[Global NK Commentary] What is the problem with North Korea's energy crisis?

[Editor's Note]

North Korean enterprises, which operate on energy supplied by the state, are unable to function properly due to a significant decrease in energy supply caused by the weakening of state functions. The prolonged energy shortage makes it difficult for the state's energy supply and demand system to operate, significantly degrading the overall functions of the state. This is understood as a complex accumulation of various problems, including state monopoly of factors of production stemming from systemic characteristics, national capabilities, and military strategy, absence of markets, limitations of policy functions, lack of capital and technology, and external isolation. The author argues that to resolve this, bold changes, including reforming the North Korean system and opening up markets, must be advanced. He adds that North Korea can find solutions by moving away from its state of external isolation, undergoing change, and utilizing external support.

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According to data released by the International Energy Agency (IEA), North Korea's per capita energy consumption in 2018 was 0.559 TOE (Ton of Oil Equivalent), which was only 29.7% of the world average, 41.4% of the non-OECD average, and 10.0% of South Korea's in the same year. North Korea's per capita energy consumption was higher than the world average in 1980 and at the same level as the world average in 1990, but has since decreased rapidly. North Korea's per capita electricity consumption in 2018 was 509 kWh, which was only 15.6% of the world average, 22.6% of the non-OECD average, and 4.7% of South Korea's. North Korea's per capita electricity consumption was also 39.0% higher than the non-OECD average in 1990, but has continuously decreased since then.

While a few enterprises exceptionally possess coal mines and are self-sufficient in coal, most North Korean enterprises operate on energy supplied by the state. However, due to the weakening of state functions, the supply of all energy sources, including coal, oil, and electricity, has significantly decreased, leaving all enterprises in North Korea's industrial sector unable to operate properly. In the transportation sector, as state functions have weakened, private sector functions have greatly expanded, leading to the spread of public transport management system disruptions and chaos in energy supply and distribution structures. The state's energy supply function to the residential and commercial sectors has also significantly contracted, with the supply of fuel energy, excluding electricity, having been suspended since the early 1990s. Electricity supply to the residential sector generally occurs for 3-5 hours a day in Pyongyang and 1-2 hours a day in other regions. For heating and cooking energy, households with income can purchase coal, firewood, etc., from the market, but most households struggle with heating even in winter and face significant difficulties in obtaining energy for cooking.

The prolonged energy shortage has severely distorted the energy supply and distribution structure established by relevant laws and systems, making it difficult for the state's energy supply and demand system to operate, thereby significantly degrading the overall functions of the state, including industry, transportation, households/commerce, and public/other sectors. The North Korean authorities consistently emphasize the importance of the energy sector in various state plans, including their annual New Year's addresses, and are making various policy efforts, but the energy crisis is not being resolved and is instead showing a trend of worsening. What exactly are the intertwined problems in North Korea's energy sector? The identified problems can be broadly categorized into issues arising from systemic characteristics, issues related to national capabilities, and issues stemming from adherence to a military strategy.

Problems arising from systemic characteristics include state monopoly of factors of production and the absence of markets. These stem from the socialist state system maintained by North Korea. Factors of production such as land, labor, and capital are monopolized by the state, private ownership is restricted, and a system where private business cannot exist. All energy enterprises, including coal mines and power plants, are state-owned, produce according to state targets, and their products are distributed by the state. Even when supply shortages become chronic due to the decline in state functions, institutional and policy flexibility to resolve them cannot be accepted due to the principles of the system. Energy enterprises such as coal mines and power plants cannot recover costs through the sale of their products. This is a system where enterprises cannot recover costs by providing goods or services, and consumers cannot use energy goods and services by paying for them, as the Commercial Energy System is not permitted. Under such a system, reinvestment through business activities is fundamentally impossible, so there are no conditions for enterprise growth, which ultimately acts as a decisive cause blocking the inflow of external capital and technology.

Problems related to national capabilities include limitations in policy capabilities, lack of capital, and lack of technology. The limitations in policy capabilities are also related to the socialist system. Intuitive decision-making where the decisions of power take precedence over considerations of productivity or efficiency, the lack of acknowledgment of policy failures and policy revisions have become institutionalized, and there is a lack of modern Energy Policy & Planning functions due to the absence of market considerations in production and a lack of systemic thinking. The lack of capital and technology is also pointed out as a representative problem of national capabilities. There is a chronic accumulation of insufficient investment in energy infrastructure and supply facilities, and most of the existing energy facilities were built with support from neighboring socialist countries such as the former Soviet Union and China, making technological self-reliance in the energy industry difficult. Since the cessation of external support, North Korea's energy industry appears to have a significant lack of internal capacity to maintain or improve production conditions in terms of policy, capital, and technology.

Adherence to a military strategy has led to external isolation and various international sanctions, collapsing the conditions for foreign trade in the energy industry. In the international community, North Korea is isolated as a state sponsor of terrorism, a representative human rights-abusing country, and a country in confrontation with the international community due to its development of nuclear weapons and long-range missiles. It is subject to the Strategic Trade Control System, which controls the export of goods that can be used for both military and dual civilian-military purposes, and is subject to UN Security Council resolutions and bilateral sanctions from major countries triggered by repeated nuclear tests and long-range missile launches. In particular, UN Security Council Resolution 2371 (August 4, 2017) completely banned North Korea's coal exports, and Resolution 2397 (December 22, 2017) limited North Korea's crude oil imports to 4 million barrels per year and refined oil imports to 500,000 barrels per year, precisely targeting energy supply and demand. North Korea is in a situation where it can neither export nor import energy freely. Furthermore, the recent border closures to cope with COVID-19 have exacerbated its extreme isolation. This state of external isolation signifies a structural situation where even short-term improvements in energy supply and demand through energy trade are difficult to attempt.

As such, North Korea's energy sector is characterized by a complex accumulation of various problems over a long period, stemming from systemic characteristics, national capabilities, and military strategy, including state monopoly of factors of production, absence of markets, limitations of policy functions, lack of capital and technology, and external isolation. Consequently, it is observed to be in a structural situation that is very difficult to resolve or improve in the short, medium, and long term, with the absence of conditions for enterprise growth, inflow of capital and technology, and collapsed production and trade conditions. Given the complexity of the problems, simple solutions are difficult to propose. It is difficult to resolve with North Korea's internal capabilities alone; North Korea must also change and utilize external support. In the short term, it must achieve normalization as a recognized state by the international community and escape international sanctions through forward-looking nuclear negotiations. In the medium to long term, bold changes, including reforming the system and opening up markets, must be advanced. Continuous inflow of Western systems, policy capabilities, capital, and technology is the only solution.■

■ Author: Kim Kyung-soolHonorary Senior Research Fellow at the Korea Energy Economics Institute and Adjunct Professor at the Graduate School of North Korean Studies, Kyung Hee University. He also serves as a director of the Korea DMZ Council and the Korea DMZ Society, and a member of the North Korea Research COP at POSCO Management Research Institute. He holds a Ph.D. in Economics from the Asian Institute of Technology, Thailand, specializing in Energy Economics and Planning. He has been actively involved in various research activities related to North Korea's energy sector, including the study on the utilization of North Korean resources for the realization of cooperation projects for the modernization of North Korea's energy industry (Korea Energy Economics Institute, 2020). Professor of North Korean Studies at Ewha Womans University. Obtained a Ph.D. in Diplomacy from Seoul National University. Researched the ROK-US alliance and North Korea for 18 years at the Korea Institute for Defense Analyses. Served as a professor of International Studies at Handong Global University. Currently a policy advisor to the Ministry of Foreign Affairs. His main research areas are the ROK-US alliance, North Korean diplomacy and military affairs, and Northeast Asian international relations.

■ Managed and Edited by: Min Ji-yoon Head of External Cooperation Department, EAI

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