09 сентября 2000

Vladimir Andrianov: Economic Aspects of the North Korean Nuclear Program

In order to define the place and importance of the nuclear energy sector in the general structure of the North Korean economy, it is important to recognize that all economic activity in the North takes place within the confines of an all-out competition with South Korea. For this reason, the nuclear factor must be put both into the context of its role in the North Korean economy and in the ongoing competition with South Korea.

This chapter begins by reviewing the economy of North Korea, which was in steep decline relative to that of South Korea in the early 1990s, and the net effect was to exacerbate feelings of vulnerability in Pyongyang. It then analyzes the economic infrastructure in the North, specifically transport and communications, highlighting a number of weaknesses. Finally, it provides an overview of conditions in the energy sector in North Korea. Given the ongoing conflict with the South, the chapter stresses the important national security significance attached to the nuclear program and how calculations of relative power must be factored into any informed analysis of the roots of the nuclear crisis instigated by the North in the early 1990s.

North Korea"s Comparative Decline versus South Korea

In recent years, the Democratic Peoples" Republic of Korea (DPRK) economy has been undergoing the deepest economic crisis in its history. Beginning in the late 1980s, North Korea"s gross domestic product (GDP) began to fall: -3.0 percent in 1991, -7.6 percent in 1992, -5.4 percent in 1993, -1.7 percent in 1994, -2.0 percent in 1995, -2.1 percent in 1996, and -6.8 percent in 1997.l

The crisis situation in the North Korean economy is preconditioned by a number of factors: chronic deficits of energy resources, fuel, and raw materials; an abrupt decline in the volume of trade and the level of economic cooperation with foreign countries; exceedingly high military spending; and an inefficient utilization of financial and material resources.

Industrial production makes up 50 percent of North Koreas GDP, with up to 40 percent of the countiy"s population being employed in this sector. Recent years have witnessed production drops in practically all leading industrial sectors, including both primary and export-oriented areas of industry. In particular, there have been severe declines in the production of steel and steel-based products, fabrics and textiles, foodstuffs, and consumer goods.2

In contrast, South Korea, one of the newly industrialized countries, has registered some of the highest economic growth rates in the Asian-Pacific region, despite its recent troubles. The annual GDP growth rates in South Korea have been as follows: 9.1 percent in 1991, 5.1 percent in 1992, 5.8 percent in 1993, 8.4 percent in 1994, 8.2 percent in 1995, 7.5 percent in 1996, and 5.5 percent in 1997.3 Industrial production in South Korea is developing at even faster rates, putting its dynamics in sharp contrast with the industrial stagnation seen in North Korea. At present, South Korea occupies one of the leading places in the world in terms of the volume of production of a whole range of industrial goods. In the mid-1990s, South Korea became the worlds second-largest producer of ships, television sets, transistors, and synthetic fibers and fabrics; the fourth-largest producer of electronics and electric equipment; the fifth-largest producer of ethyl-ene and naphtha, steel and steel items; and the sixth-largest car manufacturer.4 While its economy may register modest declines in the late 1990s due to the East Asian financial crisis, the Soudi Korean economy remains generally sound and has the productive potential to rebound quickly.

By contrast, practically all sectors of the DPRK"s industry are at the technological level already reached by South Korean industry in the late 1970s and early 1980s. A serious lag is evident in the production of consumer electronics and semiconductors, as well as in the petrochemical and oil refinery sectors. The DPRK has not yet mastered the production of nylon and polyetheric fibers. The production of communications equipment and computers is limited to the assembly process only.

There is a significant gap between the two countries in the production of such consumer goods as textiles made of synthetic fabrics and foodstuffs. The DPRK produces cement and glass, but the quality is low due to outdated equipment.

The situation in the DPRK"s metallurgy and metal-processing industry is comparatively better, primarily due to the introduction of relatively modern technology for producing nonferrous metals, which is largely oriented to the production of materials for defense industries and is comparable to that of South Korea.

Agriculture was once one of the DPRK"s strongest sectors, but, by the late 1980s, grain production had declined, forcing the country to import 10 percent of its demand.5 In 1989, grain production grew to 5.48 million tons, but the next year it fell dramatically.6 This downward trend has continued. Recent low grain output may stem in part from the decline in the production of chemical fertilizers and insecticides, induced by the oil shortage, or from the long-term overuse of chemical fertilizers, which has exhausted the naturally poor soil. Of course, aging agricultural machinery and the shortage of fuel have also played their role. Economically, the decline in grain output is a cause for concern because often it is the agricultural sector that determines market growth. With agricultural profits rising, the market for other goods grows as well. If agriculture is stagnant overall, markets are likely to be constrained too.

One third of the DPRK"s arable land is utilized for rice cultivation, with the rest devoted to a variety of grains, vegetables, and fruits, including corn, barley, wheat, millet, oats, potatoes, and soybeans. Due to a combination of economic inefficiencies and unusually cold weather, North Korea closed the early 1990s with a grain output of just 3.9 million tons in 1993, which put it in a poor situation for the crisis during the 1995 and 1996 floods.7 Even by 1997, grain output had reached only 3.49 million tons. These figures compare negatively with average annual yields of 4.2 million tons before the onset on the food crisis.8 In the early 1990s, North Korea undertook to import as much as 20 percent of its food demand from countries such as Australia, China, and Turkey to meet its growing deficits. Today, however, it lacks the resources even for these purchases, and must rely largely on foreign aid.

In 1990, the DPRK"s farm population constituted of 37.8 percent of the total population, whereas the rural population in the Republic of Korea (ROK) comprises only 15.1 percent of its total population.9 Today, North Koreas farming population is almost the same as that of South Korea in 1978, which, at that time, constituted 35.3 percent of the ROK"s total population.10 In 1997, the DPRK"s total revenues from agriculture, forestry, and fisheries constituted 28.9 percent of its GNP, as compared with 5.0 percent in the ROK"s GNP.11

As far as forestry is concerned, about 75 percent of the DPRK"s territory is covered with forests and woodlands, but top-quality timber is rare. Moreover, in order to develop the timber industry further, the DPRK needs to import modern equipment and to implement a large-scale reforestation plan. Extensive use of wood for fuel and widespread flooding during 1995,1996, and, to a lesser degree, 1998 have exacerbated these conditions.

Regarding fisheries, the DPRK"s Third Seven-Year Plan (1987-93) ambitiously set the target for the output of marine products at 11 million tons, including 3 million tons of fish, but estimated coastal and deep-sea fishing yielded only 1.7 million tons offish in 1993.12 The state invested heavily in the fisheries sector, but higher yields are hampered by limitations in ship maintenance, shipbuilding, and fishing technologies.

In the field of livestock production, the Third Seven-Year Plan envisages an increase in the annual egg production up to 7 billion eggs and that of meat up to 1.7 million tons with the aim of improving the food supply for the population. Unfortunately, by the early 1990s, declining rates for meat production, including poultry products, indicated that these targets would not be met.13

The mining sector in North Korea accounts for 6.7 percent of its GNP, although the production of anthracite coal, iron ore, and nonferrous metals is down. In South Korea, the mining sector provides just 0.3 percent of its GNP.14 The DPRK"s natural endowments of minerals and metals enable it to preserve its advantage over the ROK in per capita output of iron ore and coal, with ratios of 11:1 and 1.5:1, respectively.15

Economic Infrastructure

The DPRK"s transportation system depends heavily on railways, which carry 90 percent of total freight. The remaining capacity is covered by road transport (7 percent) and marine transport (3 percent). The transport situation in South Korea is more balanced, with about half of freights being transported by road.16 North Korea"s transport infrastructure is comparatively underdeveloped. The share of paved roads is estimated at only 8.5 percent, with a mere 2.2 percent constituting serviceable highways.17 In the DPRK, there are about 5,000 kilometers of railroads, of which 98 percent are single track and 60 percent electrified.18 Most seaports are in need of improvement and expansion. At present, the ports of Chongjin, Rajin, and Sonbong are undergoing modernization of their piers and of loading and unloading equipment, and as well as of their warehouses. The estimated capacity of all North Korean ports is 35 million tons, which is only 14 percent of the total capacity of the South Korean ports. The DPRK"s car and shipbuilding production is low, which further limits transportation services. North Koreas acute energy shortage presents a serious obstacle to future infrastructure development as well.

Services and Construction

North Koreas service sector is small but growing, although largely due to the relative decline of mining and manufacturing. In 1997, it accounted for 35 percent of the GNP, of which 25.1 percent represented government-provided services. By comparison, in 1997, the South Korean service sector accounted for 51.3 percent of the ROK"s GNP, with only 8.3 percent represented by government-provided services.19 The share of the DPRK"s construction sector in the GNP declined by 9.9 percent in 1997, adding to the two previous years" drops of-11.8 percent in 1996 and -3.2 percent in 1995. This sector now represents only 6.3 percent of GNP, compared with 14.6 percent in the South.20

Significant differences in the material production sphere of North and South Korea are reflected in the character of their foreign economic ties. While South Korea relied on an export-oriented model of development, North Korea has preached self-reliance, consistent with its juch"e ideology. South Korea is widely recognized as one of the world"s greatest trading powers by the volume of its export-import operations: $280 billion in 1996. By contrast, North Korea, with its foreign trade volume of only $2.5 billion, occupies one of the last places in the world.21

In recent years, though, certain changes have been noted in the sphere of the DPRK"s economic and foreign economic policy. These primarily concern new initiatives aimed at attracting foreign capital, forming joint-stock ventures, and establishing free economic zones. The North Korean government made a decision in 1990 to set up the Rajin-Sonbong Free Economic Zone (FEZ). It is situated in the northeast of the DPRK, with an area of 746 square kilometers and a population of 130,000 (in 1995). Within the zone, the DPRK is experimenting with new forms and methods of cooperation with foreign investors.

The FEZ is being organized in order to capitalize upon the natural and geographic advantages of the so-called Golden Triangle and to create a center for transit trade and international business activities in Northeast Asia. The zone is adjacent to Russia and China. Goods from northeastern China are expected to be transported through the zone to North Korean seaports. There are two ports in the zone-Sonbong and Rajin-and to the south is the port of Ch"ongjin. All three ports are ice-free.

The DPRK plans to develop the zone over a period of eighteen years in three stages: 1993-95,1996-2000, and 2001-10. In the first stage, a modern infrastructure of roads, railways, and ports was to have been developed. In the second stage, attention is supposed to be paid to the further development of ports and to the construction (or modernization) of industrial enterprises oriented at foreign markets. During the third stage, the government plans to develop all sectors of the economy of the zone as well as tourism. By 2010, the ports are expected to process up to 100 million tons of cargo, and its population is expected to reach 1 million people.22

Any foreign company is allowed to invest capital in the development of the zone. The DPRK has announced its readiness to accept investments from both state and private companies, financial institutions, international organizations and individual investors, including those from Japan, the United States, and other countries.23

The zone allows enterprises with 100 percent foreign ownership to be formed. Investments in any form are to be admitted, including equipment, materials, and capital. Funds can be invested into infrastructure development, hotel construction, service-sector enterprises, and, most desirably, construction of heavy- and consumer-goods manufacturing industries.

The program for the development of the zone is being managed by a committee headed by the premier of the DPRK"s Administrative Council. The legislative basis regulating the activities of foreign companies in the zone has already been established: more than twenty normative acts were adopted in the past several years, including laws on the zone"s legal status, on foreign enterprises, and other matters.24

Substantial privileges are granted to those companies that invest their capital into export-oriented enterprises, the processing of imported raw materials, and the production of finished goods. Foreign investments into high-tech industries are supposed to be exempt from taxes for the first three years. The tax on profits is 14 percent. Foreign businessmen in the zone may rent land and real estate for a period of up to fifty years. The government guarantees a stable rate of exchange of foreign currencies to the DPRK"s won. No visa arrangements for entry or exit are to be implemented in the zone.25 But only some of these measures have been put into practice to date.

The zone"s establishment is to be an integral part of the Tumen River Basin Development Program. Many foreign companies have expressed their interest in the FEZ"s development. For instance, contracts amounting to $65 million are reported to have been concluded with the Peoples" Republic of China"s companies investing in the construction of roads and railways and reconstruction of port facilities. There are proposals from leading South Korean companies as well.26 According to North Korean sources, there are a total of 111 projects in the zone, with an estimated value of $750 million. However, actual investments to date have been made in only 77 of these ventures, with total investment capital reaching only $57.92 million.27

The North Korean Energy Sector

The DPRK"s energy-intensive industries are considerably dependent on domestic energy sources and are thus extremely vulnerable to power shortages. Though the fast-flowing rivers of North Korea constitute a stable source of hydroelectric power, coal is the major domestic source of energy. Most power plants run on coal and a majority of manufacturing plants use coal as their fuel source. Oil is a precious import commodity used for transport vehicles and as a raw material for the chemical industry only.

According to 1996 data, North Korea"s main energy sources are coal (59 percent), wood and biomass (31 percent), crude oil (4 percent), and hydropower (4 percent).28 The energy sources in the ROK are considerably more diverse: oil (54.8 percent), coal (26.3 percent), nuclear power (14.9 percent), gas (3.2 percent) and hydropower (0.6 percent).29 Because both countries lack explored sources of crude oil and gas, energy shortages are determined by the level of domestically produced energy and by the availability of oil and gas imports.

Thus, the DPRK"s current energy shortages have resulted from a decline in domestic coal production and a dramatic decrease in oil imports since 1988. In that year, crude-oil imports were 3.16 million tons; whereas by 1993 crude-oil imports had declined to 1.3 million tons due to the loss of former Soviet subsidies. In 1995, according to the terms of the Agreed Framework, the Korean Peninsula Energy Development Organization (KEDO) shipped 150,000 tons of heavy fuel oil to North Korea, and, since October 1995, has provided annual shipments of 500,000 tons per year.30 Previously, China was North Koreas largest and most reliable oil supplier. The DPRK received about 1.2 million tons of crude oil from China in the late 1980s, but these supplies gradually declined to 0.2 million tons in 1994. Iran provided 1.0 million tons in 1990, but in 1992 its imports declined to 0.2 million tons. In the early 1990s, Russia also exported crude oil to the DPRK, but the 0.2 million tons it supplied by 1993 were just a shadow of the guaranteed 0.85 million tons of crude oil that had been supplied annually by the Soviet Union before 1987. This abrupt decline in oil imports was due in large part to the policy changes of the DPRK"s major trading partners. Prior to 1990, North Korea could buy oil from China at a "friendly" price of about $60 per ton (i.e., approximately half of the world market price). But both the former USSR (after 1990) and China (after 1991) demanded that the DPRK pay for oil supplies in hard currency at world market prices. North Koreas inability to pay for larger oil and gas imports on new terms, aggravated by the decline in domestic coal production, resulting in a significant energy deficit that hurt North Korean industrial and chemical production and those sectors of the economy that depended on transportation, such as fisheries and agriculture.

In sum, the DPRK"s economy has always been dependent on domestic coal production and crude-oil imports. With imports dropping, North Korea has had to rely even more on coal. However, its coal production has gradually declined since 1989 when it totaled 43 million tons, falling to 32.4 million tons by 1995.31 The decline in coal production can be explained by looking at the country"s general economic crisis. The structural limitations of the DPRK"s economy prevent the generation of capital investments needed to maintain or replace the obsolete and worn-out equipment and machinery or to purchase for hard currency enough coal and oil to compensate for the domestic energy deficit and the loss of Soviet oil imports.

Nuclear Energy Sector

The development of the nuclear energy sector in North Korea began rather early, approximately in the mid-1950s. Its development was based mainly on science and technology achievements of the Soviet Union and China, which provided assistance to the DPRK within the framework of science and technology cooperation agreements. As early as in 1956, an agreement on cooperation between the DPRK and the USSR in the field of peaceful use of nuclear energy had been signed. Dozens of specialists from North Korea underwent nuclear training in the Soviet Union and more practical training in China. With Soviet and Chinese assistance, a scientific-technical center was established in Yongbyon, where applied military nuclear research was conducted alongside work in the field of nuclear energy.

In 1965, a Soviet-supplied 5 megawatt (MW) research reactor was commissioned in Yongbyon. In the beginning of the 1980s, North Korean nuclear specialists began construction in Yongbyon of a 50 MW nuclear power reactor that was to be put into operation by the end of 1995. But it was never completed.

It is important to note that the lack of sufficient domestic energy sources and the DPRK"s heavy dependence on energy imports predetermine the importance of the development of the atomic energy sector in North Korea. By the early 1980s, the DPRKs dependence on energy imports was about 98 percent, which was almost 5 percent higher than a similar South Korean indicator. North Korea, just like South Korea, is totally dependent on imports of oil and natural gas and partially so on anthracite coal imports. Thus, the development of nuclear energy in North Korea may be one way of solving its energy problem. In South Korea, which is also quite heavily dependent on energy imports, the share of nuclear energy in the overall output of electricity is 38.2 percent, with the nuclear energy sector providing 12.1 percent of the primary consumption of energy resources.32 But the DPRK"s nuclear energy sector is still in its formative period compared with that of South Korea, where thirteen reactors are already operating as of fall 1998 and an additional eighteen reactors are under construction for completion by2015.33

Among North Korean nuclear energy facilities there are two basic types: scientific-research centers-like the experimental nuclear physics laboratory at Pyongyang University and the laboratory of the Radiochemistry Institute in Yongbyon; and industrial facilities-like a fuel-rod fabrication plant, the uranium mines in Pakch"on and Pyongsan, and two uranium-enrichment plants. North Korea"s natural deposits of uranium are estimated at 26 million tons of uranium ore containing more than 15,000 tons of uranium.34

Plans existed in the mid-1980s for the construction of a three-block Soviet nuclear reactor with a capacity of 635 MW each, but it did not reach fruition due to financing problems. Currently, North Korea expects to receive two 1,000 MW light-water reactors from KEDO by the year 2003, although, in reality, no one expects this target date to be met. In the meantime, therefore, North Korea will have to rely on its existing sources of energy, plus supplies from foreign donors and providers. South Koreas Hyundai Corporation plans to build a 100,000 kilowatt thermal power plant in Pyongyang in the coming years, if North Korea can come up with the financing.35

Overall, the current poor state of development in the North Korean energy sector testifies to a very low efficiency of capital investments and to the wasteful nature of past allocations of state funds for these purposes. While in South Korea nuclear energy plays an important role in the country"s overall energy balance, in North Korea it is a matter for the distant future.

Possible Motivations behind the North Korean Nuclear Crisis of the 1990s

Study of the DPRK"s nuclear program raises an inevitable question: what were the motives that led Pyongyang to get involved in such a provocative and dangerous undertaking?

Pyongyang"s first goal, undoubtedly, was to use the nuclear issue as a means of redressing its obvious loss of the economic competition with Seoul by the early 1990s. Developing a nuclear weapon would have, in Pyongyang"s thinking, greatly boosted its international prestige. This explains the DPRK"s attempt to withdraw from the Treaty on the Non-Proliferation of Nuclear Weapons (NPT) and to break out from the International Atomic Energy Agency"s (IAEA) controls in such a manner that could present the world with a fait accompli. Pyongyang was aware of the danger that if IAEA inspectors found out about its nuclear preparations, it might lead to a situation in which, even prior to its acquisition of new weapons, the DPRK would share the fate of Iraq and suffer a devastating foreign attack. One should not rule out the possibility that-after its initial production of weapons-grade plutonium and possibly even nuclear warheads-Pyongyang might have organized clandestine sales to its traditional buyers of its missiles: that is, other totalitarian regimes striving to acquire nuclear weapons.

Another probable motive behind Pyongyang"s nuclear ambitions was its eventual intention to exchange its nuclear program for significant political and economic concessions from the United States, Japan, and South Korea at the highest rate possible. In this respect, the DPRK"s leadership presumed that the farther its nuclear weapons efforts had advanced, the higher the price those countries would have to pay for the DPRK"s abandonment of it. Among possible demands on the part of the DPRK could have been a reduction or even termination of the U.S. military presence on the peninsula, elimination of political and economic discrimination against it, and the provision of economic assistance. All of these concessions would serve to increase its relative power compared with its rival in the South.

North Korea"s recent agreements with KEDO testify to the fact that the DPRK seems to have quite successfully played its nuclear card, achieving the goals it set. The question is whether it can continue to threaten the West and Seoul enough to keep the aid flowing. North Korea"s April 1998 threat to withdraw from the Agreed Framework and to restart its 5 MW plutonium-producing reactor, as well as its August 1998 test of a medium-range Taepodong-1 missile, attest to the continuation of this strategy. In both instances, Pyongyang tried to use threats as a means of extracting concessions for food and other aid. North Korea has even offered to trade its missile program and halt its exports of these weapons for $500,000 per year in compensation from the United States and its allies.36

What remains in doubt, however, is whether this type of crisis strategy can save the North Korean economy from its underlying structural inefficiencies. The completion of the Agreed Framework and the start-up of the two nuclear reactors are a long way off. In the meantime, North Korea needs to engage in a thorough restructuring of its economy if it hopes to use these reactors to level the competitive playing field with South Korea. To date, however, there is little evidence of progress in this direction. Thus, the prognosis for the North Korean economy remains dim.



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