August 2017 Newsletter
Piercing the Veil of North Korea
In this Issue
As tensions on the Korean peninsula rise to their greatest level in recent years, we look at the economics of the reclusive nation and the ties they have to the rest of the world.
The first thing to note when discussing the economics of the Democratic People’s Republic of Korea (DPRK) is that the data does not come from the DPRK itself. Rather it is inferred through intelligence agencies, analyzing data from Chinese sources, or through the South Korean central bank, which has been publishing GDP data on the DPRK since 1991. As a result, it is one of the opaquest economies on the planet.
It is true that on comparative terms, the economy of the DPRK is but a fraction of the South Korean economy. Real GDP in US Dollar terms of the DPRK for 2016 stood at $28.5 billion versus the $1.34 trillion for South Korea. The life expectancy at birth in the DPRK is a full 10 years less than their Southern neighbors and it is consistently ranked as one of the most economically repressed countries in the world. However, the narrative in the West that the North Korean economy is under imminent threat of collapse from sanctions pressure does not appear to be borne out in the available data.
Figure 1: North Korean versus South Korean Real GDP per capita 1950-2010
Since the early 1970’s the South Korean economy has experienced one of the highest growth rates in the world, while the DPRK has remained at relatively the same level for decades.
According to the central bank of South Korea, GDP in the DPRK rose 3.9% in 2016, the fastest pace in 17 years. They also reported a boost in exports by 4.6% and a boost in imports by 4.8%. All this even though trade between the two Koreas plunged 88% due to the shutdown of the Kaesong joint industrial zone after the North tested a ballistic missile in February 2016. These statistics are certainly not indicative of a country that is on the brink of economic collapse.
Figure 2: Ryomyong Street in April 2017
There are over 20 towers standing up to 48 stories tall in Pyongyang, as Kim Jong Un has inaugurated a grand, new apartment complex nearly every year since he assumed power in 2011.
In addition to the economic statistics, there is tangible evidence that the sanctions imposed by the Western powers have been largely ineffective. The capital city of Pyongyang has seen a construction boom over the last several years, thanks to Chinese aid and the reallocation of conventional defense spending to the civilian economy. It is difficult, if not impossible, to know how many of the shiny new skyscrapers in the capital are merely propaganda stunts, like the infamous 105-story shell of the Ryugyong Hotel, but the evidence points more to function than to simple propaganda. The Mansudae People’s Theatre in 2012, Munsu Water Park in 2013, and the Sunan airport in 2015 are all large, functional construction projects undertaken and completed during a time of increasing international sanctions.
Figure 3: Total Trade Volume: North Korea and China 1999-2016
While there has been a decrease in total trade volume since the highs of 2013, trade between the two nations is still more than double what it was a decade ago, hardly indicative of a Chinese government actively participating in international sanctions pressure against the regime.
There are many potential explanations for how they have pulled this off. One aspect is that in a state-run economy, the concept of cost differs greatly from a market economy. If most of the work is done by the military, labor cost is low. If most of the building materials are supplied by state-run companies, material cost is low. Other explanations include the injection of private North Korean capital and the de facto subsidization of the DPRK by China.
Regardless of the explanation, it is apparent that the North Korean regime is far from failing, and has in fact been strengthening in the face of international sanctions. This is troubling for the international community as Kim Jong Un has struck a different tone than that of his father in terms of the country’s nuclear and ballistic missile programs (figure 5), and despite having an economy just 2% the size of South Korea’s, the conventional military might between the two countries is on pretty equal footing.
Figure 4: North Korean Imports / Exports with China as a Percent of Total
The sanctions by the rest of the world will not have a material impact on the ability of the North Korean regime to continue its current nuclear and military program without the help of China.
Figure 5: Ballistic Missile Launches by Year and Leader
While Kim Jong Il was no stranger to provocation and military tests, the frequency and pace of the program under Kim Jong Un has advanced significantly.
It is apparent that with such a high percentage of North Korean trade being conducted with China, that they are the only country with the power to reign in the nuclear and ballistic missile programs of the DPRK through economic pressure alone. Without a significant change in policy from the Chinese, it is likely that the economic sanctions imposed by the rest of the world will continue to be ineffective.
In the last several weeks, Chinese officials have indicated that they will indeed ratchet up the pressure, but it remains to be seen how much of the rhetoric is actually implemented into policy, and how much of that policy is not simply ignored by the local officials and business people conducting transactions on the ground.
Chart of the Month
The military statistics on the Korean peninsula paints a picture of a far more balanced set of opposing forces than the economic statistics.
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