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In-depth Business Intelligence
Books on North Korea
REPUBLICAN REFERENCE
Area (sq.km)
120,540
Population
22,224,195 (July 2002 est.)
Capital
Pyongyang
Currency
North Korean won (KPW)
Leader
Kim Jong-il
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Update No: 036 - (28/04/06)
Budget blues
April in North Korea is a spring season of both ritual and (to a degree)
substantive politics. The ritual surrounds 'Sun's Day': the birthday on April 15
of the late Kim Il-sung, founder of the DPRK and still officially its 'eternal
President' over a decade after his death in 1994. As usual an arts festival and
meetings of loyalty were held in his honour. The tenor of these was described
last year in April 2005's Update*. It does not change much, as can be gauged
from our comments in February's Update on the equivalent birthday celebrations
around February 16 for Kim's son and heir, North Korea's current ruler Kim
Jong-il.
* see archives
Parliament meets, just for a day
Amongst all the festivities more serious business was done, if only for a
day. The Supreme People's Assembly (SPA), North Korea's rubber-stamp parliament,
held its usual annual spring meeting on April 11: the same date as last year,
though then it had been mysteriously postponed by a month. In the eight years
since the SPA emerged in 1998 from four years in abeyance after Kim Il-sung's
death, it has met in late March or early April. Kim Jong-il was absent this
year, as in 2003 and 2004; he attended in 2005 and each year during 1998-2002.
Another variation is how or whether the platform party is announced. After four
years when few (in 2004, none) of these elites were singled out, this time
eleven were named: the most since 2001. As usual, the topmost troika after Kim
Jong-il comprised (in order): Kim Yong-nam, who as SPA presidium president is
titular head of state; vice-marshal Jo Myong-rok, the most powerful military
figure; and the premier, Pak Pong-ju. Among other elite figures, vice-marshal Ri
Yong-mu, vice-chairman of the National Defence Commission (NDC) - the highest
executive body, outranking the Cabinet - has advanced slightly in the rankings;
while defence minister Kim Il-chol, who as of last October was senior to Ri
politically, was not mentioned by name. Unusually, the leader of North Korea's
front Social Democratic Party, Kim Yong-dae, got a mention: perhaps to give a
misleading impression of pluralism.
Where was the finance minister?
Strikingly absent was finance minister Mun Il-bong, who normally gives the
budget speech. This time vice-premier Ro Tu-chol did the honours. It is unclear
whether Ro has replaced Mun, or if the latter is ill or has lost his post; he
was last reported in September, visiting Mongolia. North Korea often does not
formally announce changes of post, for some reason.
Clearly Ro Tu-chol is a rising star. In his previous post as vice-chair of the
State Planning Commission, he liaised closely with those involved in
inter-Korean talks. Appointed vice-premier in September 2003, his profile has
steadily grown. Last year he led a delegation to China in December shortly
before Kim Jong-il's visit there, signing a US$500m agreement for joint
exploitation of undersea oil. This and his new budget role suggest that Ro is
now premier Pak Pong-ju's right-hand man in the tough task of kick-starting the
economy.
It may also indicate a more hands-on approach. Just as North Korea's foreign
minister Paek Nam-sun is a largely ceremonial figure - two vice-ministers, Kim
Kye-gwan and especially Kang Sok-ju, command the real power - so hitherto
finance ministers had been hardly more than chief clerks or book-keepers, with
little clout. Ro Tu-chol seems in a different mould.
The appliance of science
As usual the SPA session gave some clue as to North Korea's policy
priorities. Besides the usual economic and budget reports, a novelty this year
was a third major speech, on science and technology (S&T), given by Choe
Thae-bok: a busy senior figure who serves as SPA chairman (in effect speaker),
as well as a senior secretary and alternate Politburo member of the ruling
Workers' Party of Korea (WPK).
The appliance of science has long been a favourite theme of Kim Jong-il. It is
officially one of "the three mainstays", along with ideology and
military affairs. As such it is the subject of long-range plans, as the wider
economy once was but no longer seems to be. Choe spoke of three: a current
5-year S&T plan, which began in 2002; the next one, ending in 2012, the
centenary of the birth of North Korea's founding leader Kim Il-sung, which will
be a major anniversary; and beyond that, a strategy for the next decade through
2022 - or Juche 111 in North Korea's idiosyncratic calendar, which begins with
the Great Leader's birth in 1912.
Though typically Choe gave no numbers, the fields he mentioned indicate North
Korea's priorities and aspirations. Areas already described as enjoying
"steady progress without stalemate or stagnation even under unprecedentedly
difficult conditions" include integrated circuit design, Korean-style
computer operating systems, nanotechnology, and underground resource
prospecting. Typically, however, he gave no details on any of these.
A power in software, or food first?
For the future, all these and more are to be developed. Choe urged the need
to "build a nationwide information network and develop programming
technology rapidly and so turn our country into a power in software
development." He also mentioned oceanography and space technology; the
latter may be a cover for missiles whose true purpose is military.
This sounds heady stuff for a country which, as Choe admitted, also needs to
solve "urgent economic problems, including food and energy".
Typically, food is seen merely as a matter of science: high-yielding strains,
better seeds, double cropping, "producing good breeds by dint of
bio-engineering", and comprehensive mechanization - this in a land where
tractors rust away for lack of fuel. Worryingly, there is no recognition that a
similar mentality is in part responsible for North Korean farming's present
plight: the "scientific" application of excessive inorganic fertiliser
over many years has exhausted the soil, reducing crop yields.
Are no nukes good news?
On the energy crisis, most remarkable is what Choe did not say. Calling for
modernisation of existing power stations, he was silent on North Korea's two
main debates - semi-overt, for once - in this field: between hydropower and
coal-fired, and small or large-scale plants. He also advocated renewable sources
like wind power and bio-energy. But oddly, he said nothing at all about nuclear
power; even though this was long the supposed rationale for the Yongbyon site
(before its military purpose was admitted), while a right to peaceful nuclear
energy remains a key North Korean demand and point of dispute with the US in the
on-off six-party talks. In Pyongyang's bicycle-spoke model of compartmentalised
administration, with Kim Jong-il the sole hub, achieving joined-up government
appears quite a challenge.
Industry needs upgrading
Predictably Choe also called for industrial modernisation. Specifics
included industrialising iron production using local raw materials, and building
"a large-scale fertiliser industry based on coal gasification"; no
doubt to replace the oil-based technology that was left high and dry when Moscow
abruptly cut off subsidised supplies in 1991. Also mentioned were oil
exploration, a longstanding quest; and upgrading the processing of such abundant
resources as "lead, zinc, magnesite, graphite, silica and building
stone."
Juche science does not cut the mustard
None of this will come cheap. Choe said that "state budgetary
allocations for science and technology should be sharply increased and
rationally used". Yet the budget speech, which preceded his, allocated a
mere extra 3.1% to S&T: less than the average rate of increase. Or maybe
foreigners can help: Choe spoke of technological exchanges, but not joint
ventures. He called for better science education; yet there is surely a tension
between demanding both "ultra-modern science and technology as required by
the trend of … the new century" and "[creating] science and
technology of our own style" or "strengthening the Juche character of
the national economy." North Korea must accept that no nation can go it
alone in science - and that S&T is no panacea, nor a substitute for market
reform. To use the Marxian terms which North Korea has abandoned but which here
at least are very relevant, what is holding back the productive forces is above
all the outmoded socialist relations of production.
A budget with no numbers shows the limits of reform
The SPA's other two keynote speeches showed similar ambiguities. Left to
themselves, Pak Pong-ju and Ro Tu-chol are technocrats who would probably
embrace full-on reform. Yet they remain constrained by an outmoded system which
still refuses serious change.
One sign of this is that for a fourth year running North Korea produced a budget
without a single hard number. There were never many, and none at all since 2003.
Presumably the high inflation since July 2002's wage and price reforms makes a
multiplier for before and after this watershed either technically hard to
calculate - or simply embarrassing to admit. Either way, a budget with no
numbers is a bad joke; no serious modern state would do this.
North Korea overspent last year
Hence in public at least - for these figures must exist - Ro Tu-chol like
Mun Il-bong before him wielded only percentages. There is no way to assess what
most of these mean, or even if they are true. One stands out, however. According
to Ro expenditure in 2005 was 104.4% of the planned figure - meaning a
significant overspend. Despite Ro's claim that "the state budget was
satisfactorily implemented", one wonders if this is why Mun Il-bong was
fired.
Revenue overshot as well, but only by 0.8%. But the total was up 16.1% on 2004,
meaning that last year's ambitious target of increasing revenues by 15.1% was
fulfilled - or so they claim. Mun Il-bong said last year that this was to be
achieved from four sources: raising state enterprise profits by 13.5%, as well
as an 8.4% hike from profits of cooperatives, 3% more from social insurance, and
a "considerable increase" in local budgetary revenue. The actual gains
reported by Roh this time were in fact higher: profits from state enterprises
rose 14.2%, those from cooperatives (an expanding group) a whopping 24.3%, and
social insurance (an obscure category) 5.7%, while local budgetary revenue
yielded 14.2% more than planned. All this must have helped cover the
overspending.
Farming again gets an above average increase
All these percentages can be confusing. Most are year-on-year increases, but
two refer to a sector's share of the total pie: defence spending was, as
planned, 15.9% of the total, while 41.3% (the same as in 2004) went to the
economy. Reverting to the other use of percentage as increases, agriculture saw
its funding soar by 32.5%, even more than the 29.5% planned.
Ro was slightly more forthcoming on targets for 2006. Overall revenues are
planned to rise by 7.1%, with those from state enterprise profits - still
described as "the major source of budgetary revenue" - up 7.2%. But
expenditure is set to grow less than half as fast: by 3.5%, perhaps to make up
for 2005's overshoot. By sector, farming will get an extra 12.2% - more than
other sectors, if not nearly as big a hike as last year - while "power,
coal and metal industries and railway transport" - a mixed bag - are not
far behind with a 9.6% increase. But social policy gets a measly 3%, while oddly
science and technology is also a cinderella with a mere 3.1%, despite being a
key theme of this SPA session. Defence like last year gets 15.9% of the total,
which suggests a 3.5% increase - a fairly average rate.
The state seeks new revenue sources
With the real economy shifting away from vertical central planning to more
market-based horizontal inter-enterprise dealings, the state must find new ways
to tax. Thus Ro said that "the state plans to expand financial sources
through the introduction of new social insurance payment system by
enterprises"; he did not elaborate. He also called on local governments to
"manage economic life in the local areas on their own and increase their
profits so as to contribute to the state revenue." Conversely, they can
expect no subsidy from the centre.
Military priorities stymie growth
As in past years, the premier's wider economic report added a little, but
not much. Pak Pong-ju said that power generation rose 11% last year and coal
output 10%, hailing this as "patent proof that the economy … decidedly
entered upon the road of rejuvenation." More than 130 "major objects
of construction and reconstruction" were completed, while over 1,050
planned targets in science and technology "were successfully beaten."
Without numbers and detail, such claims cannot be verified. Doubt must persist,
not least because the real priorities are avowedly elsewhere. Thus "top
priority [is] "increase of military capabilities" and supplying the
defence industry. As Pak well knows, this burden negates his very next sentence:
"It is the most important task facing the Cabinet this year to effect a
decisive turn in economic development and people's living." Small wonder
that his final remarks spoke of the Cabinet as having vast tasks while facing
"difficulties and ordeals". Trying to curb the Korean People's Army (KPA)'s
greedy demands must be no picnic.
Pyongyang seeks foreign partners
The most encouraging part of Pak's speech was a strong commitment to improve
outside links: increase exports, actively explore new foreign markets, and seek
"brisk external … cooperation" including joint ventures. Yet these
goals are undermined by North Korea's wider policy stance. Not only will the
unresolved nuclear issue continue to deter western investors, but the tough
recent US response to financial crime is harming even legitimate businesses in
Pyongyang (see below). With the Bush administration not about to yield on a
challenge so basic as counterfeiting of its currency, Kim Jong-il needs to make
the "bold switchover" his media often urge on the US. Crime really
does not pay, and he cannot have it both ways. This may not bother Chinese
investors, whose numbers are growing. Yet the dear leader will not want to
become a mere economic appendage of the dragon next door.
Nuclear talks fail to reconvene
Yet again, there was no progress towards reconvening six-party talks - the
Koreas, the US, China, Japan and Russia - on the North Korean nuclear issue.
Having now not met in any substantial sense since September, except briefly in
November, concern is rising that this forum may for all practical purposes have
becom extinct. The main obstacle remains anger in Pyongyang at the new US
campaign since last autumn to target its financial misdeeds (which it denies),
said to include money-laundering and counterfeiting. North Korea says it will
not return to nuclear talks unless US sanctions are lifted. The US retorts that
crime is crime and not subject to negotiation, whereas the nuclear issue is
entirely separate.
A 'track two' meeting in Japan brings no breakthrough
Hopes rose slightly in early April. A meeting in Tokyo of the Northeast Asia
Cooperation Dialogue (NEACD), a 'track two' forum, brought together all
participants in the six-party talks. Despite this, the chief US delegate,
Christopher Hill, the assistant secretary of state for East Asia, whose
readiness to meet bilaterally and general flexibility breathed new life into the
six-party talks last year, steadfastly refused to meet his North Korean
counterpart, vice-foreign minister Kim Kye-gwan. If Hill was doubtless under
orders from Washington, even the right-wing Seoul daily Chosun Ilbo worried that
this was a snub: both to Kim, who may be in hot water after returning to
Pyongyang empty-handed, and to South Korea, China and Japan, who had all striven
to arrange for Hill and Kim to meet on NEACD's sidelines.
Foreign business protests
On April 11 the European Business Association (www.eba-pyongyang.org) in the
DPRK called for the immediate lifting of US sanctions unless allegations of
money laundering and counterfeiting can be substantiated. EBA claimed the main
impact of these steps is to harm legitimate business in North Korea, including
joint ventures; whereas any illegal activities would find ways around them.
Nigel Cowie, the British managing director of the foreign-invested Daedong
Credit Bank, said that the Macau-based Banco Delta Asia's suspension of all
dealings with North Korea means that "a large amount of our and our
customers' money … has effectively been seized, with no indication of when
they'll give it back."
Needed: a policy rethink
One despairs of the Bush administration ever producing a joined-up policy on
North Korea. The present situation is frankly a mess. Targeting financial crime,
however justifiable in theory, is backfiring in two ways. The blunt instrument
of sanctions hits the kinds of honest business which any sensible policy would
wish to assist in Pyongyang, while giving Kim Jong-il a fresh pretext to put off
nuclear talks. This serves no purpose. A rethink is overdue.
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