Monday 27 July 2015

How Does North Korea Make Money?

For us in the West, North Korea is a rather mysterious country in many aspects. A combination of government secrecy (very few updates on the nation are publicly released), strict control over entrance into the nation by foreigners and Western dislike of the DPRK's authorities mean that we know very little for certain about the country.
One of the enigmas surrounding the nation lie in its economy. While its economy is pretty much in dire straits (its annual growth of 0.8% is deemed as stagnating, per capita income is estimated to be $1-2k per year), the country continues to maintain a huge military expenditure (as evidenced by the recent reported hydrogen bomb tests). The DPRK spends around $10bn, according to International observers, on its military- a quarter of the total national GDP, among the highest rates in the world. North Korea must be getting some reliable income to be able to maintain this spending, but where from? How does the DPRK's economy function with its doors of trade largely closed to today's globalised world?

1. (Narrow) International Trade
Textiles constitutes a significant part in the North Korean
economy, but is secondary to commodities.

North Korea exports roughly $2.7bn worth of materials every year, a notably large proportion of these exports being derived from primary industry. Mining in particular plays a massive role in keeping North Korean trade afloat, with coal and iron constituting over 46% of the nation's exports. Other products exported from the DPRK include clothing, molluscs (according to the OEC North Korea's 6th most valuable export, no kidding) and fur.

Nevertheless, it is evident that North Korea is heavily dependent upon its primary sector, on the commodities (coal, iron, etc) whose prices are constantly fluctuating. The impact of these fluctuations on North Korea is amplified by this dependence, meaning their economy would be far more damaged by a fall in coal prices, for example, than other nations whose economies are far more diverse. NK's exports have given them a tightrope to walk upon- as opposed to the kind of solid, wide platform most countries would ideally like to have.

But not only does North Korea's product lack diversity, but its list of trade partners does as well. The country's lack of extensive diplomatic ties with other nations has resulted in China receiving 84% of NK's exports, followed far behind by Indonesia, which receives just 2%. This is the same when you look at North Korea's imports. 84.5% of NK's imports come from China- India follows with just 5%.

So not only are North Korea extremely sensitive to global commodity prices, but also to the performance of China. Currently the Chinese economy is relatively stable, but could a catastrophe hit, North Korea would see a severe lack of supplies, one even more deadly than it is experiencing right now.

But it would be foolish to put this off as a long-term economic problem. Kevin Stahler from the Peterson Institute of Economics claims the country's lack of economic diversity is already hitting growth. "Just as it [North Korea] rode the resource boom to its apex in 2011, it is now the victim of a steady and steep decline in world prices."

2. Tourism
North Korea's state tourism is becoming more popular to
travellers from outside the region.

It's reputation in the West has written off to many the idea of ever travelling to North Korea, but it is indeed possible, and it's not even that complicated. You just need to have two guides prepared to accompany you on a pre-planned tour, which can be organised via a number of online tour operators. It may not be totally convenient ("It's not possible to travel independently in North Korea", according to tour operator Gill Leaning), but it is an opportunity available to those who wish to take it.

It's easy to travel to North Korea because the authorities there see tourism as a potential source for a great amount of income and economic activity. Their increased efforts particularly in the past few years have seen the number of visits to DPRK growing. For example, Leaning claims to have received a 400% increase in booking enquiries in 2012, largely thanks to the nation's 100 year anniversary and the government's heavy publicity of the occasion.

It is difficult to attain the precise figures for how much income tourism brings, but what is more certain is that, currently, the majority of the DPRK's 100,000 guests a year are Chinese. "About 80% of the tourists who come are from neighbouring countries," says Kim Sang Hak, a senior North Korean economist. "It's normal to develop tourism within your region... but we are also expanding to European countries as well.". In explaining his countries target to increase tourism to two million people a year by 2020, Hak affirms that "Tourism can produce a lot of profit relative to the investment required, so that's why our country is putting priority on it."

3. The Black Market

The North Korean-built 'African Renaissance
Monument' in Senegal.
While the North Korean economy does produce something, looking at figures such as the GDP per capita earlier mentioned, it is evidently not performing particularly well. It is widely believed that the DPRK has been and still is involved in some more questionable dealings to try to further boost its revenues. The government's sale of labour workers to Russia and China has been relatively well documented. While exporting labour itself is not something unusual, the taking of up to 70% of the workers' earnings as 'loyalty payments' by the North Korean government makes this dealing particularly shady. This exporting of workers not only brings North Korea revenue, but it brings revenue in the form of US Dollars, providing the government with a far safer, stable currency than its own Won.
North Korea also exports monuments and statues of national leaders to other countries. These can be seen throughout Africa, in countries such as Senegal (pictured), and the Mansudae Art Studio, the Pyongyang-based company responsible for most of these works, had even created one for Germany in 2005.

However 'shady' one might consider these deals to be, they are technically legal- and according to NPR, they brought in around $2bn in 2009. But there is a darker side to the North Korean economy, that involves drugs, counterfeit money, and weaponry.

According to the Wall Street Journal, in 2001 North Korea made somewhere between $500m and $1bn from illegal drug sales. The late 20th century saw growing opium exports from the DPRK, but more recently crystal meth has been growing in popularity, not just outside the country but internally, where "People with chronic disease take it until they're addicted," according to an NGO worker in an interview with journalist Isaac Fish. "They take it for things like cancer. This drug is their sole form of medication."

Counterfeiting money has also been a tactic used by the North Korean government, usually of the dollar in attempts to destabilise the American economy. Making the government up to $25m a year, the USA has actively moved to stop this, by introducing a new $100 bill in 2013 specifically designed to prevent further North Korean counterfeits.
Lone Editor

Friday 17 July 2015

Iran Sanctions Lifted: What Does This Mean for the Rest of the World?

So a deal was agreed earlier this week, agreed between Iran and the P5+1 nations, and one of the headlines of the deal is the plan to lift economic sanctions off Iran over the next few years. To learn more about what these sanctions are and the effect they have had you can read our recent article here, but today we're going to look at the future for not just the Iranian economy, but the global economy as this Middle Eastern superpower re-enters many world markets it has been exiled from.

The global energy energy markets are most likely to be shaken up by Iran's re-emergence. In the face of sanctions, Iran has remained in the top 5 of the world's largest oil exporters, thanks largely to deals with China and India. However, sanctions did restrict access to large portions of Iran's original customer base. For example, the EU in 2011 were buying one fifth of all Iranian exports- meaning that the EU outlawing of any Iranian oil importations that followed proved to hit the country's oil revenues hard. Iranian production also fell due to the reduction in demand, from 4 million barrels of oil a day in 2008 to 2.8m in May 2015.

The deal just agreed, however, will remove such sanctions, meaning that Iran will re-emerge and try to claw back those losses of the past decade. Iran currently has over 30 million barrels of oil in offshore reserves that the removal of sanctions will enable it to soon sell. This flooding of global markets with Iranian oil is highly likely to lead to falling oil prices (the effects of which you can read about here).

However, analysts warn that this initial sale of current stocks will not provide a sustainable, consistent flow of revenue for the near future. "It might take years for Iran to get production in its crippled oil fields back to pre-sanctions levels," says Brad Plumer of Vox. "The country does possess vast crude reserves- but that doesn't mean it's all coming online tomorrow".

Nevertheless, due to the increase in supply of oil in the global market it will provoke, this deal will push down global oil prices. This means lower inflation is likely, as transport becomes cheaper and impacts the prices of goods ranging from food to furniture. Of course, this is a scenario in which there are no major global catastrophes in the coming years (fingers crossed).

It's not just oil that will re-enter many markets of the world from Iran, though. For years we have been deprived of many of the nation's finest exports- their rugs, caviar and pistachios to name but a few.

Iranian rugs are the most sought after in the world.
A lack of supply has led to US nut prices rising by over 40% since 2010, so Iran's re-entry into the nut market, like that of the oil market, is likely to reduce prices, providing relief to consumers but quite the opposite to Iran's nut competitors. Only America is competing with Iran at the top of the pistachio sector, and American farmers, particularly those already suffering in drought-stricken California, are likely to receive lower incomes due to the price rise.

However, businesses in America can seek to profit from the return of Persian rug imports. They have been blocked from purchasing the valuable Persian rugs since 2010, and consequently many have had to rely upon the far less lucrative second hand trade. Being able to import Persian rugs again would not only provide extra business opportunities, but it would also update the current rug market that is a couple of years behind. "I'm excited about the variety of quality and the character of carpets that will come out of there that we haven't seen for a long time," says Arash Yaraghi, CEO of NYC-based rugs and furniture outlet Safavieh.

Peugeot has historically seen great success in Iran, though
its operations were knocked back by the sanctions of the
past decade.
Not only will the lifting of sanctions bring new opportunities for Western businesses to import from Iran, but it will also grant access to a whole new market of potential consumers. Carmaker Peugeot, which has historically been a successful brand in Iran, has sought to return quickly to the Iranian market. Jean Christophe Quémard, VP of Middle Eastern and African Operations for the company, has affirmed that not only do Peugeot seek to sell cars in Iran, but also that he believes in the potential to produce in Iran, and in the long term even export. "We are ready to invest. We can provide cash and technology to build modern cars in Iran for the local market", he told the Financial Times.

Analysts are pretty much in consensus over the fact that Iran will not recover fully from the sanctions overnight- however, over the next decade or two we can certainly expect Iran to become an even greater economic power on both the Middle Eastern and global stages. Iran has arguably performed relatively well in the past decade when the barrage of sanctions forced upon it are taken into account: now it is unshackled, perhaps Alan Kohler of the Business Spectator is right: "The world just got another emerging economy".

Lone Editor

Tuesday 7 July 2015

Supply Side 'Trickle-down' economics- does it work?

Supply-side (or 'trickle down') economics has for the past few decades been one of the discreet tenets of Western economy. It's the belief that giving financial benefits to the wealthiest of society (in the way of tax cuts/breaks, regulatory advantages given to big businesses) will inevitably benefit society as a whole, as the wealth will 'trickle down' the economic ladder in the form of employment, pay rises or whatever else of the extra wealth the richest will generously share with the rest of the population.

It's been a policy the conservatives of America has held ever so close to their hearts, and one that has faced much opposition by the lower and middle classes of America.

So how did trickle-down begin?

A turning point was certainly in the 1980s, during the divisive periods when Ronald Reagan and Margaret Thatcher were in power in the USA and UK respectively.
Perhaps never have two leaders either side of the Atlantic been so harmonious- Reagan curiously dubbed Thatcher "the most important man in England", and Thatcher once described Reagan as "the second most important man in my life".
The harmony of the two certainly extended to economic policy; both leaders were strongly influenced by the Chicagoan and Austrian schools of economics, the proponents of which included notable anti-regulation, free-marketers Milton Friedman and Friedrich Hayek.

Trickle-down was one of their most prominent legacies. Thatcher and Reagan carried out drastic economic changes that were designed towards 'supply-side economics' (another name for trickle-down). The most important relevant policy change was that of tax rate changes.
In the USA, the Tax Reform of 1986 saw the top tax rate for individuals drop from 50% to 28%, partly compensated for by an increase of the bottom rate of tax from 11% to 15%. This was the very first time in the history of the USA that the top rate of tax fell at the same time as the bottom rate rising.
In the UK, Thatcher followed suit by dropping the top rate of tax from 80% to 63%, meanwhile almost doubling VAT (Value-added tax) and the amount everyone had to pay to fund the National Health Service. However, she did indeed drop the common tax rate from 33% to 30%.

So what were effects of these trickle-down policies?
Let's remember, the motivation supposedly behind trickle-down economics was that the population as a whole would benefit from the wealthy being wealthier. The idea is that as the national wealth pie grows as a result of the richer getting richer, everyone else's pie would simultaneously grow as a result.
So has it worked?
Well, a certainly interesting effect is encapsulated well in the following graphic:

Comparison of wages of the top 1%, overall wages and productivity.
(Mother Jones
Note the real separation point on the graph, where the average income of the top 1% really lifts off- it's after the turn of the decade, through the 1980s- conveniently the decade of Reagan's presidency.

Note not just how the income of the top 1% rises incredibly, that as productivity increases the average overall wages of the population lags behind, barely increasing in relation to the other two factors in the chart.
The meaning of this is pretty unpleasant- the 'pie of wealth' may have increased, but this chart suggests that more prominent has been a relocation of sorts of national wealth.
The wages of the overall population has suffered since the 1980s when it is considered that productivity has boosted- the overall population have not benefited in terms of wages from this increase. Instead the wages of the wealthiest have been boosted far more than before the 80s.
CEOs in 1965 made 24 times more than the average production worker- in 2009, this figure was 185.

It seems clear that wages of the middle and lower classes, contrary to the motives of supply-side economics, have suffered as a result of the policy- meanwhile clearly the wealthiest have benefited HUGELY.

So why haven't most of the population benefited- a key belief of the theory is that it's better for everyone if the wealthy are wealthier, right?

Buffett has been a prominent opponent
of trickle-down economics.
Here there is a great fault in the trickle-down ideology- reduction in the taxes enforced upon the wealth is itself no guarantee of further reinvestment into the economy.
This is because the benefits are being given to people who are not in need of it. Little is in the way of CEOs creating new jobs to further production- most already have the capital available to invest where they see fit.
Warren Buffett (pictured right), one of the wealthiest men in the world, and perhaps the most prolific investor claimed "People invest to make money, and potential taxes have never scared them off". Taxes are rarely a stumbling block for the wealthiest, who are willing to take risks to invest (most entrepreneurs are where they are now as a result of their calculated risks).
Therefore tax cuts to the wealthy rarely open the doors to new investments. Instead it leads to simply a further amassing of wealth by the wealthy. By no means will the wealthy invest everything they benefit from tax cuts, to the gain of the middle and lower classes as the theory suggests. A staggering example of this is how currently the top 1% of wealthiest people in the world control 39% of the world's wealth. This is a clear sign of a broken global system, a large part of which is thanks to trickle-down.

Trickle-down, supply-side, Reaganomics, whatever name it is called, is a lie.

The solution lies not in blessing the wealthy with benefits and hoping that it will filter down to the rest of society, but the solution lies in the middle class. We need to make the middle the centre of our economic system, and see middle-out growth that will benefit everyone (yes, including the wealthy).

Middle-out. That is the solution we need.

Sources for this article can be found linked within.
Lone Editor