Saturday, December 03, 2011

Ask a Korean! News: "The Blinking Red Light on North Korea"

Mr. Joo Seong-Ha has noticed that something serious may be afoot with North Korea. Perhaps an economics major can give some supplemental explanation in the comments. Below is the translation.

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This post is somewhat different from other posts on North Korea Real Talk, in that it presents a tricky question. Although I endeavored to make it as understandable as possible, this post may be difficult to understand for some.

Currently, the rice price in North Korea is around 3500-3800 won per kilo. This is double the price from just a few months ago. Just before the currency reform in November 2009, the rice price was in the low 2000s. But even after the currency was reformed by 100-to-1 exchange rate between the old money and the new money, the price did not fall to 1/100th -- instead, right now the price is 50% higher than it was two years ago. This makes a tricky calculation for the inflation rate. Does this count as an inflation of 15000% in two years? This number alone is a sufficient demonstration of the abject failure that was North Korea's currency reform.

Although it depends on the region, currently in North Korea, $1 U.S. dollar exchanges to around 3800-4000 North Korean won. In other words, a kilo of rice in North Korea is a little more than 90 cents, or 6 Chinese yuan. The price of corn also nearly doubled, to over 2000 won -- i.e. around 50 cents or 3 yuan.

The problem is that the rice price in North Korea is higher than the rice price in China. Extremely high quality rice in China can be as expensive as 10 yuan per kilo, but the rice that most people eat is around 4 yuan per kilo. The price can get as low as 2 yuan per kilo, for low quality rice. The rice that costs around 3600 won (= 6 yuan) in North Korea is around the same quality as the 4 yuan-per-kilo rice available in China.

The price of rice in North Korea is not cheap even compared to South Korea's rice price. Unless it comes from an expensive brand, the price of rice in South Korea is under $2 per kilo. In other words, North Korean rice price is around half of South Korean rice price. Considering the huge disparity between the incomes of North and South Korea, the fact that North Koreans buy rice at this price is astonishing.


I take rice as an example because it is an effective shortcut for estimating the price of all other products in North Korean market. When the price of rice rises, so does the price of everything else; when the price of rice falls, so does the price of everything else. When I was in North Korea, $1 could buy 4 kilograms of rice. Now, $1 only buys a kilo of rice. How does one explain this? It is certainly not the case that North Koreans became 4 times wealthier since I came to South Korea.

How do North Koreans purchase rice whose cost quadrupled? Of course, only the wealthy North Koreans eat rice; for many people, the staple is corn. But that was the same as before. And even the corn in North Korea is as nearly expensive as the rice in China.

China's Engel Coefficient is around 30-40%. Of course, the Chinese have little difficulty procuring any kind of food, including meat and fat. I would estimate the maximum Engel Coefficient of North Korea at around 60 to 70%, considering that even North Koreans have to spend a certain portion of its income on things other than food, such as firewood and clothing.

So let's compare an average Chinese household and an average North Korean household, in terms of the money spent on the staple food. Let us estimate that a Chinese household spends about a quarter of its food expenditures on purchasing rice. Since China's Engel Coefficient is around 40%, the Chinese household would spend around 10% of its total income purchasing rice. If we suppose a North Korean family, whose Engel Coefficient is 60%, lives mostly on corn, I would estimate that it would spend about half of its food expenditures on purchasing corn -- in other words, it would spend 30% of its total income purchasing corn. (Although non-staple food in North Korea is not as abundant as it is in China, buying even a small amount of the most basic items like pepper and cooking oil costs as much as the staple food.)

In short, a Chinese household spends 10% of its total income on the staple food; a North Korean household, 30%. And if we further consider the fact that North Korean corn costs approximately three quarters of Chinese rice, North Korea's 30% in "staple Engel Coefficient" is equivalent to China's 7.5% in "staple Engel Coefficient." Of course, this is entirely a hypothesis, generally derived from my experience of living in North Korea. But the ratio of 7.5 to 30 means a North Korean family lives at around 25% level of a Chinese family. Last year, China's GDP per capita on PPP basis was $7500. So this means the same number for North Korea is estimated to be around $1900.

North Korea purchases from China not only food, but also nearly all household items. Of course, the price of those items are more expensive in North Korea than in China -- otherwise, the Chinese won't sell them. In contrast, whatever items that North Korea sells in China would not likely receive the Chinese market price. In other words, North Korea is selling low and buying high.

How in the world do the people handle the prices that rose four times in the last decade, at least in terms of face value? One may be able to explain that the price of everything quadrupled, but in that case, it appears to me that North Korea's per capita GDP denominated in U.S. dollars should also rise. But at the same time, it does not make sense to me how the per capita GDP could simply rise like that simply because the prices rose, without any further effort.

In short, something incomprehensible is happening in North Korea. Even considering the fact that the North Korean people are dealing with severe hardship, it is incomprehensible to me that they are enduring the prices that are higher than China's.

North Korea's PPP-based per capita GDP of $1900 is also incomprehensible to me. $1900 is around the level of Tajikistan, and half the level of the Philippines. I have never been to Tajikistan, but I understand that it does not have starvation or a huge population of itinerant child beggars. Then is my estimate of $1900 too high?

When I came to China after having lived in North Korea, the economic disparity that I observed and felt was certainly far greater than four times. So far, I have been estimating that North Korea's per capita GDP (not on PPP-basis) to be around $400. Have I been incorrect?

Right now, China is growing rapidly, and its living standards have improved at a record pace. But North Korean economy is continuing to decline. The only meaningful economic activity in North Korea is at the marketplaces. Does this mean that North Korea's increase of household wealth through the marketplace is happening faster than China's increase of household wealth through its economic development? All the while the North Korean regime has been trying to suppress the marketplaces? The thought then makes me wonder how much better North Koreans could live if the regime simply allowed the marketplaces to operate normally.

This is not limited to food. There are reports that there are more than a million cell phones in North Korea, each costing several hundred dollars. This reflects a broad range of wealthy people in north Korea. Of course, North Korea recently has been rapidly stratifying, such that the wealth gap is beyond imagination. But be that as it may, shouldn't the overall society have a certain level of income in order to handle the prices that are more expensive than China's? If not, I would think that there should be mass starvation already -- but North Korea has not come to that, yet.

Does this really mean that North Korean families have the wherewithal to deal with this kind of prices? I wonder if the families are able to manage with their savings for now, but will fall to the prices in the long run. It worries me that the sudden steep rise of the price of rice may portend mass starvation deaths in the near future. In the spring of 1995, in Pyongyang, I saw the rice price going from 50 won per kilo to 200 won per kilo in just two or three months. And then two or three months later, mass starvation deaths began to occur everywhere in North Korea, and the regime declared the March of Struggle. But it is the fall right now, when rice just finished getting harvested -- and the price is already rising. I would rest a little easier if someone could explain to me that this is not a repeat of 1995.

Although it is not clear, my intuition is that there is a blinking red light on the dashboard of North Korea. South Korean administration and North Korean experts need to keep a more-careful-than-usual watch on North Korea.

북한이라는 계기판에 빨간불이 켜지고 있다 [North Korea Real Talk]

Got a question or a comment for the Korean? Email away at askakorean@gmail.com.

3 comments:

  1. The blinking red light is that they probably had most of their rice crops destroyed by the heavy rains in August/September.

    ReplyDelete
  2. Many more N. Koreans participate directly in the market themselves than in 1995. So if the prices are rising, the N. Koreans are still receiving more money. It's not like they rely on government distribution and salary as their main support system like before.

    I researched the market for business opportunities. N. Koreans have more cash to blow on non-food items then many would be led to believe.

    ReplyDelete
  3. Sure, prices are rising so people doing the selling are making more money. This is a perhaps surprisingly unexplored and unrecognized fact than it should be.

    But on the other hand, crops were apparently not destroyed in the summer, and even if it had been a fear of that which drove rice prices up then that fear has now been proven incorrect and some kind of price correction should have occurred.

    In my conversations with people in Seoul, it is abundantly clear that all anyone knows for sure is that nobody really knows what is going on.

    In conclusion, a better advertisement for an accurate understanding of economic flows in North Korea would be hard to find.

    ReplyDelete

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