KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Working Paper What the Estimates of the Balance of Foreign Exchange of North Koreans Would Tell Us

We first introduce and summarize preceding research on the balance of foreign exchange (BFE) of North Koreans (1991–2017) based on the method used by Zang (2009, 2013) and Zang and Kim (2019). Then, we present new estimates for the BFE of North Koreans in 2018 (including North Korea’s earnings from cyberattacks). Combining all of the results, we present a new estimate of the current foreign exchange holdings of North Koreans at end-2018. We also discuss how to estimate the foreign exchange holdings of North Koreans in the unofficial sector. Finally, we could present some guidelines to understand the responses from the North Korean authorities on international sanctions as well as North Korea-US dialogues.

Summary

Policy Study KOR Estimating the Early Impact of the Chinese Economic Sanction on North Korea

This paper estimates the early effect of the Chinese economic sanction on North Korea based on the United Nations Security Council resolution 2270 in 2016. Specifically, we examine the change of the Chinese government policies and perceptions on North Korea before and after the fourth DPRK nuclear test, discussing how it led to the Chinese economic sanction. Then we estimate the sanction effect between April and August 2016 using the Chinese custom’s monthly trade statistics since July 2010. The main findings of the paper are summarised as follows.

First, it is observed that the Chinese government changed to some degree its policies and attitudes toward North Korea since the fourth DPRK nuclear test. China agreed with the UN resolution 2270 applying many tough sanction measures to North Korea. And the Chinese government repeatedly emphasised its strong will to realize the measures, announcing specific trade items on which the Chines government would impose restrictions regarding the China-DPRK trade.

Second, it is however also observed that the Chinese economic sanction has clear constraints. The basic direction of the Chinese policies toward Korean peninsular has not changed fundamentally aveb after the fourth DPRK nuclear test. China still tends to see that the US is more threatening in terms of East Asian security environments than North Korea’s nuclear ambition. Indeed China has pursued ‘denuclearisation of North Korea by stabilsation of Korean peninsular’, rather than ‘stabilsation of Korean peninsular by denuclearisation of North Korea’. In this context China has emphasised the US repsonsibilities on the DPRK issues, simultaneous negotiation process of both denuclearisation and peace treaty on the Korean peninsular, so-called DPRK peoples’ lives and its strong resistance against the deployment of THHAD system to the ROK.

Third, the Chinese government announced 25 commodities in HS 10 digits as the specified objects of its economic sanction on North Korea. These items could be aggregated into 20 commodities in HS 8 digits for the purpose of data analysis. Of those 20 commodities, however, 12 commodities had not been traded between China and North Korea at all. It means that the Chines economic sanction could work only for the 40 percent of the announced sanction objects.

Fourth, a variety of econometric tests were carried out in oder to identify whether there were statistically significant changes in the China-DPRK trade since the Chines government announced to implement its sanction measures in March 2016. And the results are ① there were no such changes in terms of total trade between the two countries, ② no such changes in terms of the specified sanction objects in general, ③ no such changes in terms of each of the sanction objects with only one exception: North Korea’s export of Gold asnd Gold Ores. To sum up, data analysis suggests that there was no significant effect of Chinese sanction between April and August 2016.

Summary

Policy Study KOR Lessons from GEMSU and the Way Forward to Korean Social Security Union

This research intends to examine the social and economic consequences of German Unification, and to conduct a comparative analysis to draw general lessons and policy implications for Korea, particularly focusing on the way forward to integration of social security and welfare systems. In the first part of this study, with a review of the literature on German unification in mind, we hope (1) to help achieving a better understanding of the ‘German Economic, Monetary and Social Union’ (GEMSU) with a focus on Social Union, and (2) to generate lessons that are specific enough to be useful, but general enough to be applicable even to a Korean unification process that will differ from the German experience.

We summarize the main findings of our analysis of integration of social security and welfare institutions in the process of German unification, and offer a few careful suggestions for consideration to Korean policy makers and planners of social security integration building programs.

First, in Germany, within a short period of time, an existing and established social and economic system had to be replaced. In the transitory phase, the state owned, centrally planned economy had to be privatized and transformed towards efficiency. To mitigate the side effects, the West German system of social security and welfare had to be expanded to the East. Although this seems obvious, we also find it is necessary to once more warn against the attempt of a too direct application of Germany’s experience to the case of Korea. In addition to historical, social and cultural factors or the fact that the German unification of 1990 took place in a global technological environment that has meanwhile changed significantly, we should also consider a few key peculiarities. These have led to very specific problems and solutions that have little, if any, direct relevance for Korea. This had been discussed in more detail in the text.

Second, two decades after German unification, initial optimistic expectations have made room for more cautious assessments: ‘what had been divided for 45 years might need another 45 years to be completely united, particularly in the case for social union’. For the concluded case of German unification, however, it is very clear that the idea of combining the two systems was just a naive illusion.

Third, the logic of power is not something that everyone likes. But denying it does not make it less valid. Overwhelming West german power was not the only reason for the relatively unquestioned adaptation of their system by the East Germans. Before unification, West Germany had the status of a “yardstick society” for the people of the East Germany(GDR). As of 2015, it is much less obvious that the ROK is playing a similarly dominant role as a yardstick society for North Koreans. It will therefore be not as easy to convince them that the way towards South Korean prosperity is closely connected to the acceptance of the South Korean system.

Fourth, we also compare points of relevance and non-relevance between the German experience with unification in the 1990s and what might occur in Korea. Finally, we briefly assessed the problems that a unified Korea would confront relating to the capital costs of unification, particularly in social security integration.

In the second part of this study, we proposed two research goals. One is examination of short-term social security support policies for the protection of basic needs of the citizens in North Korea immediately after reunification; the other is seeking mid-to long-term diverse policy alternatives on the integration of social security and welfare systems during the socio-economic transitional process in North Korea. Such discussion is based on the assumption that without the reform and transition of the North Korean economy, maintenance of basic livelihood of the citizens of the North who are in ‘leveled-down’ poverty cannot be secured. Under great uncertainty and possibly extreme internal turmoil in the beginning of unification, border-opening and massive emigration might be inevitable. Like it or not, South Korea will have to be prepared for this situation. Major issues discussed in the second part of this study are as follows.

First, instant and complete integration of all kinds of social security and welfare systems is not a prerequisite that has to be unconditionally accepted. This suggests that a hasty construction of the full-scale social security system before people’s understanding of the principles of the capitalist market economy has not formed is never desirable. We should be mindful of the fact that a rapid integration can cause delay in economic and social union. In other words, ‘separate management of social security system’ on a temporary basis is desirable until after the existing state owned enterprises(SOE) in the North are privatized. Because, the unitary integrated social insurance program can be considered at the point in time only when job creation capability and market economy in the North have developed to the level where both employers and workers can contribute to social insurance premium. The most desirable condition for the integration of the social welfare system is after the completion of integration of major macroeconomic systems and they have gone through the transitional process.

Second, emergency aid measures such as basic livelihood security and health protection for the citizens in the North right after unification should be promoted in a comprehensive frame, eschewing selective support.

Third, to prevent confusion brought about by the ‘massive migration from the North to the South expected right after unification, there is an urgent need to set up a two-track policy that induces citizens in the North to voluntarily relinquish from migrating to the South by offering attractive incentives to remain in the North. on one hand and at the same time, consider employing such policy instruments as discriminatory application of social security policy measures. Speedy recovery of the self-supporting economy in the North through such active investments as the tentatively named the ‘New Five-Year Socio-Economic Development Plan of Unified Korea’ and the joint annual plan can reduce the factors that induce the migration to South Korea and the cost for social welfare in North that will be a burden on the South, and also constitutes the precondition of complete integration of both sides.

Fourth, despite the inevitability of separate management in the early stage, long continuation thereof is not desirable since it will cause delay in socio⋅cultural integration as well as bringing about adverse selection, the problematic situation where only workers with high risk ratio will gather in the North. Therefore, for the pursuit of social stabilization, the period of separate management of the social security system should be decided as a certain number of years right after unification and made public announcement.

Lastly, we also estimate what the capital costs of social security union would be under differing circumstances and assumptions. Although unification of North and South Korea will impose a new economic burden such as capital, economic and social cost of unification for a considerable period of time, however, viewed from the angle of benefits, reunification of the country will open a new development possibility and offer an impetus to national socioeconomic development.

Summary

Policy Study KOR Economic Foundation of North-South Korean Integration: Models, Issues and Policy Implications

This report studies conceptual frameworks of inter-Korean economic integration, providing a theoretical background for other related researches each of which has analysed one of the major components of the integration relatively: ① Duol Kim (ed.), A Study of Inter-Korean Economic Integration: A Development Strategy of North Korean Economy, 2012, ② Suk Lee (ed.), A Study of Inter-Korean Economic Integration: Strategies and Policy Issues for Economic Reform & Transition in North Korea, 2012, ③ Hong-Tack Chun (ed.), A Study of Inter-Korean Economic Integration: Temporary Split Operation of North Korean Economy, 2012. To do this we establish three basic models of inter-Korean economic integration, and studies how those models can be applied to actual integration processes. The first model assumes that economic integration between the two Koreas starts in the situation that they are politically unified into one nation, while the second model captures the idea that the gradual economic integration processes themselves eventually lead to inter-Korean political unification. In contrast, the third model considers the possibility that, even when the two Koreas are politically unified into one nation, their economic systems are maintained as separately as before unification due to purely economic reasons. Using those model we investigate the possible integration paths and patterns, discusiing their policy implications from the viewpoint of the ROK economy.

Summary

Research Monograph KOR A Study of Inter-Korean Economic Integration: Strategies and Policy Issues for Economic Reform & Transition in North Korea

This report studies the possible transition process of the DPRK economy to a market economy in terms of Korean unification and North-South Korean economic integration. To do this we review the models and concepts of economic transition that have been developed mostly from the experiences of former Eastern European and Asian socialist economies. The possible transition process of the DPRK economy is discussed on the basis of those models and concepts. Also, we establish ‘the most comprehensive scenario of Korean unification’, transforming it into an imaginary policy environment the ROK economic policy makers will face during the unification process. Then, we carry out a policy game to produce appropriate policy measures to transform the DPRK economy into a market economy and integrate it into the ROK economy. Those policy measures are presented as the final conclusions of this report.

Summary

Research Monograph KOR A Study of Inter-Korean Economic Integration: A Development Strategy of North Korean Economy

If North Korea is to develop its economy without any changes on the rigid political system of today, what policy choices the regime should make and what path it would be on as a result? These questions are precisely what this study attempts to answer.

Several, various studies have discussed so far what efforts the regime needs to take in order to escape its economic slump. However, most of these discussions were developed assuming that the North Korean economy would be integrated by absorption into the South Korean economy after the regime’s collapse. Only a few have been able to present comprehensive answers to this question: if North Korea tries to initiate an economic development strategy with its political entity intact, what type or form of strategy would be implemented? So, it can be said that the attempt itself to answer this question is what makes this study distinctive and significant. From a broader perspective, it is necessary to recognize that it can’t be a plausible approach to seek North Korean economic policy based on the reunification scenario most desired by the one side alone: South Korea, in this case. This is not different from a soccer coach sending out players on the field with a strategy that he planned against an imaginary opponent with no objective evaluation of its ability. Therefore, a proper approach would be to first canvass all possible roads ahead of the North Korean economy and then to think up respective plans for each road so that in any scenario South Korea could turn the situation favorable to itself. In this context is where this study emerges.

The work of analyzing North Korean economic development strategy was implemented with largely three elements under consideration. First, common characteristics of less-developed countries, rather than uniqueness of the North Korean economy, were adopted for review. This was intended to avoid being blinded by North Korea’s current economic conditions or distinctive aspects different from other countries. Instead, this study took the perspective of what policies other countries at a similar income level would generally take in order to pursue their economic development, and with that it examined necessary policies and their subsequent effects thoroughly. Second, the analysis tried to explore relevant issues through empirical basis whenever possible, which means reflecting confirmed key facts through economic development studies as comprehensively as possible, not to mention information on the North Korean economy. Third, the analysis also pondered in what way North Korea’s economic development would move forward and interact with the South Korean economy. The scope of interaction goes beyond the framework of how much aids the South Korean Economy will need to provide to help develop the North Korean economy and it embraces what evolutionary progress the two Koreas will be able to achieve in the process of bilateral exchanges of human and material resources. Key conclusions drawn from the analysis based on above perspectives can be summarized as follows.
What is most important for North Korea to escape current situation and to accomplish economic development is to open its doors. The economic openness primarily means external openness, but without internal openness working in tandem, the outcome of economic openness would end up with no substantial effects. Therefore, the concept of openness needs to be understood to include internal openness. The key part in internal openness is to enable free exchanges of human and material resources without geological or sectoral limitations. In North Korea today, simply by allowing rural population with free access to urban area, its productivity would soar significantly. Furthermore, expanding transportation system would also heighten the transfer of goods and resources, subsequently producing huge meaningful effects. If this continues and triggers more active transfer of resources through financial development, the road ahead would be perfectly bright. Without all these supportive outcomes of internal openness, seeking external openness, commonly through a special zone, would have only very limited effects.
When the North Korean economy initiates external openness in tandem with internal openness, the size of North Korea’s trade will expectedly grow remarkably in the medium- and long-term periods. According to the estimation based on the gravity model, it is expected that North Korea’s trade would rise five times and its trade volume with South Korea would also expand at a similar rate. Reflecting on the growth experience of South Korea since the 1960s and the rise of China and Vietnam, there is no doubt that a rise in trade will not only have effects of upgrading public welfare, but also serve as a driving force that enables a sustainable economic growth.
Through this economic openness, products that North Korea could trade with the world as well as its neighboring countries would be labor-intensive light-industry goods. This means that North Korea is truly on the path to industrialization. Throughout the long history of the world economy, almost no country has maintained a sustainable economic growth without industrialization. It has been often argued that it would be better to develop the North Korean economy by using its underground resources or through agriculture or to pursue an industrial division of labor between South and North Koreas; manufacturing-agriculture or manufacturing-mining. However, this argument is hardly realistic.

Unless the trade is made by the South Korean government through supporting the North Korean economy under highly constrained conditions, it is not realistic at all to assume that North Korea, as a member of the international community, would have any comparative advantage in the global market for agricultural or mining industries, when it tries to participate in production and sales. The very comparative edge that North Korea could cling to is high-quality low-income labors, and they are the fundamental factor that North Korean should use to consolidate its economic development.

It is very clear that the North Korean economy in this scenario will be able to achieve higher income growth. In particular, with simultaneous assistance from the South Korean economy, North Korea will be able to achieve a much faster and stable growth. Of course, it will still take quite some time since the income gap between the two Koreas is extremely huge for now. Efforts to prepare for such difference will be needed.

Admittedly, some arguments in this study are not well-grounded for the reason of limited resources and data. Other arguments drawn from highly limited information are mostly not very new, since many of them have failed to reach beyond existing ones. Nevertheless, this study is significant enough in the sense that it sketched out a framework that seeks ways to develop the North Korean economy through the perspective of economic development, not through the strategy for economic integration in the post-unification era. It is hoped that this study will help trigger more active discussions, and therefore make some meaningful contributions to putting North Korea’s economy, society and political system on the track of a normal country.

Summary

Working Paper Repression and Punishment in North Korea: Survey Evidence of Prison Camp Experiences

The penal system has played a central role in the North Korean government’s response to the country’s profound economic and social changes. Two refugee surveys-one conducted in China, one in South Korea-document its changing role. The regime disproportionately targets politically suspect groups, particularly those involved in marketoriented economic activities. Levels of violence and deprivation do not appear to differ substantially between the infamous political prison camps, penitentiaries for felons, and labor camps used to incarcerate individuals for misdemeanors, including economic crimes. Substantial numbers of those incarcerated report experiencing deprivation with respect to food as well as public executions and other forms of violence. This repression appears to work; despite substantial cynicism about the North Korean system, refugees do not report signs of collective action aimed at confronting the regime.

Such a system may also reflect ulterior motives. High levels of discretion with respect to arrest and sentencing and very high costs of detention, arrest and incarceration encourage bribery; the more arbitrary and painful the experience with the penal system, the easier it is for officials to extort money for avoiding it. These characteristics not only promote regime maintenance through intimidation, but may facilitate predatory corruption as well.

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