Resource Driven Equilibrium

Over at the Diplomat, Geoffrey and Andray argue that a resource curse in North Korea is something we should be keeping an eye on. Some Excerpts: The idea of the “resource curse,” long debated by development theorists, is helpful in understanding how the DPRK might marketize and yet remain stable. Rather than spur change, a what we might call “resource-driven equilibrium” might develop in North Korea.

Resources can put tremendous strains on the economy’s manufactured goods, by driving up the exchange rate and making exports more expensive. Furthermore, human resources are drawn away from export-oriented industries, further eroding the competitiveness of the manufacturing sector. There are also political consequences associated with a resource boom. When there’s a lack of manufacturing to begin with, a country’s elites are incentivized to fight for control over the resource base, rather than producing wealth by other means.

Both the economic and political pressures brought by control of a valuable resource can be mitigated in a variety of ways, including good governance through strong institutions.

If managing resources and overcoming the so-called curse is a matter of concerted, institutional commitment and the corresponding development of effective economic institutions, North Korea will struggle to avoid the trap, both in economic and political terms.Marketization without good governance could result in a stagnant and isolated economy, much like Burma over the last decade.

North Korea’s system has shown resilience to the encroachment of unofficial sources of news and information that have been growing since the mid-1990s. A more marketized economy with greater engagement with the outside world may allow more outside information in, yet paradoxically serve to bolster, rather than erode, this resilience.

Full article here.

A Question of Leadership

In March, Choson Exchange sent a delegation of financial and legal professionals to Pyongyang to conduct a series of workshops on the finance concepts of Asset Liability Management and Risk Management.  The workshops took place over the course of two days, and generated good discussions about the approach to banking and finance both inside and outside the DPRK.  The anonymous feedback from the attendees generally included comments to the effect of, “this was good, but we need more”. The other major purpose for the trip was to interview candidates for certain academic opportunities abroad.  Prior to arriving in Pyongyang, we had created a shortlist of about 7 young North Korean professionals from a pool of 30 resumes.  On arriving in Pyongyang, however, an official informed me that some of the unsuccessful candidates were quite disappointed about not making the shortlist.  They very much wanted a chance to meet me in person and to be heard.

It is important to be faithful to a process, but there are very few opportunities for North Koreans to study abroad.  I agreed to meet more people, and 7 interviews quickly became 15.  This made the schedule a bit tighter, but was overall quite positive.  I met many bright and eager young people over the course of the interviews.  For those who are not successful this time, they showed themselves to be good candidates for future opportunities.

This raises the question – on what basis are candidates selected?  As a general consideration, we are looking for high achievers: intelligent and accomplished people.  We also want to ensure, as best we can, that the candidates will be able to adapt to and function in a foreign environment.  This often involves an assessment of language ability and interpersonal skills.  Most importantly, we are looking for leaders: candidates that have the capacity to lead change and to spread the knowledge that they have gained to others.

Almost every modern business interview features questions about leadership experience and ability.  The interviewer often starts with a general question about leadership experience, and then hones in on more specific aspects of leadership.

This was the approach that I took with the first few interviews.  The responses, though, were not what I was expecting:

Q: Can you please tell me a bit about some of your leadership experiences?

(uncomfortable shuffle)

A: Ah…I’m sorry, but I don’t have any.

The first time this happened, it took me back a bit.  I admired the candidate’s honesty and sincerity, but thought that he was being a bit too humble.  “But we all have leadership experiences”, I replied.   I then identified several points on the candidate’s resume that clearly involved leadership experience on his part.

I quickly began to appreciate that there is a different cultural perspective on the concept of leadership.  In many cultures, leadership is commonly viewed as a skill set more than a formal role.  It embodies the confidence and ability to lead others, regardless of having authority to do so.  From an early age, we learn that developing and being able to employ such leadership skills is a very positive attribute.

In the DPRK, the concept of leadership appears to be more associated with formal position and authority.  To describe oneself as a leader without such title is presumptuous, perhaps even mildly insubordinate.  It is not to say that young North Korean professionals do not have leadership skills.  They do – but they are reluctant to describe them as such.

In the end, every candidate was able to talk about experiences that demonstrated leadership skills.  Whatever the label, we were talking about the same thing.

This was likely one of the first formal interviews for some of the candidates, and likely the first English interview for almost all of the candidates.  Despite my attempts to make everybody feel comfortable, it must have been a somewhat nerve-racking experience.  At the same time, it was an experience that many of them had the courage to push for.  I left with no doubt about the desire of the candidates to learn things that are new, foreign and challenging to them.

I would invariably ask each candidate why he or she was interested in the opportunity.  “Because”, one candidate told me, “there is so much more that I need to learn beyond what we are currently doing.  This is the way for me to learn it”.

Kim's Pyongyang

Calvin Chua, a London-based architect and member of Choson Exchange, recently wrote this compelling article on Pyongyang architecture for Fivefootway, a magazine focusing on design in Asian cities. Some excerpts:

Architecture and urban planning have always been used as tools to translate abstract political and economic ideas into physical forms. Across political systems, leaders often mark their political legacy through large-scale infrastructural projects and architectural icons. While some of these projects are no more than self-glorifying, many have a long lasting impact on the way residents live and interact and how the city grows and redevelops.

....

...Kim Jong-il, penned a treatise outlining an extensive architecture theory — “Juche Architecture” — based on the country’s primary ideology of self-reliance. In “On Architecture”, he spoke at length about the significance and role of architecture, the design principles and the architect’s qualification. More importantly, he called for the harmony of national virtues and modernity in the design. Ironically, at the time when the rest of the world was caught up with exploring forms in the early ‘90s, the young Kim declared that “the real beauty of architecture lies not in its external form but in its content.”

There are also some great shots of the city as well.

Kim's Speech

On April 15^th, 1912 the future path of both James Cameron’s career and the modern history of Korean peninsula began . For it was that day that man’s hubris was checked in the North Atlantic and “the lodestar of the Korean revolution” was born. (By the way, have you ever noticed that certain English words – lodestar among them – seem to have been given life only by KCNA? Have you ever seen the word ‘flunkyism’ in a publication not related to Korea?) 100 years later, Kim Il Sung’s grandson provided a spectacle that no North Korean had seen since the early 90’s. He gave a public speech. South Korean media outlets fell all over themselves as they rolled out audio analysts and psychologists to discuss the similarities between Kim Jong Un and Kim Il Sung. The link was also explicitly made on North Korean TV, with a newscaster marveling at how Kim Jong Un had the look of his grandfather.

If the style was his grandfathers, the content was his dad’s. “First, second, third…in a hundred ways we must go out and strengthen the people’s army,” he said, while at the same time emphasizing that prior accomplishments meant that North Korea was safe from its enemies. "Superiority in military technology is no longer monopolized by imperialists, and the era of enemies using atomic bombs to threaten and blackmail us is forever over," Kim said.

He threw out military terms a total of 56 times in his speech, and economic ones only 9 times, according to a count done by KBS, a South Korean broadcaster.

This weekend, despite starting badly for the North Korean authorities with the failure of the satellite launch, was always going to emphasize the military. The military parade that preceded Kim’s speech appeared to unveil a new missile.

North Korea’s experiments in economic reform are far from fully articulated. The ambivalence towards change is still there and in these early days of Kim Jong Un, it is unsurprising that they’re emphasizing the sure bet over the unsure one.

The telling thing is that this is very much part of Kim Jong Un’s process of finding the balance between his father and grandfather, before he can establish something of his own path. The content of his words in last couple months have seemed increasingly like Kim Jong Il, while his gregarious and relaxed manner have seemed every more like his grandfather.

Nonetheless, reminding people of the Kim Il Sung era won’t suffice for long. He will at some point have to start demonstrating the fruits of economic growth, including the material comforts that his grandfather oversaw for much of his tenure.  Citizens of North Korea, for now, will go back to their daily lives, with a clearer impression of Kim Jong Un: One that he is very much the inheritor of his paternal lineage.

Kim Il Sung’s Juche states that “man is the master of all things”. For now, the world – and most of all, North Koreans – are watching to see if a single man can successfully master the tricky political economy of the DPRK.

Katharina Zellweger joins Choson Exchange Board of Advisors

Choson Exchange is proud to announce that Katharina Zellweger will be joining Choson Exchange’s Board of Advisors. Katharina is a highly experienced and respected development worker with extensive on-the-ground experience in the DPRK, particularly in capacity building in our focus areas of business, economics and law. As we grow Choson Exchange’s impact, we are glad to have the opportunity to benefit from her advice on designing programs, participant selection, program evaluation and growth strategy. Coming from Switzerland and having lived in Hong Kong and the DPRK, we believe there is a strong fit between her international background and the strong international experience of Choson Exchange’s team. Her bio is attached below. Bio

Katharina Zellweger has been the Pantech Fellow in Korean Studies at the Walter H. Shorenstein Asia-Pacific Research Center at Stanford University since 2011. She is a senior aid manager with over 30 years of field experience in Hong Kong, China and North Korea.

Zellweger lived and worked in Pyongyang for five years (2006-2011) as the North Korea country director for the Swiss Agency for Development and Cooperation (SDC). She focused on sustainable agricultural production to address food security issues, income generation to improve people’s livelihoods, and capacity development to contribute to individual and institutional learning.

Before joining SDC, Zellweger worked for almost 30 years for the Catholic agency Caritas in Hong Kong where she developed pioneering Caritas involvement in China and in North Korea. Zellweger received the Bishop Tji Hak-soon Justice and Peace Award from a South Korean foundation established to promote social justice, and the Dame of St. Gregory the Great from the Vatican for her work in North Korea.

Zellweger has a Master’s in International Administration, School for International Training in Brattleboro, Vermont.

Update 25 Feb 2015: Ms Zellweger decided to set up an organization providing humanitarian and education programs in North Korea, and as such, has informed us that she will resign from the Board of Advisors.

2012: Economy vs. Military?

Expect fireworks next week in North Korea: both of the ancient Chinese gunpowder and the ballistic missile sort. The former was always going to happen. Was the latter also inevitable? Does it mean military-first is the guiding principle of the new government? It certainly struck people as strange the way North Korea accepted an aid deal with the United States on February 29^th, only to announce a few weeks later that it was going to launch a satellite on or around Kim Il Sung’s birthday celebrations. This was seen as a violation of the spirit of the deal, if not the letter, which appears to have left a loophole regarding satellite launches.

Satellite or missile – the technology is basically the same – it is certainly readable as a military provocation and it broke the already cynical hearts of people who saw the ‘leap-day deal’ as a small step in the right direction for US-DPRK relations. It also appears at first glance to run counter to what I’ve argued elsewhere, which is that economic issues are coming to the fore, while military first will begin taking a lesser role in organizing society.

The most likely explanation is that both the deal and the satellite launch are parts of a long term strategy, but one that not everyone in Pyongyang’s policy circles was privy to. Moreover, it looks like the timeline was supposed to be different. The aid-for-moratorium package might have been decided in late December, but then Kim Jong Il died and negotiations got pushed back.

What kind of debate took place in Pyongyang about adjusting the plan, given the compressed timeline for accepting the deal and announcing the satellite launch, is impossible to know. The harder line was probably the easier to take, but whatever options were laid out, the domestic value of a big rocket launch won out. That is perhaps key to understanding what’s happening right now: the satellite test isn’t about us.

At least not primarily. The countries that can produce space-faring ballistic technology form an elite club. More than anything, this display of technological prowess is designed to link Kim Jong Un to an image of strength and independence. It will instill pride in national accomplishments on North Korea’s biggest day of celebration since….ever. (Liberation might be a contender, not much of one.)

So while North Korea’s legal revisions, newfound attention paid to SEZs and domestic media campaigns all point to an increased interest in economic issues, this doesn’t mean that suddenly the military is unimportant. It is one half of the ‘great and prosperous nation’ North Koreans have been hearing about and is the half that Pyongyang can really point to and say ‘we’ve got this - this part we know how to do’. At the risk of being obvious, the military bureaucracy in general and national defence specifically are too significant in this time of transition to be radically altered.

The new generation of leadership is working on finding the balance between revering Kim Jong Il’s methods and finding its own. So while Kim Jong Un has visited several military sites this spring, the first major event after Kim Jong Il’s death was a rally focused on economic growth. Check out these compelling pictures of the event taken by Xinhua. Note catchy phrases such as ‘light industry first-ism’ and ‘constructing an economic power: the people’s lives upward’.

This long-term quest to find a new governance style also gives birth to articles such as this one that makes the claim “Songun Political Method is Driving Economic Construction”, while not actually establishing any real link between the two.

Whatever drove construction of the Huichon Power Station (referenced in the Songun article), those of us with an interest in seeing progress in North Korean economic development hope that it functions well and helps more North Koreans experience a more comfortable life. It is also not too much to hope that after the launch, all parties find a way to return to dialogue and compromise, rather than spiraling towards greater confrontation.

Commercial Lending Workshop – How We Choose Programs

Early last year, we asked a banker in Pyongyang what finance-related workshops we should implement in Pyongyang and she replied that “Exchange-Traded Funds” and “Private Equity” were topics of interest. We immediately considered these impractical and when we asked why she wanted to learn about the topics, she said that she had come across the words in the Financial Times and was “curious.”* While we encourage our participants to be curious, given limited resources, we had to pick issues where we believe we can make an impact that leads to positive outcomes. The way we do this is through a due diligence process where we identify key priorities of partners on the ground, see if this is in line with developments we would like to see, and decide what kind of workshops could help make it happen. This normally takes 3-4 trips and occasionally a pre-workshop (i.e. a workshop where the purpose is more to find out about a policy issue in North Korea and its associated challenges) before we can identify the opportunity. For our most recent workshop, which focused on systems supporting commercial lending, we started the due diligence phase as far back as 2010 through workshops and extended discussions over several trips.

Our North Korean partners have identified aspects of banking knowledge needed for commercial lending, and we agreed that these were key priorities that can be implemented in a 2-3 year time frame. Currently, at least on paper, banks lack a lending system. We believe that for new enterprises to grow and develop, a true lending system needs to be in place to provide capital on a commercial basis. This was the basis for covering risk management and asset-liability matching in our most recent workshop in March 2012, which are systems needed to support commercial lending.

*According to a friend who works for the Financial Times, one of the FT reporters had met the same person in Pyongyang and asked her what she thought about FT. Her reply was that FT focused too much on traditional equity coverage, and not enough on derivatives.

March Pyongyang Workshop Album

Choson Exchange held its first Pyongyang Workshop Series for 2012, with a two-day training session on March 13-14th. Approximately 30 participants from a variety of financial and regulatory institutions took part in the workshop. The main topic was “Asset-Liability Management,” which is a banking practice to ensure the difference between deposits and loans does not create exposure to excessive risk. Discussions also focused on how private equity can be used to grow businesses.

We'll have more details soon, but for now enjoy these snapshots.

Young Pioneer

Workshop

subway

forms

Students

Kiddo

Rush Hour

DVD Workers

Lecture Materials

Rason's Legal Code

In 2010, the DPRK revised the laws governing Rason Special Economic Zone. This booklet, scanned into pdf form, sketches out the new laws in both Korean and English (English is in the back half). It was at this time that the authorities removed Rason from provincial administration, giving it more autonomy in some ways, while also giving authorities in Pyongyang a more direct link to planning for the SEZ.

cover1

Potentially interesting clauses include:

- Ships regardless of nationality are permitted to port (article 26)

- Business licenses can be revoked if DPRK law is "seriously" violated. (article 15)

- Prices will be set between the buyer and seller, though some basic consumer goods may be fixed by the local government. (article 26)

- Disputes may be resolved by arbitration either in the DPRK or a 3rd country. (article 45)

Geoffrey: Some of the things I like are the decentralization of decision-making to the province, the allowance for managerial autonomy, and an emphasis on technical training. That said, these things will all boil down to implementation. As rule of law and legal training is a cornerstone of our work, we think there are opportunities to work with Rason in the future on such programs and we will continue with our project scoping and audience due diligence before deciding whether an expansion is warranted.

Download the complete booklet here:

Law of the Democratic People's Republic of Korea on the Rason Economic and Trade Zone. (English translation at the end)

For an analysis of Rason's prospects check out Andray's paper at the Korea Economic Institute.

Update on North Korea’s Economic Strategy – JVIC and Taepung Merger is a Positive Step Forward

Last year, we met with both the Taepung Group and the Joint Venture and Investment Commission (JVIC) to discuss potential training programs in economic and investment policy. We ended up working with the JVIC on some training programs as most of their staff came across as being professional, earnest, and well-intentioned. They were focused on critical issues such as reshaping investment laws and strengthening the rule of law in general. Many of them were aware of key challenges businesses faced in North Korea. Many of the staff also lived abroad and brought with them creativity and pragmatism in looking at problems and in devising solutions. During programs and meetings, workshop leaders constantly reinforced the themes of establishing credible investment laws, tackling corruption, providing more information on the business environment and reducing expropriation risks. We emphasized the need for a consolidation of investment-seeking efforts as we were worried that having multiple investment agencies would lead to investments being funneled into different patronage networks instead of being redirected to broader development objectives. There was also the risk that different agencies would offer inconsistent terms to investors, leading to an unfair playing field.

While we heard over the course of last year that a JVIC-Taepung major was in the works, we never knew when this might take place. Hence, we are gladdened to read that Taepung is going to be merged into JVIC (which we have yet to confirm). We believe that this is a positive step forward for North Korea’s economic development, as they will need an effective agency to support foreign investors, shape the domestic business environment, and help foreign investors navigate the domestic business environment. Perhaps a next key step would include JVIC formally taking on some of the roles of the State Planning Commission, as foreign investment is critical if North Korea is to revive its moribund state enterprises and overall economy.

What is the Taepung Group?

As of April 2011, executives at Taepung describe a business model more reminiscent of a holding company rather than a government institution. Investors place their capital with the Taepung Group or create joint-ventures with the group. Taepung acts as the manager of the companies. There could be potential deviation from this description, although this is the model envisioned by leading executives on the group. The group aims to “build an economy outside of the state-planned economy.”

What is the Joint-Venture & Investment Commission?

The JVIC is similar to the more traditional investment-promotion agencies in other parts of the world. In addition to promoting North Korea as an investment destination, JVIC officers also work with investors to navigate the North Korean business environment, as well as provide feedback on key policies influencing the investment and economic environment. They oversee North Korea’s Special Economic Zones in Rason and Wihwa Islands and lead government negotiations with China in developing these zones.