How North Korea's hushed-up economy is hindering its development

http://www.theguardian.com/world/2015/apr/22/north-korea-secret-economy-aiib-development-china

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China has rejected a North Korean attempt to join its new Asian Infrastructure Investment Bank (AIIB), according to a recent report, a decision which could have a significant effect on Pyongyang.

Masahiro Kawai, a professor of public policy at the University of Tokyo told Emerging Markets that North Korea had failed to “disclose sufficient information” relating to industry, public finances, and its tax base.

“But the North Koreans were not willing to provide that information,” Kawai said. Later, a Chinese ministry of foreign affairs spokesman claimed not to have any knowledge of such a rejection.

Though much still lies in the way of mutual collaboration, joining the bank would probably be North Korea’s best chance to sort out its infrastructure problems – from transportation to electricity.

As a multilateral development bank, the AIIB demands high levels of fiscal transparency – a requirement which would force Pyongyang to share information about its economy with the outside world. But the regime has not released economic data since the 1960s, for fear it could be used by its enemies.

North Korea has not released economic data since the 1960s, for fear it could be used by its enemies

At Choson Exchange, an organisation that runs training programmes for North Korean business people, it has become apparent that Kim Jong-un’s narrative leans heavily towards economic improvement.

The regime has introduced several new policies, from allowing more state-owned enterprises to be run autonomously to a slew of new Special Economic Zones, that suggest this focus is not just rhetorical.

These reforms have raised expectations among North Koreans, as have the numbers of companies and people tasked with attracting foreign investment and trading partners.

However, the country’s weak infrastructure remains a key impediment to attracting investment.

Electricity supply is probably the biggest bottleneck. Sanctions can be complied with or avoided, transaction costs can be planned for, but if you can’t run a mine or a factory for lack of electricity, you can’t invest.

Shortages are expected to be exacerbated by a drought severely limiting the country’s hydroelectric output.

North Korean officials tend to think of private investment as a solution to these problems, but often offer little information on how the investor might recoup their money: asking for capital to build roads with no tolls, for example, feels like a donation rather than an investment.

If you can’t run a mine or a factory for lack of electricity, you can’t invest

For a cash-strapped developing economy such as North Korea’s, the best hope for its many infrastructure problems would be a regional development bank to support regional integration and long term growth.

The two major banks that could help are not feasible – unless the issue of North Korea’s nuclear weapons programme is resolved. Washington’s preponderant role in the World Bank and Tokyo’s strong influence in the Asian Development Bank make their respective cooperation with North Korea difficult to envisage.

The Chinese-controlled bank is a more likely prospect, and it’s conceivable that the bar Pyongyang would have to reach in slowing its nuclear activities would be much lower: a freeze of its uranium enrichment activities, rather than a dismantling of its weapons cache, perhaps. In other words, the investment bank is likely to work with Pyongyang long before the other two.

If the bank continues to signal that the DPRK is welcome to participate as long as it abides by the bank’s standards, North Korean policymakers will be better equipped to argue for a more open approach to the economy. After all, some in Pyongyang understand that not being able to provide outsiders with basic statistics on the country’s economy is detrimental to its economic plans for the future.

The new bank will thus come to feature heavily in the list of factors Pyongyang must weigh up as it crafts economic and foreign policy.

Andray Abrahamian is director of Choson Exchange, a Singaporean non-profit that trains North Koreans in entrepreneurship, economic policy and law. He is an honorary fellow at Macquarie University, Australia