■ Korea's semiconductor exports have been heavily concentrated in the highly volatile memory sector, making the industry more vulnerable to downturns. - As of 2022, the proportion of the highly volatile memory semiconductor sector within Korea's semiconductor market was more than twice that of the global market. This discrepancy may have contributed to the 9.5%p decline in semiconductor exports during Q1. - Despite the growing investment in non-memory semiconductors since 2018, Korea's semiconductor industry continues to exhibit a significant reliance on the memory sector, leading to persistently high levels of volatility in semiconductor exports. ■ The trajectory of the semiconductor industry is shrouded in uncertainty, but certain indicators suggest a potential trough might occur between Q2 and Q3. - The latest replacement cycles of semiconductor-related products, coupled with the trends in production and inventory cycles, hint that the semiconductor industry may be approaching a trough. - A deceleration in the semiconductor economy is likely to exert a negative impact not only on exports but also on domestic demand via income channels. This slowdown may lead to deteriorating tax revenue conditions in 2023-2024. - However, given the relatively modest employment multiplier effect of the semiconductor industry, the repercussions on the labor market are expected to be minimal. ■ Elevating the share of the non-memory sector could contribute to reducing economic fluctuations. In addition, concerted efforts are needed to mitigate the spillover effect of intensifying geopolitical risks in recent times. - Acknowledging the growing macroeconomic significance of the semiconductor industry, the recent diversification towards increasing the investment in the non-memory sector can be viewed positively from a standpoint of economic stability. - Conversely, the semiconductor industry's high susceptibility to geopolitical risks, particularly in the context of the escalating US-China conflict, underscores the critical need to strengthen industrial, trade, and diplomatic leadership strategies to mitigate uncertainties in associated sectors.

This paper examines foreign direct investment (FDI) in North Korea (DPRK). Investment attraction is a matter of paramount importance for the past, present, future of the North Korean economy. Formerly, the North Korean regime regarded FDI as a means to offset its trade deficit. Currently, FDI is used as an indicator to gauge the effects of sanctions on the DPRK, given multiple sanctions imposed against it, including a ban on investment. First and foremost, investment from abroad is the most formidable tool for the North Korean economy to take off. Against this backdrop, this study looks into FDI in North Korea with macro and microscopic perspectives. Macroscopically, a comparative analysis is made between total foreign investment in DPRK and foreign investment by country in DPRK. Microscopically, an analysis of FDI trends is conducted by reconstructing corporate and industrial statistics. The macro-and micro-analyses have yielded the following seven findings. First, the trend analysis of total foreign direct investment in DPRK based on UNCTA statistics revealed that FDI began to increase in 2004 and fluctuated multiple times, showing large inflows in 2008 and 2014. Due to the insignificant amounts of FDI, initially, legal and institutional changes alone and a one-off corporate or national project, later on, were sufficient to rapidly increase foreign investment into the country. Second, as for FDI by country in DPRK, this study examines China, Russia, and OECD members (37 countries), which accounted for 91% of total FDI in DPRK between 2007 and 2017. According to the analysis, China has always been a strong buttress for FDI in North Korea. It also shows that total FDI increased as Germany and Russia increased their contribution in 2008 and 2009 and 2011 and 2012. It also shows that total FDI increased as Germany in 2008 and 2009 and Russia in 2011 and 2012 increased their investment abroad. Third, this study examines corporate and industrial investment in DPRK by compiling multiple previous studies and reconstructing the data. A total of 372 corporate samples from 2000 to 2015 were put together, with an estimated total investment amount of $3.5 billion and an average investment per enterprise of $14.67 million. Fourth, an analysis of the motives of Chinese companies to invest in DPRK shows that despite risks associated with property rights, the short-term prospects of profitability seem to attract them to North Korea. Incentives at work include growth of DPRK's informal sectors, regulatory evasion and cost savings, securing monopoly rights, and more. Fifth, the reconstructed data is used to understand the industrial features. It shows that the mining industry takes up a large portion of China's FDI in North Korea in terms of the number and amount of investment cases, accounting for 37% of the number of cases and 50% of the total amount. Per the analysis, five out of the top ten companies have invested in the mining sector, indicating that the mining industry led the investment in North Korea during the concerned period. Sixth, this study analyzes the ripple effects of changing investment patterns using the input-output table and finds that China's mining-centered FDI in DPRK produced some impact but not much greater than its investment in light and heavy industries. Provided that FDI shifted from mining to light industry, the effect would have increased by 27% for the same amount. Seventh, FDI stock from China took up 57% of total foreign investment in North Korea, and China's FDI flows reached an annual average of 46%. These figures are similar to corporate data based on the Open Source Center (OSC), which indicates investment by Chinese companies accounted for 58%; however, the number rises to 76% if it excludes those whose country of incorporation is unknown. To sum up, this study examines country breakdowns of FDI in North Korea using mirror statistics to explain what caused trends shown in the data. Moreover, the analysis applies a micro perspective to complement macro data. By putting together data of 372 Chinese enterprises investing in North Korea, it could identify trends by industry and estimate the ripple effects of their investments. Yet this inquiry carries more significance in that analyzing and investigating available data help get ready for when the door to North Korea for foreign investment opens up. In this way, weak points of accessible data sets can be found together with ways to make up for such shortcomings. Above all, it is meaningful to discuss basic statistics, as the process may shed light on the right direction for FDI policy.

■ Despite the recovery in the manufacturing industry, the Korean economy remains subdued led by the service industry due to the rapid domestic resurgence of Covid-19. ○ The manufacturing industry is sustaining its recovery owed to the continued fast growth in durable goods consumption, equipment investment, and goods exports. - Average exports per workday continue to accelerate while machinery equipment investment maintains high growth. - The cyclical component of the leading composite index is on the rise and semiconductor-related indicators are sustaining favorable trends, suggesting that the manufacturing industry is likely to continue improving. ○ However, the sluggishness in the service industry appears to be worsening since mid-November due to the nationwide resurgence of Covid-19 and tighter quarantine measures. - The CCSI turned to a steep decline from the continued upward trend, and high-contact businesses such as accommodation and food services continued to shrink rapidly. - In December, credit card sales are expected to drop sharply due to the ramp-up of social distancing to level 2.5 in the capital area.

In the study of the North Korean economy, industrial and business activities still remain uncharted territory. They are the most basic components of an economy, yet the scarcity of information makes those in North Korea almost impossible to understand from the outside world. Today, the general perception is that North Korea’s industrial and business activities have completely changed from those of past socialist economies. In fact, rather than central plans, capitalist factors such as markets and profit are becoming the daily standards, and North Korea’s industry and business activities are by no means exceptions to these so-called changes and economic reforms. To understand the present status and future direction of the North Korean economy, it is important to grasp how industry is managed and business activities are conducted. Against this backdrop, we have invited the leading expert in the field, Dr. Seogki Lee, Senior Research Fellow at the Korea Institute for Industrial Economics and Trade (KIET). Dr. Lee has pursued the goal to better understand North Korea through research and observations of its industry and business activities.   ♦ Date and Venue: KDI Seminar Room, July 14, 2020 ♦ Interviewer: Lee, Suk (Senior Fellow at KDI) ♦ Interviewee: Lee, Seogki (Senior Research Fellow at KIET)    Industries and Enterprises of North Korea: Facts, Concepts, and Trends In today’s , we would like to discuss North Korea’s industries and enterprises. From the outside world, these areas are the most basic yet most unknown aspects of the North Korean economy. Despite serving as both the basis and core of the economy, the lack of data has made discussing any future cooperation with and incorporation of North Korea into the international community very difficult. To further our understanding, we have invited world-leading expert Dr. Seogki Lee from the Korea Institute for Industrial Economics and Trade (KIET) to share his thoughts. Dr. Lee has dedicated the last 30 years of his career to the study of North Korean industries and enterprises and so, I firmly believe that we will have much to learn from today’s Dialogue. Our discussion will be divided into four major time points with the 1990s as the base year. First, we will examine the basic forms and concepts of a typical industry and enterprise model in a socialist economy prior to the 1990s. Second, we will discuss the substantial changes North Korea’s industries and enterprises have undergone, particularly following the economic crises in the 1990s. Third, we will explore the industrial and entrepreneurial landscape following the economic crises in the 2000s. Finally, we will learn about the current issues faced by the North’s industries and enterprises, and present suggestions on how research can be further encouraged in this field. The Industrial and Entrepreneurial Landscape Before the 1990s Lee, Suk Q. Let’s open our discussion with the state of North Korea’s industries and enterprises before the 1990s. It is widely known that until this period, North Korea maintained the basic components of a socialist economy, albeit with some deviations. This is considered a critical point as it serves as the foundation for understanding the subsequent changes and activities. Could you define the basic concepts of North Korea’s industries and enterprises, and provide an outline of the economic conditions during this time? Lee, Seogki North Korea was among the few in Asia to achieve socialist industrialization, and reach a relatively advanced stage. Above all, the initial conditions in North Korea were more favorable for industrialization in comparison to South Korea. During Japanese colonial rule, the South was mainly used for plundering rice and cotton, while the North was readied for Japan’s entry into Eurasia, equipping it with basic industries such as electricity, railway, chemical, and steel, among others. Roughly 70% of South Korea’s electricity was acquired from its Northern counterpart. The division of the Korean Peninsula, however, suspended the supply which, in turn, ramped up the availability of electricity in North Korea. The surplus was channeled to the military (for metal and machinery), agriculture and the light industries. This forged a structure that produced consumer goods and food which would then generate more labor. At the same time, South Korea had only begun to build power stations and establish key industries. As I said, in many aspects, North Korea had a more advantageous start. Through socialist trade, it was able to procure crude oil and rubber–which were not produced internally–on favorable terms. Trade between socialist countries was conducted based on “friendly prices” reached through negotiations, which was a special price that was much lower than the market price. In this manner, North Korea imported crude oil from the former Soviet Union and exported its domestic-made oil to other countries at a higher price. It was also able to sell its domesticmade machinery through socialist trade, which, in truth, was closer to aid than trade as the products were unmarketable due to their absolute lack of global competitiveness.   "The socialist system functioned well at the outset, with production and investment being generated regardless of market demand. Even when efficiency is set aside, North Korea achieved a fairly high level of industrialization by the 1970s." The socialist system functioned well at the outset, with production and investment being generated regardless of market demand. Even when efficiency is set aside, North Korea achieved a fairly high level of industrialization by the 1970s. Indeed, despite a lagging light industry and service industry similar to most socialist countries, the energy sector (electricity, coal, etc.), and capital goods industry including steel, metal, raw materials, chemicals, and machinery, began gaining momentum. This new drive eventually extended to the light industry and agriculture consequently creating a single cyclical structure that encompassed the entirety of industry. North Korea’s industrial development is not unique and can be observed in all socialist states, particularly in the former Soviet Union where it was first established. The Soviet Union aimed to create a special type of economic system that would outlast the capitalist system. Hence, it sought to create a closed but self-sufficient system that could support itself when beleaguered by capitalist foes. This was the foundation for the industrial development that was implanted in former socialist countries such as those in Eastern Europe, China, and North Korea. However, North Korea sought an even higher level of inward-oriented industrialization. Given the unique situations of a divided peninsula, Kim Il-sung explicitly ordered the creation of an industrial structure capable of producing essential goods with only local resources. This applied to all production of goods with the exception of some that required raw materials that could not be sourced domestically. For example, industries used water and coal to generate electricity, and the electricity and iron ore sectors worked together to produce metal materials for the production of machinery. At the same time, the coal and electricity sectors were combined into the coal chemistry sector which produced chemical materials for other industries. And, this self-sustaining form of industrial development was complemented by the essential resources imported via socialist trade.   "The inward-oriented industrialization strategy, called “Building a self-reliant national economy,” was considerably volatile until the 1970s." To maintain the workings of such a system, the production of basic raw materials such as coal and iron ore must increase much faster than the GDP. After peaking in the early 1970s, North Korea’s labor force began to shrink from the latter half of the decade. Subsequently, entering the early 1980s, the economy was faced with a situation where further growth was difficult, and with the continued stagnation, it began to deteriorate from the 1990s. Thank you for your explanation. In the past, North Korea pursued a Soviet-style socialist economy, and it seems that the industrial movement was very different from that of a market economy. I am curious as to how the industrial sector under a general socialist economy worked at the time, and whether it was thoroughly planned during the promotion of industry. A closer look at the overall policies shows that North Korea has consistently pursued the parallel development of its military and economy. In order to facilitate our understanding of the early development and general trends of North Korea’s industries, could you explain how that has been realized in the industrial sector? How is the sector composed, and how has it been supported through policy? The inward-oriented industrialization strategy, called “Building a self-reliant national economy,” was considerably volatile until the 1970s. In the mid- to late 1970s, there was introspection that the existing economic growth strategy would be insufficient, and hence, large-scale loans were taken out from the West to supplement the coal chemical industry with petrochemicals. The original plan was to build a new economy with the funds from the West and boost economic growth to pay off the foreign debt. However, this plan was completely stymied by the oil shock. In the 1980s, the Joint Venture Act was enacted, and economic revival was sought once more using foreign capital. In the earlier days, pro- Pyongyang Korean Japanese entrepreneurs who sympathized with the North invested mostly to show their patriotism and as a result, substantial investments and outcomes were gained. However, this also failed due to the excessive intervention and exploitative burdens imposed on these pro- Pyongyang companies by the regime as they began to reap the profits. Eventually, the companies withdrew from the North, ultimately sabotaging its economic revival strategy. The biggest misconception of the North Korean authorities was the belief that all profits belonged to them rather than sharing with the market players. North Korea’s industrial policy is very straightforward. That is, based on socialist principles, the capital goods sector must grow first for the consumer goods sector to expand in the long run. The pursuit of the parallel development of the military and economy was laid on top. Following the Soviet method, North Korea made huge investments in heavy industries while minimizing those in agriculture, the light industry, and consumer goods. Fiscal investment was concentrated in the heavy and chemical industry which is connected to the military industry. The standard of living was consistently very low in the late 1970s to the 1980s even as the economy marked record-high growth. This was because investments in the heavy industries did not have a trickle-down effect on the light industries. By the late 1980s, conditions further deteriorated to the point where existing practices could not continue any further. North Korea had managed its economy in a simple and direct manner. For example, if the military made plans to build more tanks, another steel mill or blast furnace was built within the existing mill in order to procure the scarce metal. This approach worked well in the 1960s-1970s, however, as the efficiency of capital gradually declined, it was no longer possible to carry out business as usual. In another example, construction projects to build large-scale chemical factories were never completed resulting in a loss of billions of dollars. One case in particular was the Sunchon Chemical Vinylon Complex in the 1980s. Once a factory project is launched according to the plan, it must be completed with the intent that factories are put into operation to manufacture goods in order to avoid losses. Yet, in many cases, projects were suspended, and even when they were completed, production did not meet the goals.   "North Korea’s industrial policy is very straightforward. That is, based on socialist principles, the capital goods sector must grow first for the consumer goods sector to expand in the long run." This vicious cycle continued until the late-1980s when the focus of economic policy shifted. The regime began to strengthen its economic policies by setting far-reaching goals and plans, and promoting their importance. When these virtually impossible goals were not met, Kim Jong-Il began to use the term, “Speed Battle” which refers to the early use of capital (human, materials, etc.) as investment for the future. Naturally, short-term results were achieved, and this became Kim Jong-Il's brightest achievement and also his political foundation. However, the growth was short-lived, and North Korea had to face a much longer adjustment period. By the late 1980s to early 1990s, the damage done to the North Korean economy was almost irrecoverable with the overall economy crippled by the fall of socialist states, floods, and the death of Kim Il-sung, the leader Supreme. For more, please refer to the attached file.

One of the most important variables in the study of the North Korean economy is market prices and foreign exchange rates. This is because of the assumption that the two variables immediately reflect the status and trends of the North Korean economy. In fact, many North Korean economic studies use observations on these variables as important analysis data. Despite such reality, however, market price and the foreign exchange rate are among the trickiest of all macroeconomic variables related to the economy. Researchers have yet to agree as to how the variables should be measured, what kind of methods should be used to analyze the measures, and how the outcomes should be interpreted. In an attempt to find an answer to these questions, we invited Dr. Ji Young Choi, Research Fellow at the Korea Institute for National Unification (KINU). Dr. Choi has long studied prices and foreign exchange rates in North Korea. She is recognized as one of the most prominent experts in the area not only in Korea but also abroad   ♦ Date and Venue: The Global Knowledge Exchange and Development Center, June 26, 2020 ♦ Interviewer: Lee, Suk (Senior Fellow at KDI) ♦ Interviewee: Choi, Ji Young (Research Fellow at KINU)    The Concept of Price and Exchange Rate in North Korea The KDI Office of North Korean Economic Studies publishes a series of articles under the title of Dialogue on diverse topics related to the North Korean economy. These articles are based on expert interviews. For this month, we have invited Dr. Choi, Ji Young, Research Fellow at the Korea Institute for National Unification. Lee, Suk Q. The variables that economists outside North Korea use most often when analyzing the North Korean economy are market prices and foreign exchange rates. They do so because the two variables well show the status of the North Korean economy and immediately reflect the changes in North Korean markets. Even if they do not cite the variables in their papers, they check them first when preparing their papers. However, there would be hardly anyone who could argue with confidence that they know what the terms-market prices and foreign exchange rates-really mean in North Korea. At present, much of the data on the North Korean economy is produced by South Korean institutions. The Bank of Korea (BOK) releases its own estimates (e.g. gross national income) on economic growth of the North Korean economy every year, the Korea Trade Investment Promotion Agency (KOTRA) compiles trade statistics, and the Rural Development Administration releases data on agricultural production. Nevertheless, despite their importance and high applicability, official data on prices and foreign exchange rates in North Korea are not provided by any institution. Instead, we have only unofficial estimates. Due to these limitations, there are many ongoing discussions. This is why we have chosen price and the foreign exchange rate as the topic of the third article of the Dialogue. Before joining the KINU, Dr. Choi dealt with the same subject also at the Bank of Korea for a long time. I am happy to have her here today, and expect her to share her insights and knowledge. Before delving into the topic, could you please briefly explain how the concepts of price, price level, and foreign exchange rate are understood in North Korea? It is my understanding that socialist economies have a price system called “official price” or “state-set price” where the prices of goods and services are determined by the planning authority, and tends to be maintained for a long time without changes. Are these all true in North Korea? Please give us an overall picture about what price system is used, and how the system is operated. Choi, Ji Young The North Korean price system was originally based on “planned pricing.” Since it is based on a socialist economy, the planned price is set based on a certain principle of Marx’s economic theory. In the North Korean economic dictionary published in 1985, there is a separate entry for “Price Planning.” The entry stipulates that governments of socialist states shall determine the prices of goods and services through planning in accordance with the law of the value of socialist states for the sake of the planned development of the people’s economy. This planning of prices is called “consistency in price determination” in North Korea. The underlying principle of the price system is that the economic value of a good is determined by the amount of socially necessary labor required to produce it. Under the system, the government has the authority to determine prices while enterprises and other commercial entities do not. Of course, there are exceptions. Price controls are more stringent for goods manufactured by state-owned enterprises, which are mostly industrial products, but relatively flexible for products from cooperative farms, individual households, and so on.   "Overall, North Korea was following the basic socialist price system in which price is determined according to the ownership type of production units and the necessity of the goods and services." In North Korea, there are different types of prices. For goods, there are wholesale, retail, and procurement prices, and for services, there are fees and charges. In principle, the price is set by the state, but the recent development of spontaneous system degeneration has not allowed all principles to be rigidly followed. In the case of wholesale prices, the prices of goods, especially industrial goods, are strictly set since it is relatively easy to calculate the cost of raw materials used and the input hours of labor. Retail prices are also determined by the state based on the valuation of essential and luxury goods, Essential goods are priced low through price subsidies while luxury goods are priced high. Prices are also affected by the form of ownership. Products from cooperative farms or other non-state production units are subject to more flexible pricing. On the other hand, the price of products produced by individuals from a side job or surplus farm products is set by supply and demand. Overall, North Korea was following the basic socialist price system in which price is determined according to the ownership type of production units and the necessity of the goods and services. However, this type of price system can hardly be maintained while the socialist economic system was in the process of degeneration. It is not clear when the dysfunction of the planning system became quite so conspicuous, but we can speculate that the situation has seriously deteriorated since 1990. It is known that South Korea began to collect data on North Korea’s farmers’ market starting in the mid-1990s, but if we track the institutional changes of the North, the change in the price system occurred much earlier. In 1992, price reform was implemented to raise wages and state-set prices, and in 1994, the method of calculating wholesale prices was modified. It is presumed that a change in the price system was necessary because the planned economic system did not work properly under the existing price system due to the economic shock from the collapse of the old socialist bloc. Despite these attempts to modify the planned price system, the North Korean economy has had a dual structure since the mid-1990s. In the formal sector, resources are distributed at the planned price, or the state-set price, while in the informal sector, resources are distributed at the market price. Given that market transactions are partially permitted in the 2000s, it is fair to say that both planned prices and market prices legally coexist. Moreover, after Chairman Kim Jong-un came into power, there was an institutional change to partially legalize the price-setting authority of production units. The Enterprise Act revised in 2015 expanded the price-setting autonomy to production units. The revised law stipulates that enterprises shall follow “socialistic principles and methods of price-setting”but may “set price by themselves by considering buyers’ demand and negotiated terms and then sell the goods at such a price.” This change seems to have been introduced with the implicit intention of allowing a certain level of market function in the operation of the North Korean economy. Market transactions were expanded to enable enterprises to procure raw materials by themselves in a situation where it became difficult to provide raw materials for production units through the planning system. In a sense, the change was an act of institutionalizing the price-setting function of enterprises, which had not been recognized by the formal mechanism until then.   "According to the Food and Agriculture Organization (FAO) reports, the price of foods traded in state-operated stores is marked in state-set prices." The levels of state-set prices are maintained for a long period unless the price calculation method is modified. For example, wholesale prices, which consist of cost, profit, and profit income, may be revised when methods of cost calculation and profit distribution as well as the share of profit income change. Still, when compared to the changes in the market price based on supply and demand, the stateset price seems almost unchanging. Since the 1990s, the state-set price has twice gone through extensive changes. In 1992, there was a general increase in wages, procurement prices, and state-set prices, and in 2002, similar actions were taken. The latter, called the “July 1 Economic Management Improvement Measures” (or simply, the July 1 Measures), served as an opportunity to rationalize wages and stateset prices. The price of rice was adopted as a new criteria for price-setting, presumably because rice is one of the major items traded in the market and thus, its market price is a useful anchor for setting the price of other items. The change in the state-set prices, at that time, may be considered as a measure of price rationalization. If the gap between the planned and market prices widens, resources are diverted to the market for rent seeking. To prevent this, the authorities raised the planned price almost to the level of the market price. Given that North Korea took such a measure as early as 1992, it seems that supply shortages within the planned sector had already been chronic and widespread, and the gap between statutory and market prices was very significant.The two rounds of price rationalization in 1992 and 2002 are considered as failures. In order to reduce the price gap between the market and planning sectors, supply in the planning sector should have been restored, but this failed. Still, the North Korean government had difficulties doing so. Since the adoption of the July 1 Measures in 2002, the authorities never attempted to raise the stateset price overall. While implementing a currency reform in 2009 that demanded people to exchange their existing notes with new ones at a ratio of 100:1, the North Korean government left the stateset price intact. This is partly because the existing price rationalization measures failed to achieve the intended purpose of restoring the planned economy, and on the other hand, it is also because the role of the state-set price has been reduced. As mentioned earlier, as enterprises sold some of their products in the market, prices similar to market prices were applied, even to the state-owned production units. It is not possible to estimate exactly what percentage of the state-set price is being applied throughout the North Korean economy. According to the Food and Agriculture Organization (FAO) reports, the price of foods traded in state-operated stores is marked in state-set prices. For instance, the price of rice stood at KPW 44-46 per kilogram, maintaining the level since the July 1, 2002 Measures even after the currency reform. Some people may have been subject to use the state-set price, but it is difficult to accurately know the extent to which resources are allocated according to state-set prices. Your explanation gave me an overall picture of the price system in North Korea. As a socialist state, North Korea draws plans to set and control prices according to the labor theory of value as advocated by Karl Marx. Price is classified into wholesale, retail, and procurement prices for goods, and fees and charges for services. The labor theory of value is best applied to wholesale price, particularly for those of industrial goods, which are easy to calculate. Therefore, state-set prices are well observed in the production of industrial goods. Procurement prices seem to be flexible in implementation since their main users are farmers. cooperatives and individuals. You also said the price system seems to have been effective to some extent with some flexibility. When looking at the first price rationalization measure in 1992, the North Korean government seems to have recognized the incompetency of state-set price in distributing resources. The measure was followed by significant chaos in the North Korean economy. In addition, the government once again introduced a similar measure, the so-called, July 1 Measures in 2002. Since then, state-set prices have become nominal in resource allocation, and market prices filled the void. Nevertheless, you said state-set prices still seem useful for the allocation of foods and other essential goods. Now, let’s turn to the foreign exchange rate. I wonder what official foreign exchange rates mean in North Korea and how they are set. I was told that in addition to the official exchange rate, there are sometimes state-set exchange rates, fair exchange rates, and foreign trade exchange rates. Please tell us how they are different from each other. Also, I especially wonder if the official exchange rate do still exists and function these days in North Korea. In a socialist economy, the government has monopolistic control of foreign currency, and North Korea is not an exception. As there are state-set prices, there are also official exchange rates. In North Korea, exchange rates are referred to as the exchange rate quotation. There are multiple types of such exchange rates, such as fixed exchange rate quotation, exchange rate quotation for settlement, and exchange rate quotation for cash. The revised Foreign Exchange Control Act in 2004 stipulates that the Ministry of Finance, the central agency with fiscal management authority, sets the fixed exchange rate quotation as the benchmark for the cash buying/selling rates (exchange rate quotation for cash), and telegraphic transfer buying/selling rates (exchange rate quotation for settlement) set by the Foreign Trade Bank of North Korea. In 2015, the authority to set the “benchmark exchange rate” was added to the Central Bank by the Central Bank Act revised during the same year. The intention of this seems to have been to transfer the authority to determine and stabilize exchange rates from the Ministry of Finance to the Central Bank. The Foreign Exchange Control Act has not been revised since then. It is thus uncertain whether additional changes have been made to the institutions related to foreign currency management. Still, the existence of a benchmark exchange rate demonstrates that an “official exchange rate” does exist. According to the Fiscal and Financial Dictionary of North Korea, the official exchange rate is determined by considering the values of local and foreign currencies, international market prices of goods of trade, and so on. There have been sharp fluctuations in the international market price of goods of trade and the value of the North Korean won. However, except during times of significant institutional changes, such as price rationalization and currency reform, the official exchange rate has shown little changes. This suggests that the official exchange rate is also determined in an arbitrary manner. Before the July 1 Measures, both the official exchange rate and foreign trade exchange rate had been in use. However, after the measures, the latter was merged with the former. Data on North Korea’s official exchange rate trends have been released by the Statistics Korea and the Bank of Korea on an annual basis, and by Germany’s Bundesbank on a monthly basis. According to the Exchange Report of Bundesbank, the official exchange rate of the North Korean won to US dollar skyrocketed from 2.2 won at the time the July 1 Measures were implemented to over 150 won. The significant devaluation was intended to rationalize the official exchange rate in a way to properly reflect the value of the North Korean won given the wide gap between the official and market exchange rates. Little changed until the currency reform in 2009 when the value of the North Korean won appreciated to around 100 won to 1 US dollar. The appreciation in 2009 came without any adjustment of the level of state-set prices. No specific studies have been available on the background of the appreciation. Presumably, the North Korean government seems to have been determined to confiscate currency assets while maintaining state-set prices because the stateset price was not as meaningful as they had been before, and previous attempts to adjust the stateset price and wages only caused confusion. In fact, there was no need to rationalize exchange rates because the measures in 2009 were not to rationalize prices. On the other hand, the appreciation of the local currency seems to have the effect of buying in foreign currencies from foreign tourists with less domestic currency.   "Except during times of significant institutional changes, such as price rationalization and currency reform, the official exchange rate has shown little changes." The existence of an official exchange rate was confirmed by the fact that exchange rates different from the market exchange rate were applied for foreign tourists visiting North Korea. Accordingly, the exact figures of the official exchange rate can be checked from the rates applied to foreigners. For example, 1 US dollar would buy you 8,000 won in the market but only 100 won if you are a foreigner. This means that the market exchange rate was 80-times higher than the official exchange rate. Since the 2009 currency reform, the difference has been maintained without considerable modifications. For more, please refer to the attached file.

 Many agree that the economy of North Korea has changed under the Kim Jong-un regime, but there are often different interpretations as to whether these changes are in line with the continued transformation from the 1990s or they should be seen as a completely separate trend. And the way of understanding the shift varies on which side you stand.   In this context, the KDI Review of the North Korean Economy September edition chose “Macroeconomic Trends in the Kim Jong-un Era: Continuation or Break” as the first theme of its new section, ‘Dialogue.’ The section covers expert interviews devoted to exploring fundamental and diverse research questions about the North Korean economy in the aspects of economics. We hope that readers find this article interesting and informative.   ♦ Interviewer: Lee, Suk (Senior Fellow at KDI) ♦ Interviewee: Kim, Kyoochul (Associate Fellow at KDI) ♦ Editor: Kim, Soyoung (Reporter at the Farmers Newspaper)   Are there any methods to find out whether there was continuation or break in the macroeconomic trends of North Korea after Kim Jong-un rose to power? If so, please introduce them. Many argue that the North Korean economy has gone through significant changes since 2012-2013, the initial period of the Kim Jong-un regime. However, it is hard to find substantial discussions on what the changes are or if the changes are real. It seems that most of them tend to argue with their own personal experiences or based on media reports. They often lack strong objective grounds although clear evidences and concrete facts are critical to such arguments. Economists use Chow test to verify a structural change of an economy. Please see Figure 1 below and imagine that the thick solid lines do not exist. Then, the remaining dots would appear to present similar upward patterns. The patterns, however, are quite different from each other when compared before and after the thin solid line rising from T (time). If one does not pay enough attention, s/he may easily think that the trends of dots follow the dashed line that crosses the chart. This observation will lead to a wrong conclusion on the relationship between axes x and y. Therefore, it is critical to verify the difference in the trends before and after T if the value of T is available. Here comes the Chow test, which is a statistical method used to verify the difference in the gradient and intercept of a trend before and after T. Everyone agrees that the structure of the South Korea economy has changed in many aspects including employment stability and corporate accounting practices, since 1997 IMF financial crisis. Before the crisis, the concept of a ‘life-long employment’ had been held; but employment stability has deteriorated and corporate accounting practices have greatly improved since the crisis. Data also confirm that there was a break in the trends of many economic variables before and after the crisis. The break is not only observed intuitively in charts but can also be verified through statistical analysis. Likewise, it is possible to determine if there has been a break in the trends of North Korean economy before and after the inauguration of Kim Jong-un in 2012 by first intuitively interpreting graphs and then confirming through a statistical verification. I would like to take this interview as an opportunity to explain the results of statistical verification of any change that arose in the trends of the North Korean economy under the Kim Jong-un regime based on data of various sectors that comprise the economy. You are saying that it is possible to objectively determine whether an economy has experienced a structural change using classic quantitative methods such as the Chow test, and this applies to the North Korean economy under the Kim Jong-un regime. Then, how does that work? For example, what data do you use for Chow test? Is there one or multiple data to use? Please tell us about it in detail. If one judges the general situation of North Korea only from the aspects of Pyongyang s/he may believe that the North Korean economy has made more progress than expected. According to visitors, Pyongyang has a number of skyscrapers and stores that sell luxury goods not easily affordable even for South Koreans. However, according to the World Food Programme reports, one out of five North Korean children are malnourished and 40% of all North Korean people suffer from poor nutrition. If this is true, North Korea is still one of the poorest countries in the world. The contradiction raises a question, ‘What life is really like in North Korea?’ I believe both sides reveal a bit of truth. From the perspective of observers on North Korea, especially researchers, information about North Korea seems partial as it usually derives from personal experience like mentioned above. Also, when they choose information on North Korea, bias sometimes plays in depending on their political orientation. The contradiction seems to incur unnecessary costs such as the so-called South-South conflicts when establishing policies on North Korea. What I would like to emphasize here is that the assessment of the North Korean economy should be based on objective data and hard facts while excluding fragmented information and bias as much as possible. Some assess the North Korean economy based on their own personal experiences because, they say, statistics on the economy are hard to obtain, and, if any, they are unreliable. Recently, however, the reliability and the availability of data on the North Korean economy have gradually improved as international organizations provide reliable statistics on North Korea, and new kinds of data become available. Of course, it is too early to say that statistics on North Korea are equally diverse, reliable, and of high quality as those on such advanced countries as South Korea and the US. Still, analyzing indicators that are considered reliable should come first when we understand the North Korean economy.   the assessment of the North Korean economy should be based on objective data and hard facts There are many components that form an economy, and the North Korea economy also consists of diverse sectors. Trade data tells us much about the economy, but they are not enough to represent the whole. Likewise, jangmadang is essential part of the economy, but it would be ridiculous to try to explain the economy in general only using the data of jangmadang. The reality of the North Korean economy would become comprehensible only after reaching a general conclusion based on the analysis of various components. In this sense, I would like to review four types of economic indicators of the North Korean economy for this interview. First, I reviewed aggregate economic indices such as gross domestic product(GDP) and economic growth rates. Second, North Korea’s foreign trades including the scale, trends, the structure of trades and export items as well as trade partners were reviewed. Moreover, I researched what impacts export items would have on the economy in the long term, in other words, how the quality of North Korea’s trades transformed over time. Then, I examined informal sectors of the economy, i.e. jangmadang or markets. Specifically, currency-related factors including the market prices of rice and market exchange rates between North Korean won and US dollar were examined. Finally, public health and welfare indicators including life expectancy, neonatal mortality rate, infant mortality rate, under-five mortality rate, and immunization rates were analyzed. The comprehensive analysis of the four indicators provided a basis to understand changes the North Korean economy has experienced and whether the economy has become any different from the past under the Kim Jong-un regime. The kinds of statistics mentioned above have been recognized for their verified reliability thus used by most researchers who study North Korea. The producers of those statistics include the South Korean government agencies such as Bank of Korea, Statistics Korea; international organizations such as the Food and Agriculture Organization, the United Nations International Children's Emergency Fund; and customs offices of other countries that trade with North Korea. What you explained would be like the following. There are diverse methods to verify the characteristics of the trends of the North Korean economy under the Kim Jong-un regime, and Chow test is one of the most common quantitative methods. To conduct the test, objective statistical data should be available. Although still controversial, it is true that the quantity and quality of statistical data on the North Korean economy have been improving. Thus, it is possible now to thoroughly examine and verify diverse economic indicators such as GDP, growth rates, and those for trades, markets, agriculture, public health and welfare to reach a conclusion on whether there is a break in the trends of the North Korean economy. This sounds very interesting and scholarly. I wonder what the outcome of that process are. Please tell us about the outcome of the statistical verification of GDP and economic growth rates, the two most representative macroeconomic indicators. An economic growth rate is a representative indicator that shows a country’s economic development and growth. As North Korean authorities do not release economic growth rates, the estimates provided by the Bank of Korea are used most widely. The estimates are virtually the only data on the North Korean economy available since the United Nations also cites the BOK data for its reports on the economy.   Figure 2 shows the economic growth rates of North Korea from 1990 to 2018 based on BOK’s data. During the period, North Korea recorded negative growth rates from 1990 to 1998, an exceptional phenomenon for a normal economy—meaning that the North Korean economy contracted for a long period of time. Then, the rates shifted to the positive territory in 1999 and remained there before beginning to alternate between the negative and positive territories from the mid-2000s. The alternation means that the North Korean economy has experienced stagnation or a slow growth since then. Because the growth rates show no particular moves right after 2013 when Kim Jong-un seized power, it is hard to argue intuitively that the economy improved significantly under the Kim Jong-un regime. Recently, the growth rates have fluctuated from 3.9% in 2016 to -3.5% in 2017 and then to -4.1% in 2018. Given these, an answer to the question, “Has the North Korean economy changed since the inauguration of Kim Jong-un?” would be, “No, it has not.” For more, please refer to the attached file.