Microeconomic Implications of the Sanctions Emplaced on North Korea - Case Study Example

Topic: Microeconomic Implications of the Sanctions emplaced on North Korea Sanctions on North Korea is an old issue, which comes into focus time and again as and whenever there is progress in North Korea in the making of nuclear armament or increase in extremist activities, endangering the safety and security of international community, especially the United Nations. In the year 2005, on September 19th, the six nations – namely the United States, North Korea, South Korea, Japan, Russia and China agreed to issue a joint statement specifying targets and principles to follow an action plan to ensuring the Korean peninsula free from nuclear hazards and normalize relations with North Korea. The collective initiative was taken as a last resort to solve the crisis of North Korea’s nuclear weapons program. Background for such initiative happened in 2002 when North Korean diplomats were questioned about a secret uranium enrichment attempt. As a punitive measure, fuel supply via shipment was canceled. North Korea also ordered International Atomic Energy inspectors to leave the nuclear complex, started producing plutonium and denounced membership of Nuclear Nonproliferation Treaty (NPT). The most latest North Korean ballistic missile tests have worsened the situation for continuing dialogue process. Again keeping in view the 9/11 extremist attack, Washington put North Korea on the “axis of evil” list and in the light of 2006 nuclear tests, the Security Council members enforced sanctions on North Korea. Sanctions are on financial sector as well as military, technology and luxury products. Generally, sanctions are used as a medium of international policy. Economic sanctions are enforced on economic activity with other nations or people, keeping a country’s foreign policy in view. They are mainly trade, investment and financial sanctions. Sanctions have been enforced mainly by the United States, aimed at North Korea. As a result, the national economy of North Korea is at limited resources as economic reasoning dictates. Microeconomic implications cannot be derived without keeping in mind the larger perspective of macroeconomic impact of sanctions. Supply of essential or other products is interrupted. Demand of such products is generally inelastic as consumers depend totally on imports. Some of the essential category of items consumed by masses are food, medicine and energy needs. There is a price hike for such products. In such a scenario there is possibility of either buying those goods in increased prices or totally rejecting the idea of purchasing such products due to higher prices for lower strata population. In other words, sanctions can result in poor people buying lesser quantity of food, energy and medicine or remaining hungry. Rich class will spend more money on purchasing essential consumer items like food and medicine. Impact on both classes of consumers of sanctions is not easy although the level of impact may vary. Sanctions are knowingly imposed by the sender country or organization so that it affects negatively the targeted population so that under pressure from voting community, leaders of the sanctioned country change their wrong policies and amend their ways. There is a theory behind such sanctions that common masses bearing the brunt of sanctions can pressurize their government to reform but it doesn’t happen that way. Actually, and on the contrary, what happens is that “those in power, perversely, often benefit from such sanctions by their ability to control and profit from black market activity, and by exploiting them as a pretext for eliminating domestic sources of political opposition,” as written by the UN General Secretary in his millennium report. There is logic of “smart sanctions” regarding financial sanctions, presented by Elliot and Hufbauer, as generally, “bad guys” are punished by such sanctions. The burden of sanctions cannot be transferred to another person. It is based on the thinking that “pet projects” are normally usurped by leaders and financial sanctions will affect them severely. This argument is taken well by the UN in the assumption that impact of such sanctions will not be as deep and non-partial as routine sanctions will have. Taking the case of North Korea, there is lesser global integration on North Korea. It is just like a trade barrier in which both parties get affected. It is also a historically tested fact that limited resources affect distribution adversely; those in power or money in pockets get preferential treatment when goods are scarce. Poor are left barehanded because of their lesser purchasing power. It is very difficult to reach at costs of sanctions to the end consumer. It depends on the economic “balance sheet” – the relation between costs and benefits to a people or company. Only rough idea of costs can be had but actual mapping depends on distribution and aims of a seller, which cannot be sure and definite. Past experience indicates that sanctions on North Korea have not yielded positive results. Sender has not been able to achieve any of its aims. Sanction can work only if it results in change of leadership of the target country. Humanitarian casualties might be too high to bear of creating a political turmoil in the target country. Take the example of Japan. Its regulations for pollution insurance for ships arriving Japanese ports turned out as sanctions against North Korea, the Japanese put restrictions on ferry services and cash remittances by Pro-North Korean population to Pyongyang. The US put sanctions on the import of double-use technology in the Ginseng Zone and financial sanctions. Sanctions can create shortage of hard currency, resulting in people’s involvement in illegal options of earning money. If you penalize a hungry person, he won’t stop stealing until he is given employment. Same thing has happened in the context of North Korea. Discussing the implications of sanctions at micro level is a tedious job as reliable data is missing. Quantitative research, as a result of missing data, cannot be made. In July 2002, there was a change in the country’s price-system. Raw data from that period could be helpful in reaching at certain conclusions. The North Korean market scenario can be at the best looked at with the help of product behavior of food grains like wheat and rice as per the basis of economic theory. Food distribution in the scenario of under-supply after price reforms led to dual price structure for many products. In 1990, it changed the local market as economic reforms happening due to Joint Venture Law of 1984 were behind the dual price structure for some products. The old rate of rice per kg.was 0.08 Won and new price was 44 Won, resulting in Nominal Change Factor (NCF) 550.00 times. The price of Corn was 0.49 Won earlier with the new price at 20 Won with NCF at 40. Electricity was charged at 0.035 Won per kWh with the new price fixed at 1.8 Won, NCF at 51.43. Further the new price structure affected increase in the rate of other essential items like bus fare, basic wages, rice procurement and change in the rate of dollar to Won. One US dollar was 2.19 Won before price-restructure, which reached at 150 Won, bringing the nominal change factor to 68.49 (Source: People’s Korea at www. Korea-no.co.jp, Aug. 17, 2002) It is a fact that there is no distribution chaos in North Korea; actual problem is production. Just maximizing the supply of limited products might ease the burden on common masses to a limited extent. It is not a solution to all economic problems. Market should be let free to behave as happens in private market. A totally legalized market permitting free trade of food and other items might increase the price of goods until there is plenty of supply. It will bring the prices down. In the case of food grains, what happens is that demand is downward inelastic as it is limited to a quantity essential to remain alive. Incentives to increase output take time to give results. The result will be a scenario where some of the people might not be able to buy enough food grains to eat for a limited time until incentives result in increased production. Such a situation where some part of population was without their quota of needs was there and chose other practical methods to survive in the absence of food grains. But the situation where they have to control their hunger in front of fully stocked markets and neighbors having sufficient to eat might lead to a revolution of Lenin times. Rulers at North Korea fully understand the situation as they know history well. That’s why they permit a sudden rise in price, which can be controlled. This approach suits the rulers as it creates minimum political risk of revolution but at the same time decreases the incentive level of producers to produce more. An appropriate analysis of price change is possible only when we keep such reactions and their effects in mind. The available data is not completely reliable and expressive. Changes cannot measure the short-term microeconomic effects of the reforms but discussions can lead to an understanding of the market according to the limited purview of data available. Determination of actual price changes is important regardless of more or less absolute numbers to measure the planned impacts of the new prices on the consumers and producers. It is of value as income of people has also increased as the rate of price change differs to a large extent on the choice of product. Measurement of nominal increase rate in the price of all commodities needs some parameter; there could be many possibilities worth knowing. Nominal wage hike and real: It is quite reasonable to compare the change rates in nominal income with the change rates in nominal prices. As discussed earlier, we need to zero-in on the factor by which the price of a commodity ‘a’ has behaved. First, it is to know the new price of a commodity ‘a’, which equals of old price of the commodity ‘a’ with its nominal price change factor. Then only the factor of determination of change in income can be measured. Secondly, new wage is resulted by equaling the old wage with wage change factor. Change in the nominal price is compared to the change in nominal income. Thus, we reach at price change factor of a commodity ‘a’ to income change factor in Won equal to real price change factor for commodity ‘a’. If the real price change factor is 1, no actual or real change occurs in prices. If it goes down under 1, the commodities are actually lower than before in prices. In case it behaves otherwise, that is, it rises above 1, it shows by how many times the actual prices have increased. One can get results from these comparisons of the nominal change factor with the change factor of minimum wages; the actual prices have also risen. One thing that comes clearly is that the buying power of an average worker in North Korea has decreased to a certain extent. It can be explained through the example of rice purchase. A common man could buy 1,375 kg of rice in a month under the old system on the assumption of spending all his income on the purchase of rice. But under the new system, he could purchase only 45.5 kg of rice. It is very little in comparison to global parameters. It shows the global market price applicable on the new Won-Dollar exchange rate on which will be based the rice price of 0.29 US$ per kg. Conclusion is straight and clear: rice price is not high; income is highly insufficient to purchase rice. That is just 13.30 US$ per month for common North Korean worker, as derived from the official exchange rate of Won with Dollar. Conclusion: The economy of North Korea is mixed one comprising of big state sector and government permitted small private sector. Actual issue is lack of funds. Funds are in dire need to create necessary infrastructure of good means of transport and communication besides sufficient supply of electricity, the shortage of which fails all inputs to maximize output of food grains. Economic reforms have further widened the difference between costs and cash-flow of individuals and companies. Agriculture sector demands urgent attention to grow more food grains. Some macroeconomic measures are being taken by the central bank to energize the microeconomic market in which people have sufficient money to save themselves from starvation and increase their capacity to purchase essential items. Sanctions might run against the interests of all concerned; there is need to help the economy with foreign assistance in the matters of distribution, technical know-how and funds so that microeconomic implications might not hit the common man of North Korea hard on the head. References: Frank, Ruediger 2003, ‘A Socialist Market Economy in North Korea? Systemic Restrictions and a Quantitative Analysis1’, viewed 10 November 2007, . Frank, Ruediger 2006, ‘The political economy of sanctions against North Korea’, Asian Perspective, vol. 30, no. 3, viewed 10 November 2007, . Global Policy Forum, Sanctions against North Korea, viewed 10 November 2007, . Kimball, Daryl G. 2006, Next Steps on the North Korean Nuclear Challenge, Media release, 19 September, viewed 10 November 2007, . Read More