this is the last assignment of MGX 5440, also, it is last assignment of my Monash study life.
Abstract
North Korea is a less developed country as well as a mysterious socialist country. In this report, it will figure out how to develop its economic. First, the background of North Korea is introduced. From the introduction, it finds that North Korea is a unique country, and it should find a special way to develop its economic. Second, some problems contained in North Korea are identified. Two types of problems are found, first one is political problem, such as bad relationship with other countries. Second one is economic issue, such as its infrastructures are needed to be modernised. Between these two problems, political problems are needed to be fixed first, as the economic cannot be developed without a stable social environment. So, in the third part, two plans are recommended- first five years plan and long term plan. In the first five years plan, it will focus on fix its political problems through Six Party Talks. And the main idea of long term plan is using China and Vietnam's method- "economic reform and opening up" to change North Korean economic situation. The priority of long term plan is infrastructure construction, as without infrastructure, other economic activities are hard to work smoothly. And at the end of this report, some special tips are given, North Korea government can learn a lot from China's high speed economic development, but it also should watch out some bad impacts of high speed economic development.
Introduction
Democratic People's Republic of Korea is a country in East Asia, occupying the northern half of the Korean Peninsula. The peninsula was governed by the Korean Empire until it was annexed by Japan following the Russo-Japanese War of 1905. It was divided into Soviet and American occupied zones in 1945, following the end of World War II. North Korea refused to participate in a United Nations–supervised election held in the south in 1948, which led to the creation of separate Korean governments for the two occupation zones.
North Korea has long maintained close relations with the People's Republic of China and Russia. The fall of communism in Eastern Europe in 1989, and the disintegration of the Soviet Union in 1991, resulted in a devastating drop in aid to North Korea from Russia and North Korea's economy declined sharply, although China continues to provide substantial assistance (Travel Document Systems, 2010).
GDP is estimated to have fallen by about 25% in 1990s. The economy has since stabilized and shown some modest growth in recent years, which may be reflective of increased inter-Korean economic cooperation. Output and living standards, however, remain far below 1990 levels. North Korean industry is operating at only a small fraction of capacity due to lack of fuel, spare parts, and other inputs. Agriculture and fisheries were 22% of GDP as of 2008, although agricultural output has not recovered to early 1990 levels. The infrastructure is generally poor and outdated, and the energy sector has collapsed (ABC, 2010).
North Korea has a centralized government under the rigid control of the communist Korean Workers' Party (KWP), to which all government officials belong. A few minor political parties are allowed to exist in name only (Government, 2010).
In the rest of this report, it will first identify the current problems contained in the North Korea. Then based on the features and problems of North Korea's economic and government system, it will make two plans for North Korean government to solve these problems as well as help its future development. At the end of the report, a conclusion will be given.
Current Problems
There are two types of problems are needed to be considered in North Korea future development- political problems and economic problems.
Political issues
North Korea was placed under the Soviet Union's rule for a considerable period of time, thus it is structured as a Communist state with special references taken from the Russian constitution. Even though the political system of North Korea has undergone several changes over the last few years in order to boost up the economic growth of the country, the nature of the political system, a major aspect of the North Korean political system lies in the fact that it is widely seen as a totalitarian dictatorship built upon the rationale of centralization. Due to the political and historical reasons, the bilateral relations with its neighbouring western-friendly countries are often tense. It remains a lot contentious issues among those countries on political and economic aspects.
America
North Korea has been among the most vexing and persistent problems in U.S. foreign policy in the post-Cold War period. The United States has never had formal diplomatic relations with North Korea. Relations between the two countries worsened in the early 1990s when North Korea expanded its nuclear program and the US considered bombing the suspected weapons development facilities. The two sides eventually negotiated their way back from the brink of the war. The resulting Agreed Framework required that North Korea freeze its nuclear program in exchange for shipments of heavy fuel oil from the US and two light-water nuclear reactors to be built by an international consortium funded largely by Japan and South Korea. As part of this agreement, the two countries pledged to move toward full normalisation of relations. However, the Agreed Framework averted war but did not create a lasting peace. The US government has continued to criticize North Korean sales of advanced missile technology to countries such as Pakistan and Iran. In August 1998, North Korean launched a satellite that pass over Japan and demonstrated its possession of three-stage rocket technology without notification. At the same time, US and South Korean get the information that an underground facility in North Korea might house a nuclear weapon program, the US encouraged Japan to expand its military role in the region to threat North Korea. All of these limited the steps toward normalisation of relations. Although US rhetorically supports a more open and internationally integrated North Korea, all the embargo further servers Pyongyang from the capitalist world and reinforces the isolationist faction within the North Korean political elite (Porter, 2010).
Japan
Attempts to establish normal relations in the early 1990s and again in 2000 ended in failure, due to seemingly unresolvable obstacles. In September 2002, a one-day summit was held in Pyongyang between Japanese Prime Minister Junichiro Koizumi and North Korean leader Kim Jong il, the first ever between the leaders of the two countries. Koizumi and Kim momentarily appeared to break longstanding stalemates on several issues and agreed to restart bilateral normalization talks, but the talks subsequently stalled, due to North Korea's apparent admission to U.S. officials in October 2002 that it had a secret nuclear weapons program based on the process of uranium enrichment. Japan's role is potentially critical in the current crisis over North Korea's nuclear weapons programs for a number of reasons. Most importantly, Japan has promised North Korea a large-scale economic aid package to compensate for the Japanese occupation of the Korean Peninsula from 1910-1945, much as it gave South Korea economic assistance when Tokyo and Seoul normalized relations in 1965. Since North Korea launched a long-range missile over Japan in 1998, relations with North Korea have been a highly politicized issue inside Japan, creating strong domestic support for taking a hard line against Pyongyang. Prime Minister Koizumi, however, has equivocated on taking more coercive measures against North Korea, such as economic sanctions, absent an escalation of the situation by Pyongyang. Japan fears such measures could provoke a military response by North Korea or trigger a surge in refugees (Japan-North Korea Relations, 2010).
South Korea
After nearly two decades, inter-Korean relations had not improved measurably. In fact, it may be argued that political leaders in Seoul and Pyongyang have skilfully used the perceived mutual threat to maintain and justify their political legitimacy. Recently, the sinking of the South Korean Navy warship Cheonan on 26th March and the subsequent determination two months later by a multinational investigation team that a North Korean torpedo attack had caused the destruction has sharply escalated tension on the Korean peninsula (Kurt Achin, 2010).
Economic issues
The political issues are not the only problems that North Korea faced at the moment. Although North Korea's infrastructure is extensive, it is crumbling and in need of expansion and modernization. The country's road system, estimated at 20,000 to 31,200 kilometers, is limited and unpaved. Private cars are scarce and the number of trucks is limited. The 5,000-kilometer railway network, originally built by the Japanese, provides 70 percent of passenger transport and carries about 90 percent of the annual freight traffic.
Most of the country's ports and airports need modernization. Of North Korea's 12 ports, only a few can handle large ships, while only 22 of its 49 airports have paved runways. Pyongyang's Sunan airport operates 20 weekly flights, servicing only 6 destinations.
North Korea suffers from a shortage of oil and gas. The oil shortage came after the country was deprived of its access to low-priced Soviet oil and saw a significant decrease in oil shipments from China. The country produces electricity from fossil fuel (34.4 percent) and hydroelectric power generators (65.6 percent). Over the next several years, North Korea will approve funds to construct over 100 new power generating plants. The state-owned oil and gas facilities are being privatized and provide excellent opportunities for investment. In 1999 it was estimated that the country produced 28.6 billion kilowatt-hours of electricity.
The telecommunication system is undeveloped. In 1995 there were 1.1 million telephone lines in use. Based on 1998 statistics, North Korea has 12 radio stations and 38 television stations. There are 3.36 million radios and 1.2 million television sets in use. The country has one Internet service provider and no cellular telephone system (Vyapaarasia, 2010).
Future Plans
First five years plan (2011-2015)
Obviously, there are several problems with North Korea. As mentioned above, the most important problem is that the society is not very stable. More explicitly, the relationship with Japan and USA is bad, and import and export activities cannot work well. If the society is not stable, it will be very difficult for this country to develop their economic. So in the first five years, North Korea should work hard on fixing its relationship with other countries, especially with Japan, USA, and South Korea.
Six-Party Talks
Seven years ago, an meeting called the Six-Party Talks used to give North Korea a very good platform to communicate with other countries. Unfortunately, the Talks was discontinuation since 2007. The last Talks was held on September 2007. And after its discontinuation, several events happened in North Korea. On 5th April, 2009, North Korea proceeded with its announced satellite launch, despite international pressure not to do so. The pressure was due to international belief that the "satellite" was in fact a test of North Korea's Taepodong-2 ICBM. The launch was a failure, and it landed in the Pacific Ocean. Despite the failure, U.S. President Barack Obama responded that "violations must be punished," ordered North Korea to be "punished." South Korea urged heavier sanctions against North Korea. On 13th April, 2009, the United Nations Security Council agreed unanimously to a Presidential Statement that condemned North Korea for the launch and stated the Council's intention to expand sanctions on North Korea. On 14th April, 2009, North Korea, responding angrily to the UN Security Council's resolution, said that it "will never again take part in such [six party] talks and will not be bound by any agreement reached at the talks." North Korea expelled nuclear inspectors from the country and also informed the International Atomic Energy Agency that they would resume their nuclear weapons program (Mark, 2009). On 25th May, 2009, North Korea detonated a nuclear device underground. The test was condemned by the United Nations, NATO, the other five members of the Six-party talks, and many other countries worldwide (Louis, 2009).
These facts indicate that the discontinuation of the six party talks made the situation worse in North Korea. We suggest North Korea goes back to the Six-Party Talks. The Six-Party was set up to solve the problems between Korea and other countries, North Korea should seize the opportunity to solve the problems. We suggest North Korea uses 3-5 years to make some agreements with these counties through the Six-Party Talks. By singing these agreements, at least North Korea can achieve peace at some level. And the peace in North Korea is the precondition of the development of North Korea. So at the first five years plan, North Korea should put Six-Party Talks in the first priority. Only under peaceful environment, the economic construction can be conducted smoothly.
To sum up, the first five years plan is aim to let North Korea achieve some level of peace through six party talks. After that, the economic development can be done without so many troubles.
Long term plan
Overall
There are only few countries are socialism countries, for instance, North Korea, China and Vietnam. During recently years, China and Vietnam are developing very well. Basically, these two countries used the same method to develop the economic- the reform and opening-up policy. In the following few paragraphs, it will introduce the cases in Vietnam and China.
Vietnam started Economic Reform in 1986. Over the past 20 years, Vietnam has made a shift from a centrally planned economy to a Socialist-oriented market economy. Over that period, the economy has experienced rapid growth. Nowadays, Vietnam is in the period of integrating into world's economy, as a part of globalization and is in transition from a planned economy to a market-oriented mixed economy. Although, almost all Vietnamese enterprises are SMEs with some nationwide trademarks such as VNPT, Vinamilk, Trung Nguyên, Kinh Do and others, Vietnam has been rising as a leading agricultural exporter and an attractive foreign investment destination in East and Southeast Asia.
In 2009, the nominal GDP of Vietnam reached $92.439 billion, with nominal GDP per capita of $1,060. According to a forecast in December 2005 by Goldman-Sachs, Vietnamese economy will become the 17th largest economy in the world with nominal GDP of $ 436 billion and nominal GDP per capita of 4,357 USD by 2025 (IMF, 2010). According to the forecast by the PricewaterhouseCoopers (2008), Vietnam may be fastest growing of emerging economies by 2025 with a potential growth rate of almost 10% per annum in real dollar terms that could push it up to around 70% of the size of the UK economy by 2050.
China has had a spectacular economic development and has come to play an increasingly important role in the world economy, especially since China became a member of the WTO. For a long time, the Chinese economy was a centrally-planned economy in which all companies were owned by the state. In 1978 China started an economic reform. In the beginning, in the late 1970s and early 1980s, trade was opened to the outside world and the Contract Responsibilities System was implemented in agriculture. By the end of the 1980s China had almost solved its food shortage problems. Around 1990 six special economic zones were established, including the Shanghai Pudong zone, which was a pioneer attracting foreign capital.
The reforms of the late 1980s and early 1990s focused on the creation of a pricing system, which was achieved using a dual track pricing system (China.org, 2009), and on decreasing the role of the state in resource allocations. Increasingly competitive sectors, such as distribution, were opened to private enterprise and foreign capital. In 2004 the GDP per capita was US$1,267. In 2009, this number reached US$ 6,567. Industrialization, open organization and internationalization was the tendency that helped move towards a market economy. In 2009 GDP increased to US$8.765 trillion, which makes China the third biggest economic body in the world, just followed US and European Union (IMF, 2010). Opening to the outside remains essential to China's development.
China continues to attract large investment inflows. By the end of 2004 China had become the biggest FDI developing country. In 2003 foreign fund and enterprises produced about 45% of China's exports. By comparison, China's imports and exports account for 5.3% and 5.8% of the world's, respectively. Foreign exchange, on the other hand, total about US$ 609.9 billion in 2004. This appeared in the IMF report of 2004. More than 20% of the world increase in trade was contributed by China. China emerged as the third biggest trade body, after the US and the European Union.
From these two cases, it is clearly that "economic reform and opening-up policy" seems very suitable policy for socialism country for economic development. So, in the long term plan, North Korea can follow the China method, first set up one or two special economic zones. We suggest the first special economic zone should set up at Sinuiju. Sinuiju is a city near China, so it can build up some factories in this city, and then trade with China more easily. Another reason for setting up a special economic zone in this city is because of Pohai (Korea Bay). North Korea can trade with other countries through Sinuiju Port. So in the overall level, we suggest North Korean government follow China and Vietnam's way to improve its economic situation.
Priority in the long term plan
Generally, when a country decides to improve its economic situation, the infrastructure should be improved first. For example, when several factories are needed in special economic zone, it needs power to support these factories, also needs roadway to deliver their products. And as mentioned above, there are so many problems contained in the infrastructure system of North Korea. So we suggest North Korea should consider how to improve its infrastructure first. And we also notice that the North Korea government may face financial problem, so BOT can be used to finance its infrastructure construction. Also China has some experiences on BOT. For example:
China's Shajiao B Power Plant Project
Located in the Hong Kong border area of China's Guangdong province, the US$550 million, 700 megawatt Shajiao B project was developing Asia's first large independent power producer (IPP) program. In 1984 the local government of the fast-growing area, realizing it urgently needed better power generation capacity, accepted a proposal by Hong Kong construction firm Hopewell Holdings to develop a plant on a BOT basis. Risks were high because the BOT structure was very new to Asia and China had no policy on foreign investment into infrastructural development, which was controlled by the country's state-owned enterprises. The project proceeded on the basis of Hopewell founder and chief executive Gordon Wu's good relations with government officials and state enterprises in both Beijing and Guangdong. In addition, the government shouldered a significant portion of the risk, while offering disproportional rewards to Hopewell. A government owned investment unit became a significant equity partner, and another state-owned entity guaranteed power purchase payments and foreign exchange risks. Meanwhile Hopewell, which was the major contractor to the project as well, arranged that it (as equity partner) would be paid a large cash bonus and preferential share of tariff receipts (compared to other investors) for beating the construction deadline. This amounted to more than US$50 million. These payments ensured that, for Hopewell, Shajiao B would make an estimated 25-30 per cent return on equity, thus reducing its capital exposure very quickly. In essence, China's acceptance of a very high level of profitability and very early payback for the sponsors, in return for the latter's commitment to provide new power capacity rapidly, made the project work (Handleya, 1997).
Accordingly, North Korea government could sign contracts with foreign countries' companies to construct infrastructure. Especially, the government can hire Chinese companies to do that. Because China and North Korea have good relationship compared with other countries, when China companies running business in North Korea, the resistance from government maybe low.
Special tips
As mentioned above, North Korean Government should learn a lot from Chinese Government. So, North Korean Government should also notice the shortcomings of Chinese high speed economic development. There are several points should be avoided.
1) The economic growth model, from an extensive economy to an intensive one; from large investment and high consumption of resources to a high technology model, high added value and low consumption of resources.
The foreign companies direct invest in China contributes some GDP of China. For example, SONY operates some factories in China, and these factories manufacture a lot of products every year, and make some profit which count in China GDP. But who is the really beneficiary for operating the factories in China? The answer is SONY. SONY opens factories in China does help China to solve the employment problem in some level. But the eventual beneficiary is SONY. SONY can reduce cost through producing the products in China. And it gets the net profit of its products, just leave the Tax and GDP number for China. And China cannot get the technologic because SONY still holds that. From the pure economic point of view, SONY can get more benefits than China.
So, North Korea needs pay more attention to develop the high-tech products by itself, and get more real economic benefits.
2) Gap between the rich and the poor.
There is a common comment in China now- the rich people get richer, and the poor people get poorer. The rich people can use their capital to reinvestment, and earn more profit. But the poor people cannot do that. The huge gap between rich and the poor people maybe the main shortcomings of capitalism economic. But some capitalism countries use some leverage to solve this problem. For example, Australian Government uses tax to balance the gap between rich and poor. When people earn more money, they must pay more tax. The highest tax rate for individual people is 45%, if plus medicare levy it can reach 46.5%. That's quiet high tax level. A joke talk about the huge gap between rich and poor- China spent 30 years creates the gap between rich and poor larger than that capitalism spent more than 100 years. That's quite an irony. But it can reflect the true situation in China. So North Korea should also need to find some methods to balance the income of difference groups of people.
There are also some other problems should be considered, such as pollution problem during the high speed development.
Conclusion
In this report, it first introduces some background of North Korea, and it shows that the economic situation in North Korea needs to be improved. Then it finds the main problems contained in North Korea. There are two main problems, one is political problem such as bilateral relationship with US, and the other is economic problem, such as infrastructure needs modernized. After that, according to the problems contained in North Korea, we make two guidelines for North Korea Government. First one, we call it "first five years plan". We suggest North Korea Government uses 3 to 5 years to fix its relationship with other countries through the Six Party Talks. After fixed the political problems, the economic problems can be fixed faster. The second plan, we call it "long term plan". The main idea of long term plan is North Korea can use China and Vietnam's method to fix its economic problems, we can call it "reform and opening up". The priority of long term plan is constructing infrastructure. As North Korea government may face financial shortage, it is recommended to use BOT to construct infrastructure. Also, some special tips are given such as notice the gap between rich and poor people during the economic development.
References
ABC, 2010, Korea, North, http://www.theodora.com/wfb/korea_north_economy.html
Achin, K. (2010) North Korea Breaks Relations with South Korea, Global Security, http://www.globalsecurity.org/wmd/library/news/dprk/2010/dprk-100525-voa01.htm
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Handleya. P, (1997) 'Critical View Of The Build-Operate-Transfer Privatization Process in Asia', Asian Journal of Public Administration Vol 19, No 2 (December 1997) 203-243
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Louis, C. (2009) U.N. Security Council condemns North Korea nuclear test. Reuters. http://www.reuters.com/article/worldNews/idUSTRE54O4FS20090525
Mark, L. (2009). North Korea Says It Will Halt Talks and Restart Its Nuclear Program. The New York Times. http://www.nytimes.com/2009/04/15/world/asia/15korea.html?ref=global-home.
North Korea Economy Watch (2010) http://www.nkeconwatch.com
PWC (2008) China to overtake US by 2025, but Vietnam may be fastest growing of emerging economies http://www.pwc.com/gx/en/press-room/2008/china-asia-economic-markets-growth-emerging-markets.jhtml
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Vyapaarasia (2010) http://www.vyapaarasia.com/n.korea/roads.asp
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