With a second summit between North Korean leader Kim Jong Un and U.S. President Donald Trump on the horizon, the spotlight has been on sticking points that seem to have stalled negotiations since their first meeting in June last year.
Washington and Pyongyang have publicly disagreed on international sanctions against the DPRK, with North Korea calling for rolling back the restrictions while the U.S. says the ball is in Pyongyang’s court.
Speaking to NK News, William Brown, adjunct professor at Georgetown University School of Foreign Service and former Senior Advisor to the National Intelligence Manager for East Asia in the Office of the Director of National Intelligence, assessed the state of the sanctions regime and North Korea’s economy.
Brown, who regularly tracks North Korea’s primary economic indicators also weighed in on North Korea’s “very low” oil imports, China’s trade numbers, the DPRK’s oddly stable exchange rate and Pyongyang’s ballooning trade deficit.
This interview has been edited and condensed for clarity and readability
NK News: How would you assess the condition of North Korea’s economy today, as compared to before the recent sanctions era?
William Brown: It’s a little bit perplexing, looking at the North Korean economy today, because you get a lot of positive views from people who go into North Korea, and a lot of people still do that in North Korea, and the publications that they are putting out and what the research community is putting out, are tending towards the positive side, to quite a much-invigorated economy.
On the other hand, you have these huge sanctions that I do firmly believe are affecting the economy quite a lot. So the way I’m posting that is it looks to me that more than ever, there are two economies in North Korea.
There is the state socialist economy, we call it the old command economy system. I think a lot of people think that it’s gone away, especially in South Korea. The South Korean economists that I talk to are kind of convinced that the command economy has collapsed and has gone away.
But I think that’s kind of a mistake. There is no question that the central plan is broken down… it’s not working as it did, say in the 60s and 70s, even in the 80s, but it’s not gone away. I think that the big problem with North Korea is that the socialist or what we might call a fixed price economy has not gone away. So that’s still there. What percentage of the economy is in that part of it, it’s really difficult to measure because the prices are different in the economy.
“More than ever, there are two economies in North Korea”
Maybe if you look at employment, maybe half the people are in that. Maybe while you have about a third of the people in agriculture, which is its own economy, then another third that’s in the state economy, I would call it, and then another third is the private economy. It looks to me like the private economy is doing really well, the state economy is doing very poorly, and the agriculture economy one of my more perplexing issues.
I’m not sure how agriculture is doing because I get very different views from people who travel there. It’s not doing great, but it doesn’t seem to be doing that badly either. Some reforms seem to be beginning to take hold in agriculture, which shows an extremely important development. So on the balance sheet when you net that all out, then you get sort of a no-growth economy.
But what you don’t see, and I would be very happy to hear from people who visit say, the Kim Chaek Steel Mill in Chongjin, for example. That’s North Korea’s largest industrial establishment – it used to have a hundred thousand workers.
From the imagery, and from what they talk about it, it looks like it’s pretty moribund it might be working at twenty percent of its capacity. So what are all those a hundred thousand steelworkers doing?
I guess they are doing private work, but it’s kind of a waste of a huge national resource, that steel mill. And similarly, for lots of big factories. That’s what we don’t get a very good glimpse of, from the people visiting. People don’t visit the steel mills.
NK News: So is the current sanctions regime is impacting the command economy, which in turn is spurring the private economy?
William Brown: Yes. It’s kind of a complex argument, but the way I look at the system, the command economy is like any controlled market, for example, the drugs market here. A controlled market requires a lot of government control – fixing the prices, or just not letting the natural market develop.
So when the government weakens the natural market growth, the state side is having a lot of trouble, so they are releasing workers – workers can pay either bosses, or pay a fee, or pay a tax or pay some corruption, and go and do some things on their own. The interesting thing is, when they go out and do things on their own, they can be much more productive and so the economy can grow.
Another thing I’d like to say about North Korea is if you look at why is it so poor, clearly it’s because of poor productivity. Production in the country is one of the worst in the world, but it’s not a result of a lack of assets of capital or land or resources. It’s not a result of a lack of inputs. An economy requires inputs – labor and capital – and North Korea has a lot of assets, a lot of capital actually, fixed capital. The social system, one thing it’s good at is building factories, so that’s what they did.
The problem in North Korea’s productivity is that the productivity of labor and productivity of capital is truly abysmal. The productivity of land, I might argue, is about the worst in the world. So the state squanders the assets they have. But on the other hand, when the state shrinks, people start doing their private things, they are able to grab a hold of some of those assets and make startling gains in productivity. So it’s not an all bad news story, it’s actually kind of a good news story. You’ve got all this latent capital, and a huge amount of human capital, for example, and they can use that, as the state shrinks, to go to the private side.
“North Korea has a lot of assets, a lot of capital actually, fixed capital”
NK News: How would you assess the state of sanctions now as compared to the height of the maximum pressure campaign?
William Brown: The strong sanctions I never really thought they were working until the Chinese came on board really strongly in the middle of 2017 after Xi Jinping and Trump met down in Florida.
They argued about a lot of things, but one thing they seemed to agree on was North Korea. And China really stepped to the plate after that and slammed the door, officially, on imports from North Korea. So those have just really shrunk. They have been way down for about a year now, so it’s been some time.
One thing to realize though is, in a command economy, we need to accept that there is still a command economy, exports are not so important. In our economy, the market economy, we always focus on exports because exports are so linked to jobs, and jobs create confidence and spending. So if you are to look at this circle of activity, you look at exports first.
In a command economy, they are not so worried about jobs. Everybody is employed in some way. They might not be working very much, or they might be working hard but not being very productive. But the reason that a command economy exports is only to import.
The exports are kind of a side thing. They look at the plan and say well this is what we need. We need imports – things we don’t have but are really expensive f0r us to make, or we don’t have any at all, like petroleum, for example.
The plan is geared toward exporting in order to import. And I think that is important if you look at the current situation. So the exports tanked – they went down by 88 percent last year, and now, and now maybe an annual export of about $200 million with China, but that’s most of their trade, which is just almost nothing if you think about it.
But last year, the North Korean import side was much less affected. Now though and presumably into 2019, the imports are suffering quite a lot. There is a six-month period when China didn’t produce any detailed commodity-by-country data, at least not in a computerized format. But that’s for everybody, not just for North Korea. Some people thought this was related to North Korea, but I don’t think so.
They had a massive computer problem and couldn’t put out the data for anybody. But now, about a month ago, they fixed that problem and so the data is pouring out. Most of it was pretty predictable; North Korean exports to China were down – a lot of zeros. Wherever there were sanctions, there was zero. Chinese customs says if it’s not legal, they will put a zero, so there are a lot of zeros.
But to me, maybe the more interesting part was on the Chinese exports to North Korea. Some of those are constrained by the sanctions, many of them are not. So what we are seeing is consumer products – things like tobacco, cosmetics, sugar, confectionaries, textiles, that kind of thing – they are doing really well. They are kind of flat, kind of normal.
The kind of things that you imagine you’d see in North Korean market places, those products are holding up pretty well. But the overall North Korean imports are down about a third from 2017, which is a huge cut. So what gives?
Well, what gives is the machinery and the vehicles, non-electric machinery, electric machinery, anything electronic, anything kind of modern, if you think about it, most importantly though, anything that goes into industry, into factories, those are down really sharply. A lot of that is sanctions. So you get this kind of a funny thing; it says North Korea imported 20 trucks from China in the whole year.
I’m sure it’s not that accurate, and a lot of smuggling takes place. After all, if you have a factory you really need some ball bearings or something, you are going to get them. If you really need them, you are going to send somebody into China and they come back with them. But it’s going to be an expensive way to get them, and if it’s on the margin you are not going to get them, you might substitute some poor quality ones, or you’ll just keep using your old ones, try to fix them.
So this is what I’m thinking is happening in North Korean industry today. This is why I’m thinking the state sector is having a lot of trouble. They are not able to import the normal parts and equipment that they need. So those imports are down really sharply. Partly because of the sanctions, but partly, I suspect, they are running out of money to buy those kinds of goods.
NK News: What do you make of the reliability of China’s trade data?
William Brown: There is no question we are overly dependent on this little bit of data we get on North Korea. Similarly, on the Daily NK, the prices data. We are very dependent on very few sources of data.
But on the trade data, I’m less worried than a lot of people, probably because I used to work in a commerce department that’s in charge of our balance of payments and all of our trade data, the Census Bureau. And what you realize is, for a country like China, if we are talking about Chinese data, customs collection is an enormously difficult and kind of a historical process. So the people are very proud of collecting good data.
China is the ultimate bureaucracy, if you think about it, it’s a bureaucracy that made all the other bureaucracies. So when you look at their customs collection, I’m pretty impressed with it, generally. The detail, the speed at which they put out massive amounts of data on their trade with the whole world – after three weeks. Then you start seeing these zeros, and you think, “could it really be a zero?” I’m sure this is kind of a police state, so they are not going to obviously break the law and say we imported something we were not supposed to.
So on the one hand, it’s predictable, but on the other hand, the idea that you would go in and screw up the data, for political reasons, is much more complicated than anybody can imagine. For one thing, if you’re exporting something to North Korea, you are a company in China, when you get your payments, you have to put in all this paperwork, and the paperwork includes your customs declaration, the details of the buyer, the seller, and so on.
It’s part of the accounting system of the country. So I guess, in a nutshell, I’m thinking that the data itself is pretty good but what’s happening is a lot of what we might call smuggling or trade that goes around the data, around the customs house.
“There is no question we are overly dependent on this little bit of data we get on North Korea”
So, clearly, sanctions create smuggling. I’m sure the smuggling is up a lot, but if the Chinese report an 88 percent drop in imports from North Korea in 2018, I might say maybe it’s down 30 percent or 50 percent at max. Even so, that is a huge amount for the macroeconomy. So it’s inescapable to me that there is a huge impact of the sanctions on North Korea just because China is such an important player, and the data that the Chinese show is so incredibly dramatic.
I don’t think we’ve ever seen any kind of fall off in trade this much between two countries anywhere, except if you have a war, and there are really not that many sudden wars. My guess is this drop in the China-North Korea trade is of historic proportions and is really damaging to many aspects of North Korea, but not all of them. Trade always works both ways, there are winners and losers. So there are some winners in North Korea, and there are some winners in China. But I think overall the North Koreans are feeling the crunch.
NK News: North Korea’s trade deficit with China last year was one of the largest we’ve ever seen. How does North Korea continue to run in the red like this? Do you think barter agreements and credit systems could play a part?
William Brown: One thing to remember that people tend to forget is that smuggling is on the North Korea import side – so petroleum products such as ship-to-ship transfers or whatever. That, by the way, to me, is an indication of the sanctions working. Why else would you do a ship-ship transfer unless the police are out to get you? But that’s a costly import for North Korea.
What I also have been thinking is the Korean diaspora, a couple of million Korean-Chinese, a couple of million in Russia, a million in Japan, I’m thinking those people, especially maybe the ones in China, they can travel to North Korea, and with the markets opening up in North Korea, especially for real estate (apartments) I’m thinking if you are third generation Korean living in Manchuria or someplace, you’ll look at North Korean apartments as really a great deal.
So I’m thinking some money may be flowing down in the capital account, if we could have a balance of payments, but it’s still a flow of money into North Korea. And I’m thinking that could be $10 million or so a month, so that should help balance those books. That’s an area that we haven’t really looked at – capital flows into North Korea. I’ve always thought the capital account would be like a zero because, who in their right mind would invest in North Korea?
Actually, if you think about it, if North Korea is allowing people to buy or lease apartments, and somebody is going to be Chinese, or Russian, or Japanese, you could see that flow starting to happen. That might be helping. Probably what’s happening is that the data isn’t quite as bad as it looks; in other words, there is more exports than the Chinese document.
Another interesting point I’d like to make though is that it seems like a lot of this activity on the foreign finance side is likely to be market or private driven, not by the state. So again, I think there was some activity. I’m not so tough on sanctions enforcement in a way because, to me, a lot of this is private activity that should be encouraged.
I greatly appreciate sanctions on state activities, especially military related state activities, but to the extent that private activities are continuing. And that’s kind of shown in the Chinese trade data where you see all these consumer products being exported to North Korea.
I’m pretty sure that the state doesn’t want a lot of sugar coming in, but the people do want sugar coming in. So when you see sugar coming in, you think, “well, the private side is winning that battle”, and that’s, to me, a good thing to be happening.
NK News: On the Daily NK data, we saw an interesting difference in North Korea’s unofficial foreign exchange rate. In December their data had a big spike though but in our data, we had no such spike. What do you think accounts for this?
William Brown: I did see the Japanese Nikkei data that shows the levels were all about the same but the spikes were a little different. To me, the stunning thing about that exchange rate is how flat it’s been for the last year – right around that 8,000 won to dollar rate. And if you look at the RMB side of it, my sense has been that North Koreans have been deliberately taking the won around the 8,000 rate. They can’t keep it exactly that, but if people think it’s going to be 8000, it will stay 8,000. In other words, it’s based on expectations. If you think it’s going to be 8,000 next week, you will pay 8,000 for it this week.
And so I think that stability is pretty remarkable. The interesting thing is when you get those spikes as Daily NK showed back in November – 8,050 or something like that. Then it came back down to 8020 and sort of stayed. So what’s with this spike? To me, the exchange rate is the best temperature gauge we have of the North Korean economy, so we should be watching it very closely expecting it to move around some, and expecting it to be a little different in different places, different days, like it is everywhere else.
Some people say it’s a fixed exchange rate but that’s really unfair because there is a market for it. There is clearly a market for dollars and a market for RMB. People clearly can have dollars in one pocket and won in the other pocket. We see it, and everybody talks about it – so many dollars circulating. So a given wallet might have dollars and RMB and North Korean won in it. That means they can trade them, and the price between them is the exchange rate. But if you have a sense that one is going to get stronger and one weaker, you will trade one for the other.
“I’m thinking that the monetary authorities badly want that rate fixed or steady because they are really worried about hyperinflation”
There is no way that that can be regulated like it would have been 20 or 30 years or even ten years ago. So there is a natural and quite viable market for dollars in North Korea and the price is what we see – that exchange rate of 8,020 or whatever today. Supply and demand is important, like with any other market. Expectations are terribly important.
Some people argue that how can they do that? How can they keep the rates stable if there is an outflow of foreign exchange on the trade account like that $100 million per month? Why isn’t the won dropping? That is what you’d expect. But there is another phenomenon there. When you look at the supply and demand of dollars, you are also looking at the supply and demand for won. And I’m thinking that the monetary authorities badly want that rate fixed or steady because they are really worried about hyperinflation.
And to do that, they have to keep the supply of the won down. They have to keep the won stable by making it scarce. So I’m thinking their monetary service, the Choson bank or the finance ministry, they have an extremely tight monetary policy that doesn’t allow them to create won credit or even print very much wŏn currency, which means there is a shortage of won just like there is a shortage of dollars. So the exchange rate will remain fairly stable. You wouldn’t expect it to be completely stable, except if everybody thinks it’s going to be stable it will stay stable. That’s a big question.
Suppose people think it’s going to explode again, then it will explode. It’s all about expectations. So people think, “they are losing control of the won, I better buy some dollars now”, and everybody will jump, and then you see that rate moving.
That’s why I like to look at it. If it goes to 9000 won per dollar, I would speculate that it would very quickly go to 10,000 and maybe 20,000 because people will jump on board and say, “uh oh, time to sell the won”. And then it becomes a self-fulfilling fiasco. That’s what happened in 2009. It was a disaster. The monetary stability is critically important right now. But right now it seems to be pretty stable. I think it is something we should watch real carefully and try to get better data on it.
NK News: You said it seems there could be a forex market within North Korea, but who are the participants in that market?
William Brown: There’s got to be a lot of brokers. It’s kind of the way the culture works. There is nothing bad about that, but let’s just say they like brokers for everything. I’m sure there are a lot of brokers and they are making the market. They are really important people.
I think enterprises are sort of playing this game, probably in a pretty big way. It’s more dangerous for an enterprise because you’re fooling with your ideology. But if you are a factory, since 2009, there’s been no restriction on the use of foreign exchange. So I’m sure they dabble in the exchange market, and more and more, they are using dollars, it appears.
I was talking to some defectors here and some high-level finance people who have a lot of money. I asked, “how do you make money?” and they said, “it’s easy to make money in North Korea because the prices are so screwed up”. So they are playing these games, and ultimately, it’s very dangerous for the regime because some people are going to make a lot of money, other people are going to lose a lot of money, and it’s going to cause all kinds of disturbances.
Think about it this way, 20 years ago, there was kind of no money in North Korea, everything runs off of a ration system. Ten years ago, it’s basically mostly North Korean won. So now the third stage, in 20 years, you’ve gone from a ration economy to a partially dollarized economy. That’s a mind-boggling change in the system, from an extremely tight system, to an extremely in a way open system.
I don’t think we’ve really quite sorted it out, but that worked for the economy, and that’s generally a good thing. But for the government, I think it’s a really bad thing. In other words, they can only finance government activities with the use of dollars ultimately, which would be kind of an astonishing development.
“It’s easy to make money in North Korea because the prices are so screwed up”
I think something is going to have to give. I don’t think it’s a sustainable situation. But it may not be a disaster because there are ways they can walk out of it, but the ways they walk out of it generally are going to be reducing the role of the state and improving the role of the markets, which is a good thing.
Generally, I’m pretty optimistic on the direction of things, but I’m thinking there are some shoes to drop on the financial side.
NK News: Do you suppose we’ll see sanctions relief at the upcoming summit?
William Brown: I’m expecting something surprising to happen, I don’t know what it is. There has been a lot of talk about Kaesong and Kumgangsan, and of course a lot of talk about sanctions relief, and a lot of talk on this side of Yongbyon – maybe closing down the Yongbyon facility which produces plutonium and also has a highly enriched uranium cascade, and also the pilot, really crazy, nuclear power reactor they have been trying to build, and a lot of research stuff.
Yongbyon is important, but it’s really important to know that highly enriched uranium is produced in other places than Yongbyon. I’m sure our government doesn’t want to fall into a trap that they did in the Agreed Framework of disclosing one site and thinking you’ve got it done. That was a huge mistake on our part. But it would be significant.
And for what we would give in return, there is talk about a peace treaty or something. I wouldn’t mind them signing some kind of peace treaty, I don’t think it makes too much difference. But the sanctions relief, I think the sanctions are working. I think that’s why we are having this summit, really.
I think Kim is under a lot of pressure from his economics folks, and they really need to get some relief on these sanctions. I would have a tendency not to release the sanctions, to be really tough on that side until we get more progress.
But Kaesong and Kumgangsan are interesting possibilities probably because the South Koreans want to open those up again. To be honest, I’ve never liked them because they are basically state enterprises. They pay workers through an agent, and not much. It’s basically a ration system – the workers get paid rations more than money – which is just totally despicable behavior. It’s kind of like a slavery system.
“Kim is under a lot of pressure from his economics folk”
But now that North Korean markets are opening up, even the labor markets, let’s take care to rearrange those so that the workers are paid directly by the South Korean companies. And there are a lot of them – 50,000 of them in Kaesong. That could be a transformative experience for them.
I think our government is thinking about that; not releasing UN sanctions, but maybe giving some exceptions for something like Kaesong or Kumgangsan. I don’t know what they are thinking, but I would only do that if they were allowing direct pay for workers, and making a truly market experience in Kaesong, and not a state enterprise.
Another one is tourism. UN sanctions don’t much deal with tourism but U.S. sanctions prohibit Americans from going to North Korea.
That would be a very easy one for us to release, and it wouldn’t make much difference to the North Korean economy, but it could make a big difference to Kim because he so much likes these tourism resorts. I don’t know what they are going to do, but I would say we might offer up some relief on tourism and maybe Kaesong, in return for something like the closure of Yongbyon.
But that’s just speculation on my part, and everybody else is speculating.
Edited by Oliver Hotham
Featured image: KCNA
With a second summit between North Korean leader Kim Jong Un and U.S. President Donald Trump on the horizon, the spotlight has been on sticking points that seem to have stalled negotiations since their first meeting in June last year.
Washington and Pyongyang have publicly disagreed on international sanctions against the DPRK, with North Korea calling for rolling back the restrictions while the U.S. says the ball is in Pyongyang's court.