The ICAS Lectures

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
Fax: (610) 277-3992




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


Slide 1




Why stress economics?

What do we have to work with?

A WEFA Iniative


Slide 2


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



Slide 3


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.


Slide 4




Why stress economics?
What do we have to work with?

A WEFA Iniative


Slide 5


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


Slide 6


Some successes, some 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


Slide 7


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.


Slide 8


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
Value of capital output & labor
inputs is difficult to measure
Falling exports, focus
on heavy industry, lack
of transparency
Little/no foreign investment


Slide 9


NK per capita income is 1/15 of South Korea's

Source: CIA, Australian National University


Slide 10


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


Slide 11


Slide 12




Why stress economics?

What do we have to work with?
A WEFA Iniative


Slide 13


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.


Slide 14


Slide 15


I. Macroeconomic Audit and Benchmarking

• Determine the strengths and weaknesses of the NK

    - 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.


Slide 16


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


Slide 17


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


Slide 18


IV. Information Infrastructure Audit

• What information is needed, and what is currently
    - 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


Slide 19


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


Slide 20


Slide 21


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


Slide 22


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


Slide 23



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