NORTH KOREANS ARE FENDING FOR THEMSELVES

C O N F I D E N T I A L SEOUL 002611 SIPDIS SIPDIS E.O. 12958: DECL: 08/16/2017 TAGS: KN KS ECON PGOV SUBJECT: NORTH KOREANS ARE FENDING FOR THEMSELVES ECONOMICALLY, SAYS ROK UNIFICATION MINISTRY Classified By: POL M/C Joseph Y. Yun. Reasons 1.4 (b/d) -------------- SUMMARY -------------- ¶1. (C) ROK Ministry of Unification (MOU) officials estimate that most of the DPRK's current economic activity is informal, while its formal economy and industrial base has severely eroded since the 1990s. As a result, the average household in North Korea earns the bulk of its income through the informal sector, and a small fraction of its income from the formal sector. MOU also notes North Korea's heavy dependend on foreign assistance. In the 1960s and 1970s, this aid was devoted mostly to heavy industry, but is now slated for agriculture and light industry. The DPRK government has effectively given up on resurrecting its heavy industrial sector. End Summary. -------------- MANUFACTURING SECTOR CORRODED -------------- ¶2. (C) During August 27 informal discussions with U.S., Japanese and Australian emboffs about economic conditions in North Korea, MOU Director for Inter-Korean Social Exchanges Park Kwang-ho, a regular visitor to Pyongyang and other North Korean cities, and Kim Jong-ro, of the Intelligence and Analysis Bureau, assessed the DPRK's official economy and industrial base as severely eroded, with little prospect of recovery. Park said that the DPRK's manufacturing sector boomed in the 1960s and 1970s based on the industrial base that the Soviet Union supplied, in accordance with the DPRK's 1954-1956 three-year plan. Soviet assistance, expertise and parts subsequently kept factories running, belying North Korea's official self-reliance ("Juche") ideology. But factories and infrastructure have been in steady decline since the Soviet Union collapsed. Since the early 1990s, when the Russian Federation started demanding cash for parts and stopped sending free technical assistance, the DPRK has not chosen to use its scarce hard currency to purchase the parts and services needed to keep factories operating, and they have largely ground to a halt. International export controls further limited the DPRK's access to technology. ¶3. (C) As a result of the breakdown of its industrial capacity, Park said, the DPRK "gave up" on heavy industry during the 1990s, even though they "desperately need an industrial revival." Trade in primary products such as ;minerals continued, but the proceeds had not been invested back into industry. The result was increased dependence on aid as well as increased trade, mostly with China. (Park and Kim acknowledged that China had recently invested in the DPRK, but requested that Chinese influence be subject of another discussion). Emphasizing what he saw as the decline in the DPRK's economic situation, Park observed that in the 1960s-80s, the DPRK was dependent on foreign assistance to keep its industries running, but was self-sufficient in food. Now, not only had the manufacturing sector collapsed, but the DPRK needed food aid also. -- Examples ¶4. (C) The spotty supply of electricity in the DPRK is both an example of the overall decline in industrial production and a factor compounding the difficulties facing industries, Park said. The DPRK's electrical generating capacity is 7,500 MW, but actual output is only one third of that, MOU estimates. (Note: A 2002 Nautilus Institute paper provides similar estimates: 10,000-12,000 MW capacity, and 2,000-3,000 MW production. End Note.) As an example of the deteriorated electrical system, North Korean engineers had told him about a hydroelectric turbine where one of four large propeller-like blades had broken, leaving the turbine unbalanced and inoperable. Instead of replacing the blade or the entire turbine, the engineers broke off the matching blade on the other side of the shaft, allowing the turbine to spin but at reduced capacity. Such coping mechanisms were common. The ROKG and other Six-Party government were now beginning to supply heavy fuel oil to run DPRK power plants, but repair of the power distribution grid would also be needed, Kim noted. ¶5. (C) Park said that in connection with an MOU project in 2003, he spent nine days in Hungnam, a main industrial city on the DPRK's east coast. Each day, he had occasion to pass the city's main steel manufacturing area, and he left convinced that no manufacturing was going on, seeing no smoke from smokestacks (he illustrated this with a photograph) or signs of material going in and out of the huge facility. ¶6. (C) Kim noted the ROK's 2007 agreement to supply USD 80 million worth of light industrial materials that DPRK factories were to use to produce shoes, clothing and other necessities, in exchange for the DPRK allowing ROK companies to mine minerals in the North. He said that MOU surveys of DPRK factories, including several on-site visits, had led the ROKG to conclude that it would make more sense to supply the shoes, clothing and other items directly, since DPRK manufacturing capacity was so poor, but the DPRK had insisted on receiving the inputs instead. -------------- THE INFORMAL MARKET IS THE ECONOMY -------------- ¶7. (C) Park said that the erosion of the DPRK economy's formal sector had led to a "change in mindset" as the extreme version of the dual economy (formal and informal),common to developing countries, took hold in North Korea. North Koreans had become less dependent on the central government for either employment or daily necessities, in part because of partial economic liberalization that the DPRK government introduced in 2002. MOU estimated that the average income of a North Korean laborer was 2,500 North Korean won (KPW) per month (equivalent to less than 1 USD at the unofficial exchange rate of 3,000 KPW/USD),whereas actual household expenditures, according to recent defectors, were 150,000 - 200,000 KPW per month. In other words, official wages amounted to a small percentage of actual income. Defectors had said that additional earnings came from trading, smuggling near the border, or extra work. Kim said MOU estimated that only 50 percent of North Koreans were still going to their official places of employment. (Note: ROK academics have said that many workers pay their factory managers bribes to list them as present, while they spend the day on other pursuits. End note.) ¶8. (C) MOU also saw emerging differences between the "haves" and "have nots" in North Korea. For example, the public distribution system allowed Pyongyang residents to buy rice at 45 KPW per kilogram, but in the countryside, where the public distribution system was no longer functioning, North Koreans had to pay 700-2,000 KPW per kilogram. (Note: ROK NGO Good Friends reported on August 28 that the market price for rice was around 3,000 KPW per kilogram because of recent floods. End Note.) The price discrepancy could breed resentment, and likely resulted in officials in control of the official rice supply selling it into the open market. ¶9. (C) Some North Koreans appeared relatively well off lately, Kim and Park noted. Park had seen many North Koreans eating "expensive" meals at the Koryo hotel (which usually caters only to foreigners) on a recent visit to Pyongyang, and had also seen several North Korean families in the hotel's pricey sauna. Some identified themselves as doing business with China; others claimed to represent DPRK state-owned companies. His overall sense was that economic activity, most of it informal, had increased lately, but that did not mean production had increased: factories were still moribund. -------------- COMMENT: NO EVIDENCE OF LONG-TERM STRATEGY -------------- ¶10. (C) Park and Kim speculated with emboffs about how DPRK authorities might view the current economic situation: a deteriorated formal sector; continued dependence on foreign assistance for food and other needs; a growing informal sector that provided little revenue to the central government and included much smuggling; and emerging income gaps that could lead to societal stress. There was no evidence that the DPRK government had a strategic approach to enlarging the formal sector, they suggested. Instead, the strategy appeared to be twofold: for the government, continued dependence on outside assistance and probably illicit activities (nfi) while waiting for a big payoff such as reparations from Japan, and for individuals, a continued extreme version of laissez faire economics. VERSHBOW