September 7, 2016 7:00 pm JST

Market forces stir in North Korea's power, property sectors

ATSUSHI IJUIN

This thermal power plant in Sonbong, North Korea, is to be converted into a coal-burning facility.

North Korea has two key goals: to modernize its rickety economy and build a nuclear arsenal. But nearly six months after it was slapped with tougher United Nations sanctions, the regime's recent saber rattling has brought even more international pressure. How is the isolated country's economy faring under the circumstances?

Looking for answers, this writer traveled to North Korea in July and August. The visit revealed signs of change in how the country operates.

A North Korean official in Rason, a port city at the northeastern tip of the country, downplayed the effects of the tighter sanctions. "There may be various problems in relations between countries, but we are engaged mostly in private-sector businesses," said Kim Myong Gook, an official in the economic cooperation bureau of the People's Committee of Rason.

Kim, who is in charge of attracting foreign investment, insists the new sanctions are "not causing any significant impact on the local development projects we are promoting."

Rason borders China and Russia. In 1991, soon after the end of the Cold War, North Korea designated the area its first special economic zone. In the 2010s, China began supporting the construction of bridges, roads and other facilities in the zone to ensure stable relations with its neighbor and promote the economy of its own northeastern region.

The distance between the departure gate on the Chinese side and downtown Rason is about 50km. In response to growing traffic, China has been building a new bridge over the river that separates the two countries. It is scheduled for completion this autumn.

All over town, there are commercial complexes built by Chinese concerns. They typically house banks, shops and leisure facilities. In the summer, a raft of hotels and condominiums were under construction.

The number of casinos for foreigners has also increased in the past several years. The flow of Chinese tourists has not diminished despite the sanctions, according to Kim.

Higher floors, lower prices

The condos that are sprouting up in Rason highlight a shift occurring in the city. 

Health care, education and housing have long been free, at least in principle, under North Korea's socialist system. Since the turn of the century, however, a growing number of apartments have been going up for sale in Pyongyang and other cities.

The trend has reached Rason, where the average condo starts at $200 to $300 per square meter. The prices are determined by market conditions; the Chinese yuan, which is in wide circulation in the area, is generally used for the transactions.

"No housing loans are available in our country, so people usually buy condos with money kept under the mattress," one businessman said. "Some borrow funds from the country's tonju (new rich), but others hate the cumbersome procedures and borrow instead from Chinese companies or people they do business with."

A man in his 40s was worried about whether he was buying a condo at the wrong time. "Apartment prices have been trending down recently as China's economy slows down," he said.

One unique aspect of North Korea's property market is that units on higher floors are cheaper, like those on the first floor. This is because blackouts frequently take elevators out of commission. 

Reliable beats free

Along with property transactions, another new trend is attracting the attention of Rason's residents and foreign businesses alike: power market reforms.

North Korea's power supply is notoriously unreliable, due to a shortage of energy. Its socialist credo means the government is supposed to supply electricity, running water and other basic services at near-zero prices. But even in key markets such as Pyongyang and Rason, ordinary households are allowed to use electricity for only limited hours. Blackouts are a daily occurrence.

A U.N. report estimated that only 26% of the country's households are connected to the grid. In both urban and rural areas, it is common for residents to install solar panels near their windows to bring in a bit of juice.

In Rason, however, electricity meters are becoming increasingly common in condos, especially new ones. This way, citizens are charged according to the amount they use. The price is 0.058 euros (7 cents) per kilowatt-hour, according to a businessman in the city. The same rate applies to both companies and households, he said.

Behind this trend are two factors -- recent modest improvements in the power supply and the growing ranks of relatively wealthy people who are willing to pay for reliability.

Rason plans to negotiate electricity purchases from China and Russia, officials say. It is also trying to improve supply capacity by converting oil-burning power plants into coal-fired ones, expanding hydropower generation and developing wind power facilities, among other steps.

"Currently, my family hardly buys electricity from the state because TVs and lights can be powered by a solar panel alone," one resident said. "But we will consider [buying power], as we want to use a refrigerator and a washing machine."

Electricity meters have also been introduced in some households in Pyongyang. Consumers in the capital insert prepaid cards into their meters to receive power, according to a Korean resident of Japan who has relatives in the city.

As with rations of food and other basic necessities, households are given a quota on power use. If they exceed it, they must pay a premium. In some cases, participation in this system is a condition for using popular cellphones, this person said.

The main purpose for installing the meters in Pyongyang is supposed to be conserving power. But a researcher who fled the North and now lives in South Korea said it is just a new way for the cash-strapped regime to siphon money from its people.

Some citizens do appreciate the system. "A paid service offering reliable supply is better than a free but unreliable service," one said.

"A system in which you pay according to how much you use is more rational" than a free service, another said.

It is worth watching how this undertaking pans out. Solving the chronic power shortage is one of the top policy priorities of the Kim Jong Un regime. At the Workers' Party Congress in May, held for the first time in 36 years, Kim pledged to tackle the energy problem under a new five-year plan for economic development. "National resources should be concentrated on efforts to deal with the power problem," he said. "Solving this problem is a precondition for carrying through the five-year plan and vital to economic development and improving people's standards of living."

Central to overcoming any shortage of electricity is expanding overall power production. But equally important is how to better supply a given amount of electricity. This summer, there were rumblings about various reform plans.

One proposal would create regional utilities and use meters to charge for power consumption. Another idea is to promote electricity sharing between regions -- Rason, for example, could buy power from outside the special economic zone.

Building power plants and establishing electric utilities, naturally, requires money. Some officials hinted at the possibility of turning to the tonju for investment. North Korean government officials would never use the words "market mechanisms," but bringing such ideas to fruition would amount to adopting market principles, at least partially.

Since the envisioned system would effectively give utilities regional monopolies, the tonju could see this as a chance for stable investment income.

Sources familiar with the North Korean government's thinking say Pyongyang also believes a decentralized power supply would enhance national security.

Atsushi Ijuin is the lead economist at the Japan Center for Economic Research.

Get Insights on Asia In Your Inbox

To read the full story, Subscribe or Log in

Get your first month for $0.99

Redeemable only through the Subscribe button below

Once subscribed, you can…

  • Read all stories with unlimited access (5 articles per month without subscription)
  • Use our smartphone and tablet apps

To read the full story, Subscribe or Log in

3 months for $9
SUBSCRIBE TODAY

Take advantage of this limited offer.
Subscribe now to get unlimited access to all articles.

To read the full story, Update your account

Resubscribe now to continue reading.
BEST OFFER:
Only US$ 9.99 per month for a full-year subscription

To read the full story, Subscribe or Log in

Once subscribed, you can…

  • Read all stories with unlimited access (5 articles per month without subscription)
  • Use our smartphone and tablet apps

To read the full story, Subscribe or Log in

3 months for $9
SUBSCRIBE TODAY

Take advantage of this limited offer.
Subscribe now to get unlimited access to all articles.

To read the full story, Update your account

We could not renew your subscription.
You need to update your payment information.