Bloomberg News

‘Medieval’ Economy Is Kim Jong Il’s Legacy as Minerals Untapped

January 04, 2012

(Please see {EXT2 <GO>} for more coverage on the aftermath of Kim Jong Il’s death.)

Dec. 22 (Bloomberg) -- Kim Jong Un, North Korea’s anointed leader, inherits an economy that was outstripped by South Korea in the 1970s, shrank after the collapse of communism in Europe and now struggles under its stated policy of self-reliance.

Gross domestic product of 30 trillion won ($26.5 billion) in 2010 was one-fortieth of the size of South Korea’s, according to estimates by the South’s central bank. The North’s economy probably shrank in four of the past five years, the Bank of Korea says. North Korea doesn’t release GDP data.

The choice for Kim and his supporters is whether to stick with the central planning that’s failed in the past or embark on the type of opening that led neighbor China to surpass Japan as the world’s second-largest economy. Founded with more mineral resources and a bigger industrial base than the South, North Korea can barely feed itself after more than six decades of totalitarian rule, with the U.S. Central Intelligence Agency calculating its global GDP rank at 195th out of 228.

“It’s the best example of the failure of a closed economy -- they’re still living in a medieval era when the rest of the world is moving forward every day,” said Cho Bong Hyun, a researcher at IBK Economic Research Institute in Seoul, who has visited the North more than 30 times since 2000 and advises South Korean companies operating in an industrial zone there. “The young leader may try some economic reforms such as a partial market system and foreign investment zones once he gains unchallenged control of the country.”

Famine, Hunger

North Korea has depended on economic handouts since the mid-1990s when an estimated 2 million people died of starvation under then-ruler Kim Jong Il, Jong Un’s father

Food aid is currently needed for about 5 million of the nation’s 24 million people, with one in three children physically stunted from a lack of nutrition, according to a Nov. 25 report from the Food & Agriculture Organization of the United Nations and the World Food Programme.

From May to September, the daily cereal ration that most households rely on was 200 grams or less per person, or one- third of minimum needs, the organizations said. People eat wild foods such as edible grasses, acorns, pine nuts, berries, mushrooms and flower roots, they said.

“Kim Jong Un won’t do anything about the economy in his first year -- he will put everything into politics and maintaining order,” says Lee Young Hwa, an economics professor at Osaka’s Kansai University who is active in the Japan-based human-rights group Rescue the North Korean People. “This will further worsen the economy. Once the political situation has stabilized, he will focus on the economy.”

China Ties

Close ties with neighboring China, a source of oil and food and a purchaser of coal, have yet to convince North Korea to mirror that nation’s opening up. North Korea’s trade of $4.17 billion in 2010 compared with South Korea’s $891.6 billion, the Bank of Korea estimates.

Informal citizens’ markets exist and some foreign companies have made limited inroads.

Macau billionaire Stanley Ho backed a casino in a state-run hotel in Pyongyang through his Sociedade de Turismo e Diversoes de Macau SARL. Hong Kong’s Emperor Group has a gambling venue in Rason, a city near China’s border intended to operate as a special economic zone.

Capitalist Enclave

At the Gaeseong industrial park, 10 miles (16 kilometers) from the border with South Korea, companies from the South such as underwear maker Good People Co. operate with mainly local labor. Cairo-based Orascom Telecom Holding SAE had about 666,520 mobile phone subscribers in the nation as of June 30, up from 184,530 a year earlier, according to data compiled by Bloomberg. News Corp. has published mobile-phone games developed by North Korean programmers.

“North Korea’s economy used to be in a better shape than the South until the early 1970s, thanks to the industrial infrastructure that the Japanese set up to invade China during World War II,” said Cho, of IBK. “The situation reversed as South Korea boosted its growth through industrialization and exports while the North kept its door closed to protect its dictatorship.”

The collapse of the Soviet Union in 1989 removed one of the North’s main sources of funding. The regime, founded by Kim Jong Un’s grandfather, Kim Il Sung, has pushed a doctrine of self- reliance known as Juche that has led to shortages of raw materials and foreign currency.

Adapting Technology

North Korea’s state-run KCNA news agency frequently touts the marvels of Vinalon, a fiber made from limestone that was invented in the country, and domestic techniques for making steel without coking coal, an expensive ingredient that it would need to import.

The nation’s deposits of minerals including coal and metals may be worth about 6,984 trillion won, or 24 times more than those in the South, according to South Korea’s state-run Korea Resources Corp.

Industry “is operating at only a small fraction of capacity” due to lack of fuel, spare parts and materials, the U.S. State Department said in an Oct. 31 report. At the same time, the nation is “thought to earn hundreds of millions of dollars from the unreported sale of missiles, narcotics and counterfeit cigarettes and currency, and other illicit activities,” it said.

Intelligence Gathering

Last year, major industries “were hampered by bad weather, poor energy and raw material supply, and the international economic sanctions on the country,” according to the Bank of Korea, which produces its analysis of the North from information gathered in part by the South’s National Intelligence Service. Teams of about 25 economists help compile the data.

Accurate intelligence is difficult to obtain because of the North’s secrecy, analysts said. David S. Maxwell, the associate director of the Security Studies program at Georgetown University in Washington, said in an interview this week that “what makes it hard for us to penetrate is the same control of information that keeps the regime in power.”

Risks of economic policy changes in the North were highlighted early last year by the execution of an official held responsible for bungling a currency revaluation. Pak Nam Gi, the ruling Worker’s Party of Korea head of finance and planning, was shot for intentionally damaging the economy, South Korean news agency Yonhap reported in March.

The revaluation was an attempt to reassert the regime’s control by confiscating the savings of people active in private trading, according to analysts including Andrei Lankov, an associate professor at Kookmin University in Seoul. Instead, it fueled inflation and exacerbated shortages of food and basic goods already endemic due to mismanagement of the economy.

KCNA has a different view. It reported this month that North Korea’s economy is prospering after “unprecedented miracles and innovations in socialist economic construction,” while “the U.S. is troubled by a large number of poor people” and South Korea by an increasing number of suicides “due to unemployment and poverty.”

--With assistance from Andy Sharp in Tokyo, Sungwoo Park in Seoul and Ben Richardson in Hong Kong. Editors: Paul Panckhurst, Chris Anstey

To contact the reporter on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net;

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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