LIM Soo-ho^

NORTH KOREAN ECONOMY RECORDS THE LOWEST GROWTH RATE IN TWO DECADES

On July 21^st, the Bank of Korea (BOK) released ”GDP Estimates for North Korea in 2017”. According to the BOK, North Korea’s real annual gross domestic product (GDP) fell by 3.5% in 2017, the lowest growth rate in two decades since 1998 following the ”Arduous March” (1995-1997). As can be seen in the graph below, the North Korean economy experienced substantive negative growth every year following the collapse of the Soviet Union up until 1997, and the economy finally began to recover as Kim Jong Il took power in 1998. From 1998 to 2016, GDP annual growth rates in North Korea averaged 1.3%, reaching a relatively high rate of 3.9% in 2016. Thus, even taking into account the high base effect of 2016’s 3.9% growth, a negative growth rate of 3.5% is an exceptionally steep decline. In fact, there have been cases in which a relatively high growth rate led to slower growth in the following year, as shown in the years of 1999-2000 (6.1% to 0.4%), 2001-2002 (3.8% to 1.2%), 2005-2006 (3.8% to -1%), and 2008-2009 (3.1% to -0.9%). However, even by historical standards, the contraction from 3.9% in 2016 to a negative 3.5% in 2017 is still a dramatic fall.
North Korea’s economic growth rates

* percentage change over previous year
** Source: Bank of Korea (BOK)

ECONOMIC SANCTIONS AS THE KEY CAUSE OF NEGATIVE GROWTH

As one may assume, the sharp decline in North Korea’s growth rate was largely attributable to international sanctions. In a breakdown of the BOK estimates by sector, all sectors recorded negative growth rates except for the services sector (0.5%). The figures show that among others, mining (-11%) and manufacturing (-6.9%) drove such a widespread downturn.
These are the sectors that have been hit hardest by sanctions.
In particular, the big contraction in the gross domestic production of minerals and manufacturing seems to have been the result of sanctions on North Korea’s mineral exports as well as textile and completed apparel exports, which took effect in February and September 2017, respectively.
Meanwhile, North Korea’s anthracite exports, its top export product, contracted by 65.9% in 2017 year on year according to China’s General Administration of Customs. North Korean exports of anthracite went down to zero in the periods from March to July and October to December, as China joined international efforts to implement sanctions since February 2017 pursuant to UNSCR 2321 and 2371.
The export volume of iron ore, North Korea’s second largest export item, grew rapidly from January to April but started to show negative growth in June, with no exports recorded since October. This seems to be the effect of UNSCR 2371 passed in August 2017 that bans all imports of North Korean anthracite and iron ore.
Export volumes of textiles and apparel fell by 22.3 percent year on year. Although UNSCR 2375, which prohibits importing North Korean fabric and apparel, was adopted in September, and China started to implement sanctions in December, export volumes for these items fell year on year for every month with the exception of May and June. This leads to the reasoning that apart from UN resolutions, China initiated unilateral sanctions against North Korea in July. In December, when China started to implement UN sanctions, the export volume fell by a whopping 75.9 percent compared to the same month in the previous year.
Sanctions on North Korean minerals and textile industries directly affect production of related industry sectors due to a reliance on exports by these sectors. For instance, export sanctions had little impact on domestically-consumed anthracite, but with export channels blocked, the production of anthracite intended for overseas sales seems to have stopped completely. Similarly, there has been minimal impact on iron ore mining for domestic use, while mining activity for overseas exports in exchange for coke imports appears to have plummeted. The same goes for textiles and apparel products. It is assumed that there has been little impact on domestically-consumed production, while toll-processing orders from countries such as China were hard hit.

NEGATIVE GROWTH TO CONTINUE IN 2018

The problem is that negative economic growth in North Korea is inevitable in 2018 as well. Unless UN sanctions against North Korea are lifted, exports will drop even further. According to China’s General Administration of Customs, North Korea’s export volume to China in all months between January and May 2018 dropped compared to the same month the previous year – by 30.1 percent in January, 32.4 percent in February, 56.4 percent in March, 43 percent in April, and 40.3 percent in May.
It is worth noting that UNSCR 2397, adopted in December 2017, started to be fully implemented in 2018. Resolution 2397 adds North Korean agricultural products, machinery and electronic equipment, earth and stone, wood and vessels to the list of banned products, which already include minerals, seafood and apparel. A sharp decline in export revenues will lead to less means (foreign currency) to import materials needed for industrial production, which will unavoidably result in production downturns.
Meanwhile, UNSCR 2397 sets forth sanctions on imports in addition to existing sanctions on exports. Resolution 2397 restricts the export of refined petroleum to North Korea to 500,000 barrels, or one-fourth the existing level. It also prohibits all North Korea-bound exports of machinery for industrial production, electronic equipment, shipping equipment and base metals. Under these restrictions, machinery, machine parts and vehicles and even items such as a simple metal spoon cannot be sold to North Korea. It is assumed that these sanctions will have a direct impact on North Korea’s factory operations and shipping activities.
From the perspective of the North Korean leadership, the greatest headache is that there are bound to be setbacks in promoting the five-year strategy for economic development (2016-2020) that was adopted at the Korean Workers Party Congress in May 2016 as well as in implementing the new strategy of concentrating all efforts on economic construction as announced at the plenary session of the Party’s Central Committee in April 2018. This is clearly reaffirmed by looking at the import trends from China to North Korea in 2017.
Unlike exports, there was a significant increase in imports up to July compared to the same period in the previous year, but starting in August, import volumes started to fall, with the drops getting bigger month by month. It seems that for the period between January and July, Pyongyang decided to push forward with its original import plan by drawing from existing foreign currency reserves under the reasoning that a sharp decline in anthracite exports can be offset by increased exports of other products such as iron ore, seafood and apparel.
However, as iron, iron ore, seafood and apparel were added to the sanctions list in August along with anthracite, and a depletion of foreign currency reserves became foreseeable, Pyongyang changed its plans and started efforts to manage the balance of payments. The regime was thus unable to mention the phrase ‘achievement of plan’ in assessing its second-year progress of the five-year strategy at the Supreme People’s Assembly meeting held this April. It is expected that the third-year progress report will be even grimmer.

IMPROVING INTERNATIONAL RELATIONS AS AN EXIT STRATEGY FOR ECONOMIC RECOVERY

Historically, North Korea has made determined efforts to improve relations with other countries whenever its mid-to-long-term economic development plans were at risk of falling apart, as a means to bring in foreign capital. For instance, when Pyongyang failed to fulfill the second five-year plan (1967-1971) due to an increase in the national defense budget, it eagerly went along with the Soviet Union’s detente policy with an aim to obtain Western loans. This led to the adoption of the July 4 Inter-Korean Joint Statement in 1972.
Another example would be in the late 1980s when the third seven-year plan (1987-1993), an ambitious goal for North Korea at the time, was about to fall through due to large-scale foreign currency loss from holding the Pyongyang World Festival of Youth and Students and constructing the Sunchon Vinylon Complex, coupled with plummeting trade due to the downfall of Socialism. North Korea was unable to repay the loans from the 1970s and was thus designated as a defaulting nation by Western loaners. North Korea was left with no choice but to acknowledge the ROK as a counterpart for economic cooperation and improve inter-Korean relations. These were the economic circumstances that led to the adoption of the Inter-Korean Basic Agreement in 1991.
The enthusiasm demonstrated this year by North Korea in improving relations with the ROK and the US would be in some way or another related to the difficulties that the regime faces in implementing the five-year strategy under international sanctions. What is more, in April, North Korea concluded the ‘byongjin’ policy of parallel economic and nuclear development and declared a shift to a new strategic line that focuses on rebuilding the economy. Thus, going forward, it can be expected that Chairman Kim Jong-un will have no choice but to continue efforts to improve international relations for the sake of regime stability.
In the economic perspective, however, it is important to keep in mind that whether or not North Korea maintains its favorable attitude toward others closely depends on the existence of other economic alternatives. This is why, despite North Korea’s ongoing efforts for the improvement of inter-Korean and US – North Korea relations, the international community should continue to maintain sanctions against the North and prevent the diversion of related countries.