Rare earths bankroll North Korea's future

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Rare earths bankroll North Korea's future
By Leonid Petrov
Aug 8, 2012

Those who travel to North Korea regularly might have noticed that the last couple of years have brought significant improvement in the country's economic situation. Newly built high-rise apartments, modern cars on the roads and improved infrastructure come as a surprise to visitors. It begs the question, where does Pyongyang get the money from?

The ambitious rocket and nuclear programs, which North Korea continues to pursue despite international condemnation, are expensive and harmful to its economy. International sanctions continue to bite the Democratic People's Republic of Korea's foreign trade and investment prospects. Regular floods and droughts, animal epidemics and other natural disasters hit the fragile economy even harder.

According to expert estimations, the DPRK should have ceased to exist in the mid-1990s, after the Communist Bloc collapsed and Kim Il-Sung died. But North Korea has fully recovered after the famine and even shows steady signs of economic growth.

Foreign critics looked everywhere with hope to unravel the mystery. After 2008, the stalled inter-Korean cooperation left North Korea without South Korean financial assistance. Western humanitarian aid has also been exhausted or reduced to a number of goods with little market value. Although the volume of North Korea's foreign trade is negligible, the domestic economic situation continues to improve. Pyongyang is routinely suspected of violating international sanctions by trading arms, smuggling drugs, counterfeiting US dollars and other crimes.

These activities would be expected to refill the impoverished state with badly needed foreign exchange. However, anti-proliferation operations and bank account arrests have never disclosed anything criminal nor did they manage to answer the main question: where does the money come from?

In fact, North Korea is sitting on the goldmine. The northern side of the Korean peninsula is well known for its rocky terrain, with 85% of the country composed of mountains. It hosts sizeable deposits of more than 200 different minerals, of which deposits of coal, iron ore, magnesite, gold ore, zinc ore, copper ore, limestone, molybdenum, and graphite are the largest and have the potential for the development of large-scale mines.

After China, North Korea's magnesite reserves are the second-largest in the world, and its tungsten deposits are almost the world's sixth-largest. Still the value of all these resources pales in comparison to prospects that promise the exploration and export of rare earth metals.

Rare earth metals are a group of 17 elements found in the earth's crust. They are essential in the manufacture of high-tech products and in green technologies, such as wind turbines, solar panels or hybrid cars.

Known as "the vitamins of high-tech industries," REMs are minerals necessary for making everything that we use on a daily basis, such as smartphones, flat-screen TVs, and notebook computers. Some rare earth metals, such as cerium and neodymium, are crucial elements in semiconductors, cars, computers and other advanced technological areas. Other types of REMs can be used to build tanks and airplanes, missiles and lasers.

South Korea estimates the total value of the North's mineral deposits at more than US$6 trillion. Not surprisingly, despite high political and security tensions, Seoul is showing a growing interest in developing REMs together with Pyongyang.

In 2011, after receiving permission from the Ministry of Unification, officials from the Korea Resources Corp visited North Korea twice to study the condition of a graphite mine. Together with their counterparts from the DPRK's National Economic Cooperation Federation they had working-level talks at the Kaesong Industrial Complex on jointly digging up REMs in North Korea. An analysis of samples obtained in North Korea showed that the type of rare earth metals could be useful in the manufacture of liquid crystal display (LCD) panels and optical lenses.

The joint report also revealed that there are large deposits of high-grade REMs in the western and eastern parts of North Korea, where prospecting work and mining have already begun. It also reported that a number of the rare earth elements are being studied in scientific institutes, while some of the research findings have already been introduced in economic sectors. The North built a REM reprocessing plant in Hamhung in the 1990s but has been unable to put the plant into full operation due to power and supply bottlenecks.

Rare earth minerals are becoming increasingly expensive, as China, the world's largest rare earth supplier, puts limits on its output and exports. In February, China's exports of rare earth metals exceeded the price of $1 million per ton, a nearly 900% increase in prices from the preceding year.

China, which controls more than 95% of global production of rare earth metals, has an estimated 55 million tons in REM deposits. North Korea has up to 20 million tons of REM deposits but does not have the technology to explore its reserves or to produce goods for the high-tech industry. Nevertheless, in 2009 the DPRK's exports of rare metals to China stood at $16 million, and as long as someone invests, exports will continue to expand.

This growing rise in REM prices and strong demand gives the young leader Kim Jong-Un a good chance to improve the economic standing of North Korea without actually reforming its economy.

Following the Gulf States' and Russian example of catching the wind of rising oil prices in their sails, Pyongyang is likely to follow suit, becoming rich and powerful through the exploration and sale of natural resources. The export of rare earth metals will replenish the state coffers; stimulate the loyalty of the elites to Kim Jong-Un's autocratic rule; and secure the growth of consumption among the ordinary people.

Relations with South Korea, China and Japan are also likely to improve due to the large scale cooperation on exploring, processing and utilizing REMs - the mineral of the 21st century.

Pyongyang needs international assistance through joint projects to explore its mineral resources, and mainly its rare metal and rare earth minerals. North Korean and Chinese teams have been cooperating to explore mineral resources in the DPRK for many decades. Seoul has recently expressed interest in working with Pyongyang on mining projects and technological innovations.

Perhaps, Japan and Taiwan, which look for alternative REM supplies for their micro-processor and other cutting edge industries, might also decide to contribute to the development of this economically promising venture.

Paradoxically, the promise of Kim Jong-Il might soon come true and North Korea may become a "rich and prosperous state" - rich in natural resources and empowered by nuclear technologies. In that case, North Korea might not even need to go through a painful and potentially destabilizing economic reform.

Although the political regime will remain dictatorial, the idea of unification with the South by war or absorption will soon become meaningless. The purges of political elites and the mass starving of ordinary people in North Korea will cease. Gradually the level of prosperity in the two halves of the divided Korea will start equalizing, opening more opportunities for greater exchange and cooperation.

Leonid A Petrov PhD is a lecturer in Korean studies at the School of Languages and Cultures, Faculty of Arts and Social Sciences, University of Sydney

http://www.atimes.com/atimes/Korea/NH08Dg01.html

Pyongyang serves itself
By Yong Kwon
Aug 8, 2012

While the mainstream news on North Korea has been focusing on Kim Jong-un's marriage and the early "retirement" of vice-marshal Ri Yong-ho, the event with the most long-term significance for North Korea seems to have received very little coverage.

Despite rejecting the prospect of political reform, Pyongyang has explicitly announced that it will conduct agricultural reform in an attempt to end the endemic food crisis. The so-called June 28 Policy will reduce the size of the average cooperative farm production unit, guarantee market prices for farmers selling grains to the state, and allow agricultural cooperatives to sell or consume surplus yields that exceeded the state-mandated target production.

The state is hoping that small-scale privatization will better incentivize surplus production and close the food deficit that has been plaguing the country for nearly two decades. However, the reality of the situation is that Pyongyang has already systematically sabotaged the agricultural reform by disproportionately concentrating resources around the central government.

Recent visitors to North Korea noted massive urban development projects in Pyongyang that were not evident a year ago. Modern apartment complexes and amusement parks are being constructed. One veteran observer commented on how stunned he was by the sheer number of cranes towering over the skyline of Pyongyang and the presence of traffic in the streets of the capital.
To top it off, the futuristic 105-story Ryugyeong Hotel, which loomed incomplete over the city for two decades, appears to be nearing completion. With such rapid growth and development, a denizen of Pyongyang may actually believe that his or her country had become powerful and prosperous.

Indeed, even foreign observers remarked how the number of construction workers at these urban renewal sites seemed to suggest that the food crisis is over. In addition, a recent Bank of Korea study indicated that North Korea is showing signs of growth in its gross domestic product. Bolstering these incredible claims, news of increased cross-border cooperation with China and Russia promises continued development and economic growth in the future.

However, all of the development is entirely contained within Pyongyang and the food crisis is certainly ongoing or on the brink in other parts of the country. The same travelers who were impressed by Pyongyang's new skyline also exhibited surprise at how little development is going on outside the capital.

According to anecdotes from foreign observers, even the roads in major urban centers outside the capital were more often than not in terrible shape.

Meanwhile, food prices throughout the country have been rocketing since the summer, rising 65.6% in Pyongyang, 28.2% in Hyesan, and 26.5% in Sinuiju between June and July alone, leaving people increasingly less able to afford basic goods and much less able to engage in activities that will ensure long-term food security. [1]

Unlike the mid-1990s, the rise in prices this time around may not necessarily reflect the country's dire shortfall in food acquisition (domestic production and imports); rather, the determining factor in this situation appears to be the consequence of inter-provincial inequality and failed monetary policy.

China clearly plays a key role in North Korea's economic affairs. Beijing provides enough food for Pyongyang to mobilize workers and supplies crucial tools, such as fertilizer and trucks, to assist in increasing agricultural yields.

Although this subsidized assistance is ultimately beneficial to North Korea, diluting domestic prices by increasing supply, Pyongyang's overconsumption of resources combined with the city's privileged access to income may be creating a disparity that is affecting prices throughout the country.

Alongside massive construction projects, every foreign car in North Korea appears to be registered with Pyongyang license plates. These are a few of many visible examples where the city's engorged expenditure is clearly visible. While Pyongyang's relative prosperity compared to the provinces is not new, the recent disparity is being fueled by the effects of the disastrous currency reform in November 2009 and is also indicative of how ineffective Pyongyang-directed reforms have been.

North Korea's last currency reform, by obliterating people's savings and supplying the new currency under strict state control, created a distortion that caused relative prices to change arbitrarily. This also gave people in Pyongyang, endowed with political power, connections to the Korean Workers' Party, or, at the least, access to income opportunities, a disproportionate advantage in acquiring the new currency.

Much like the localized effect of inflation that economist Richard Cantillon described in "Essay on the Nature of Trade in General", this economic reform allowed Pyongyang to in effect to enrich itself at the cost of the rest of the country. [2]

With the country's wealth largely concentrated in the capital and most of the resources from abroad going through Pyongyang, the already-unstable food prices are invariably affected by this privileged population's ability to afford higher food prices.

Pyongyang's market rice prices are by far more expensive than the rest of the country, yet it appears more than capable of feeding its affluent population. Meanwhile, the rest of the country is forced to compete for resources using less capital. Thus, even if rice is not as expensive in the provinces, the relative increase in food price is harder to overcome.

In this difficult situation, Pyongyang's attempt at small-scale privatization through the June 28 Policy will face major challenges. While privatization in theory should increase productivity, the cooperatives will still be still dependent on the central government to provide them with the necessary tools and seeds - considering the existing distortions in resource distribution and money supply, the future of this reform already looks grim.

The investments necessary to develop the new agricultural communities will face budgetary challenges from Pyongyang's constantly burgeoning need to build and maintain its new projects, which will add to Pyongyang's consumption and further distort prices. In addition, with North Korea's limited transportation infrastructure, it's questionable whether an equal distribution of resources is even technically possible at this stage.

Ultimately, an effective economic reform is not possible without political reform that breaks the monopoly of resources by the Korean Workers' Party to service its core cadres. At the same time, to allow for greater devolution of economic planning means allowing political plurality, which poses a threat to the homogeneity of the established political order.

Therefore a successful economic or political reform is difficult to foresee - it is not just a matter of implementing macroeconomic logic, but the issue that goes to the core of the state structure.

Notes:
1. North Korean Market Trends, Daily NK. Accessed on August 6, 2012.
2. For an in depth description of the Cantillon Effect: Pablo Paniagua. "The Cantillon Effect on Relative Prices: the redistribution of wealth through monetary policy." The Classic Libertarian Perspective, June 4, 2012.

Yong Kwon is a Washington-based analyst of international affairs.

http://www.atimes.com/atimes/Korea/NH08Dg02.html