Jing and Lovely on North Korean Indigenous Industrial Capacity
Problems of data availability foreclose the opportunities for most state-of-the-art forms of economic analysis on North Korea. And given the methodologically-driven nature of academic publishing, little on the North Korean economy appears in peer-reviewed journals. So when someone manages to place a paper on the North Korean economy in a peer-reviewed journal, it’s a bit like the proverbial five-legged sheep, hence today’s post on Ran Jing and Mary Lovely’s “A View Through the Trade Window: North Korean Exports as an Indicator of Economic Capabilities” forthcoming in the World Economy. (Depending on your access options, a link to the abstract and full paper through SSRN is here, Wiley is here, and Research Gate is here.)
The paper uses Chinese customs statistics, KOTRA data, and data from Brazilian customs, to analyze North Korean trade performance, with a particular emphasis on the commodity composition of trade and the comparative competitiveness in the Chinese, South Korean, and Brazilian markets relative to “low-income Asian” peers. While it is well-known that trade performance by centrally planned economies may not provide a true signal of underlying comparative advantage (because the enterprises are not producing with input costs evaluated at world prices), Jing and Lovely argue that trade performance conveys some information about underlying capacity because these transactions require a willing buyer. They describe the results of the analysis as “sobering”: “there is little evidence of indigenous manufacturing activity capable of meeting international standards,” and go on to argue that policy changes since 2005, are unlikely to make the situation better, since tightened controls have left indigenous industrial enterprises with “little or no ability to identify and meet international standards.” Indeed, as competitors across Asia and Africa strengthen capacity, they see North Korea falling further and further behind.
These are pretty depressing conclusions. Any reason to believe that Jing and Lovely may not be correct?
One key issue is the term indigenous. Jing and Lovely demonstrate, for example, that North Korean exports to China produced by Chinese-invested operations are more sophisticated than those produced by North Korean enterprises. Obviously in the land of juche, indigenous capability is the coin of the realm. But is it necessary to get ahead? One development strategy, used most notably by Singapore, was to invite in foreign producers and allow them to develop the manufacturing sector, while indigenous capacity was developed. While this would seem to be an anathema to juche, an approach based on being a foreign-invested export platform, at least for some period of time, might be a sensible development strategy. The issue then is not so much the lack of indigenous capacity but the willingness and ability to attract foreign investors. As Steph Haggard and I have demonstrated in multiple studies, the basic institutional weakness of the North Korean business environment is a huge obstacle in this regard, particularly outside the extractive sector.
A second issue with the analysis is that some of it is conducted at a pretty high level of commodity aggregation and given the broad categories it is hard to discern if North Korea is really underperforming in terms of the technological sophistication embodied in manufactured exports. Indeed a scatterplot of the export sophistication against per capita income (yeah, I know, that is
measured guessed with a high degree of uncertainty) shows North Korea actually above the regression line, i.e. its exports were more sophisticated than expected on the basis of its estimated income, though the peers: Nepal, Bangladesh, Cambodia, Pakistan, Laos, Yemen, Vietnam, Mongolia, and India, are not necessarily ones with which its supporters would normally like to compare the North.
Nevertheless, the paper seems to convey an essential message: under current policies, indigenous capacity is not being developed, and as a consequence North Korea has a choice. It can either invite foreign investors in, or, absent policy change, fall further and further behind.