No. 99-0507-RWW

Pitching in for North Korea's Economic Development Plan: A WEFA Initiative

  Robert W. West

ICAS Spring Symposium
Asia's Challenges Ahead
University of Pennsylvania
May 7, 1999

Institute for Corean-American Studies, Inc.

965 Clover Court, Blue Bell, PA 19422

Tel : (610) 277-9989; (610) 277-0149
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Pitching in for North Korea's Economic Development: A WEFA Initiative Institute for Corean-American Studies, Inc. Spring Symposium May 7, 1999 University of Pennsylvania Robert West Senior Vice President, International Relations

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AGENDA Why stress economics? What do we have to work with? A WEFA Iniative

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What we are NOT talking about here:   The NK missile program and armaments exports  The Agreed Framework Famine War mongering The DMZ New government structure

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Why stress economics?   Whether the current regine survives or collapses, the economy of NK needs help from the outside to grow. After many years of "demonixation" of North Korea, a fresh attitude is needed. Planning, even when done centrally as in NK, requirea a statistical reporting system to determine where the economy is today, and some form of model for predicting how the economy will unfold in the future. WEFA wants to pitch in.

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AGENDA Why stress economics? What do we have to work with? A WEFA Iniative

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North Korea is slightly smaller than Mississippi Population declining (1998 = 21.2 million) Coal, lead, copper and hydropower Literate population (95%) Real output falling 4-5% per year 1989-97 (1995-96 fell even more) Grain shortages 2-2.5 million tons per year Heavy manufacturing and military products dominate industry (32%) Secrecy   Source: CIA

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Some successes, some failures SUCCESSES FAILURES The NK regime has provided education, health care, and education through first 11 years. Strong economic growth through the mid-1980s More open telephone service: US-NK, SK-NK More open approach to foreign trade Growing interest by foreign firms (GM, LG, Daewoo) Mechanization and irrigation have improved crop yields. Only 1 telephone per 750 people Heavy industry focus held NK back from achieving higher growth Food shortages in recent years have been severe Decisions are made at the top Poor infrastructure, both physical and informational Many of the falures have resulted from central planning approach

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North Korea's approach to economic development has been centralized, top-down, and inward-looking. Foreign trade - kept to a minimum, with imports still greater than exports. The barter economy is still large - unrecorded transactions, uncertain value. Whatever information is available on economic development is closely held. Self-sufficiency has been the watchword - although in the last 20 years, a more open attitude hbas emerged regarding foreign investment. the economy may have contracted by 30% since 1990.

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Knowing the current economic conditions in North Korea is very difficult. There are no National Income Accounts Net Material Product approach is taken Production is reported only in index form Time series are stopped when they turn negative The service sector is considered non-productive Concept of industry clusters may not be well understood No good price/inflation data Value of capital output & labor inputs is difficult to measure Falling exports, focus on heavy industry, lack of transparency Little/no foreign investment

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NK per capita income is 1/15 of South Korea's Source: CIA, Australian National University

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Economic Shock therapy is not the answer. What's needed for Shock Therapy to work? North Korea Working infrastructure: transport, telecomm NO Competitive experience or intuition NO Civil law - regulations and controls NO Currency-based economy NO Willingness to open the borders to world trade NO

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AGENDA Why stress economics? What do we have to work with? A WEFA Iniative

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WEFA wants to help North Korea develop a new economy based on the assumption that it is ready to become integrated into the world economy. • Over time, NK will have to implement several   key steps:     - introduce a common currency nationwide       for all transactions     - set up exchange rate mechanisms that       provide a semblance of free floating     - begin to measure and catalogue economic       activity using standard NIA accounting • Define the industries that should be developed.

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I. Macroeconomic Audit and Benchmarking • Determine the strengths and weaknesses of the NK   economy     - Industrial policies and their effect on productivity     - Savings and investment (?)     - Barter versus currency, the role of exchange rates     - Lack of transparency     - Supervision of the financial sector     - Limits placed on Government activism • Train NK staff in the workings of an open, free market. • Highlights of key economic areas to address.

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II. Export Industries and Competitiveness • Examine market growth of NK's existing and     potential exports, produce forcasts. • What is the competitive advantage that NK offers? • Can industry clusters be developed around growth     industries that are export-focused? Tourism may     be a start. • Can a long-term competitive footing be

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III. Overview of Competing Economies • What are the development lessons, both good   and bad, from other economies of similar size   and openness?     - Not many countries like this     - Paraguay, Kasakhstan, Cuba? South Korea • How can NK use new technologies to leapfrog   to a higher stage of development?     - cellular telephones     - the Internet: market exposure, training, marketing     - production software and logistics management

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IV. Information Infrastructure Audit • What information is needed, and what is currently   lacking?     - industry outputs in physical terms is probably good     - information on prices and value of transactions is likely       to be absent • What is feasible to collect?     - production may be easy, savings per capita may be difficult     - must develop a plan for data collection: by variable, by time • Build an economic model for forecasting, performance   monitoring, and management     - investment, government spending, consumption     - otherwise forced to use benchmarking to track performance

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What is needed for success? Clear and full committment from the NK government to move to a new form of economic magement. External support from the U.S., South Korea, Japan, etc., and the major multilaterals Understanding of the unique cultural and social practices Open access to relevent NK government officials Training of NK staff - economics - industry development 1 1/2 years

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Potential Risks Inflation "Mafia - ization" Enforcement of laws and regulations Foreign "take over" State employees have a hard landing Some industries will have to close

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Potential Results Economic databases and models with collection and updating routines established Development and training of NK staff in new methods of economic management and measurement Definition of industry clusters to be developed, the rationale, and the detailed business plans Attraction of foreign investors - tourism Open interaction with new trading partners Economic and personal income growth in NK

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