Daily Earth Hour: North Korea

Popular wisdom holds that celebrating Earth Hour has been about the preservation of the environment.

But popular wisdom doesn’t even attempt to scrutinize on the possible agenda behind Earth Hour, except to swallow hook, line and sinker about the supposed truism of Earth Hour/Earth Day advocacy.

Yet there is a living example of Earth Hour/Day. 

And that country is North Korea

Fantastic photograph from National Geographic (as of February 2014) depicting a predominantly light deprived North Korea. From National Geographic

Since the mid-1990s, when fuel stopped flowing from the defunct Soviet Union to North Korea, the famously hermetic country has descended into darkness.

Newly released photos taken from the International Space Station last month reveal just how energy bankrupt North Korea has become. The photos, and a time-lapse video of the region, show the country as almost completely black, in contrast to the bright lights of neighbors like South Korea and Japan.

In South Korea, each person consumes 10,162 kilowatt hours of power a year. North Koreans each use just 739. Other than several small spots of light, including the brightly illuminated capital of Pyongyang, the country just about blends in with the surrounding black ocean.

And North Korea has not been an environmental paradise. To the contrary North Korea has been an environmental disaster. From Wikipedia.org…

Air pollution

According to the United Nations Environment Programme in its 2003 report on North Korea, titled DPR Korea: State of the Environment 2003, air pollution is a perplexing problem. Owing to more coal being burnt to cater to the growing population's needs, the rate of air pollution in the country has been growing.

Water pollution

An unidentified river in North Korea, photographed in September 2008. The North Korean waters are heavily polluted and thereby unfit for human consumption.

Industrialisation and urbanisation causes the water to be polluted and unsanitary for human use.

Urbanisation

North Korea's bid to become an urban nation has seen it sacrifice the tranquil environment of the country. Wildlife is scarce in the country, and "[t]he landscape is basically dead", according to Joris van der Kamp, a Dutch scientist who visited the communist nation after being invited to. This situation is described as "so severe it could destabilize the whole country".

Deforestation

To satisfy ever-growing demands, more and more trees in the country have been chopped down to produce fuel for the people. Without these trees, soil erosion easily occurs when the wind blows or when the rain flows. This in turn burns a big hole in the North Korean government's pocket.

This PBS March 2013 report says North Korea have been at the verge of an environmental collapse

North Korea has been hiding something. Something beyond its prison camps, its nuclear facilities, its pervasive poverty, its aching famine, its lack of energy—electrical, fossil, or otherwise. What the hermit kingdom has been covering up is perhaps more fundamental than all of those: an environmental collapse so severe it could destabilize the entire country. Or at least, it was hiding it.

To achieve “earth hour” hardly means about the environment but rather to embrace poverty and despotism.

So before you celebrate Earth Hour think of North Korea.

Watch the late great comedian George Carlin deal with the hypocrisies of "Saving the Planet"

North Korea’s Hyperinflation Prompts for the widespread use of the US Dollar and Chinese Yuan

The recent Hyperinflation in North Korea has prompted the repressed citizens to use the US dollar and the Chinese yuan even when foreign currency trades goes against the government’s prohibition which is punishable by death.

From Reuters (bold mine)

Chinese currency and U.S. dollars are being used more widely than ever in North Korea instead of the country's own money, a stark illustration of the extent to which the leadership under Kim Jong-un has lost control over the economy.

The use of dollars and Chinese yuan, or renminbi, has accelerated since a disastrous revaluation of the North Korean won in 2009 wiped out the savings of millions of people, said experts on the country, defectors and Chinese border traders.

On the black market the won has shed more than 99 percent of its value against the dollar since the revaluation, according to exchange rates tracked by Daily NK, a Seoul-based news and information website about North Korea.

I previously posted about North Korea’s hyperinflation here.

The growing use of foreign currencies by North Koreans can be seen as a form of civil disobedience

More from Reuters:

But experts said the growing use of foreign currency is making it increasingly difficult for Pyongyang to implement economic policy, resulting in the creation of a private economy outside the reach of the state that only draconian measures could rein in.

For now Pyongyang appeared to be capitulating, rather than trying to stamp out foreign currency use, they said.

Estimates of how much hard currency is in circulation vary, but an analyst at the Samsung Economic Research Institute in Seoul put it at $2 billion in an April study, out of an economy worth $21.5 billion, according to some assessments. Pyongyang doesn't publish economic data.

The use of dollars and yuan is now so pervasive there is little Pyongyang can do about it, said Marcus Noland, a North Korea expert at the Peterson Institute for International Economics in Washington.

The government would increasingly have to force people to provide goods and services to the state and get paid in won, added Noland, who closely studies the North Korean economy.

More on people defying the government:

North Korea made circulating foreign currency a crime punishable by death in September 2012, the Paris-based International Federation for Human Rights said in a report last month.

Another group, Human Rights Watch, recently interviewed more than 90 defectors who had fled North Korea in the past two years about punishment they had received for economic crimes. None said they were penalized for using or holding hard currency.

Nevertheless, ordinary North Koreans are very careful.

"I have heard multiple stories of people hiding foreign money under the floorboards in the house, or burying it up the hill in the woods out back," said one person in northeastern China who has lived in Pyongyang and regularly interacts with North Koreans.

"Nobody puts it in the bank because nobody trusts the government.

Even in North Korea, people see banks as wards or instruments of the government

Foreign currency use as backlash against the government’s attack on the thriving informal economy

Faith in the North Korean won crumbled when Kim's father, Kim Jong-il, ordered the sudden revaluation of the currency in November 2009.

The government chopped two zeroes off banknotes and limited the amount of old money that could be exchanged for new cash. The move, seen as an attack on private market activity at the time, spurred a rush to hold hard currency.

It also quickened inflation and according to South Korea's spy agency, sparked rare civil unrest in one of the world's most entrenched authoritarian states after North Koreans realized the won was not a safe store of value.

The government is widely believed to have executed the economic official who oversaw the revaluation.

Dollars have circulated in North Korea for decades, partly because of the cash siphoned off from official foreign trade.

The rise in the use of yuan is a more recent phenomenon and reflects a surge in trade and smuggling between North Korea and China along their 1,400 km (875 mile) land border, where a lot of the currency changes hands. Official trade with China is worth $6 billion annually.

Black market rates illustrate how far the won has fallen since the revaluation. It has plunged from 30 to one U.S. dollar to about 8,500, according to exchange rates tracked by Daily NK. The current official exchange rate is about 130 won per dollar.

This goes to show how people respond to repressive regimes especially when their survival is at stake.

This also goes to show of the limits of government’s influence in imposing the use of their fiat currency on the public. Despite threats on their lives, people junk worthless currencies for better alternatives.

This also exposes how much a paper tiger North Korean government is with regards to using its military to enforce the geopolitics of blackmail.

North Korean won seems headed in the same destiny with the Zimbabwean Dollar

How the Korean Peninsula Crisis will be Settled

Historian Eric Margolis at the lewrockwell.com offers the scenario (bold mine)

Now, the US has finally deployed its diplomatic muscle by sending the new Secretary of State John Kerry to Beijing to try to arm-twist China into clamping down on its errant bad boy, North Korea. The result was a joint communiqué calling on the US and China to jointly pursue the de-nuclearization of the Korean Peninsula.

China has long advocated this policy, so nothing new here. But the North American media hailed it as a breakthrough in the crisis. In fact, China is not happy with North Korea’s nuclear program, but Beijing considers an independent, stable North Korea essential for the security of its highly sensitive northeast region of Machuria.

Chinese strategists fear the collapse of the Kim dynasty in North Korea would lead to the US-dominated South Korea absorbing the north and even implanting US bases within range of Manchuria and the maritime approaches to Beijing. In 1950, China responded to the advance of US forces onto its Manchurian border, the Yalu River, by intervening in the Korean War with over 1.5 million soldiers.

The collapse of North Korea would also move South Korean and US military power 200 km closer to Russia’s key Far Eastern population and military complex at Vladivostok.

Accordingly, China’s strategy to date has been to talk moderation and issue occasional blasts at North Korea to appease the outside world and its major American trading partner while quietly ensuring that North Korea remains viable. China supplies all of North Korea’s oil, part of its food, and large amounts of industrial and military spare parts.

North Korea’s Kim Jung-un appears to have climbed too far out on a limb by issuing dire threats that include nuclear war. His problem is to climb back without losing too much face or appearing to be forced by the United States.

Prestige is a key factor in dictatorship. An obvious defeat can lead to the dictator’s fall. That’s why Hitler refused to retreat from the deathtrap at Stalingrad, rightly fearing such a loss of prestige and his mystique of military genius would encourage his domestic foes to move against him.

So Kim will likely need Beijing’s help in ending the crisis, and Beijing will be both happy to do so and end up in a position to demand useful concessions from Washington.

Beijing has been claiming that the US whipped up the current Korea crisis to justify deploying new military forces to Asia and emplacing more anti-missile systems in Alaska and a new one in Guam – all part of President Barack Obama’s much heralded "pivot to Asia."

At the end of the day, North Korea will remain as the convenient bogeyman, stooge, prop and supposed “buffer” for the benefit of both China and the US (particularly the military industrial complex and the neocons).

The vaudeville of the geopolitics of blackmail continues.

The Phisix Amidst the Korean Peninsula Stand-Off

Domestic headlines continue to banner on the verbal showdown and belligerent artifice between the US and North Korea.

DPRK’s Declaration of War and War Posturing

While I think that this seems more a vaudeville than of a real threat, geopolitical brinkmanship can always deteriorate into a real thing. Inflated egos of political leaders may impulsively react on events that could push posturing into a full scale war. All that is needed is an event that may serve as the Casus Belli[1].

North Korea or Democratic People's Republic of Korea (DPRK) has already declared a “state of war”[2] with its wealthier kin, South Korea or Republic of Korea (ROK) last March 30, 2013. But through the week, all that has occurred have been the mobilization or a show of force from contending parties. 

Yesterday North Korea reported to have moved its two medium range missiles, the Musudan missiles, which has a range of 1,865 miles and has the capability to strike at South Korea, Japan and US bases in the Pacific, supposedly for a missile test[3]. 

Yet despite all the North Korean rhetoric and propaganda about launching a nuclear war with the US, her nuclear missiles hardly have the range and capability to reach the US[4].

On the other hand, the US has transferred anti-ballistic missile defence system to Guam[5] along with several B-1 ("Bone") Lancer strategic long-range bombers.

The US has also “secretly” deployed the E-6 Mercury “Doomsday plane” which has been reportedly “tasked with "providing command and control of U.S. nuclear forces should ground-based control become inoperable" and whose core functions include conveying instructions from the National Command Authority to fleet ballistic missile submarines and also to further command post capabilities and control of land-based missiles and nuclear-armed bombers”, according to the Zero Hedge[6].

In other words, should there be a full scale war, such may include the use of nuclear weapons. The outcome, hence, is likely to be devastating and cannot be compared to any previous conventional wars.

Thus any comparisons with modern wars as the 1982 Falklands War between the UK and Argentina[7], the 1991 US-Iraq Gulf War[8], the 1999 Kargil war between India and Pakistan over the Kashmir region[9], the 2003 US Invasion of Iraq[10], the Afghanistan War[11] or the 5 day South Ossetia war between Russia and Georgia[12] represents apples-to-oranges.

South Korea and the US will have to deal with North Korea’s 12-27 nuclear weapons with a TNT yield of 6-40 kilotons[13]. The atomic bombs that leveled Hiroshima “Little Boy” gravity bomb and Nagasaki “Fat Man” gravity bomb had TNT yields of 13-18 kilotons and 20-22 kilotons respectively[14].

Why is War Unlikely; North Korea’s Geopolitics of BlackMail

In 2010 I expressed doubts that a war in the Korean Peninsula will take place. I still maintain such skepticism.

Why?

North Korea is an impoverished state whose weapons are mostly dilapidated and obsolete, and whose vaunted millions of soldiers are likely to be starving, ill equipped and poorly trained[15].

And in spite of the North Korea’s vaunted war machinery, wherein much of the misallocation of the nation’s resources had been directed, the North Korean army is in a state of dilapidation and obsolescence: they seem ostensibly good for parades and for taunting, but not for real combat…

Thus, based on socio- political-economic and military calculations, the North Koreans are unlikely to pursue a path of war, because the odds are greatly against them. And their political leadership is aware of this.

And as I previously pointed out, North Korea is the embodiment of the environmental politics of known as “Earth hour”[16]. Except for the North Korea’s capital, Pyongyang, satellite photos reveal that at night, the entire country has mostly been dark or without light, which is in stark contrast to South Korea (left window).

Moreover, North Korea has recently been plagued by hyperinflation[17]. 

Since July 2010, price inflation as measured by rice prices has pole-vaulted by 5x. So we can’t discount that such war histrionics may have been meant to divert public’s attention from internal economic woes, and instead, like typical politicians North Korean leaders have used foreigners as scapegoats for policy failures.

Except for nuclear weapons, North Korea isn’t likely to win a conventional war against South Korea, even without US support.

South Korea can afford to defend herself with a modern well equipped well trained army given the wide difference of her economic growth[18], capital surpluses and wealth disparities. But the problem is that she may have substantially relied or delegated to the US much of the home or national defense duties.

Given such reality, political leaders of North Korea have long used nuclear weapons as bargaining chips to indulge on the geopolitics of blackmail. 

So unless North Korea’s Kim Jong-un has gone rogue and suicidal, the odds are that North Korea’s Kim will unlikely take on this war path. 

Besides, Kim’s wife Ri-Sol-ju has reportedly given birth to their first baby in secret[19]. A war would mean sacrificing both their political privileges and their lives. And they know this.

Yet a conventional war may perhaps open the gateway for ordinary North Koreans to make a mad dash out of their highly repressive country. 

And it isn’t also far fetch to think that a war may inspire many of North Korea’s military to immediately surrender or pledge allegiance to the South or mount a mutiny, given the horrors of the North Korean dictatorship. Just recently a North Korean official was executed by mortal shell for infringing on the rules covering the 100 day mourning period for the late King Jong il[20].

Of course such faceoff hasn’t been all about North Korea’s fault.

Aside from the sanctions imposed by the UN due to DPRK’s third missile tests, North Korean leaders may have been traumatized by recent US military air exercise involving heavy bombers[21].

Notes the historian Eric Margolis[22],

During the 1950-53 Korean War, US B-29 heavy bombers literally flattened North Korea. That’s why North Korea reacted so furiously when US B-52 heavy bombers and B-2 Stealth bombers skirted its borders late last month, triggering off this latest crisis. The B-2 can deliver the fearsome ‘MOAB’ 30,000 lb bomb called "the Mother of All Bombs" designed to destroy deep underground command HQ’s (read Kim Jong-un’s bunker) and underground nuclear facilities.

The real threat from a realization of a full scale war really hasn’t really been just about North Korea’s nuclear missiles but about the possible involvement of other nations as China, whom has long been North Korea’s key ally, and of Russia whom has had on and off relationship with the DPRK[23]. Although recently China’s leaders have expressed concern over the bellicose rhetoric of North Korea’s leaders[24], events may turn out differently once the shooting war begins. 

Remember the Casus Belli of World War I had been the assassination of Archduke Franz Ferdinand of Austria[25], which invoked the assembly of opposing alliances that lead to the outbreak of war[26]. The opposing alliances then consisted of the Allies (based on the Triple Entente of the United Kingdom, France and Russia) on one side. And the Central Powers (originally the Triple Alliance of Germany, Austria-Hungary and Italy; but, as Austria–Hungary had taken the offensive against the agreement, Italy did not enter into the war), on the other side.

The US Military Industrial Complex and Stock Market Scenarios

Lastly the US seems to have been itching for a war either with Iran or with North Korea. Yet North Korea has long served as a useful public bogeyman which benefited of the US military industrial complex and the neoconservative politicians who support them.

The existence of a “bellicose” and “provocateur” DPRK has justified US military power build up in Asia. Jack A. Smith writing at Anti-War.com[27] 

Washington wants to get rid of the communist regime before allowing peace to prevail on the peninsula. No “one state, two systems” for Uncle Sam, by jingo! He wants one state that pledges allegiance to — guess who? In the interim, the existence of a “bellicose” North Korea justifies Washington’s surrounding the north with a veritable ring of firepower. A “dangerous” DPRK is also useful in keeping Tokyo well within the U.S. orbit and in providing another excuse for once-pacifist Japan to boost its already formidable arsenal.

Not only “war is the health of the state”[28], war signifies as good business for the politically anointed since defense industry benefits from subsidies or wealth transfer from taxpayers to politicians and military industrial complex.

So how the Korean Peninsula standoffs affect the domestic and the regional stock markets?

I see four potential scenarios with different outcomes. 1. No war. 2. Limited conventional war. 3. Limited war but with use of nuclear weapons. 4. World War III.

The stock markets will hardly be affected given the first two situations: no war or a limited conventional war. I lean towards the first scenario.

Nonetheless if the second condition occur, central banks are likely to inflate more. US monetary base surged during World War II, and also climbed during the Vietnam War.

If nuclear weapons will be used, the stock markets may be affected. But this will largely depend on the location and the extent of the damages.

Remember if DPRK’s Kim will go berserk and become suicidal then he may wish for retribution or make a statement against the West. Thus we should not dismiss the possibility that the DPRK may target nations with the least anti-ballistic defence or nations who are most vulnerable to their missiles. This puts Southeast Asia on such a list.

In this nuclear age, World War III means that we can kiss the stock markets goodbye and pray that we survive the nuclear holocaust.

Ignoring all these would signify as “denigration of history” or the false assumption that one is immune from misfortunes or disasters.

---

[1] Wikipedia.org Casus belli

[2] Bloomberg.com Mongolia Seeks to Play Peacemaker as North Korea Declares ‘War’ March 30, 2013

[3] Guardian.co.uk North Korea readies missile launch as fears of a covert cyberwar grow April 6, 2013

[4] Foreign Policy Blog Battle of the maps: North Korea's actual missile capability vs. North Korea's threatened missile capability March 29, 2013

[5] Reuters.com Extra line of defense – graphic of the day April 4, 2013

[6] Zero Hedge US Secretly Deploys B-1 Strategic Bombers, E-6 "Doomsday" Planes Near North Korea April 5, 2013

[7] Wikipedia.org Falklands War

[8] Wikipedia.org Gulf War

[9] Wikipedia.org Kargil War

[10] Wikipedia.org 2003 Invasion of Iraq

[11] Wikipedia.org Afghanistan War

[12] Wikipedia.org Russia-Georgia War

[13] Wikipedia.org North Korea and weapons of mass destruction

[14] Wikipedia.org Nuclear Weapon Yield

[15] See Will A War Break Out In The Korean Peninsula? November 28, 2010

[16] See Earth Hour: North Korean Version March 31, 2010

[17] Steve H. Hanke, North Korea’s Hyperinflation Legacy, Part II Cato.org December 7, 2012

[18] Washington Post Kim Jong Il’s economic legacy, in one chart December 19, 2011

[19] CSMonitor Did Kim Jong-un and his wife have a baby? March 5, 2013

[20] Daily Mail North Korean official is executed by MORTAR SHELL for drinking during 100-day mourning period for late 'Dear Leader' Kim Jong-il October 24, 2012

[21] Bloomberg North Korea Vows Military Action Against More U.S. B-52 Flights March 20, 2013

[22] Eric Margolis War in Korea April 6, 2013

[23] Wikipedia.org North Korea–Russia relations

[24] Washington Post China expresses concern over North Korea’s rhetoric April 7, 2013

[25] Wikipedia.org Assassination of Archduke Franz Ferdinand of Austria

[26] Wikipedia.org World War I

[27] Jack A. Smith, Behind the US-North Korean Bluster Anti-war.com April 4, 2013

[28] Randolph Bourne War is the Health of the State Bureau of Public Secrets

North Korea’s Thriving Informal Economy

I have been saying that the informal economy, or what I call as guerrilla capitalism, has functioned as an unorthodox source of wealth operating outside the government’s radar screen.

One good example seems to be the informal economy in North Korea.

From the Economist, (bold mine)

When there have been crackdowns on the markets, as during a disastrous currency experiment in 2009, Mr Noland reckons large chunks of the economy may have seized up because of shortages of basics, such as cement. This may have taught the authorities to turn a blind eye to the illegal activities. Even remittances from defectors in South Korea seem to be tolerated, provided officials get a cut. A system loosely akin to Islamic hawala has developed, in which money flows between banks in South Korea and China and brokers deliver the cash equivalent to family members in North Korea. Sokeel Park of Liberty in North Korea, a group which works with defectors, says this is how some people acquire cash to escape.

Enterprise, North Korean-style

It is not just the elite who have benefited from what Messrs Haggard and Noland call “entrepreneurial coping behaviour”. Lee Seongmin, a 27-year-old defector in Seoul, had no such privileges when, at the age of 12, he started to sneak into China to find food as famine ravaged North Korea. At 17, however, he was caught, imprisoned and severely beaten. When he came out he decided to take a more enterprising route, befriending border guards and acquiring an illegal mobile phone from his sister in China. He started importing car parts, using his phone to call China for deliveries. The soldiers at the border would pull the merchandise across the Yalu river with ropes, he says, and he would pay them off. He would then use his job working for a state distribution company to truck the parts around the country. He made so much money that he had to bury it under his kitchen floor, and often regrets his impulsive decision to defect.

These illegal markets, Mr Lee says, have produced a class of new rich who sometimes flaunt their wealth—and pay off the authorities if they become too suspicious about it. Those with hard currency also instantly became relatively richer after the 2009 currency experiments, which had the effect of severely devaluing the North Korean won.

Since then, conspicuous consumption appears to have increased. Mr Lankov writes of rich people going to expensive sushi bars and buying illegal property, TVs and refrigerators. Their main complaint is the unreliable electricity supply. Perhaps the biggest luxury is a dedicated line to the local power substation, paid for by bribing a corrupt official or military commander.

Repressive regimes hardly stops people from contriving efforts to survive and progress.

A Video Tale of Two Koreas

Economic Freedom defines the difference (hat tip Art Carden at the Division of Labor) 

North Korea

  

South Korea
 

Resource Curse: Rare Earths bankroll North Korea’s Despotism

Abundance of natural resources can serve as deterrent to economic development, a phenomenon which has widely been known as the resource curse.

That’s because plentiful resources provides the wherewithal to the political class to thrive on a politically repressive system without the need for economic liberalization reforms.

Thus the tendency for resource rich nations has been concentrate wealth on the politicians and their cronies at the expense of the nation.

Apparently rare earth exports may have bankrolled North Korea’s isolated economy which has so far allowed the regime to survive.

From the Asia Times Online,

In fact, North Korea is sitting on the goldmine. The northern side of the Korean peninsula is well known for its rocky terrain, with 85% of the country composed of mountains. It hosts sizeable deposits of more than 200 different minerals, of which deposits of coal, iron ore, magnesite, gold ore, zinc ore, copper ore, limestone, molybdenum, and graphite are the largest and have the potential for the development of large-scale mines.

After China, North Korea's magnesite reserves are the second-largest in the world, and its tungsten deposits are almost the world's sixth-largest. Still the value of all these resources pales in comparison to prospects that promise the exploration and export of rare earth metals.

Rare earth metals are a group of 17 elements found in the earth's crust. They are essential in the manufacture of high-tech products and in green technologies, such as wind turbines, solar panels or hybrid cars.

Known as "the vitamins of high-tech industries," REMs are minerals necessary for making everything that we use on a daily basis, such as smartphones, flat-screen TVs, and notebook computers. Some rare earth metals, such as cerium and neodymium, are crucial elements in semiconductors, cars, computers and other advanced technological areas. Other types of REMs can be used to build tanks and airplanes, missiles and lasers.

South Korea estimates the total value of the North's mineral deposits at more than US$6 trillion. Not surprisingly, despite high political and security tensions, Seoul is showing a growing interest in developing REMs together with Pyongyang.

In 2011, after receiving permission from the Ministry of Unification, officials from the Korea Resources Corp visited North Korea twice to study the condition of a graphite mine. Together with their counterparts from the DPRK's National Economic Cooperation Federation they had working-level talks at the Kaesong Industrial Complex on jointly digging up REMs in North Korea. An analysis of samples obtained in North Korea showed that the type of rare earth metals could be useful in the manufacture of liquid crystal display (LCD) panels and optical lenses.

The joint report also revealed that there are large deposits of high-grade REMs in the western and eastern parts of North Korea, where prospecting work and mining have already begun. It also reported that a number of the rare earth elements are being studied in scientific institutes, while some of the research findings have already been introduced in economic sectors. The North built a REM reprocessing plant in Hamhung in the 1990s but has been unable to put the plant into full operation due to power and supply bottlenecks.
Rare earth minerals are becoming increasingly expensive, as China, the world's largest rare earth supplier, puts limits on its output and exports. In February, China's exports of rare earth metals exceeded the price of $1 million per ton, a nearly 900% increase in prices from the preceding year.

China, which controls more than 95% of global production of rare earth metals, has an estimated 55 million tons in REM deposits. North Korea has up to 20 million tons of REM deposits but does not have the technology to explore its reserves or to produce goods for the high-tech industry. Nevertheless, in 2009 the DPRK's exports of rare metals to China stood at $16 million, and as long as someone invests, exports will continue to expand.

This growing rise in REM prices and strong demand gives the young leader Kim Jong-Un a good chance to improve the economic standing of North Korea without actually reforming its economy.

Any “improvements of North Korea’s economic standing” “without reforming its economy” will likely reflect on statistically chicanery rather than from real economic growth.

Real productivity gains through trade and capital accumulation, and not from overdependence on finite resources and redistribution, are the way to lasting economic progress.

The idea that resources will function as a wealth equalizing elixir will be exposed as a socialist’s dogmatic fantasy as it has always been.

Will North Korea Pursue Economic Liberalization?

This should signify as a wonderful development if this would materialize.

From Reuters,

Impoverished North Korea is gearing up to experiment with agricultural and economic reforms after young leader Kim Jong-un and his powerful uncle purged the country's top general for opposing change, a source with ties to both Pyongyang and Beijing said.

The source added that the cabinet had created a special bureau to take control of the decaying economy from the military, one of the world's largest, which under Kim's father was given pride of place in running the country.

The downfall of Vice Marshal Ri Yong-ho and his allies gives the untested new leader and his uncle Jang Song-thaek, who married into the Kim family dynasty and is widely seen as the real power behind the throne, the mandate to try to save the battered economy and prevent the secretive regime's collapse.

The source has correctly predicted events in the past, including North Korea's first nuclear test in 2006 days before it was conducted, as well as the ascension of Jang.

The changes could herald the most significant reforms by the North in decades. Previous attempts at a more market driven economy have floundered, most recently a drastic currency revaluation in late 2009 which triggered outrage and is widely believed to have resulted in the execution of its chief proponent.

"Ri Yong-ho was the most ardent supporter of Kim Jong-il's 'military first' policy," the source told Reuters, referring to Kim Jong-un's late father who plunged the North deeper into isolation over its nuclear ambitions, abject poverty and political repression.

The biggest problem was that he opposed the government taking over control of the economy from the military, the source said, requesting anonymity to avoid repercussions.

North Korea's state news agency KCNA had cited illness for the surprise decision to relieve Ri of all his posts, including the powerful role of vice chairman of the ruling party's Central Military Commission, though in recent video footage he had appeared in good health.

Ri was very close to Kim Jong-il and had been a leading figure in the military. Ri's father fought against the Japanese alongside Kim Jong-il's late father Kim Il-sung, who founded North Korea and is still revered as its eternal president.

The revelation by the source was an indication of a power struggle in the secretive state in which Kim Jong-un and Jang look to have further consolidated political and military power.

Kim Jong-un was named Marshal of the republic this week in a move that adds to his glittering array of titles and cements his position following the death of his father in December. He already heads the Workers' Party of Korea and is first chairman of the National Defence Commission.

Observe that despotic or totalitarian regimes, in realization of the futility of their centralized political institutions, have slowly been giving way to globalization.

However this runs in contrast to formerly free (developed) economies who seem to be progressively headed towards fascism if not despotism.

The opposite path of political directions represents the major force that will drive wealth convergence.

The Philippine Financial Markets Shrugs off the Scarborough Shoal Standoff

The financial markets and politicians backed by mainstream media apparently lives in two distinct worlds.

If one goes through the daily barrage of sensationalist headlines, one would have the impression that the Philippines must be in a state of panic. That’s because media has been projecting what seems as intensifying risk of a full blown shooting war over the contested islands, the Scarborough Shoal with China. And all these should have been sending investors scrambling for the exit doors, if not the hills.

But has such alarmism represented reality?

Of course by reality we rely on expressed and demonstrated preferences and not just sentiment. Over the marketplace, people voting with their money have fundamentally treated the recent geopolitical impasse as pragmatically nonevents.

The Phisix has been little change for the week but importantly trades at FRESH record high levels.

Meanwhile the local currency the Philippine Peso posted its SIXTH CONSECUTIVE weekly gains and has been approaching February’s high, whereas local bonds ADVANCED for the week, amidst the geopolitical bedlam[1]

Contrived Risks and Real Risks

There’s a world of difference between real risk and that of a pseudo, or may I suggest concocted, geopolitical risk.

Media has slyly been luring the gullible public into oversimplified “emotionally framed” explanations based on flimsy correlations which blatantly overlooks the behind-the-scenes causal factors[2]. Emotionalism thus opens the door for politicians to prey on the public by manipulating them through the foisting of repressive policies that benefits them at the expense of the taxpayers and importantly of our liberties. The recent call for nationalism via “unanimity” by a national political figure is just an example[3].

Politicians use fear or what the great libertarian H. L. Mencken calls as endless series of imaginary hobgoblins as standard instruments of social controls meant to advance their agenda or self-interests through the political machinery.

Aside from possible factors for the standoff, such as the smoke and mirrors tactic probably employed by China to divert the world from witnessing the brewing internal political schism[4] and or the promotion of sales for the benefit of the military industrial complex, it could also be that the call for “unanimity” may be associated with the domestic impeachment trial of a key figure of the judiciary where “rallying around the president” would extrapolate to the immediate closure of the case in the favor of the administration.

In doing so, the incumbent administration will be able control three branches of government and impose at will any measures that suits their political goals with hardly any opposition, all done under the sloganeering or propaganda of anti-corruption.

Yet the brinkmanship geopolitics in Asia, has not been limited to the controversial territorial claims in Scarborough and Spratlys, as well as Japan claimed Senkaku Islands[5]. Recent events includes the recent widely condemned missile test by North Korea, as well as, missile tests of former archrivals India and Pakistan[6]

Yet market’s responses to these events have disparate.

Pakistan’s Karachi index (KSE:100 orange) trades at the highest levels since 2009 and seems on the way to knock on the doors of the 2007 highs, whereas India’s BSE (SENSEX green) has struggled since peaking late February.

In short, the recent missile tests by both countries hardly influenced financial markets for the two South Asian giants.

The reason for this has been due to substantially improving trade relations[7] that has dramatically eased political tensions between them.

This validates the great free trader Claude Frédéric Bastiat[8] prediction centuries ago.

if goods don t cross borders, armies will

North Korea as the Real Geopolitical Risk

The North Korea-South Korea tiff cannot be seen in the same light.

Since the North Korea’s announcement of a missile test last March 16^th, South Korea’s KOSPI has been struggling. (chart from stockcharts.com)

The South Korean currency, the won, has also wobbled in the face of Nokor’s actions. (chart from yahoo.com)

Nokor’s largely embarrassing failed missile launch[9] last April 13^th has not deterred the new regime under Kim Jong Un from threatening to do another nuclear blasting test[10]

The fundamental difference from the abovementioned instances, including the unfortunate Scarborough-Spratlys affair, has been the near absence or the lack of trade linkages of Nokor which has not fostered social cooperation or goodwill with other nations.

Instead, Nokor’s despotic communist government’s survival has long been dependent on the ‘blackmail diplomacy’ in securing foreign aid. Yet uncertainty shrouds on the direction of Nokor’s foreign policy under the new leadership which appears as being manifested on the markets.

The good news is that so far there has been no sign of panic. This means South Korea’s consolidating markets could be digesting or has been in the process of assessing the political and security risks from Nokor’s new regime.

Otherwise if the worst option does occur, where posturing turns into armed confrontation the ensuing violence will spillover the world markets. But again Nokor has been more of a paper tiger than a real military power considering their dire economic status. A war is likely to cause the Kim regime to disintegrate under its own weight as famished and ill equipped soldiers are likely to defect to the South or a coup will force down the leadership.

The Free Trade Factor and Geopolitical Linkages

The same premise tells us why domestic politicians and media live in a different world from the citizenry. And this is why I hardly touch on mainstream news, except when scouring for the facts. I avoid from reading “opinions”, especially from so-called experts. That’s because mainstream’s opinions blindly represents the interests of the establishment[11].

China ballooning trade with ASEAN, which includes the Philippines[12], represents a very important deterrent from aggression.

As the great Professor Ludwig von Mises wrote in his magnum opus[13],

Man curbs his innate instinct of aggression in order to cooperate with other human beings. The more he wants to improve his material well-being, the more he must expand the system of the division of labor. Concomitantly he must more and more restrict the sphere in which he resorts to military action. The emergence of the international division of labor requires the total abolition of war.

So aside from her thrust to use the yuan as region’s foreign currency reserve as evidenced by the push for wider Free trade zone (including the ASEAN China Free Trade Agreement which began operations in 2010[14]) hardly squares with the bellicosity that has been publicly portrayed.

Free Trade agreements in Asia has exploded since China’s Deng Xiaoping opened China to the world bannered by the famous catchphrase “To get rich is glorious” (which according to some has been misattributed to him)[15]

Claude Barfield of the American Enterprise Institute points out that[16]

In 1975 there was one free trade agreement in the region but in 2011, there are now currently 245 free trade agreements that have been proposed, under negotiation or concluded.

Besides it is naïve to see events in the lens of a single prism.

An outbreak of military conflagration will likely draw in various major players that could lead to a world war, an event which hardly any party would like to indulge in (despite the politicians arrogant rhetoric), considering the today’s age of NUCLEAR and DRONE warfare, standing armies have been rendered obsolete, and mutually assured destruction[17] will likely be the outcome.

So aside from some missile tests by Asian countries, recently Vietnam hosted a joint naval exercise with US[18] while on the other hand China and Russia also recently completed naval war games[19]. While these may look like a show of force for both parties, they could also just be pantomimes.

Yet for me all these seem like watching a movie that gives you the vicarious effect, especially from the 3D vantage point. However when the closing or end credit appears or when the curtains fall, we come to realize that this has been just a movie.

So far the financial markets seem to be exposing on the exaggerations of the so called gunboat diplomacy, or perhaps too much of yield chasing activities may have clouded people’s incentives that has led them to underestimate such a risk.

While I believe the yield chasing factor has functioned as a substantial contributor to the current state of markets domestically and internationally, I also think that the local market has rightly been discounting the territorial claims issue for reasons cited above.

So unless politicians here or abroad totally losses their sanity, the issue over territorial claims will eventually fade from the limelight.

So be leery of politicians calling for patriotism or nationalism, that’s because as English author Samuel Johnson famously warned on the evening of April 7, 1775[20]

Patriotism is the last refuge of a scoundrel.

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[1] Bloomberg.com Philippine Peso Completes Sixth Weekly Gain on Growth Outlook, April 27, 2012

[2] See The Scarborough Shoal Standoff Has Not Been About Oil April 16, 2012

[3] See Scarborough Shoal Dispute: The Politics of Nationalism April 28, 2012

[4] See China’s Political System Reeks of Legal Plunder, April 20 2012

[5] See From Scarborough Shoal to Senkaku Islands April 19, 2012

[6] Globalspin.blogs.time.com Will Pakistan and India’s Back-to-Back Missile Tests Spoil the Mood?, April 25, 2012

[7] Thehindubusinessline.com Pak may be allowed to invest in India February 16, 2012

[8] The Freeman.org Claude Frédéric Bastiat

[9] See See North Korea’s Failed Missile Launch Reflects on Dire Economic Status, April 14, 2012

[10] Bloomberg.com North Korea Poised to Rattle Region With Nuclear Blast April 27, 2012

[11] See The Toxicity of Mainstream News March 13, 2012

[12] networkideas.org China, India and Asia: The Anatomy of an Economic Relationship (Draft Copy) 2009

[13] von Mises Ludwig 4. The Futility of War XXXIV. THE ECONOMICS OF WAR Human Action

[14] Wikipedia.org ASEAN–China Free Trade Area

[15] Wikipedia.org Deng Xiaoping

[16] Barfield Claude TAIWAN AND EAST ASIAN REGIONALISM American Enterprise Institute, November 10, 2011

[17] Wikipedia.org Mutual assured destruction

[18] Telegraph.co.uk Vietnam begins naval exercises with the US, April 23, 2012

[19] Abs-cbennews.com China, Russia end naval exercises, April 27, 2012

[20] Wikipedia.org The Patriot Samuel Johnson's political views