Reading Aidan Foster-Carter’s “Budget Blanks and Blues,” I feel inspired to add my own slightly more optimistic thoughts on the analytical value of North Korean annual budget reports, in particular, if contrasted with statistics on its economy in general, a quagmire I have been dealing with for almost two decades now.
For an economist, it may seem that there is not much to research in North Korea. True, there is an economy; but we have access to very little of what would usually form the basis of a serious analysis. The main problem is not the reliability of data; there is a lack of numbers in general, even manipulated ones. Some healthy skepticism is also warranted regarding outside reports on North Korean macroeconomics. Too often, such numbers produced by Seoul’s Bank of Korea or published in the CIA World Factbook seem to be a curious product of the market mechanism. Where there is a demand, eventually there will be a supply: if you keep asking for numbers, they will eventually be produced. But knowing how hard it is to come up with reliable statistics even in an advanced, transparent, Western-style economy, it remains a mystery to me how suspiciously precise data are collected on an economy that has no convertible currency and that treats even the smallest piece of information as a state secret.
A few years ago, a former member of the intelligence community told me on condition of anonymity that most of these numbers are computed out of a roughly estimated base value (a number with many zeros) plus consecutively applied annual estimated change rates. Let me illustrate this: the value of a given item (say, GDP) is estimated to be about 100 million US$ in year one. In year two, it is thought to have grown “a bit,” which some poor fellow under pressure from his superiors then defines as about 2.5%, and boom, in year two the value is 102.5 million. Next year, growth is thought to have been “slightly higher than last year,” which is translated into, say, 3%. The value then becomes 105.575 million. Continue this for a few more cycles, and you know where most of our macroeconomic data on North Korea comes from. Marcus Noland provides a very similar assessment in a recently published article.
That said, we can use satellite imagery to determine the amount of arable land in North Korea, even to find out what crops are planted there. We can also use our weather data to estimate the size of any given harvest. Apply world market prices, and you get an estimated value for agricultural output (these prices are not valid on the ground, but who cares). We can also use satellites to estimate mineral resources, and thermal images to estimate an operation rate of major factories. Knowing the technological level of these factories, we can use our experience with factory output as a base, and deduct something due to a low operation rate and low input quality—as long as we do this for every single factory, knowing what is produced there, and hoping we do not overlook any facilities hidden in mountains or inside of larger factories. We can calculate North Korea’s trade through reverse statistics, i.e. asking every country in the world what their trade with North Korea was last year, and then use a little magic to turn cost insurance freight (CIF) into free on board (FOB) and vice versa (import prices and export prices are usually measured differently, including/excluding certain types of costs). Not that this would be impossible; but of course we must hope that all those trading partners of a pariah state subject to numerous sanctions are dumb enough to tell us the complete truth, including their trade in weapons and other illicit goods. Noland (op.cit.) points out additional sources of errors, such as the omission of trade with South Korea and with countries where for technical or political reasons, data on trade with North Korea cannot be obtained at all.
In any case, the numbers we get by all these methods are better than nothing, as long as we are aware of their origin and the resulting limitations to their applicability as the foundation for a serious argument. However, with the right care, I believe we can use North Korean data to supplement this effort. In particular the annually published budget reports are rather expressive—if contrasted with what else we do (not) know about North Korea. Two skills are important here: comparison and creative interpretation.
A single North Korean budget report as presented at the annual session of the Supreme People’s Assembly (SPA) is indeed dull and empty. Since 2003, the year after the July 2002 economic measures that rebalanced the domestic price system and devalued the North Korean currency, no absolute numbers have been published, and even growth rates have been provided selectively and inconsistently. It is also hard to understand the meaning of single items in the report. For example, is it immediately obvious to everyone what “huge funds” (많은 자금) or “popular policies” (인민적시책) means? I would nevertheless argue that the DPRK’s official budget reports are useful, mainly for two reasons:
(1) True, the data are most likely doctored—deliberately and for systemic reasons. Their value per se might thus be limited; but we learn a great deal about the intentions, perceptions, and limitations of those who manipulate the numbers.
(2) Each year, the data are “produced” by more or less the same institutions according to the same preferences, rules, and mechanisms. In other words, even if we fail to properly understand all the errors, they can be assumed to be more or less constant. This means that while we cannot trust absolute numbers or one-time change rates, there is some value in data regarding year-on-year changes of these numbers or rates.
A look at table 1 provides a quick impression of such budget reports. Not only are the meaning of the single items and the reliability of the numbers (like 15.8% for defense) debatable, we can also only speculate why certain items are mentioned one year but left out the next. One possibility is that the actual report is much more extensive, but that only selected positions are included in the version published in the state media.
Table 1: Comparison of State Budgets 2009-2012
|State budgetary revenue||+5.2%||101.7%+7%||+6.3%||+7.7%||+7.5%||+8.6%||+8.7%|
|Profits of state enterprises||+5.8%||+7.7%||78.5%||–||+10.7%|
|Profits of co-operative organisations||+3.1%||+4.2%||+3.8%||–||+5.3%|
|Fixed asset depreciation||+6.1%||+2.5%||+1.4%||–||+2.3%|
|Real estate rent||+3.6%||+2%||+0.7%||–||+1.9%|
|Local budgetary revenue||‘over-fulfilled’||16.1%||+12.8%||–|
|State budgetary expenditure||+7%||99.8%||+8.3%||+8.2%||+8.9%83.9%||99.8%||+10.1%|
|Priority sectors of the nationaleconomy (metal, power, coal, railway)||+8.7%||‘huge
|Development of science and technology||+8%||+7.2%||+8.5%||+8.1%||+10.1%||–||+10.9%|
|City management/capital construction||+11.5%||+8.6%||+12.9%||+15.1%||–||+12.2%|
|Culture and arts||+3.2%||–||+6.8%|
Source: KCNA. (If trouble viewing this table, view PDF here.)
To me, the most important numbers are those on the overall budget. We roughly have four such numbers for each year: achieved revenue, planned revenue, planned expenditure, and achieved expenditure. Data on the latter is scattered and seems to more or less correspond perfectly with planned expenditure (at 99.8% or +/- 0.1%, see table 1).
The key to interpreting the overall budget numbers is understanding their relevance in North Korea. Forget what you have learned about state budgets in your own country: Except for the not insignificant part of the economy owned by the military (the “second economy”—not to be confused with the shadow economy), given the absence of any major private sector, the state economy is more or less “the” economy. The state budget is thus not just a fiscal instrument; it reflects the flow of inputs and outputs in North Korea. The growth of state budgetary revenue is thus more or less the civilian part of the DPRK’s GDP—or at least the perception thereof that the North Korean leadership has or wants to spread. The gap between budgetary expenditure and revenue is the annual state deficit/excess.
What would we expect from North Korea? Well, continuous growth, of course; plan fulfillment at 100% at least, or over-fulfillment; and a message to the population that everything is just getting better and better. This is only partially true, as graphs 1 and 2 show. There are two ways to display the annual growth rates for the main budgetary positions: apply a base value of 100 (%) to a given year, and then apply growth rates annually (graph 1); or simply look at the changing value of the annual growth estimate (graph 2). Our stereotypical knowledge about the manipulative North Korean state suggests that we would see a steadily rising curve for graph 1, and a more or less flat or slightly ascending curve in graph 2.
Graph 1: Cumulative Economic Growth in North Korea According to the DPRK Budget
(base year 2004 set as 100, annual rates applied)
Graph 1 almost shows what we expected, although we note a rather sudden increase between 2003 and 2005, and a widening gap between the values for revenue and expenditure after 2005. It also seems that the North Korean government applies good fiscal discipline, as the graph for planned expenditures is below the one for revenues.
But if we look at the same data separately rather than cumulatively, we find a very different graph 2 that is quite dynamic, zigzagging up and down. In particular since 2008, we also see that fiscal discipline has been given up; North Korea now deliberately runs a modest deficit, as it plans to spend more than it plans to earn. We see a correlation with political events: the reform period after the June 2000 inter-Korean summit and the July 2002 economic reforms; the reversal after the war on Iraq, and in 2005 when the idea of the introduction of market elements was finally put on hold; the 2008 stroke of Kim Jong Il and the (alleged) continuous growth ever since.
Graph 2: Economic Growth in North Korea According to the DPRK Budget and the Bank of Korea
(annual growth rates in %)
(If trouble viewing the graphs, view PDF here.)
How do we interpret these data? First of all I would discourage you from taking them as exact GDP growth rates, or in any other way as a reflection of reality. Sometimes I ask myself whether, in the absence of money as a reliable means of accounting, even the North Korean leader himself has such numbers. He surely knows how many rubber boots or Kimjongilia flowers have been produced; but the value of these products, of the inputs necessary, and in the end, of profitability are not calculable as long as prices are naturally distorted in a centrally planned economy with no money market.
The budget growth rates thus tell us something else: how the North Korean leadership estimates the performance of its economy. Graph 2, with its ups and downs, makes me believe that this is not just propaganda, but rather more or less the contribution of the North Korean leadership to the guessing game about numbers. Clearly that is not the final answer on the GDP question, but certainly something we should contrast with our own insights, in particular, given the latter’s flaws.
So we find that the self-perception of economic growth has been relatively moderate until 2002; suddenly we see a dramatic increase that reflects the high hopes pinned on the July 2002 economic measures. Was it the failure of these measures or the changed order of priorities after the USA fully embarked on its “War against Terror” with the Iraq invasion in 2003 that resulted in the drop a year later? We can only speculate why also in 2005, we see another peak of optimism before 2006, the year of the first nuclear test, when expectations of economic performance drop as suddenly as they had jumped up a few years before. From 2008, the rates grow more steadily. The reform period with its enthusiasm was over, and a more conservative outlook seems to have taken hold. This is interesting to note as 2008 was the year of Kim Jong Il’s stroke, i.e. a time when the leader was probably less effective and others had to take on greater responsibility. Note also that from 2008, achieved revenue is above planned revenue—a typical feature of orthodox socialist planning that regards “over-fulfillment” of the plan as a key indicator of success. I have called this “socialist neoconservatism.” Furthermore, we find that from about the same time, planned expenditure grew at a higher rate than planned revenue. Without absolute numbers, and looking at the opposite relationship between the two indicators in graph 1, we should be careful interpreting this as a deliberate policy of deficit spending. But if the latter was the case, we should ask where the funds to bridge this gap come from. To be really speculative, we could even argue that a new reform period is imminent with official growth rates reaching the levels of 2003.
Graph 2 also includes the North Korean GDP growth estimates by the Bank of Korea (purple line). In absolute terms, these are much lower than the North Korean data. But remarkably, the correlation coefficient for this South Korean estimate and North Korea’s officially announced achieved revenue (blue line) from 2005 to 2011 is relatively high with r=0.65 (Pearson’s product-moment coefficient; indicates the strength of linear dependence between two variables; range from -1 [very strong inverse correlation], 0 [negligible], to 1 [very strong positive correlation]). In other words, although both sides seem to differ about the amount of growth, at least there is some moderately strong agreement about its general direction.
Last but not least, the first budget report in the Kim Jong Un era contained major differences, two at least, if compared to previous years. There was the first ever mentioning of a transaction tax (거래수입금), called “a key source to budgetary revenue” (기본원천). The only occasion where I encountered the transaction tax in a North Korean context before was related to the Kaesong Industrial Zone, where it was applied to tax foreign enterprises. Either Kaesong has had such a major impact that revenue generated there is more or less openly regarded as a key source of income by the North Korean state, or some of the experience generated through operating Kaesong has migrated into the North Korean economy. Both would be sensational. Also, let’s not forget that taxes are a relatively unusual tool of economic and fiscal policy in socialist economies, where production units and their finances are part of the plan. Why would the state tax itself if it gets all the profits anyway and can influence companies’ decision making simply by administrative order? More than once I have heard from North Koreans—with great pride—that the abolishment of taxation was a major achievement of the post-1945 socialist economic reforms under Kim Il Sung. Such prominent mentioning of a tax in 2012 thus has a number of potential implications that deserve investigation. For example we could ask, again speculatively: Do we see a paradigm shift in fiscal policy, even the preparation for another round of market-based economic reforms or at least a change of the state’s tools to direct the economy?
Furthermore, for the first time since 2004, Premier Choe Yong Rim, in his report on the work of the cabinet, mentioned a specific growth rate for “gross industrial output value” (공업총생산액), standing at 2% (KCNA, 13.04.2012). It remains to be debated how such a low number corresponds with the much bigger budget increase rates; but this is North Korea. In any case, an optimist would see a cautious return to a higher rate of professionalism (by North Korean standards) of macroeconomic reporting, if we consider that in 2010, the gross industrial output value grew “remarkably” (KCNA, 09.04.2010), and in 2008, it “swelled” (KCNA, 10.04.2008). Besides, 2% sounds rather modest and might thus even be true. And if last year’s industrial output grew only 2%, where was the 8.7% increase in state budgetary revenue in 2011 generated? In agriculture? Through trade? Is the production of local industries included in “gross industrial output value,” which might not be the case as “local budgetary revenue” supposedly grew by 12.8% (see table 1)? The answers would be quite telling in terms of understanding the sources and dynamics of North Korea’s economic development. We could learn something about the impact of SMEs on the economy, debt, and the resulting pressure on economic policymakers. Having the role of rural enterprises in China’s early reform period in mind, we should certainly keep an eye on those local industries.
To conclude, I would argue that the annual budgetary reports provide ample food for thought if approached with an open and creative mind. There is no need to push tea-leaf reading too far, but ignoring what little official data we get from the North Korean side would be as wrong as blindly trusting the numbers produced further to the south, north, east, or west.
 For more recent versions including the years before 2009, please consult www.kcna.co.jp or look at my annual contributions on domestic developments in North Korea in Rudiger Frank, James E. Hoare, Patrick Kollner and Susan Pares (eds.): Korea. Politics, Economy and Society, Leiden: Brill; http://www.brill.nl/publications/korea-politics-economy-and-society.
 “Achieved Expenditure” has not been considered in the graphs because data are scattered and the value seems to be more or less congruent with planned expenditure for the respective year.