KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR Empirical Analysis of Political and Economic Relations between the Korean Peninsula and Surrounding Countries: Focusing on Country Relations Index Using Big Data

Recently, tensions between the US and China have been escalating across various sectors, concurrently with rapid shifts in the international arena due to conflicts such as the Russia-Ukraine war and the Israel-Hamas conflict. The Korean Peninsula is also entwined in the fabric of these dynamics. The Taiwan issue, one facet of the US-China rivalry, is linked to the strategic presence of US forces in South Korea, and semiconductors, South Korea's key industry, are among the most affected by the intensifying tensions between the US and China. North Korea's economic and military ties with Russia, as evidenced by North Korea's supply of conventional weapons and materials to Russia in defiance of international sanctions, are strengthening. Given the complex and grave political and economic environment surrounding the peninsula, evidence-based policymaking grounded in objective data becomes indispensable.

This study utilizes Google's Global Database of Events, Language, and Tone (GDELT) to analyze country relations around the Korean Peninsula. The data provided by GDELT quantitatively measures qualitative variables of inter-country relationships, utilizing machine learning and other state-of-the-art technologies to extend traditional event data methodologies to a vast collection of news articles gathered worldwide by Google. However, despite its strength as one of the most comprehensive and objective event datasets available, it is important to acknowledge and address the limitations such as the reliability and scope of news sources and potential errors in event identification and classification.

Using trade data and GDELT, this study examines the economic and political dynamics between the US and China for time-series econometric analysis―what drives the US-China conflict, which country triggers cooperation and conflict, how the other country responds, and whether these outcomes vary over time. This analysis reveals that before President Xi Jinping's tenure, US-China relations were primarily influenced by trade, with a notable positive correlation between increased trade and more favorable relations. During this period, their interactions appeared to have no significant impact on each other. However, since the beginning of Xi's presidency, China has actively responded to US diplomatic protests and corrective measures. Empirical analysis supports this move, which aligns with China's strategy to assert itself as a global power through expanded political and military influence, underpinned by its economic growth. The shift towards mutual diplomatic and security issues over economic variables in influencing US-China relations indicates that future tensions are likely to arise from areas such as Taiwan rather than trade.

The study further explores inter-Korean relations and the dynamics among countries surrounding the Korean Peninsula, investigating how the US-China power dynamic, bilateral relations, and interactions among neighboring countries influence the two Koreas. Findings indicate that the US-China power dynamic and relations have a significant correlation with South and North Korea's external relations with these superpowers but exert minimal impact on the peninsula's international relations. This suggests that the US-China relationship is a major factor in shaping the external relations of both Koreas without directly affecting the internal tension or peace. However, it is important to acknowledge that the recent escalation in US-China tensions, if it has fundamentally changed the geopolitical context surrounding the Korean Peninsula, might render predictions based on historical data incomplete.

This study showcases an analysis of inter-state relations using quantified objective data. The data, methodology, and findings presented are expected to serve as reference materials for formulating future foreign policies.

Summary

Research Monograph KOR Future North Korea Policies and Inter-Korean Economic Cooperation

This report provides a comprehensive and systematic analysis of inter-Korean economic cooperation thus far, with the aim of deriving implications for future endeavors should cooperation resume. To achieve this goal, the report will examine four main topics: South Korean policies toward North Korea, relevant concepts and theories, economic history, quantitative analyses, and public opinion. Each of these topics will be discussed individually and then connected to facilitate a comprehensive discussion.

Firstly, the report will examine how inter-Korean cooperation is related to and derived from South Korea's unification and North Korea policies, and how its concept is defined as internal trade between ethnic groups. A theoretical analysis is conducted of how its objectives, systems, forms, and strategies are designed accordingly. In addition, a summary is presented of South Korea's two different positions on North Korea from the perspectives of conservatives and progressives, and a discussion on how inter-Korean cooperation is reflected in each perspective, how controversies and debates surrounding it are formed, and what diverse arguments exist using economic concepts and techniques. Based on this, the practical development process of inter-Korean cooperation that started in the late 1980s or early 1990s is discussed.

The policies and attitudes of South and North Korea toward inter-Korean cooperation is analyzed as well as what the progress and forms have been, and what influence was exerted between North and South Korea in the process. Moreover, the so-called “peace effect of inter-Korean cooperation” and the “principle of separation of economy and politics” in the context of inter-Korean relations was empirically analyzed. Based on these concepts, historical analysis, and empirical analysis, this report also analyzes what South Korean citizen’ thoughts are on what desirable inter-Korean cooperation would be through structured surveys. These surveys concentrate on not only on the past and present, but also on the expectations and aspirations of South Korean citizens for future cooperation, as well as their perceptions on feasibility in relation to various environmental factors. The aim is to obtain more insights into how the inter-Korean cooperation system should be designed in the future with focus placed on the future rather than the past.

Summary

Research Monograph KOR The Impact of DPRK Sanctions and North Korea’s Economic Future

This study aims to provide an understanding of the significance and impact of the stronger sanctions than were enforced against North Korea from 2016. To that end, it first discusses the concept of DPRK sanctions. The discussion begins with a comparison of past and present sanctions against North Korea, and then explores the US’　perspective　and the commonalities and differences between the present DPRK sanctions and sanctions against other nations, such as Iran. This is followed by an analysis of the economic impact on North Korea from 2016-17 to the present. Specifically, the North Korean economy was divided into trade, industry, foreign exchange, markets and the informal sector, and food and agriculture, and an analysis was conducted on how each area was affected and to what extent. While the analysis is based on empirical data, it also looks into the qualitative information observed from the North Korean economy. Lastly, this study examines the economic repercussions of sanctions in relation to the future of the North Korean economy. By employing new perspectives and data to analyze the qualitative, not quantitative, impact of sanctions on trade, which is tied to North Korea's economic growth, it discusses the growth trajectory of North Korea when sanctions are maintained and when they are lifted.

Summary

Policy Study KOR A Study on the Determinants of Food Prices in North Korea

This study provides various analyses related to food prices in North Korea. I examine in detail the factors that determine the price of food in North Korea, including supply factors such as internal food production and imports, demand factors such as the income level of North Korea, food distribution and market activities, and the price control policy of the North Korean authorities. In addition to analyzing data, I employ qualitative methodology such as interviews with North Korean defectors to examine the contents related to food prices in North Korea. This study finds that North Korea's grain import prices significantly affected North Korean grain market prices during the period 2014-2019 when North Korean prices were stable. Through this, it raises the possibility that North Korea's grain market price may not accurately reflect the North's food situation. Even if the food situation inside North Korea worsened, market prices could have been stabilized due to import prices. In this regard, it is emphasized that food aid policies for North Korea need to be established based on various data, such as internal crop production, imports, North Korean income levels, and rations, in addition to market prices.

Summary

Policy Study KOR Long-term Trends in North Korea’s Income and Welfare Estimated Through New Data

In the mid- to late 1990s, the North Korean economy fell into a deep recession―this is a fact that is undisputed even by experts. However, upon entering the recovery period in the 2000s, two different views have formed on the issue of growth. According to the Bank of Korea’s GDP estimates, North Korea’s growth has been far from vigorous, and is moderate at best. Moreover, recent economic trends in North Korea appear to be following in line with those in late 1990s when the country was in economic crisis, according to the Bank of Korea. On the other hand, numerous indicators related to living standards, such as surveys on the nutritional status and diets of North Korean children conducted by international organizations, indirectly suggest that the economy has improved significantly since then. The testimonies and articles of North Korean defectors and specialized media have also attested that there has been considerable economic progress since the late-2000s and Kim Jong Un’s ascension. As a result, opinions over North Korea's economic trends since the 2000s have become divided. Accordingly, based on a comparison of these differing views, this study presents a research question. Specifically, why are there discrepancies in the North Korean economic trends estimated through production (income) and those estimated through people’s livelihood.

Firstly, this study used the physical indicator method to analyze production and welfare indicators. For this, reliable physical indicators that can be used to construct panel data were selected and divided into indices for industry, health and nutritional status, and society. Each index was used to estimate the trends in North Korea's per capita GDP, and the trends were analyzed using a fixed-effect panel model that reflects country-specific characteristics. The trends in production- and welfare-based per capita GDP estimates were then compared for any inconsistencies. Satellite data on North Korea’s night lights was also deployed to obtain additional estimates. This new physical indicator is more objective than existing indicators, and can be used to verify the economic performance of each local area in North Korea.

According to the analysis, North Korea’s economic trends estimated through industrial indicators, such as energy, electricity, and oil, exhibit neither a major recovery nor any improvement since the 2000s. This result is similar to the Bank of Korea’s estimates which are based on production indicators. However, the per capita GDP trends estimated through welfare indicators, such as health and nutritional status, clearly show a degree of recovery after the Arduous March (great famine). Therefore, it can be determined that a gap does indeed exist and that opinions can differ depending on which indicator is used. Additionally, the trends estimated using satellite data on night lights also clearly point to a recovery after the 2000s, echoing the trends based on welfare indicators.

So, what are the reasons behind this gap? This study presents the possibility that internal factors, such as the rise of jangmadangs (informal markets), and external factors, such as foreign trade and investment, may be the cause. Indeed, when North Korea’s economic trends are examined by region using satellite data on night lights, it is found that the vitalization of external economic activities (trade with China and South Korea, investments in Mt. Geumgang tours and Kaesong industrial complex, etc.) is closely tied to the economic activities of local areas.

The following implications can be derived from the above results. Depending on what the recovery conditions are found to be in each sector of North Korea, priority issues can change when inter-Korean economic cooperation resumes. For example, the energy sector could serve as an ideal agenda for cooperation since its recovery has been the slowest. Also, although living standards are believed to have improved, the level of welfare is still inferior to that in other countries. Accordingly, given that the livelihoods of North Koreans are firmly connected to the expansion of jangmadangs, market-oriented measures should be considered.

A meaningful achievement of this study was the use of satellite data on night lights in the analysis of North Korea’s economic performance by region. Indeed, the results could be used to measure local economic conditions to establish future North Korea policies. The findings also bear significant policy implications as they provide perspective on regional approach, for example, regions that need humanitarian assistance, among others.

Summary

Research Monograph KOR Measures for Inter-Korean Economic Cooperation and Collaboration with North Korea to Incorporate North Korea into the Global Economy

This study examines the significance and implications of North Korea's full participation in the global economy from the perspective of the South Korean economy. It begins with an objective assessment of how today’s North Korean economy differs from the general market economy, or more specifically, the economic systems of the many other countries engaged in the global economy. It then explores the concept, contents and process of North Korea's participation and presents relevant case studies on and outcomes of other countries in similar situations―thus, it can be a meaningful reference. Also, based on the above findings, this study attempts to examine North Korea's development potential in regard to its participation in the global economy.

There are four theses that are independent but are also closely interconnected. Based on the definition of an ‘economically normal country’ derived from individual national economies that comprise today’s world economy, Chapter 2 presents a conceptual understanding of North Korea's participation while Chapter 3 discusses how the current North Korean economy differs from ‘economically normal’ countries based on various empirical statistical data. Chapter 4 examines past case studies on this unique phenomena which emerges in underdeveloped countries during the participation process, and Chapter 5 evaluates the growth potential of the North Korean economy in terms of participating in the global economy through production factors (capital, labor, productivity, etc.) and comparative advantage. Lastly, Chapter 6 compiles all of the results and findings from the four theses and provides a separate discussion on the implications for South Korea’s policies on North Korea and inter-Korean economic cooperation in relation to North Korea's earnest participation in the global economy. These policy discussions were formed through the collective debates between the contributors of this study, and shall be regarded as the final conclusion.

Summary

Policy Study KOR Assessment of North Korea’s Current Economic Policies and Outlook

Dominating not only the actions of economic players but also the daily lives of citizens, economic policies play a fundamental role in the shaping of North Korea as we know it. Needless to say, analyzing the progress and significance of these policies is imperative in understanding the “enigmatic economy.” Accordingly, this paper examines the direct and indirect economic impact of the North’s major policy trends and measures upon entering the 21st century.

The keynote address on economic policy was delivered every 5-6 years during the 2000s. The main objective of the North Korean government, above all else, was to restore the collapsed planning function of the economy by resolving the disparity between official and market prices. Following the implementation of subsequent measures, however, market prices and the North Korean won rapidly reverted back to their original high levels, even exceeding them in some cases. In fact, the price gap widened further and marketization gained speed. This, in turn, has exacerbated the dollarization and yuanization of the North Korean market, presenting a phenomenon resembling that of the ‘informalization’ seen in other socialist nations.

To confirm, a survey was conducted on 1,010 North Koreans residing in South Korea. The survey results reveal that 52.1% of household income was generated from informal sectors. Specifically, the share of household income from informal sectors increased from 43.4% before 2005 to 63.5% after 2011, presenting statistical significance; the reasons as to why have changed from “survival” to “consumption and business purposes.”The diminishing role of the public sector can be conjectured from figures related to the people’s daily lives, including the dependency level for food items and consumer goods and share of disposed products as a result of national planning policies. It was also found that informalization is evolving into dollarization and yuanization.

Finally, a logistics regression analysis, using the survey results, examined the characteristics of people who claimed to be influenced by economic policies. Accordingly, the results show that those with a larger share of informal income (52%) than formal income and those who actually experienced the 2009 Currency Reform were more susceptible. Meanwhile, the level of education, participation in government, type of job, and income levels were found not to have much relevance. This implies that, the more people are exposed to informal sectors, the more they are influenced by economic policies.

Despite the underlying limitations, this paper is significant in several aspects. Firstly, while previous studies only center on specific periods and policies, an diachronic investigation, focusing on the 2000s, was conducted in order to understand the overall impact of and trends in policy. This is particularly meaningful as the government moved back and forth, from permitting then banning market activities and vice versa, in response to the rapidly expanding informal sector from the 2000s, following the“Arduous March” (great famine and economic crisis 1994-1998). Secondly, efforts were made to examine the ripple effects from the North’s economic policies and to verify the ‘informalization hypothesis’ via a survey of 1,010 respondents. Notably, the specimen pool included those who had first-hand experience of the currency reform to see whether the changes indeed correlate with informalization. And thirdly, this paper explored the differing perceptions of economic players with regards to economic policy and how these policies have affected North Korea’s current economic landscape via a cross-checking of existing studies, North Korean literature and survey results.

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

KDI Policy Forum Path to Inter-Korean Economic Integration: Gradual Merger Within Temporary Separation

□ Broadly speaking, the unification of the Korean Peninsula can unfold in either rapid or gradual scenarios. The rapid scenario may be further divided into two tracks: immediate and simultaneous political and economic unification or fast political unification coupled with gradual economic unification.

- The latter track would have the North Korean and South Korean economies remaining apart for a designated time period after political unification. During this temporary arrangement, the North Korean economy would be managed as a special zone and two different economic systems would continue to coexist on the peninsula.

□ The objective of this paper is to explore methods of running the economy in North Korea and of gradually integrating the economies of the North and South during a designated time period. It assumes both sides have agreed to rapid political unification but opted for a moderate pace in merging their economies.

- The operation and integration of the economic system will naturally span various areas, including the labor market, currency and finance, health and medical care, and trade. However, in this paper, the focus will be placed on the labor market, which will be a key sector while the two economies remain separated, and social security areas such as employment insurance, pension, and public assistance, which will be important in terms of political and social stability and the cost of unification.

□ As for the labor market, operating the North Korean economy as a separate special zone will require phased entry of its residents into the South for work. Simultaneously a market economy system should be introduced into the labor market with an employment safety net.

- Mechanisms for determining price (wages) through free supply and demand must be installed in the labor market and the full employment policy must be abolished.

- Nevertheless, it will be necessary to create an employment safety net for the unemployed and to provide public assistance for those who are unable to work.

□ The basic South Korean pension and public assistance systems should be assimilated in North Korea as quickly as possible. However, considering the gap in economic capacity and wages between South and North, North Korean pension and public assistance systems should be operated differently from the South Korean system. In other words, while the pension payment formula should be the same for South and North Korea, the average income level used to calculate payouts should differ temporarily between the two sides. The vested rights that North Koreans have accrued from their subscription period should be preserved, but other preferential benefits (such as pension for services rendered) should not be recognized.

- Pension financing and bookkeeping in South and North Korea should be split, and any deficit in the pension financing for the North Korean zone should be covered by fiscal support from the South.

□ During the first two to three years after a special economic zone is established in North Korea, it is particularly important to obtain information about North Korean economic and social statistics, accounting, and the administrative organizations in charge of these.

- One priority is collecting information on related areas in order to design a system for split operation of the systems for pension, public assistance, and the employment safety net.

- To accomplish this, a fact-finding team comprised of government and civilian experts should be dispatched and joint surveys should be conducted on each area of concern.

□ There are also other important elements that are only briefly touched upon or are not covered at all in this paper.

- This paper only offers a broad outline about the unification scenario under which the “North Korean Special Administrative Zone” would be established and governed.

- An estimate of the scale of financing needed for gradual integration of the employment safety net, pension, and public assistance is also needed, but because of the limitations of research sources and the period of research, this question will have to be deferred for subsequent research.

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