Economic studies
North Korea

North Korea

Population 25.49
GDP per capita 1,252
E
Country risk assessment
E
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Synthesis

MAIN ECONOMIC INDICATORS

 

  2016 2017 2018 (e) 2019 (f)
GDP growth (%)* 3.9 -3.5 -1.0 2.0

(e): Estimate. (f): Forecast. *Approximate data based on available sources.

STRENGTHS

  • Bilateral talks with South Korea increase likelihood of economic integration
  • Secondary markets provide shelter from international sanctions
  • Young population; low labour costs
  • Borders with China and Russia
  • Extensive mining resources still unexplored

WEAKNESSES

  • Economic and political isolation
  • Chronic shortages of food and electricity
  • Military spending dwarfs investment in productive sectors
  • Extreme poverty (half of the population)
  • Lack of infrastructure

Risk assessment

 

 

Easing of international sanctions to boost growth

After a year of thawing diplomatic relations, it is likely that sanctions on North Korea will ease going forwards, allowing the economy to expand after two years of contraction. The end of strict sanctions will allow imports from China and Russia, the country’s main trading partners. Despite these imports, the economy will continue to grapple with chronic shortages of energy, food and other basic consumer staples. The agricultural sector accounts for a large proportion of output (25% of GDP), but remains largely state-owned and unproductive. On the external front, exports of coal to China will increase foreign exchange reserves and government revenues. Additional revenue should be supportive of higher government spending, including in the state-dominated services sector (30% of GDP). Improving diplomatic relations should also lead to higher tourism revenues. The development of the Wonsan-Kalma coastal tourism zone should help to boost tourism, bringing in necessary foreign exchange while also promoting domestic demand. Progressive reduction of military spending should also help unlock growth potential. However, inflation ought to remain quite volatile considering the complete external dependency for oil and frequent shortage of consumer staples. The won should continue to be subject to depreciatory pressures (it is mostly traded on the black market).

North Korea’s economy is characterised by central planning and strict state-ownership of capital and resources. However, growing economic liberalisation is likely, as Kim Jung Un has suggested that North Korea should pursue a model similar to Vietnam during the 1980s (Doi Moi Policy), combining market reforms and better ties with the West while guarding political control. This is in keeping with the byungjin line, which pursues the parallel development of the economy and nuclear weapons, as significant progress has been achieved on the latter. Moreover, since the end of the 1990s, the market economy has been nascent with illegal smuggling and bartering initiatives. And since Kim Jung Un came into power, markets, or jangmadangs, have doubled in size and number, and currently allow a share of the population to show entrepreneurial endeavours and supplement their income. Furthermore, warmer relations with South Korea should boost the manufacturing sector (20% of GDP), with the reopening of the Kaesong Industrial Zone, a huge special administrative industrial region on North Korea’s southern border closed by South Korea in 2016 following Pyongyang’s fourth nuclear weapon test. Increased FDI from South Korea and Japan will greatly aid development. Rapprochement could also provide impetus to the construction sector, as North and South Korea endeavour to build connectivity infrastructure (rail and road).

Denuclearisation continues to shape diplomatic relations

Supreme Leader of North Korea Kim Jong Un succeeded his father in 2012. He controls the three main administrative bodies on North Korea: the Workers Party of Korea (WPK), the Korean People’s Army, and the State Affairs Commission. Elections to the Supreme People's Assembly (the legislature) are held every five years; the next ones are due in 2019. However, Kim Jong Un’s position is unlikely to be challenged as he has been effective at consolidating power. Moreover, he faces less opposition, following from the execution of his uncle Jang Song Thaek in 2013 and the assassination of his step-brother Kim Jong Nam in Malaysia in 2017. Policy making is centralised and is conducted in Soviet-style five-year plans; the current plan concludes in 2021.

In 2017, North Korea tested launches of long range missiles that could reach US territories and continued to enhance its nuclear capacities. In response, the US led a “maximum pressure” strategy to force North Korea to denuclearise. The UN Security Council voted for sanctions to cut exports by 90% (coal, iron ore, seafood, and textiles) and oil imports by 55%, thus curtailing North Korean revenues and its most crucial imports. Moreover, the US consolidated economic isolation by denying third country actors not complying with UN sanctions access to US markets. This unprecedented pressure level (China and Russia also applied sanctions) is thought to have led to two years of economic contraction. However, since then, US President Donald Trump revived diplomacy in March 2018 and relations with China and South Korea improved. South Korean President Moon Jae-in has set an ambitious agenda for increased economic integration and cooperation on social and military issues, which was advanced in 2018 as he met with Kim Jung Un on three occasions. The Panmunjom Declaration was adopted on April 2018, with both sides agreeing to work together to end the Korean War and promote the Denuclearisation of the Korean Peninsula. The country will benefit from the pragmatic stance of the South Korean President in his pro-engagement policy and from the tensions between the United States and China that will hamper cooperation efforts to apply economic sanctions. While the issue of denuclearisation will take longer to clear, the growing dialogue should allow for some sanction easing. Although China is applying the sanctions since the second half of 2017, the border with China and Russia allows the country to benefit from some supply, international sanctions notwithstanding.

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