North Korea’s moribund economy is one that most observers would like to see marketized and internationalized. This is often considered an end in itself, wherein such transformations would expose the country to irresistible forces of social and political reform. Indeed, there’s evidence that changes in economic management are taking place. Instead of heralding some great reform, however, the tapping of North Korea’s rich mineral and fossil fuel wealth can be seen as potentially retarding social change. The idea of the “resource curse,” long debated by development theorists, is helpful in understanding how this might be the case. Rather than spur change, a what we might call “resource-driven equilibrium” might develop in North Korea.
The idea of a resource curse was developed in the 1980s, as economists noted that countries, particularly post-colonial ones, with large reserves of natural resources were often not developing as successfully as they potentially could. Sometimes, problems stem from economic causes, such as those faced by the Netherlands in the 1960s and ’70s, after huge reserves of natural gas were discovered in the North Sea. The export of this fossil fuel put tremendous strains on the economy’s manufactured goods, by driving up the exchange rate and making exports more expensive. Furthermore, human resources are drawn away from export-oriented industries, further eroding the competitiveness of the manufacturing sector. These economic pressures came to be known as “Dutch disease.”
There are also political consequences associated with a resource boom. When there’s a lack of manufacturing to begin with, a country’s elites are incentivized to fight for control over the resource base, rather than producing wealth by other means. It’s easier for them to distribute resource wealth to secure their own positions and enrich their political allies. Nigeria is an oft-cited example of this.
Both the economic and political pressures brought by control of a valuable resource can be mitigated in a variety of ways, including good governance through strong institutions. Norway is an example, with its oil revenues parked in a sovereign wealth fund, which is only allowed to invest overseas. This prevents pork-barrel spending and limits the inflationary impact of resources. Distribution of oil wealth is also heavily regulated.
North Korea, by all accounts, is rich in valuable natural resources, particularly coal, iron ore, gold ore, zinc ore, copper ore, limestone and graphite. North Korea is a statistics abyss, however, leaving a lot of guesswork for economists who keep an eye on the country. South Korea’s estimates put the North’s mineral resources figure at over $6 trillion.
There’s growing interest in exploiting these resources for export through joint ventures. There are more trade fairs in Pyongyang than ever before, and last autumn, Rason became the first city outside of the capital to host an international trade fair. North Korean investment officers we have worked with on economics and business training have been incredibly busy sending delegations out on investment roadshows, and two major organizations were set up in the last two years to bring in investments.
Most of that foreign investment is Chinese, of course, and Chinese companies have redoubled their focus on securing North Korea’s underground wealth over the last several years. For those willing and able to navigate a very trying business environment, the combination of cheap labor and accessible resources can potentially pay large dividends.
According to KOTRA, China’s trade with North Korea has tripled since 2005. Recent data suggests North Korea’s trade deficit with China has improved on the back of natural resources: A joint Yonhap-IBK Economic Research Institute study concluded that China imported 8.42 million tons of minerals from North Korea from January to September last year, worth $852 million. This was triple the amount imported during the same period of 2010.
Some North Koreans have expressed wariness over the country’s increasing dependence on China. Nevertheless, since North Korea is unable to revive its transportation network, energy supplies, or manufacturing base on its own, the country appears to have little choice. Seoul, incidentally, is also concerned about China’s ever-greater ownership of North Korean resources, but not enough to overcome internal divisions over approaches to North Korea
The new leadership recognizes that it can’t rely forever on exhortations to sacrifice for the stake of security and must find a way to deliver economic results. This requires foreign currency, and therefore sellable products, of which North Korea has few. North Korea’s growing interest in exploiting resources through joint ventures can be seen in the radically increased authority that investment agencies have been endowed with compared to their predecessors 3 to 4 years ago, as well as in the investment pitches they’ve made to investors abroad.
New investment laws, whether well-drafted or not, and public pronouncements in favor of investments, whether supported by effective actions or not, make clear the government’s intentions. Over the last few years there have been multiple organizations competing for investments, suggesting a certain degree of competition at the apex of North Korean society. Cross-agency communication is notoriously bad in North Korea. Indeed, part of the country’s philosophy of centralized rule means that organizations share information upward, while remaining stovepiped from parallel organizations. Different investment agencies appear to have had different patrons and belong to different patronage networks. North Korean government officials have described the competition for investments as “intense.”
As many agencies take a cut of the investments they bring in, the blurred lines between profit-seeking and regulatory responsibilities, combined with some degree of competition with rival organizations, means that a development strategy based on foreign investments could degenerate into rent-seeking by rival patronage networks if the process is managed poorly.
Recent reports from North Korea indicate that the two main agencies dealing with investment are in greater contact with each other. The Joint Venture and Investment Committee and the Daepung Investment Group operate under new investment laws passed in 2010 and amended in January this year. These laws are North Korea’s attempt to clarify the legal status of joint ventures along the lines of China’s own investment laws. Unifying competing institutions and revising legal codes are both positive signs.
However, it remains to be seen how the relationship between JVIC and Daepung will develop. Discussions with North Koreans indicate that understanding of the rule of law and property rights remains weak, that transparency is a major issue, and that much commercial activity takes place outside of the legal framework put down on paper. This exposes business people without the right connections and backing to arbitrary penalties.
If managing resources and overcoming the so-called curse is a matter of concerted, institutional commitment and the corresponding development of effective economic institutions, North Korea will struggle to avoid the trap, both in economic and political terms. Pyongyang will increase trade and exports, but resources could go to supporting different – sometimes overlapping, sometimes competing – groups of elites. The issues with rule of law and competition at the top of society, combined with large payouts from mining joint ventures, could actually lead to a “resource-driven equilibrium.” Marketization without good governance could result in a stagnant and isolated economy, much like Burma over the last decade, as broad-based economic development is ignored while a narrow elite is enriched and existing power structures are strengthened by resource wealth.
We use the term marketization to mean both the reduction of controls over State-Owned Enterprises as well as a relaxation of restrictions on smaller business people or the informal markets. The commanding heights of the economy will be firmly in control of various groups of elites. Lower down, trade and market activity might be tolerated. Yet at the same time, the additional wealth at the top can be invested in apparatuses of control. While living standards will improve marginally, Burma’s situation over the past decade shows that this isn’t enough to sustain broad-base economic development.
North Korea’s system has shown resilience to the encroachment of unofficial sources of news and information that have been growing since the mid-1990s. A more marketized economy with greater engagement with the outside world may allow more outside information in, yet paradoxically serve to bolster, rather than erode, this resilience. We might see a more internationally engaged economy, but one that’s still harnessed to maintain the social and political structures essentially as they are.
That marketization will naturally lead to other positive social and political changes in North Korea is too often assumed, and not questioned enough. Natural resources will provide more income for North Koreans. Nonetheless, we need to be prepared for the possibility that resource-fueled growth can lead to equilibrium where the economy is marketized, broader economic development remains a pipedream, and existing political structures that dominate North Korean society today are reinforced.
Andray Abrahamian is an Executive Director at Choson Exchange (www.chosonexchange.org), a Singapore-based non-profit focused on economics, business and legal knowledge exchange with North Koreans, and a lecturer at the University of Ulsan. Geoffrey See is a Managing Director of Choson Exchange.