Abundant Underground Resources and the Policy for Their Development

Abundant Underground Resources

This was an article from the latest issue of Foreign Trade, Pyongyang's quarterly journal on, well...foreign trade. Like many, including Professor Leonid Petrov, we think underground resources will drive the DPRKs development, whatever direction it takes. This interview (which actually consists of just two questions, which could have been consolidated into none, really) explains the official situation on resource exploitation. The reality is more complicated than one page can express, of course.

A Very Baguettey New Year

One of the small perks of dealing with foreigners for North Koreans is access to the odd small luxuries of life that would otherwise be difficult to obtain in the country. Our newest partner assigned to work with us on the Women in Business program, a recent university graduate, made this point in a very chirpy New Year card. Last fall on a visit to North Korea, I went with our partners to the new restaurant (run by Hae-mat-chi) at the newly built Moranbong apartment complex. This restaurant had a bakery adjacent to it. When it came to ordering the entrée, our new partner got really excited. She started describing this “French Bread” in vivid terms to the waiter, explained how it had to be sliced meticulously, and how the bread expands to fill the mouth with its flavors. It was even more fun hearing it in Korean as it was full of the onomatopoeias found in the Korean language. The last time she had a baguette was 13 years ago.

When the North Korean interns for our entrepreneurship program were heading back to Pyongyang last year, we had one of them buy a baguette to bring it to our partner. Earlier this year, we received New Year greetings in the mail from Pyongyang and in it were special thanks for the baguette. Our partner described the baguette as “it is too small…but small is beautiful.”

"China's Impact on Korean Peninsula Unification and Questions for the Senate"

Recently, our attention was drawn to a very interesting report written for the US Senate. Titled, "China's Impact on Korean Peninsula Unification and Questions for the Senate",the main thesis of the report is that in any unification scenario, "China could attempt to manage, and conceivably block the unification process." China has overweening influence and currently sees the status quo as favorable. The division of Korea, in its current form, does have advantages for China. The greatest of these is that it has become a stable system of division. While not without its problems, it is currently a "manageable low-burn crisis".

Strategically, the division allows China to counterbalance the US influence on the Taiwan issue and provides China an ally in Northeast Asian affairs. It also gives China monopsony power over several key industries in the DPRK, such as mining, while not interfering with economic relations with major trading partner in the South.

If a unifcation process began to foment, China would want to protect its commercial assets and keep the north of the peninsula in its sphere of influence, the report concludes. It would also want to try to mitigate any increased influence of the US over a united Korea as well as ensure no ethnic unrest develops among Korean-Chinese along the border. These are no small tasks and the desired outcomes by no means certain. The changes could erase some of China's advantages on the peninsula.

We concur that China's current economic advantage in the DPRK is expressed (perhaps ironically) through the market. Even though the DPRK is a source of "unique anxiety", China's recent increase towards marketized support rather than direct subsidy "reflects an incremental economic integration with the North and is reminiscent of similar situations involving other sovereign states bordering China including Cambodia and Laos."

China's meta-concept for regional relations is  to “be harmonious, pacify and enrich thy neighbors” (mu lin, an lin, fu lin), promoting Beijing's twin pillars of economic growth and social stability. In this sense, North Korea is not viewed differently from other surrounding countries, as the report points out. Beijing gives little special support to Chinese companies doing business in the DPRK, but recognizes that it does not have to, because of the North's relative isolation from other regional sources of investment. It's reticence to truly back large Chinese enterprises is perhaps due to an awareness that flooding the country with transformative FDI could also be a source of risk, in that it could contribute to dramatic social change.

The study quotes an unnamed US official as saying:

 ‘‘The day China decides to break with the DPRK and the moment the PRC decides that a reunified Korean Peninsula (under Seoul’s aegis) is more in its interest than a divided peninsula, that is when the process of Korea’s national unification will begin in earnest, and there will be little the DPRK can do to sustain itself as an independent entity. It is for that reason that the North has been extremely cautious in its ties with Beijing. . . . China is the DPRK’s lifeline and insurance policy, which for a nationalistic North Korea is something that necessarily sticks in the craw, but it is a fact of life.’’

If China holds all the cards on Pyongyang's regime stability, Pyongyang also knows it holds the cards on regional stability, giving it some room to maneuver. Thus the two allies can warily look across the Yellow Sea at each other and say, "let's not change things too much".

The report, well worth reading, is here in full. 

2012 Annual Report

We are excited at introducing our 2012 annual report, capturing highlights from a year where we have continued to push the innovation frontier for programs in North Korea. The report kicks off with the following introduction from Managing Director Geoffrey See:

This year, we continued to grow programs we have conducted since 2010. On the operational side, we have improved our ability to execute well on programs, with a 17% selectivity ratio for our overseas programs, and managed to bring the average age for overseas program participants to 31 years old.

We have also continued to push program frontiers with a new program in Singapore housing DPRK interns at a startup incubator. We believe that such an unstructured work experience provides the most realistic introduction to entrepreneurship. More than half of the participants we selected for the program were female.

Next year, we look forward to opening a full-time office in Beijing, and to kickoff a new flagship Women in Business program focusing on young and high-potential female business managers and entrepreneurs.

Click here for our 2011 Annual Report.

Mr. Schmidt Goes to Pyongyang

News reports suggest that by now the Executive Chairman of Google has touched down in the DPRK. (I wonder which of Beijing Terminal 2 Starbucks' soggy  sandwiches he grabbed on the way to his flight.) Is he going on business? Is it a humanitarian mission? Is he beginning a foray in international policy issues?

Thursday, as Google Wave lit up with news about the Richardson/Schmidt trip, these questions came to the fore.

An interesting wrinkle was thrown in by the US State Department saying "we don't think the timing of this is particularly helpful". This is probably very little to do with Schmidt, however.

With North Korea's recent rocket launch, South Korea joining the UN Security Council this week as a non-permanent member, a new government in Seoul from next month, State Department would probably rather keep more control over contact with North Korea at the moment. They'll be concerned that Richardson suggests/does/promises something that they aren't interested in.

Schmidt is probably not going to hammer out some investment deal, though tech is a safer bet than many sectors because it doesn't necessarily require much capital investment in the local partner. Pyongyang has many software engineers and programmers and the Korea Computer Center is eager to get more outsourcing work.

That said, it is unlikely that Pyongyang sought out Schmidt in particular; he was probably contacted by Richardson's team, though PY is happy to have him. As Geoffrey mentioned last week, Schmidt probably has a personal interest in the DPRK as a global issue. This is likely an attempt to lay the groundwork for a long-term connection between people he knows and people in Pyongyang.

Furthermore, his company, with revenues bigger than the GDP of some countries, has to engage in corporate diplomacy. For Google, Schmidt has become the figure in charge of this nexus between business and government relations.

In the end, Google will probably be lauded for this trip to North Korea. They have a reputation as fighting for information freedom and so whatever comes or does not come from this trip, what Schmidt does will likely be seen as a good faith effort to build positive ties with Pyongyang. This is not something many other tech companies could get away with, given their varying degrees of cooperation with China. A scandal a few years ago involving Google's rival, Yahoo!, comes to mind. In contrast to don't-be-evil-Google, the PR for them would be unmanageable.

CE’s work in the context of the New Year Address

Back in 2011, when many observers were still pessimistic about North Korea’s strategic intentions after the 2006-2009 tightening of North Korean economic policy, Andray and I pointed to how North Korea is shifting the basis of its legitimacy to economic performance. This year’s New Year Address by Kim Jong Un bears this shift out in its strong focus on the economy. As we have discussed before, North Korea faces significant challenges in developing its economy. Many observers of North Korea conflate intention with capability when it comes to economic development in North Korea. “Intention” deals with the question of whether the leadership in the country considers economic development a priority. “Capability” is about whether North Korea is able to successfully pursue the priority. Andray and I question whether North Korea has the economic policymaking capabilities and institutional capacity to avoid falling into the “resource curse.”

Some observers have argued that North Korea will not pursue a new economic trajectory, as this would risk regime collapse once North Koreans learn more about South Korea’s economy. In making this prediction, these analyses conflate “intention” and “capability,” and assume that North Korean policymakers also share the analysts’ conjectures.

As with any strategy, quality of execution matters. North Korea can prioritize economic development without risking collapse, if it executes well on this approach. People are more apt to compare their present and future to the past than to South Korea. If standards of living are getting better, and people believe it will continue to improve, North Korea can enjoy significant stability for a time. And the mood on the ground (in Pyongyang at least) is definitely one of optimism – people expect things to improve although clear policies supporting economic development have yet to be put into practice (but are being discussed). At the same time, Pyongyang has been using re-defectors to send the message that going to South Korea will not necessarily lead to better lives, and that it just might be better to stay put.

What does all of this mean for Choson Exchange? We first started pursuing the idea for CE in 2007, and launched our first program in 2009/2010 after a currency reform and the sinking of the Cheonan. Despite the gloomy and tough start, over the last 2.5 years, we have impacted over 200 program participants. Next year, we are poised to rapidly grow our program and we are excited that we will be reaching more young North Korean professionals in the 20-40 age range, and reaching more women through our Women in Business in program. We will be covering a wider range of policy and business topics. However the future evolves in the country, North Korea will need young businesspeople and young policymakers who have the skills needed to develop the economy and raise living standards. We are excited for the New Year.

Time to Party Like it's 1994

For Korea-watchers who were expecting to work through their hangovers by sifting through another New Year's Editorial, Kim Jong Un had a surprise in store. Returning to his grandfather's template, he gave a speech instead. The speech centered on the slogan for 2013, "Let's Use the Spirit and Consciousness that Conquered Space to Change the Situation in Constructing an Economically Powerful Country"and Kim set the tone during his introductory niceties, calling for "a devoted struggle for the fatherland's wealth and prosperity".

So, following on from the themes we've seen in 2010 and 2011, the citizenry's attention is being drawn towards economic issues, with military ones taking a back seat. The mode for improvement still harks back to classic communist imperatives, however, where spirit, unity and struggle will bring about development.

Nonetheless, this New Year's Address should be seen in the context of an ongoing transition, the foundations of which are both generational and ideological. Kim Jong Un can be seen as moving away from Military First, which is a lengthy and uneven process. In the speech, North Korea's need for military might was still highlighted as necessary for a thriving nation. Indeed, a strengthened military was called for, but ultimately "building an economically powerful country and going forward fulfilling the feat of building  a powerful socialist country is today's greatest task," he says at another point. That this speech had only very weak military-related content is quite clear.

Much of the speech unsurprisingly comprises vague exhortations, but some noteworthy passages stand out. The Huichon power station is linked to improving the material-technological foundations of the economy. Kim also states that they "must improve the people's dietary life to be more bountiful." Demands for "actual development" must also be met through improved economic leadership and management.The word 'reform' was used a handful of times, primarily in reference to the need to improve industry, specifically the coal and metal mining industries.

For those of you with an interest in empirical measurements, Kim Jong Il's "Songun" only got six mentions this year. Kim Il Sung's "Juche" got 13. But as much as the content of Kim's speech is important, the very fact that he made a speech at all demonstrates his continuing efforts to associate himself with the pre-Songun era of his grandfather. Implicit in Kim's style is a return to the relative stability and prosperity that Kim Il Sung oversaw.

Returning to content, perhaps the most striking thing was how Kim Jong Un spoke about South Korea and did not speak about the United States.

As Park Geun-Hye prepares to take office in less than two months, Kim called for a "removal of the confrontation" between the two Koreas. He didn't offer details on how relations would be improved, though he did state that previous North-South joint statements must be respected and implemented.  Regardless, it bodes well that both he and the South's president-elect Park are talking about changing the relationship.

Importantly, there was no criticism or even mention of the United States in the speech. Perhaps this signals the potential for some kind of outreach from Pyongyang to Washington D.C.. If the Obama administration is willing to take a backseat to initiatives between Seoul and Pyongyang, there is the opportunity for the three countries to move forward on trust-building and development projects to a degree that has not existed in over a decade.

One musn't be naive, but in Pyongyang's first New Year's speech since 1994, there were at least hints that it could be a happier 2013 on the Korean peninsula.