North Korea’s Economy in Retrospect and its Prospects
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By Min-Hua Chiang

North Korea’s Economy in Retrospect and its Prospects

Sep. 17, 2018  |     |  0 comments

According to South Korea’s central bank, North Korea’s economy plummeted to a negative growth rate of 3.5 percent in 2017, the worst in the last decade. The international economic sanctions, including a ban on exports, the freezing of overseas hiring of North Korean workers, and the prohibition on foreign firms’ joint ventures with North Korea, are the main factors for its economic setback.

The Trump-Kim meeting on June 12, 2018 in Singapore raised hopes of the lifting of sanctions and the bolstering of North Korea’s economy. During the meeting, the two leaders signed a comprehensive document outlining a joint commitment to complete denuclearization of the Korean peninsula. However, the removal of sanctions may not be realized soon. So far, both sides have not yet reached a detailed plan about denuclearization. Instead, the US-North Korea controversy has continued to arise from time to time.

The geopolitical uncertainty among the major powers in the region, notably the US and China, could also delay the denuclearization process. Without favorable external conditions, it is hard to see strong economic growth in North Korea.

Overview of North Korea’s Economy

Based on Kim Il-sung’s Juche (self-reliance) ideology, the Democratic People’s Republic of Korea’s (DPRK) goal was to establish a self-reliant economic system with limited trading sectors. As shown in Figure 1, the DPRK’s economic growth rates in the 1950s were quite remarkable. The economic recovery from the war and influx of aid from the Soviet Union allowed North Korea to experience high economic growth rates during this period. In the 1960s, North Korea’s moderate economic growth can be explained by its import-substitution policy that facilitated domestic production and foreign direct investment (FDI) from ethnic Koreans in Japan. In the meantime, financial aid from the Soviet Union continued to underpin North Korea’s economic development.

However, the import-substitution policy proved to be unsustainable. The purchase of capital equipment and machinery from Western countries increased North Korea’s external debt. The country fell into greater difficulties in its debt repayment due to the plunging prices for nonferrous metals (North Korea’s main export items) following the two oil crises in the 1970s.

The most important factor that caused North Korea’s sharp economic decline was the termination of aid by the Soviet Union after its collapse in the 1990s. North Korea’s economic crisis, known as the arduous years, triggered an extreme food crisis from 1995 to 1998. The economy gradually improved after the 2000s. Nevertheless, after the UN imposed sanctions on North Korea following its nuclear and missile tests in 2006, the country experienced a sharp economic slowdown that year. In 2017, UN sanctions again negatively impacted North Korea’s economy. Evidently, if the deep economic downturn continues, it will undermine both Kim Jong-un’s legitimacy and the country’s social stability.

Figure 1. North Korea’s Annual Economic Growth Rate 1954-2017

Source: Byung-Yeon Kim, Unveiling the North Korean economy: collapse and transition, Cambridge University Press, 2017, pp. 74-78; Bank of Korea, Press Release, 22 July 2017, accessed 18 June 2018.

North Korea’s Current Economic Profile

The North Korean government releases very limited statistics about the national economy. Through estimates from the South Korean government and figures from the United Nations, a rough profile of North Korea’s economy can be constructed as shown in Table 1. First of all, North Korea so far remains one of the poorest countries in the world. Its GDP per capita is USD 648, which puts it in the 176th position among 193 countries in the world. Second, although agriculture contributed to only 21.6 percent of the country’s GDP, it has employed most of the people in the country (58.9 percent of total employment). This indicates that most of the people in DPRK rely on agriculture, which provides only a tiny revenue for living. The manufacturing industry is supposed to be more productive and could offer better remuneration than agriculture. Nonetheless, employment in the manufacturing industry is limited.

Third, according to the South Korean central bank, government services still account for a large part of North Korea’s GDP (22.4 percent). However, the government’s contribution to GDP could have been deteriorating. The 2016 suspension of the Kaesong Industrial Complex, a joint venture between the two Koreas and a major source of government revenue for North Korea, has resulted in a worsening fiscal condition for the government. Fourth, China is North Korea’s most important trade partner, accounting for 86.4 percent and 91.4 percent of its exports and imports in 2017, respectively. As such, China’s sanction enforcement has made the greatest impact on North Korea’s economy. Fifth, the country owns substantial natural resources for exports. Mineral product was North Korea’s largest export item in 2016, followed by textile and animal products. On the other hand, it relies on importing all kinds of industrial and consumer goods from abroad. Sixth, North Korea has a population of 25.5 million and a well-educated labor force. The literacy rate for people aged 15 and above is 100 percent. However, the supply of cheap labor may not be sustainable. With a median age of 34, North Korea is older than the median age of Southeast Asia (28.5) according to the United Nations.

Table 1. Major Indicators of North Korea in 2017

Sources: United Nations Bank of Korea, Statistics Korea, accessed 2 August 2018.

Kim Jong-un’s Economic Reform

Private business in North Korea emerged as early as in the 1990s. To obtain food during the famine, workers and women began to sell or barter anything valuable from their plants and homes. Cross-border smuggling also increased in border areas. After Kim Jong-un took office in 2011, several institutional changes from the socialist to market economy have been observed. For example, 19 small-scale economic development zones in various provinces were announced in 2013-14. Certain industries are allowed to sell some of their output in the marketplace. State-owned enterprises (SOEs) can now set up subsidiaries in other areas of business. Independent entrepreneurs are also allowed to set up operations under the SOEs’ wings. Members of co-operative farms can cultivate on their own and sell their products in the informal markets in many North Korean towns.

In 2016, Kim announced North Korea’s first “five-year plan for economic development” (2016-2020) with the aim to raise the quality of life of the people, solve energy shortage problems, encourage FDI, and diversify its external trade relations. Kim has attempted to revive the economy through greater deregulation on market economic activities in the agricultural, industrial, and tourism sectors. The growing trend towards the market-oriented economy may add pressure on the government for greater economic liberalization. The growth of the private sector will expose the general public to foreign commodities and information about the outside world. How to balance economic growth and political stability will be a challenging task.

Political and Economic Factors

In April 2018, Kim Jong-un announced that the “new strategic line” for the ruling Workers’ Party would be “socialist economic construction” and not the need for more atomic or missile tests. If the denuclearization issue is settled and economic sanctions are removed, North Korea will be more attractive for foreign investors. Its tourism sector could also be developed. The overall economic prospects are expected to be good.

However, North Korea’s disagreement with the United States over its denuclearization process could hinder its economic development. US Secretary of State Mike Pompeo said that “reaching a denuclearization deal with North Korea may take some time” after inconclusive talks with North Korea’s former intelligence chief on July 6. Mike Pompeo arrived in Japan the following day to discuss coordination over North Korea’s denuclearization with Japan and South Korea. Meanwhile, President Trump also elicited a promise from Russian President Vladimir Putin at their Helsinki meeting to help negotiate with North Korea. On the North Korea’s nuclear issue, multilateral talks seem to dominate again.

Trump also made a statement that China could be influencing North Korea in the denuclearization deal. China supported the Trump-Kim talks as it would help to stabilize the region. China might want to keep North Korea as a buffer zone between it and the United States.

From a geopolitical perspective, an integrated Korea, inclined towards the United States, would be disadvantageous for China. Even if China were to work with the United States to denuclearize North Korea, progress would be uncertain. On several occasions since 1994, North Korea has proclaimed its intention to denuclearize but all attempts and efforts came to naught. Amid the uncertain geopolitical situation, China could remain as an important support for North Korea’s economy. Economic cooperation through the Belt and Road Initiative (BRI) could increase connectivity and stability across the peninsula. Kim Jong-un’s relatively frequent visits to China (three times in three months) also shows China’s importance to North Kora’s external relations.

Beyond the geopolitical factors, North Korea will have to fix some fundamental problems in its domestic economic system before economic take-off can occur. First, the current tax system does not allow public savings to pass through the budget to increase public expenditure in the civilian economy. Second, its banking system has not adapted to the growing accumulation of private wealth. Due to corruption and black-market lending, the banking services are not widely trusted by the public. Third, the energy shortage problem in North Korea is severe. Public transport is also poorly maintained. Fourth, while FDI could help North Korea to improve its economy and people’s living standards, the government fears the influx of foreign capital and information could lead to political destabilization. The potential challenge to government stability may constrain the level of opening up. The current path of diplomacy will most likely shape the economic development path of North Korea in the short term. In the long run, North Korea’s economic achievement will largely depend on its smooth integration with the global economy. However, due to its long-term inward-looking economic policies, the DPRK lacks the experience to flexibly respond to global economic fluctuations.

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