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)

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SUMMARY
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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.

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MANUFACTURING SECTOR CORRODED
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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.

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THE INFORMAL MARKET IS THE ECONOMY
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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.

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COMMENT: NO EVIDENCE OF LONG-TERM STRATEGY
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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