Is Pyongyang’s investment in steel prudent?

picture via Vintage Ad Browser

picture via Vintage Ad Browser

In April we made the claim that allocating a greater share of Pyongyang’s budget to achieve a 108.3% increase in the country’s annual steel output is unproductive. Instead of steel, we argued that increasing consumer goods production to ensure market stability should be the state’s first and foremost concern.

Recently a commenter argued that this is an imprudent advice for the following reasons:

  • Steel industry is the bedrock of any modern economy and the advancement of material-technical capabilities of this sector will spur industrial development in other areas
  • Export of steel to China brings valuable foreign exchange to North Korea

Indeed, the commenter raised valid points, but our answer remains decidedly pessimistic for two reasons.

First, we can have a long discussion on whether or not steel is truly an indispensable component of modern economic growth. However, the core question at hand was not if the steel industry is important to development, rather it questioned whether greater investment in heavy industries at this time constituted an optimal allocation of scarce resources.

It is certainly true that most economies with high-incomes today can boast some domestic steel producing capacity, but so can failed economies of the past like the Soviet Union. In addition, the presence of heavy industries alone did not prevent countries like Great Britain from sliding into a deep recession in the 1970s. Steel is clearly not a magic bullet by itself.

At the same time, the lack of a steel industry is not an immediate impediment to economic development. For instance, South Korea did not engage in Heavy Chemical Industrialization Plan until the 1970s, a full decade after beginning its extraordinary economic ascent.

Meanwhile, as stated in a previous article studying the case of inflation in the Soviet Union, Pyongyang faces a very real danger of falling off the monetary cliff in the near future if it is unable to manufacture more consumer goods for its domestic market. Therefore, it seems more prudent for Pyongyang to invest the limited capital it has in producing consumer goods, which will immediately have a positive effect on the market, rather than hoping that its capital-intensive investment in steel will somehow have a knock-on effect on other sectors at some undetermined time in the future.

Second, the world steel market tends to suffer from perennial over-capacity, thus North Korea cannot rely on steel exports to bring in valuable foreign exchange forever. Although China’s monstrous growth rates in the past decade created demand for North Korean steel, in the face of a slowing economy and a massive housing bubble, Beijing has reduced its spending on infrastructure. As a consequence, analysts expect China’s demand for steel to drop in 2014. A bad time to increase output.

Therefore, we stand by my criticism of North Korea’s plans to increase steel output on the basis that the scarce labor, energy, and capital could be all be utilized more optimally in another sector.

On that note, enjoy this fantastic set of pictures taken at the Chollima Steel Complex in South Pyongan Province, courtesy of the Velvet Rocket.


About Yong Kwon

I develop trade advocacy strategies for a DC-based consulting firm. Studied economic history at the London School of Economics, and can be found on twitter at @ykwon88
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