Outlook for 2011-12

The outlook is grim for North Korea and its leader, Kim Jong-il. Kim Jong-il's health is fragile, and there is thus a strong probability of a change of leadership in the forecast period. Kim Jong-il's third son, Kim Jong-eun, has been officially presented as his father's heir-apparent. But he is young, and it is thus likely that there will be an interregnum under the leadership of Kim Jong-il's brother-in-law, Jang Song­taek, which could prove unstable. The impoverishment of most of the population may spark popular unrest, and disaffection could spread to the regime's core supporters. There will be a US-led effort to force the North to abandon its pursuit of nuclear-weapons capability, but success will be elusive. The government will try to increase light industrial and agricultural output, but any increases are not likely to be big. A surge in Chinese foreign investment looks increasingly possible in the next two years, which would boost growth. Investment will also be boosted by preparations for the centennial celebrations of the birth of North Korea's founder, Kim Il-sung, in 2012.

The political scene

In November 2010 North Korea shelled an island that is under South Korean control, Yeonpyeong, killing four people. The US and South Korea escalated their naval exercises in response, but China only appeared to draw closer to the North, partly owing to fears of increased US interference in the region. Unconfirmed reports in the South Korean media suggest that public executions rose in the North in 2010, and that political purges are taking place.

Economic policy

A joint New Year editorial that was printed in North Korea's main newspapers shed little light on economic policy, but a new ten-year State Strategy Plan for Economic Development was announced in January (albeit without detail). A planning law that was published in 2010 appeared to reassert central control compared with similar regulations passed earlier in the decade.

The domestic economy

Reports from non-governmental organisations that are active in North Korea suggest that food price inflation has remained high.

Foreign trade and payments

Kim Jong-il held a landmark meeting with Naguib Sawiris, executive chairman of an Egyptian firm, Orascom Telecom, one of the North's biggest foreign investors, which may presage a new push to attract foreign investment. Work has begun on a new US$258m bridge over the Yalu river from Dandong in China to Sinuiju in North Korea. Other Chinese investments in mining and infrastructure also look set to make headway in the near future.

Land area

122,762 sq km (official figure)

Population

24.1m (2008 census)

Main towns

Population in '000, 1993

Pyongyang (capital): 3,255 (2008 census)

Nampo: 731

Hamhung: 710

Chongjin: 582

Kaesong: 334

Sinuiju: 326

Wonsan: 300

Climate

Continental, with extremes of temperature

Weather in Wonsan (altitude 37 metres)

Hottest month, August, 20-27°C (average daily minimum and maximum); coldest month, January, minus 8-1°C; driest month, January, 30 mm average rainfall; wettest month, August, 317 mm average rainfall

Language

Korean

Measures

Metric system; also Korean measures

Currency

North Korean won (Won). Won1 = 100 chon. Official exchange rate in 2009: Won145:US$1, but black-market rates are vastly higher. The currency was redenominated in November 2009 at the rate of 100 old won for 1 new won

Time

9 hours ahead of GMT

Public holidays

January 1st (New Year); February 3rd-5th (Seollal, Lunar New Year); February 16th, 17th (Kim Jong-il's birthday); April 15th-16th (birthday of the "eternal president", the late Kim Il-sung); April 25th (founding of the Korean People's Army); May 1st (Labour Day); June 6th (Surinal); July 27th (Victory Day); August 15th (Liberation Day); September 9th (National Day); September 12th-14th (Han'gawi, Harvest Moon Festival); October 10th (foundation of the Workers' Party of Korea); December 27th (Constitution Day)

Official name

Democratic People's Republic of Korea

Form of government

One-party rule, based on the ideology of juche (self-reliance)

The executive

Constitutional revisions in 1998 abolished the Central People's Committee, renamed the State Administration Council as the cabinet and reaffirmed the National Defence Commission (NDC) as the highest state body, albeit nominally under the Supreme People's Assembly (SPA, parliament). The SPA is a rubber-stamp body that meets for only a few days each year

Head of state

The president of the SPA presidium performs the formal duties of the head of state, but ultimate executive power lies with the chairman of the NDC, Kim Jong-il

National legislature

The unicameral 687-member SPA, which is directly elected for five-year terms. Its presidium, formally the standing committee, substitutes for the legislature when the SPA is not in session

Regional legislatures

Each province, city, county and district elects people's assemblies or committees. These committees elect local officials to carry out centrally decided policies

National elections

The 12th SPA was elected in March 2009. These are communist-style elections, with a single list of candidates; the claimed turnout and "yes" votes approach 100%

National government

The Workers' Party of Korea (WPK) controls all arms of the state. Since the death of North Korea's founder, Kim Il-sung, military figures have grown in influence

Main political parties

Government: the WPK is nominally in coalition with the Social Democratic Party and the Chondoist Chongu Party

Key occupants of state and party positions

National Defence Commission chairman: Kim Jong-il

First vice-chairman: Vacant

Vice-chairmen:

;Kim Yong-chun

;Ri Yong-mu

;O Kuk-ryol

;Jang Song-taek

SPA presidium president: Kim Yong-nam

Vice-presidents:

;Yang Hyong-sop

;Kim Yong-dae

Premier: Choe Yong-rim

Vice-premiers:

;Kang Nung-su

;Kim Rak-hui

;Ri Tae-nam

;Jon Ha-chol

;Jo Pyong Ju

;Han Kwan Bok

WPK Central Military Commission vice-chairmen:

;Kim Jong-eun

;Ri Yong-ho

WPK Politburo Presidium members:

;Kim Jong-il

;Kim Yong-nam

;Choe Yong-rim

;Jo Myong-rok

;Ri Yong-hol

Central bank president

Ri Kwang-gon

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North Korea's domestic political scene remains notoriously opaque, but events in 2010 seemed to confirm Kim Jong-eun, the third son of the country's leader, Kim Jong-il, as the heir-apparent to the Kim dynasty. He was appointed to a series of senior posts in the military and the nominally ruling Workers' Party of Korea (WPK). Foreign analysts and policymakers may be relieved that almost two years of uncertainty about the succession are finally over, but it is still possible that the relatively young dauphin may lose his elevated status before his father passes away. Moreover, Kim Jong-eun's promotion will mark not an ending, but rather the beginning of a transition period. This period may prove lengthy and fraught, but could also conceivably be brief and dramatic, should Kim Jong-il, whose health remains fragile, die sooner rather than later.

The next phase of the succession will involve Kim Jong-eun having to prove himself and convince any doubters of his fitness to rule. The "young general" has already been seen frequently at his father's side on so-called guidance visits, and there is speculation that the recent incidents of military aggression by North Korea against the South may be designed to shore up his credibility. He may yet take on a weightier role in his own right. Celebrations for 2012, long hailed by the regime as a landmark year for the country-it marks the 100th anniversary of the birth of North Korea's founder and Kim Jong-il's father, Kim Il-sung-will provide ample opportunities for grandstanding. Yet the succession process, which is managed so smoothly in public, is clearly sparking unusual volatility behind the scenes in North Korea's political sphere. Rumours from South Korean sources (which must always be treated with caution) speak of purges and factional jockeying.

Such political struggles have institutional as well as personal roots and dynamics. Last year's rare delegate meeting of the WPK may mark a comeback for the party, after more than a decade during which its top organs atrophied while Kim Jong-il instead declared a military-first policy (Songun) and prioritised the Korean People's Army (KPA). However, the KPA still seems to retain primacy. In addition to these two largely separate and rival bureaucracies, each with their own interests and input into policy formation, the cabinet remains an important and independent player. Some observers suggest that the cabinet may favour market reforms while the military is more hawkish, although the full picture is probably more complex.

Meanwhile, the National Defence Commission (NDC), as the highest executive organ of state, outranking the cabinet, remains the body most likely to take control if Kim Jong-il does pass away suddenly. Under the traditional communist model, the NDC would be outranked by its party shadow, the Central Military Commission, of which Kim Jong-eun is joint vice-chairman. The other vice-chairman is North Korea's most influential soldier, the chief of the general staff, Vice-Marshal Ri Yong-ho. However, the NDC, of which Kim Jong-eun is not a member, has outgrown rival institutions in power and is unlikely to have had its grip loosened by the political developments of 2010.

Jang Song-taek, a vice-chairman of the NDC and alternate politburo member, is widely seen as a likely regent if the commission does need to oversee a regime transition. He is married to Kim Jong-il's sister, Kim Kyong-hui, who was made both a four-star general and a full politburo member in late 2010. Other leading figures are also reported to be relatives by marriage or close allies of the Kim dynasty, confirming the status of the family as an institution in itself. Such a set-up suggests that the system is riddled with patronage ties and entrenched interests that will fight any efforts to change policy direction suddenly. However, the country's recent tendency to live on the edge, economically speaking, suggests that there will be no shortage of crises that might galvanise reforms if the leadership were inclined towards change.

North Korea is a dictatorship, and elections to its rubber-stamp legislative body, the Supreme People's Assembly (SPA), are conducted in the traditional communist style. Polls in March 2009, for example, involved a single list of candidates and secured turnout and approval levels approaching 100%. Such votes do not occur on a regular basis, and no election is expected in 2011-12. Should Kim Jong-il die in the next two years, it is not clear how his successor will be formally chosen-Kim Jong-il himself was "acclaimed" leader by local WPK meetings.

North Korea's interlocutors all hope that Kim Jong-eun's emergence will bring a measure of clarity and stability to the country's foreign policy, which in the past two years has become even harder to decode than before. It remains puzzling why in 2009 North Korea greeted the incoming US president, Barack Obama, with missile and nuclear tests, and it is hardly less clear what sense it made for the North to sink a South Korean naval vessel, the Cheonan, in March 2010 or in the following November to shell Yeonpyeong, an island long held by South Korea although sited in disputed waters off the peninsula's west coast. Suggestions that these moves were designed to promote somehow the succession process appear to be the most plausible. But the moves also illustrate an extreme degree of recklessness.

Both China and North Korea argue that the best way to resolve tensions is to return to talks. The urgency of doing so was highlighted in late 2010 as new revelations highlighted previously unsuspected aspects (ostensibly peaceful) of the North's nuclear capabilities. Some form of the nuclear six-party talks-involving the two Koreas, Japan, China, Russia and the US-that have been stalled since 2008 will probably resume in 2011. Bilateral talks with either the US, South Korea or both are also possible. Yet the outlook for progress is bleak.

The North seems unlikely to make any commitment to abandoning its nuclear weapons programme fully-it seems to be hoping instead for recognition of its existing capabilities. But unless it gives up its programme, the key western parties will be reluctant to offer any substantial economic incentives. Public opinion in the US, Japan (which is still grappling with the issue of past North Korean abductions of its citizens) and, since the Yeonpyeong incident, South Korea, would be fiercely opposed to any concessions that "rewarded" the North's aggression. The US could attempt to engage North Korea on non-nuclear issues, as the administration of a former US president, Bill Clinton, did over missile proliferation (his successor, George W Bush, abandoned this effort). However, the nuclear issue will most likely remain the main focus of attention.

Given this background, China's diplomatic and economic clout in the North is set to increase. China's enforcement of the UN sanctions regime that is in place on North Korea is already lax. Recently, there have been signs that by drawing the US into a more active military partnership with the South, the North's aggression has actually strengthened the Chinese government's willingness to do whatever it takes to prop up its neighbour in order to stem US influence. Investments made by Chinese state-owned enterprises in North Korea have long been discussed but not acted on, owing to reservations among Chinese firms and lenders about the North's volatile political and economic climate. Many projects now appear to be moving forward, particularly in mines and infrastructure, thanks to more vigorous backing from the Chinese leadership. Demand in China for North Korea's minerals remains as strong as ever.

However, it is far from clear whether the North will simply become a satellite of China. The scale and extent of Chinese investments are likely to fall far short of the heady figures, sometimes of billions of US dollars, mentioned in press reports. Moreover, Kim Jong-il is wary of overdependence on China, and as his government's concerns are manifested, Chinese projects will come up against the same sorts of administrative obstacles that have deterred past investors. China's calls for market reforms will also be met with stonewalling from North Korea.

The North's wariness of becoming reliant on China's support may open the door for rival powers. Russia could step in to play a more active role, although its leaders seem to have lost interest in the region. More likely, South Korea's next president-the incumbent, Lee Myung-bak, cannot run again once his term ends in February 2013-may well reconsider the country's hardline policy. The risk of "losing" North Korea to China, coupled with concern about the perceived ineffectiveness of the current approach in reducing the risks associated with the North, could prove to be an important factor.

Boosting light industry and agricultural production remain key priorities for the regime, but a series of ministerial shuffles in related posts in 2010-11 show that ministers have not yet come to grips with the challenge. The recent reappointment of Ri Kyong-sik as minister of agriculture, a post he has held before, also shows the dearth of new thinking. One of the key reasons for the failure to improve economic policy has been the prioritisation of military needs ahead of the civilian economy, yet this will continue in 2011-12. Kim Jong-il's hostility to private enterprise appears to be undimmed. The prospects for economic reform are thus, as ever, poor, but it cannot be entirely ruled out, especially given the strong pressure from China for change. The elevation of Pak Pong-ju (who as the premier of North Korea from 2003-07 sought to implement a partial reform package) to the position of alternate politburo member in late 2010 was one optimistic sign for future policy, although most of those holding economic posts are managers rather than reformers. In the field of foreign trade and investment there may be more room for optimism than in other areas. Kim Jong-il's hosting of Naguib Sawiris, the executive chairman of an Egyptian telecommunications firm, Orascom Telecom, one of North Korea's most prominent foreign investors, in January 2010 may have presaged a new push to draw in foreign direct investment. This could be an aspect of a new ten-year State Strategic Plan for Economic Development that was announced in the same month, but unsurprisingly no concrete details on the plan were given.

The post of finance minister was vacant for several years from 2005. Kim Wan­su was eventually appointed in 2009, but he lasted less than six months before being replaced by Pak Su-gil, who has held on to the position for long enough to have presented a budget in April 2010. As usual, the budget contained no useful information; the absence of relevant historical or current data makes fiscal policy in the next two years impossible to predict. The reason for Kim Wan­su's brief tenure of the finance portfolio is unclear. He does not seem to have been purged, given that he has survived as vice-chairman of the SPA.

North Korea lacks both an effective financial system and an independent central bank, making its monetary policy simultaneously crude and difficult to manage. In general, prices are set by the regime, in line with traditional communist practice. The government's tendency to view policies through the lens of Marxist thought, ignoring the crucial role played by the limited (and often illicit) private sector, can result in serious errors of monetary policy. In December 2009 the latest of these mistakes was a botched currency redenomination that led to a period of runaway inflation. It is unlikely that the government has learnt its lesson from this incident, and further mismanagement of monetary policy can be expected in the forecast period.

There is still no sign of any political will for serious economic reforms of the sort seen in China or Vietnam, but the backlash following the disastrous currency reform, coupled with the need for stability while managing the succession of leadership, will discourage further attempts to roll back the rudimentary markets that are now essential in terms of allowing the economy to function and enabling people to get by from day to day. This should allow hard-pressed citizens, many of whom are malnourished, to subsist at a basic level. If Chinese investment in North Korea takes off, economic activity could receive a big boost. However, even if foreign investment fails to meet elevated expectations, it should provide a positive boost to growth in 2011-12. This will supplement strong investment activity associated with preparations for the centenary of Kim Il-sung's birth in 2012. Trade activity will continue to be depressed by restrictions imposed by South Korea in 2010, but rising exports to China will provide an offsetting force, and any easing of the South's measures would significantly boost trade. Economic growth will remain vulnerable to weather, and the risk of another disastrously poor harvest in the next two years is high.

Most prices are regulated by the state, but food is the largest item of expenditure for most North Koreans, and domestic agricultural production therefore dictates the underlying rate of consumer price inflation. Volatility in the size of harvests is likely in the forecast period, as the country has repeatedly proved itself ill placed to take steps to offset the impact of natural disasters, and its ability to invest in agriculture is limited by its overall lack of resources. Consequently, periods of very rapid inflation are possible. This trend could be heightened by ill-judged monetary policies-inflation has still not come back down to its previous rate since the failed currency reform of 2009. North Korea imports most of its oil. Global oil prices are expected to rise further in the forecast period, pushing up the North's energy costs. More generally, the cost of imported inputs could fluctuate dramatically, depending on the trade policies adopted by China and South Korea, the two main countries that export to the North.

North Korea's official exchange rate will remain a fantasy, completely detached from the black-market rate used by most traders. The North Korean won's unofficial exchange rate is not expected to strengthen much in 2011-12. Traders' willingness to deal in the currency is likely to have been severely undermined by the 2009 redenomination, which rendered virtually worthless the won holdings of many outside the country. The increasingly unstable political outlook will put further pressure on the currency's value.

The legacy of juche (self-reliance) thinking will remain, despite increased levels of trade in the forecast period. North Korea's foreign-exchange earnings will continue to be dominated by exports from the Kaesong Industrial Complex (KIC, a zone in the North in which many Southern companies operate) and sales of ores and minerals to China. Illegal sales of arms will bring in further funds, but probably less than each of the former two sources, at US$200m-500m. Exports to China should continue to grow in 2011-12, but those from the KIC may stagnate as investors in the zone move to reduce their exposure to the volatility of inter-Korean relations. North Korea's imports, of which petroleum products form the main component, may be limited by a growing shortage of foreign exchange. However, given the large drop in imports of oil products in 2009, further large falls are unlikely. Beset by sanctions and the costs of a hypertrophied military, North Korea has only one real source of foreign investment: China. Such investment in the North is already forthcoming on a modest scale, for example in mining, a new bridge across the Yalu river, which is located on the North Korean-Chinese border, and projects to upgrade facilities at a north-eastern port, in Rajin.

On November 23rd 2010 North Korean artillery shelled military and civilian targets on Yeonpyeong, one of five South Korean islands in the West (Yellow) Sea, close to North Korea. Two marines and two civilians were killed, 18 people were injured, and fire damage to property and land was substantial. South Korean forces on the island returned fire, but the South did not escalate its retaliation further. Most of the island's population was evacuated over the next few days. The South's currency, the won, fell and stockmarkets were shaken, but in the end both held up relatively well.

The political fallout went deeper. There was fury in South Korea over the country's apparently impotent response to Northern aggression. This came just six months after the South had accused North Korea of sinking a Southern military vessel, the Cheonan, in nearby waters on March 26th. On both occasions the South threatened to strike back the next time such an incident occurred. While some South Koreans had been sceptical of the official account of the Cheonan's sinking, this time they were nearly unanimous in their condemnation of the North. The longer-term political impact in the South remains to be seen. Although the president, Lee Myung-bak, took immediate flak, the military confrontation hardly helps the centre-left opposition Democratic Party (DP), which wants to restore the former "sunshine" policy of engaging the North. Applications to join the marines shot up in December, amid talk of a sea-change in attitudes towards the North from widespread pity and sympathy to fear and hatred. However, Southern political sentiment can be volatile.

Following reports that the radar and some howitzers on Yeonpyeong had not worked, South Korea's defence minister, Kim Tae-yong, who had offered his resignation in May over the Cheonan, found it accepted on November 25th. A former chairman of the Joint Chiefs of Staff, Kim Kwan-jin, replaced him.

Unlike the Cheonan incident, North Korea could not deny the shelling. Instead, it claimed to be reacting to South Korea's having first shot live artillery shells into Northern waters, claiming that it had warned the South to desist before it fired back. The background of such disputes is complex, as is the maritime geography. North Korea has never accepted the Northern Limit Line (NLL), the de facto marine border set by the UN Command (UNC) after the Korean War. Instead it claims a line of its own, extending the land-based Military Demarcation Line (MDL) westwards. This puts Yeonpyeong and other islands (including Baengnyeong, off which the Cheonan sank) in Northern waters.

In practice, the North mostly respects the NLL, but intermittently challenges it. In 1999 and 2002 the waters near Yeonpyeong saw two brief but fatal firefights between patrol boats. Another occurred in November 2009, in which some reports suggest that several North Korean sailors were killed. The sinking of the Cheonan followed in March 2010. Both Koreas hold regular military drills. In November the South and the US were engaged in their Hoguk joint exercise, held every year. The North always complains about the exercise, as it does about all such manoeuvres, claiming that they are a prelude to invasion. Separately but simultaneously, South Korean marines on Yeonpyeong were holding their regular monthly live fire drill.

The key issue is whether South Korea or the US did something out of the ordinary that might have been perceived as a genuine threat, but there is no evidence that they did. The allies fired inside South Korean-controlled waters, to the south-west of Yeonpyeong on the opposite side of the North Korean coast. The North did not claim that any of its ships were a target or in the vicinity, but merely that the shelling had hit Northern waters.

This incident, said to be the first shelling of South Korean civilians since the 1953 Armistice was enacted, was thus a dramatic and deliberate escalation of hostilities by North Korea. As with the Cheonan's sinking, there was much speculation about the North's motives, including both domestic and external goals. The former might include boosting the prestige of Kim Jong-eun, Kim Jong-il's heir-apparent, among a military that is probably sceptical of his untried youth. Significantly, both Kim Jong-il and his successor were in the vicinity on the day of the North's shelling, ostensibly to visit nearby economic facilities.

The South and its US ally reacted with shows of force in the Yellow Sea that included a US aircraft carrier, USS George Washington. This time, unlike after the Cheonan's sinking, China did not protest unduly at such manoeuvres near its own waters. Nor, once more, did it condemn North Korea. It did send high-level envoys to the respective capitals of the South and North, Seoul and Pyongyang. A later report from Japan claimed that China briefly suspended its oil supplies to North Korea as a warning not to escalate tensions.

The North, for its part, issued vehement threats, continuing into December as the South held a series of naval and land manoeuvres, but in the end it held its fire. That is just as well, for if the North were to strike again it would be politically all but impossible for Lee Myung-bak not to order a forceful military riposte, despite the risk of provoking further escalation.

The start of 2011 brought a more pacific tone, including an offer from the North on January 5th to meet "anyone, anytime, anywhere". The South, while insisting that North Korea must admit responsibility and apologise for the Cheonan and Yeonpyeong incidents has accepted an offer of high-level military talks to exchange views on both events and to discuss ways of reducing tensions. No date has been set so far, but initial working-level talks are expected in February.

North Korean issues have featured in many of the headlines surrounding the leaking of alleged US diplomatic cables by a whistle-blowing organisation, WikiLeaks. Some media outlets have suggested that the documents provide evidence of a growing rift between Chinese officials and North Korea, but even if the information is genuine there appeared to be little evidence of such a split. Although it is certainly possible that there are many in China who are fed up with North Korea's behaviour, Chinese policy over the past year appears to have been going in the opposite direction, strengthening both political and economic support for the North.

The one field in which Chinese support for the North seems to have been eroded is that of the North's uranium enrichment. In January 2011, during a state visit by China's president, Hu Jintao, to the US, the Chinese agreed to a joint statement that expressed concern over this programme-the first time that such a concession has been made to the US. The statement also emphasised the importance of dialogue between the two Koreas. It is not clear whether the concern that China expressed is entirely genuine; it appears to view the US stance on nuclear proliferation as hypocritical, especially given US acquiescence to India's nuclear weapons programme.

The extent of North Korea's programme was highlighted in November 2010 when a leading US physicist, Siegfried Hecker, was shown an ultra-modern plant for enriching uranium, with up to 2,000 centrifuges operating at Yongbyon, the North's main nuclear site. This hitherto unsuspected facility is new, supposedly built to world-class standards in barely 18 months since International Atomic Energy Agency inspectors were expelled from the site in April 2009. Such a pace of construction is implausible, and the suspicion is therefore that North Korea therefore moved some of the resources from another undisclosed site or sites. The North claimed that the plant was making fuel for a new civilian light-water reactor under construction, which was shown earlier to a separate US delegation.

On January 13th a conservative South Korean daily newspaper, Chosun Ilbo, accused the North of instituting a new reign of terror to enforce Kim Jong-eun's succession. It reported that one defector source had claimed that public executions tripled last year, to at least 60. Capital offences were said to include robbery, people-trafficking, the illicit use of Chinese mobile phones and unauthorised possession of US dollars. Whereas in the past many North Koreans have slipped into China, to find work or escape the Northern regime, there is now by some accounts a new shoot-to-kill policy on illegal border crossings.

Elite figures are not safe either. On January 10th the same paper, citing "a high-level North Korean source", claimed that in December the State Security Department (SSD) had detained or executed nearly 200 senior officials, many of whom were working for companies under the nominally ruling Workers' Party of Korea (WPK) or the Korean People's Army (KPA). It was also said to have conducted house raids at dawn in search of illegal US dollar stashes, finding US$1m in one home. Kim Jong-eun reportedly ordered the arrest as a traitor of anyone found in possession of more than US$50,000.

These unconfirmed reports must be treated with caution, but the article revealed victims' identities. These are said to include Ri Jong-ho, the head of Taehung, a major trading enterprise; Pak Jong-su, the head of a coal-trading firm owned by the KPA; and the unnamed heads of two further companies, Sogyong Trading and "Number 54", run by the finance and accounting section of the WPK and the Ministry of People's Armed Forces (the defence ministry) respectively. The head of Taehung's Wonsan branch, Ri Chol-su, allegedly jumped to his death during SSD interrogation on charges of espionage and illegally amassing wealth.

The article further claimed that this reign of terror was targeted at two influential figures: General O Kuk-ryol, a vice-chairman of the top executive body, the National Defence Commission (NDC), who once headed the WPK's operations department, and Kim Jong-il's brother-in-law, Jang Song-taek, the director of the party's administration department, who is viewed as a potential regent for Kim Jong-eun. However, on January 24th Jang Song-taek was seen at Kim Jong-il's dinner for Naguib Sawiris, the head of an Egyptian telecommunications firm, Orascom Telecom, one of North Korea's most prominent foreign investors. His attendance suggests that he, at least, remains secure for the time being.

On January 6th an unnamed South Korean government source told the South's semi-official news agency, Yonhap, that the WPK meeting that took place last September rewrote the party's rules to facilitate a hereditary succession. By this account, a full party congress is no longer mandated every five years (there have, in fact, been none since 1980). Instead, a delegates' meeting like that in September 2010-even rarer, since the last one took place in 1966, but perhaps easier to convene and to pack with "yes-men"-is now empowered to change the rules and elect officials. In addition, the party's general secretary will automatically become head of its Central Military Commission (CMC). Kim Jong-eun's first party post is the newly created one of CMC vice-chairman.

A second aim of this rule change is institutional: to reassert party control over the army, whose clout has grown under Kim Jong-il's Songun (military-first) policy. One new rule affirms that "all military activities of the KPA are to be executed under the leadership of the WPK". The fact that this needed to be stated so explicitly indicates that resistance is expected.

North Korea is rated last among the 167 countries that are covered by the Economist Intelligence Unit's 2010 Democracy index. As one of the 55 states considered "authoritarian" it stands in the company of Zimbabwe, the Central African Republic and Myanmar.

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North Korea is a de facto hereditary monarchy

The most recent "elections" to the Supreme People's Assembly (the legislature) in March 2009 merely highlighted the lack of democracy in North Korea, confirming the country's score of 0 for the electoral process category. Each constituency boasted only a single approved candidate, who duly received 100% of the votes cast in a near-100% turnout, making a mockery of the concept of competitive selection. The status of the North's "dear leader", Kim Jong-il, as a de facto hereditary monarch has only been reinforced by the intense speculation surrounding his eventual successor; in 2010 his third son, Kim Jong-eun, emerged as his father's designated successor. No effective political opposition exists, and none is expected to emerge under the remaining period of Kim Jong-il's leadership, but it is possible that rival factions could emerge after his death. Kim Jong-il's "military first" policy ensures that the Korean People's Army takes precedence in all matters. Given the secretive and closed nature of the country and the lack of independent media, North Korea's human rights record is difficult to assess. However, anecdotal accounts, mostly from defectors and refugees, suggest a lack of protection of or respect for basic human rights, including freedom of speech and the right to due judicial process. North Korea thus also scores 0 for the civil liberties category.

The government is able to exert relatively effective control

In the government functioning category, North Korea scores respectably compared with other authoritarian regimes. It also outscores several countries that we designate "hybrid regimes", including Iraq and several former members of the Soviet Union, such as the Kyrgyz Republic. This owes much to the fact that Kim Jong-il's authority extends over the whole of the country's territory, and that the doctrine of juche (self-reliance) ensures that foreign powers have no influence over state functions or policies. However, the effectiveness of the state in delivering economic growth and development for its citizens is poor.

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Democracy index 2010: Democracy in retreat, a free white paper containing the full index and detailed methodology, can be downloaded from www.eiu.com/DemocracyIndex2010.

Note on methodology

There is no consensus on how to measure democracy, and definitions of democracy are contested. Having free and fair competitive elections, and satisfying related aspects of political freedom, is the sine qua non of all definitions. However, our index is based on the view that measures of democracy which reflect the state of political freedom and civil liberties are not "thick" enough: they do not encompass sufficiently some crucial features that determine the quality and substance of democracy. Thus, our index also includes measures of political participation, political culture and functioning of government, which are, at best, marginalised by other measures.

Our index of democracy covers 167 countries and territories. The index, on a 0-10 scale, is based on the ratings for 60 indicators grouped in five categories: electoral process and pluralism; civil liberties; functioning of government; political participation; and political culture. The five categories are interrelated and form a coherent conceptual whole. Each category has a rating on a 0-10 scale, and the overall index of democracy is the simple average of the five category indices.

The category indices are based on the sum of the indicator scores in the category, converted to a 0-10 scale. Adjustments to the category scores are made if countries fall short in the following critical areas for democracy:

• whether national elections are free and fair;
• the security of voters;
• the influence of foreign powers on government; and
• the capability of the civil service to implement policies.

The index values are used to place countries within one of four types of regime:

• full democracies-scores of 8 to 10;
• flawed democracies-score of 6 to 7.9;
• hybrid regimes-scores of 4 to 5.9;
• authoritarian regimes-scores below 4.

The lengthy joint New Year editorial published this year by the three major daily newspapers in North Korea-those of the party (Rodong Sinmun), the army (Joson Inmingun) and the WPK's youth league (Chongnyon Jonwi)-setting out tasks for the year ahead provided a rare statement on economic policy, but little clarity otherwise. As was the case for 2010, light industry was again mentioned in the editorial's headline, although unlike last year agriculture failed to win similar top billing. Unusually, for the first time in 50 years the editorial appeared inside the papers, whose front pages instead carried the music and lyrics of revolutionary songs. It is not clear what this change might signify.

It was encouraging that the main theme this year was once again economic rather than political, ideological or military. Light industry was mentioned 21 times and "people's livelihood" 19 times, as opposed to just 14 mentions for the Songun doctrine and eight for Kim Jong-il himself. However, the editorial itself provided little in the way of concrete measures, much less reforms, instead relying on the usual rhetoric. South Korea's Ministry of Unification noted that the North had been calling for a revolution in light industry for 25 years, without saying how to achieve it.

A renewed emphasis on economic self-reliance (juche), not only in minerals (with which North Korea is fairly well endowed), but also in technology, provided an ominous subtext. The editorial speaks of "a bright prospect of mass-producing the juche-based steel, fibre and fertiliser". This refers partly to the recent revival of vinalon, a fabric that was much touted by Kim Il-sung and that is made from limestone, but which is uncomfortable, shiny, prone to shrinking and difficult to dye; North Korea's elite conspicuously do not wear it. There was also reference to a need to lead progress in the knowledge-based economy, citing nanotechnology and bioengineering as fields to be "developed radically". Yet North Korea's achievements in the field of enriching uranium-which is emphatically not a juche technology-must surely demonstrate that science cannot develop successfully on the sort of closed basis that is being advocated. Unlike last year, the editorial made no mention of foreign trade or investment.

The New Year editorial contained no hint of a major change that was announced a fortnight later, which must have been already in the works. On January 15th the Korean Central News Agency (KCNA, North Korea's official news agency) reported that the cabinet had adopted a ten-year State Strategy Plan for Economic Development, and that it would create a State General Bureau for Economic Development (SGBED) to implement it. The goals are vague, to say the least. The new plan's main emphasis will be on building infrastructure, developing agriculture and basic industries such as power generation, coal, oil and metallurgy, and promoting regional development. In terms of a time-scale, the new plan "helps lay a foundation for the country to emerge a thriving nation in 2012 and opens a bright prospect for the country to proudly rank itself among the advanced countries in 2020".

These dates are significant. For several years North Korea has been proclaiming that it will create a "great and prosperous nation" (kangsong taeguk) by 2012, the centenary of Kim Il-sung's birth. That is plainly impossible. The new ten-year plan, despite a ritual nod to 2012, in effect moves the goalposts, making 2020 the focus instead. Intriguingly, the Korea Taepung International Investment Group (KTIIG) will be entrusted with the implementation of major projects under the plan. KTIIG was established about a year ago as a joint venture, also involving a "Korean resident in China", Pak Chol-su, and is closely linked to the State Development Bank (SDB), founded last March. The bank is under the control of the NDC, which outranks the cabinet. It is unclear whether the new SGBED supersedes, controls or even competes with the SDB; it could be a move by the civilian cabinet to reassert its authority over the economy.

In November 2010 South Korea's unification ministry released texts of three new or revised Northern laws: one on economic planning, revised in April, and two orders of the Supreme People's Assembly presidium (a standing committee that acts when the full assembly is not sitting) issued in July, covering labour protection and a law for chambers of commerce. Kyungnam University's Institute for Far Eastern Studies (IFES), one of the least ideologically biased observers of the North in Seoul, suggested that comparison with the legislation to earlier regulations dating from 2001 and 2002 indicated a clear retreat from reform.

The new planning law reasserts state control, stating that the planned economy will be based on prepared figures and that enterprises, organisations and companies will operate on the principle of "ensuring regulated numbers" (presumably this means sticking to prescribed numerical targets laid down from above). It seems to contradict facts on the ground: since the fiasco of the botched currency redenomination in late 2009, markets have largely been left alone. The fear is that this tactic may be temporary, with the state still aiming to reassert control when it can.

As for the labour protection law, on paper this lays out detailed workers' rights. Difficult and strenuous jobs, including mining and fishing, are to be rewarded with additional clothing, food and other rations. The working day is restricted to eight hours, with guaranteed holidays and time off, healthcare and protection of property. As fine as all this sounds, it bears little if any relation to what happens in practice.

The third law is mildly encouraging. North Korea has had a chamber of commerce since 2000. According to IFES, the new order codifies the Chamber of Commerce Regulation issued by the cabinet in 2008. It covers a range of duties and rights concerning commercial operations, including contracts and operations regarding joint ventures with foreign firms; legal letters of confirmation, certificates of country of origin and other paperwork related to trade issues; and exhibitions and conventions held with foreign businesses.

Fears of increased state control over the economy have been reinforced by a new measure. On January 13th the KCNA reported a new decree by the SPA presidium, to upgrade the State Price Bureau into the State Price Commission. The body's new title puts it on a par with, or even above, cabinet ministries. This reflects the perceived urgency of quelling inflation, which remains high in the wake of the 2009 currency reform. Yet the hope that stronger central command over prices will bring down inflation seems to indicate that the government may have learned the wrong lessons from the crisis.

Meanwhile, one of the underlying causes of inflation is the North's chronic failure to improve its production of food. On this front, the revelation, in a by-lined article that appeared in Rodong Sinmun in early January, that Ri Kyong-sik has returned as agriculture minister was notable. He succeeds Kim Chang-sik, who had held the post since early 2009 when he replaced Ri Kyong-sik, who in turn had replaced Kim Chang-sik in 2003. It is unclear what such musical chairs are meant to achieve, but they do not suggest that a new approach towards agriculture is in the offing.

The government's focus on improving light-industrial output was reflected in Kim Jong-il's first "guidance" visit of 2011, to the newly built Nampo Glass Bottle Factory (Nampo is the port for Pyongyang). KCNA reported that the plant began production on January 24th, and was capable of producing tens of millions of bottles a year. However significant this industrial development, the underlying state of the North Korean economy looks dire. The cold winter has exacerbated shortages of food and fuel. Power cuts are also problematic. On January 20th Open Radio for North Korea (ORNK), one of several Seoul-based non-governmental organisations (NGOs) with seemingly good contacts inside the North via defectors and other sources, reported that part of Ryanggang province in the far north had been without electricity all month. Even in Pyongyang, where brown-outs had grown rarer last year, most people reportedly only have electricity for a couple of hours per day.

Inflation remains a severe burden. ORNK has also reported that recently "students and parents have been burdened with supplying firewood for school heating, while the prices of coal and wood are skyrocketing in the markets". The IFES has noted that staples such as rice, maize and pork are also rising in price. It cited a claim by a Japanese NGO, Rescue the North Korean People! Urgent Action Network (RENK), that the price of rice in Pyongyang soared from Won1,400 (around US$10 at the official exchange rate, or 40 US cents at the unofficial market exchange rate) per kilogram on January 7th to Won1,900/kg just three or four days later. Maize rose from Won750/kg to Won950/kg, and pork from just under Won4,000/kg to around Won5,000/kg in the same time-frame. Prices cited by other sources vary slightly from RENK's, but the underlying story of rapid price increases remains the same. A South Korean Buddhist NGO, Good Friends, has suggested that grain prices may have risen in the North this year because party officials in charge of grain imports are behind schedule, while the rising value of both the US dollar and the Chinese renminbi has driven up the cost of overseas food purchases.

On January 5th Good Friends published what it claimed were the views of local officials in various different regions of North Korea. Those in Hamhung city on the east coast, the site of the main vinalon factory, reported that output of juche steel and textiles was lower than expected. In Sariwon, which is located south of Pyongyang, a major provisions store for the military was emptied when its entire contents were sent to the KPA after the WPK conference in September 2010. To restock it, officials were sent to farms to get more grain. After a poor harvest caused by flooding, this meant appropriating farmers' personal stocks.

On December 1st North Korea reorganised the way it runs its resources sector. What had been the "State Guidance Bureau of Resource Development under the Ministry of Mining Industry", has been upgraded to become the Ministry of State Resource Development. This suggests a renewed emphasis on the mining sector, which is crucial for both domestic growth and exports. It may also reflect a perceived need for better co-ordination and a top-down vision, amid reports of local jurisdictions striking their own individual deals for Chinese companies to invest in mines.

On January 5th the South's state data agency, Statistics Korea, released figures showing that the North's resource deposits were estimated to be worth at least US$6.1trn as of 2008. Specifically, North Korea's minerals include the world's largest reserves of magnesite (6bn tonnes, valued at US$2.4trn), as well as coal (20.5bn tonnes, worth US$2.4trn), limestone (100bn tonnes, worth US$1.1trn), iron ore (5bn tonnes, worth US$270bn), gold (2,000 tonnes, worth US$54.5bn) and zinc (21m tonnes, worth US$2.18bn).

In January Naguib Sawiris, the executive chairman of Orascom Telecom, was granted a dinner with Kim Jong-il. The rare honour reflects the fact that Orascom is probably the largest overseas investor in North Korea. Its interests are dominated by the telecoms sector, where it runs North Korea's mobile network, branded as Koryolink. Orascom owns 75% of Cheo Technology, which operates this service, while the Ministry of Post and Telecommunications has 25%. There was initial talk of a US$400m investment, but it is unclear how much has actually been disbursed.

As of September 2010 Koryolink's third-generation (3G) network service had over 300,000 subscribers, according to Orascom. However, with a population of roughly 22m there is still much scope for growth. The service is quite expensive and unwieldy, as there are separate non-interoperable channels for locals (who cannot call abroad) and expatriates. Although some quarterly operating profits have been reported, it seems unlikely that Orascom is anywhere near to recouping its investment, especially given that since 2009 it has also been working on the 105-storey Ryugyong hotel, a building that has stood unfinished for 20 years. The gaunt concrete frame is now clad with glass, but it is unclear whether this will be functional or is merely cosmetic. North Korea may well hope to entice Orascom into yet other fields of investment.

Amid indications that China is planning to increase its investment in North Korea sharply, it is vital to distinguish fact from hype. One confirmed project is a new US$258m road bridge over the Yalu river, which lies on the border of the two countries, between Dandong in China and Sinuiju in North Korea. A groundbreaking ceremony was held on December 31st, and construction may take three years. The bridge will run west of the existing narrow one built in 1937 by the Japanese, which is congested and cannot take trucks heavier than 20 tonnes. It may also carry a new and more modern railway link.

When the bridge is completed, it will have at least two knock-on effects. South Sinuiju, already a nominal special economic zone, will finally see some development. Astonishingly, there is no modern highway southwards from Sinuiju to Pyongyang, and so this will be remedied-probably, as is the case for the new bridge, with China footing the bill. All this will help to open up North Korea's interior. The project has been slightly delayed, but Chinese sources have denied vehemently the suggestions from South Korean sources that this is because of the North's security concerns about opening a route for the Chinese to its capital.

In December 2010, on the other side of the peninsula, North Korea's north-eastern port, Rajin, began shipping Chinese coal. Between early December and early January 20,000 tonnes of coal mined in China's Jilin province passed through Rajin, destined for the Chinese ports of Shanghai and Ningbo. The coal was transported from the mine to Rajin by road, which was no easy task, since on the North Korean side of the border the roads are winding, hilly and unpaved. Even so, for Hunchun this is the best logistical option. Rajin is not only close at hand, but is also the region's most northerly port that is free of ice all year round.

It will be better still if plans to develop Rajin-Sonbong (Rason), which was declared a special economic and trade zone in 1991, are realised, as the zone has struggled to take off. Apart from a casino-hotel that was built by a property developer from Hong Kong, Emperor Group, which had to close for some years after China cracked down on crossborder gambling tourism, Rason remains quiet. Recent visitors have found no sign on the ground of reported projects by both Russian and Chinese firms to modernise harbour facilities. A Chinese company, Chuangli Group, reportedly signed a ten-year deal in 2008 to lease a dock at Rajin and expand its annual capacity to 1m tonnes.

Kim Jong-il has high hopes for Rason, and North Korea has produced a video depicting an ultra-modern vista of skyscrapers as part of its promotional efforts. The government aims to turn Rason into a world-class economic and trade zone based on international freight brokerage, export processing and finance business, making it "a beautiful cultural port city". The video's narrator quotes Kim Il-sung as saying that the port must become "a better city than Singapore".

Hopes that some development might actually take place this time received a boost in December 2010 when another Chinese firm, state-owned Shangdi Guanquan Investment, signed a letter of intent to invest up to US$2bn in Rason. A US newspaper, the Wall Street Journal, quoted a company official as saying that the plan was to develop first infrastructure (docks, a power plant and roads) and then industrial projects, including an oil refinery-there is already one, North Korea's largest, at Sonbong-in the next five to ten years. The spokesman added that the company was still awaiting permission from the North, and that US$2bn was what North Korea hoped for, not necessarily what his company could deliver.

Data on Chinese business activity in North Korea have hitherto been scarce and fragmentary. A recent report by Drew Thompson, the director of China studies at a US think-tank, the Nixon Center, shines much-needed light on the subject. So far the scale does not seem to be large. In 2003-09 Chinese investment in North Korea totalled only US$98.3m, far less than that in any other neighbouring state-South Korea received US$1.2bn. Nor is it very successful: North Korea is described as "a particularly difficult environment for Chinese investors due to rent-seeking, poor infrastructure and the oppressive political environment".

The majority of Chinese investors in the North are privately owned companies and state-owned enterprises under the control of provincial, prefecture and municipal authorities. Only four out of 138 were companies controlled by the Chinese central government. China's largest private firms were largely notable by their absence: only two of China's top 100 companies have invested in North Korea, and they are both steel-makers. By sector, mining and consumer goods are prominent. Of the 138 joint ventures established between 1997 and August 2010, 41% were in extractive industries and 38% in light industry, with 8% in heavy industry and 13% in services. Geographically, the two Chinese provinces that border North Korea predominate, as 28% of Chinese firms involved in these joint ventures come from Jilin and 34% from Liaoning.

The overall sense is that so far these projects are relatively small in scale. But Chinese investment in North Korea could grow significantly in the future if fresh infrastructure plans come to fruition-as some past projects, for instance, that to upgrade the Hunchun-Rajin transport corridor, have not. There has been some suggestion recently that the Chinese government has put pressure on state-owned banks to support increased investment in the North by Chinese companies. The tough business environment, volatile political outlook and ambivalent position of many of the larger Chinese companies involved in the projects may nevertheless mean that both the scale and impact of Chinese foreign investment will fall short of the billions of US dollars that are often talked of.