which was made back the next day.

Timeline of North Korea's rocket launches and their impact on the South Korean KOSPI stock index

Timeline of North Korea’s rocket launches and their impact on the South Korean KOSPI stock index.

That markets would react to the earlier ICBM launch and the nuclear test makes a degree of sense, considering that both added a new component of geopolitical risk on the Korean Peninsula. The July 4 missile launch was the first time Pyongyang demonstrated its capability of hitting a U.S. state and the nuclear test also possibly revealed its ability to miniaturize a nuclear weapon.

However, from stronger market responses to the Trump administration’s approach towards Kim Jong-un, it is highly likely that Washington is playing a greater role in the negative market reactions to Pyongyang this year. From April 4 to 11, the height of confusion over the whereabouts of the USS Carl Vinson, the KOSPI fell six straight days, totaling to a 2 percent loss. From August 8 to 11, after Trump’s “fire and fury” comments, it fell four consecutive days, amounting to more than a 3 percent loss. “Fire and fury” was also a retort to the July 28 ICBM launch, which ironically had no discernible financial impact in Seoul.

Table of North Korea's nuclear tests and their impact on South Korea's KOSPI stock index

Table of North Korea’s nuclear tests and their impact on South Korea’s KOSPI stock index.

Both incidents also had a bigger impact on the price of gold than did North Korean provocations.  Between April 3 to 13 the price of gold shot up 2.75 percent. It rose again by 2.5 percent from August 8 to 11. Market responses to the provocations in July were mere blips by comparison. Gold rose a quarter percent on July 4, but was back to its previous price within two days, and the price actually fell after the subsequent ICBM launch. Though the August 29 and September 3 provocations were met with steep price increases – 2 percent and 0.68 percent, respectively – these reactions seem to be heavily influenced by Trump’s “fire and fury” comments, evidenced by the current increase in gold prices starting around the time of his remarks.

While harder to judge from the KOPSI alone, the comparison with gold prices implies that this week’s drop in the KOSPI was a product of market nervousness about how the U.S. might reply to the test, not North Korea. Further, if geopolitical concerns did play a role in the KOSPI in early July, they were likely caused by anxieties about a U.S. response, fueled by the USS Carl Vinson incident and Trump’s “disruptive” foreign policy.

Although these reactions are relatively minor and fleeting in the grand scheme of markets, they provide a window into how investors view geopolitical developments on the Korean Peninsula. They may only reflect temporary sentiments, but present the strongest case there has been in recent years that Washington is perceived as the primary driver of risk on the peninsula, not Pyongyang.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Photo from the Rafael Matsunaga’s photostream on flickr Creative Commons.

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

Not Worth a Dime? Korea Should Stop Producing 10 Won Coins

By Patrick Niceforo

Late last year, the Bank of Korea (BoK), South Korea’s central bank, announced its plans for a “Cashless Society,” which first and foremost means getting rid of coins by 2020. A proposed method for gradually removing coins from circulation is encouraging travelers in South Korea to deposit their change onto their T-Money cards, electronic travel passes that are used to pay for metro and bus fares. But while the BoK has reduced its annual expenditure on coin production by 200 million won from 2015 to 2016, it could do more. Similar to Canada ceasing production of its penny, South Korea could simply stop minting its equivalent of a penny, the 10 won coin.

The BoK issues won banknotes in denominations of 50,000, 10,000, 5,000, and 1,000 and won coins in denominations of 500, 100, 50, and 10. According to a recent study, only 8.5 percent of 10 won coins are in circulation, with the remainder sitting in jars or private safes in peoples’ homes.  As of last year, the cost of producing the 10 won coin (0.009 USD) was reportedly twice its face value at 20 won (0.018 USD). Other sources such as KNN and Asia Economy, however, have estimated the cost of production to be as high as 40 won (0.036 USD).

Besides the fact that it costs more to mint a 10 won coin than it is actually worth, the coin’s value is so low that it has little, if any, purchasing power. At the current exchange rate, the 10 won coin is worth slightly less than an American penny. As a result, its only real use is when one needs exact change, which is rare since just 20% of financial transactions involve cash. Furthermore, given the coin’s low value, most coin-operated devices such vending and laundry machines do not even accept it.

In addition to Canada, many other countries such as Brazil, Australia, Finland, Israel, and Malaysia have removed their equivalent of a penny from circulation, primarily because inflation rendered the coin virtually useless. To compensate, many penniless countries round prices to the nearest 5 or 10 cents. South Korea could easily implement similar policies, especially since prices in Korea already include sales tax. In other words, consumers who pay with cash in South Korea can easily calculate how much one or more item costs before reaching the cash register since their final price is whatever is listed on the labels. Getting rid of the 10 won coin will not only make Koreans’ wallets lighter, it will actually expedite cash transactions.

It does seem like South Korea is naturally moving further away from physical currency, with more Koreans starting to use smartphone apps in lieu of credit cards. Nonetheless, achieving a cashless society could take some time, especially since cash discounts are common in the informal sector. Moreover, the gifting of cash is a cultural tradition in South Korea at weddings and during certain holidays. A small and cost effective step consistent with a cashless society policy could be to cease minting the 10 won coin. Many other countries have already removed the penny from circulation for these same reasons. Perhaps South Korea should, too.

Patrick Niceforo is a graduate student at the Middlebury Institute of International Studies and an intern at KEI. The views expressed here are the authors’ alone.

Image from YunHo Lee’s photostream on flickr Creative Commons. 

 

Posted in Economics, slider, South KoreaComments (0)


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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.