North Korea's economic catastrophe will only worsen
New information sheds light on the North Korean economy’s disastrous state; no prospects of improvement are in sight
The latest evidence regarding North Korea's economy points in a single direction: chronic, extreme and worsening underperformance. Pyongyang does not publish figures, but data and estimates produced in Seoul show that North Korea’s GDP shrank by 4.5% last year, its worst fall for 23 years, and trade hit a 30-year low. In June, supreme leader Kim Jong-un called the food situation “tense” and in August he dispatched troops to help deal with flooding.
What next
If extreme weather -- drought, followed by typhoons -- persists as in 2020, and trade does not resume, the economic disaster will deepen. This increases the risk of regime change, but there is no inevitable tipping point; the regime could persist indefinitely, no matter how impoverished. Similarly, reliance on Chinese aid will grow further, increasing the chance of more active intervention in North Korean politics.
Subsidiary Impacts
- Small signs of fence-mending and lack of weapons tests may imply sufficient desperation for Kim to start, or feign, denuclearisation talks.
- Kim's choice to halt to all foreign trade is an overreaction to COVID-19; a second wave in China will fuel this paranoia.
- Kim's explicit rejection of foreign aid will be hard to reverse, but not impossible if he is desperate and a face-saving mechanism is found.
Analysis
Pyongyang stopped issuing regular economic statistics in the 1960s. Since 1991, South Korea's central bank, the Bank of Korea (BOK) has published annual estimates.
Sources and methods are undisclosed, so there is some cause for scepticism. Still, this yields a 30-year series using consistent methodology.
Its latest report, covering 2020, came out on July 30. The 4.5% GDP slump was the worst since a 6.7% contraction in 1997. GDP fell by half in the 1990s, after the Soviet Union ended subsidies and then collapsed, leading to a famine in 1995-98, with at least 500,000 deaths.
After slow recovery in the early 2000s, the past decade has seen stagnation. Northern GDP last year was no higher than in 2003, at KRW31.4tn (USD27.4bn).
The worst-performing sectors were agriculture (down 7.6%) and mining (down 9.6%).
Manufacturing and services registered smaller falls (3.8% and 4.0%).
Construction and utilities each posted modest growth (1.3% and 1.6% respectively).
Several factors contributed to the largest falls:
- Typhoons in late summer pounded fields and flooded mines (see NORTH KOREA: Rare admission reveals economic strain - August 25, 2020).
- Mining suffered additionally under UN Security Council sanctions, which since 2016 have banned many key mineral exports.
- Draconian anti-COVID-19 curbs decimated fisheries, confining most vessels to port.
Farming and mining remain vital to the economy, at 22.4% and 10.8% of GDP respectively.
Trade
South Korea's official Korea Trade-Investment Promotion Agency (KOTRA) tallied North Korea's trade last year at USD860mn, down 73.4% from 2019's USD3.5bn.
Unlike the BOK's GDP figures, which are estimates, KOTRA's data are garnered from Pyongyang's trading partners.
However, they are incomplete:
- North Korea's large chronic trade deficit hints at aid and other hidden support from Beijing.
- China's data also omit trade that violates sanctions (eg, widely observed oil transfers at sea).
- Illicit North Korean activities such as cybertheft continue, as may its undeclared arms exports (see NORTH KOREA: Cybercrime capabilities are evolving - October 9, 2020).
North Korea never traded much and has always run deficits, first with the Soviet Union and later with China, which grew to comprise some 90% of all its trade.
Beijing's efforts to make trade a genuinely two-way endeavour have borne some fruit. By 2016, North Korea's total trade reached USD6.55bn, with exports of USD2.82bn not far behind imports worth USD3.73bn. However, tighter UN sanctions thereafter squeezed exports, reducing commerce and widening the imbalance once more.
Kim's response to the COVID-19 pandemic has done even more harm, causing trade to plummet from a total already barely half of 2016's peak. The traditional huge imbalance is back: Pyongyang's 2020 exports were a paltry USD90mn, against imports of USD770mn.
If the border stays shut to most trade, 2021 may be no better. This will hit consumption by Pyongyang's elite and hurt everyone by squeezing the private markets on which most households depend for food and often income. The coming months may therefore see selective resumption of trade.
Inter-Korean disparity
The quantitative chasm between the two Koreas, already vast, continues to widen. In 2020, North Korean gross national income (GNI) was KRW35tn, according to the BOK: just 1.8% (1/56) of South Korea's. The South's population being twice as large, its GNI per capita gap was 27 times the size of North Korea's.
For trade, the gulf is even larger: above 1,000:1 overall, but over 5,700:1 in exports and 600:1 in imports. In 2020, South Korea exported more in two hours than the North achieved all year.
South Korea exports more in two hours than the North Korea does in a year
Underperforming and unrealistic
As with statistics, Pyongyang no longer publishes its economic strategies. No details were revealed about the new five-year plan announced in January.
However, researchers in Seoul have obtained an official document from 2015 summarising its predecessor, the Five-Year Economic Strategy covering 2016-20.
This is revealing in at least three ways.
Great leap backwards
Startlingly low numbers suggest the economy never recovered from the 1990s disaster. In key sectors, output in the 1980s or even 1970s reached heights not attained since. North Korea's best year for grain production, as also for fertiliser and fabric, was 1979. Coal and electricity both peaked in 1988. Even after the catastrophic 1990s, there was no full recovery. Comparing 2003-13 with the pre-crisis decade 1980-90, electricity generation only averaged 73% of its earlier level. Other sectors performed much worse: cement 45%, coal 35%, and steel a disastrous 5.3% of past levels.
Output in many sectors peaked in the 1980s, reaching heights never regained since
Population puzzle
Grain production was more stable, at 6.14 million tonnes in 2014. However, supply per capita fell from 404 kilogrammes in 1979 to 301 in 2014. The latter figure implies a total population of just 20 million, far less than the 25 million officially claimed.
Possible explanations include the long-suspected exclusion of the country's million-strong army from some data, and the possibility that the highest estimates for famine deaths in the 1990s, 3 million, may be correct after all.
High hopes
Given this background of chronic underperformance, the Five-Year Economic Strategy had unfeasible goals.
Claiming average annual growth of 5.7% for 2002-14 -- well above the BOK's estimates -- Pyongyang sought to raise this to 8%. Individual sectors were set far higher targets. Cement, coal, electricity, fabric and fisheries were all meant to grow by 20% or more annually, so as to double output (or more) by 2020. Steel was supposed to soar tenfold during the period.
None of this was attained. Details are lacking, but data furnished to the UN by Pyongyang claim only 5.1% average growth (likely exaggerated) for 2015-19, covering most of the plan's duration. In November last year, Kim Jong-un admitted failure, blaming sanctions and accusing officials of subjectivity, formalism and "not guiding their sectors scientifically". In all likelihood, the new five-year plan is similarly divorced from reality and similarly likely to fail.
