Knowledge is power

Contrary to general belief, it is not North Korea that knows the most about the North Korean economy. South Korea does.

And it’s not easy. Data is not easy to trust, especially from Communist command economies. For example, according to Soviet Union data, its economy grew 9 percent annually on average from 1928 to 1985. That record even beats the paces of the economies of South Korea and China, which obviously made great strides in short periods. The fact that its economy crumbled so rapidly in the early 1990s suggests the data must have been misleading. The U.S. Central Intelligence Agency estimated that the Soviets’ average growth during the period was around 4 percent. Historians believe the CIA figure is closer to reality. The U.S. knew better about the Soviet economy than the Soviets. Accuracy and transparency in data-keeping could not have been expected from a society where rewards and punishments were delivered according to achieving a pre-set output target.

Official economic data from Pyongyang is rare. According to Ri Ki-song, a professor at North Korea’s Academy of Social Sciences, the North Korean economy grew about 10 percent on average from 2007 to 2011, a big difference from the Bank of Korea’s estimate of 0.3 percent. Ri’s estimate was calculated on North Korea’s export growth alone while the Bank of Korea’s is based on global accounting standards.

We are in a better position to have a clearer view of the North Korean economy. The North Korean government can’t gather accurate data from households or companies even if it wanted to. They are likely to report exaggerated figures in fear of reprimands. They are likely to hide unregistered economic activities. U.N. investigators testified that North Koreans did not want to talk about their individual market activities because they could get into trouble. A U.N. report stated that a majority of North Koreans were on food ration.

But from what I have learned, such rations made up just 24 percent of the food that was actually consumed. Most of the food rations are actually being exchanged in the black market. We can get a sense of what the real North Korean economy is like from testimonies from defectors. We can assess the real gap in the two economies through objective study of materials acquired from defectors. Traders with North Korea also can provide insight into the reclusive country’s economic conditions. The real prices and value of products and currency being exchanged on North Korea’s unregistered markets also can be checked through mobile phones.

South Korean experts doubted the efficacy of the sudden currency reform by North Korea in 2009. Without a sharp increase in consumer products, North Koreans won’t give up individual market activities, nor could runaway inflation be subdued. Pyongyang learned of the policy failure many months later. Officials were ignorant of the mechanism of supply and demand and underestimated the role of market activities.

The North Korean people rely entirely on the market and mid-rank officials survive on the money they pocket by turning a blind eye to individual trading activities. The people at the top of the power hierarchy finally realized that their viability relied on unregistered trading and market activities. They did not see what had been obvious to South Koreans for a long time.

North Korea’s leaders are illiterate when it comes to economics and market mechanisms. North Korea relies heavily on trade and oversees business activities, with external trade taking up 50 percent of the national income. But Pyongyang officials did not have the ability to respond to the external factors from international trade. North Korea’s trade with China fell sharply due to a slowdown in the Chinese economy and earnings from its overseas workers, sent mostly to China and Russia, sank because of the depreciation of their currencies. The money collected from 20,000 North Korean workers sent to Russia was halved from early 2014 due to a sharp fall in the Russian currency. An amount tantamount to half the income from the Kaesong inter-Korean industrial park was lost.

Without any preparations for such setbacks, however, North Korea spent wildly on luxurious showpieces like a ski resort that hardly anyone uses. An economy naturally would sink further if earnings from outside decline while it cannot generate funds from exports of factory products. Construction and machinery supplies as well as consumer goods also come from outside. To make things worse, farm yields also fell sharply due to a severe drought.

The North Korean economy is drowning. Without radical action, it may be sunk. We must use the dire state of North Korea as leverage in negotiations with Pyongyang to stimulate exchanges, collaborations, and the fostering of change. We cannot read minds. But we can assume someone’s needs when we know what their true situation is like. Our policymakers must make most of their intelligence.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Sept. 24, Page 31

*The author is an economics professor at Seoul National University.

by Kim Byung-yeon