Departments
Impact of Global Economic
Crisis on North Korea
LEE Han-Hee
Realities in North Korea
North Korea’s economic hardship has continued in a vicious circle primarily due to the inherent nature of the country’s planned economy, where politics matter more than anything
else and state-planned and managed economic
operations have efficiency problems. With a
lack of resources, in particular, the communist
country has experienced difficulties in the
whole process of input and output. This creates
a vicious cycle wherein a shortage of materials
causes problems in improving facilities, developing advanced technologies and conducting
research and development, thereby causing a
further deterioration in industrial productivity.
|Figure 1
Resources are lacking even within the food sector. This leads to fewer agricultural inputs (fertilizers and agricultural machinery), creating a
decline in agricultural productivity and ultimately a chronic food crisis. In present day
North Korea it is common to see individuals
and companies secretly hoarding state resources by reporting minimum production capabilities and outputs while at the same time maximizing their demand for production resources.
This is primarily due to the gap between reality
and state-led planning, plus the lack of “incentives to produce more.”
Placed at the top of priorities in the North Korean economy are the “elite economy” and “mili-
Vicious Circle Surrounding North Korea’s Chronic Economic Difficulties
-Limited agricultural inputs (agricultural machines, fertilizers and seeds)
-Difficulties in food imports
-Production setback due to natural disasters
-Lack of incentives lowers the farmers’ productivity
-Reporting of minimums in production capabilities while increasing
demand for additional resources
-Procurement of resources through secret hoarding or bargaining
Decline in Industrial
Production Rate
-Shortage of material supplies
-Inefficient distribution of resources
-Delay in improvement and repair of production facilities
-Difficulties in introduction of advanced technologies
-Lack of incentives lowering productivity of workers
-Reporting of minimums in production capabilities while
increasing demand for additional resources
-Procurement of resources through secret hoarding or bargaining
Food Crisis
Lack of Capital
Energy Crisis
-Moral incentives
-Heavy industry-oriented
-The point of agriculture is to contribute to industrial development
-Inefficiency of centralized planning and control system leads to
shortages and extravagance
-Confrontation with capitalist countries
-Politics the most important factor
Isolated, Socialist
Planned Economy
-Crude oil imports face difficulties
-Outdated mining equipment deteriorates further mining endeavors
-Inefficient distribution of coal due to shortage in transport vehicles
-Lack of incentives lowers the productivity of miners
July 2009 | SERI Quarterly | 115
Impact of Global Economic Crisis on North Korea
tary supply,” both of which focus on maximizing the economic comfort of its leader Kim
Jong-Il and the elite. The private economy (or
“secondary economy”) for North Korean residents is lower down the priority list. Even in
times of chronic shortages amid an economic
crisis, the state used to distribute resources and
materials according to this priority sequence.
Thus, only the Kim Jong-Il-centered economic
area, coined the “royal court economy,” is
looked after properly. Under these circumstances, a market mechanism is being formed in
North Korea. As distribution problems occur,
people have begun to trade necessities among
themselves. And as this vicious cycle persisted,
markets were formed.
Unable to offer any
solutions to address the
economic crisis, North
Korean authorities have
inevitably legalized
trading activities, thus
clearing the way for the
emergence of North
Korea’s “comprehensive”
market
Unable to offer any solutions to address the
economic crisis, North Korean authorities have
inevitably legalized such trading activities, thus
clearing the way for the emergence of North
Korea’s “comprehensive” market: It was the
most famous economic policy, so-called “July
1st Economic Reform Measures.” Based on its
judgment that such market expansion poses a
potential threat to regime stability, the state is
now tightening its grip to prevent markets from
spreading further. However, the effectiveness of
the state’s attempt to do so remains uncertain,
as market forces have already spread widely
across the country.
cies are using both “planned” and “unplanned”
channels in their businesses to earn foreign currencies. They provide the state with a certain
portion of their foreign currency earnings while
retaining the rest.
North Korea’s official economy is run with foreign currencies gained from the shipments of
natural resources, primary products and labor
which are then used to import petroleum, food
and daily necessities. Due to chronic shortages
and a lack of production capabilities, North
Korea has no option but to import most of its
daily necessities and products from foreign
countries. Demand for foreign currencies, especially the US dollar, euro and the yuan, is high
due to the North Korean won’s low currency
value. Individuals, enterprises and state agen116 | www.SERIWorld.org
Impact of Global Economic
Crisis on North Korean
Economy
The elite sector, led by Kim Jong-Il, controls the
core areas of foreign currency earning businesses, including gold mines, zinc refining and exports of high-end agricultural and fishery products. Led by the Communist Party’s foreign
currency earnings department, so-called ‘Room
38,’ North Korea is going all-out to accumulate
more foreign currencies through several institutions assigned to foreign-currency denominated
earnings, such as hotels, foreign currency shops,
restaurants and banks. This is the common
practice for military authorities as well.
Under these circumstances, the global economic crisis could deal a blow on businesses, tourism income and international investment in-
LEE Han-Hee
|Figure 2
Market-Forming Process
Black markets are also
being established
Difficulties in food rationing (i.e., rice)
Repeated stoppage
in food rationing
Chronic
shortage
Short-term solution
– Hunger
Planned mechanism
hits a snag
Residents begin
trading and exchanging
daily necessities
with each other
Necessity to create
a place where
exchanges can
be invigorated
Market established
(i.e., general market)
Emergence of capitalists
with accumulated capital
Small markets established
(e.g., farmers market)
-Upscaling through attraction
of additional resources
-Producers make false
reports about outputs and
sell the excess in markets
Manufactured goods
are beginning to sell
out in markets
Interestingly, profit-making is possible, where the
state-fixed price is lower than market price
f lows. North Korea is also earning foreign
currency through overseas construction, restaurants and sewing businesses. For example, the
country has construction interests in the Russian and Middle East construction markets,
runs its own restaurants in China and Southeast Asia and has sewing businesses in Southeast Asian and Eastern European markets.
Amid the recent global economic slump, Middle Eastern and Eastern European countries
have suffered from a severe decline in activity.
This would make it more difficult for North
Korea to earn foreign currency through its service businesses and its exporting of construction workers. Moreover, investments in North
Korea have the potential to ease financial flows
from China, the Middle East and EU that seek
business opportunities in the areas of natural
resources, construction and mobile telecommunications are highly likely to delay. Earnings at
hotels and restaurants, which mainly depend
on the pockets of visiting foreign investors,
could plunge.
In particular, the global economic crisis may
weaken the cash-based political influence that
Kim Jong-Il wields on the country’s elites.
North Korea’s core group of leadership has enjoyed an extravagant life filled with luxurious
goods from China and Southeast Asia.1 Kim is
known to have spent foreign currency generously to handle the elites. The global economic
crisis could potentially dampen the foreign economic activities of North Korea’s institutions
that make foreign-currency denominated profits, thereby weakening the political influence of
the core leadership group.
The global crisis, in particular, is expected to
cause trouble in North Korea’s foreign trade, especially with China. North Korea-China trade
1 Hwang
Jang-Yeop, a former major politician in North Korea who defected to South Korea in 1997, said “Kim Jong-Il turned the
North Korean economy into his personal economy that managed his own interests. By doing so, he reorganized not only the social
management system but also the ownership and governance system into feudal systems.” – “Life of the Nation is More Precious
Than Those of Individuals.” The Spirit of the Times (1999), p. 15, 89
July 2009 | SERI Quarterly | 117
Impact of Global Economic Crisis on North Korea
accounts for about 25% of the country’s real
economy.2 Trade between the two countries totaled US$2.78 billion in 2008, up 41.2% from a
year earlier (exports were up 29.6% with imports
up 46%).3 Roughly 80-90% of the goods available at North Korean shops and markets today
are Chinese-made. North Korea relies heavily
on China as it is without the in-house capability
of producing simple products, even toothbrushes. Accordingly, an attempt by China to lower
import prices of products from North Korea
due to the global economic slump could deal a
heavy blow to North Korea’s foreign currency
earnings. In 2008, North Korea shipped US$201
million worth of coal, US$172 million worth of
iron ore and US$35 million worth of pig iron to
China, increasing on a year-to-year basis by
23.8%, 115.5% and 57.8%, respectively. Amid the
possibility that the global economic crisis may
lead to a decline in Chinese exports and a contraction of its domestic economy, so will North
Korea experience similar hardship due to its
heavy reliance on China.
For North Korea, which is totally dependant
on imports of strategic resources such as crude
|Table 1
The global crisis is
expected to cause trouble
in North Korea's foreign
trade, especially with
China. North Korea-China
trade accounts for about
25% of the country’s real
economy
oil, a possible decline in international raw material prices resulting from the global economic
recession could be seen as a favorable factor.
However, a change in international raw material prices would not be completely advantageous
to North Korea considering that it has imported raw materials from China at levels cheaper
than market prices under mutually-favorable
transaction agreements (considered “hidden
aid” from China). The global economic crisis
may in fact cause trouble for North Korea’s exports of raw materials.
North Korean Trade With China
Year
(Unit: US$1,000, %)
2000
2001
2002
2003
2004
2005
2006
2007
2008
37,214
166,797
270,863
395,546
582,193
496,511
467,717
581,521
754,046
(-10.8)
(348.2)
(62.4)
(46)
(47.2)
(-14.7)
(-5.8)
(24.3)
(29.7)
450,839
570,660
467,309
627,995
794,525
1,084,723
1,231,886
1,392,453
2,033,233
(37.2)
(26.6)
(-18.1)
(34.4)
(26.5)
(36.5)
(13.6)
(13)
(46)
Total
488,053
737,457
738,172
1,023,541
1,376,718
1,581,233
1,699,604
1,973,974
2,787,279
Trade Surplus
-413,625
-403,864
-196,447
-232,448
-212,332
-588,212
-764,168
-810,932
1,279,188
Export
Import
Note: The figures in the parenthesis refer to % change
Source: Korea International Trade Association (KITA.net)
2 The
Bank of Korea estimated the size of the North Korean economy at about US$27 billion (GNI). However, the size of the
real economy was estimated to be US$12~13 billion as of 2008
3 North
Korea is also trading with Thailand, Russia and India. However, the trade volume is trivial. World Trade Atlas (2009)
118 | www.SERIWorld.org
LEE Han-Hee
North Korea’s Choice in Times
of Global Economic Slump
Since 1998, the North Korean leadership has extensively propagandized to its people that the
country will emerge as a Strong Big Power
(philosophically, economically and militarily)
by 2012. The country has already completed its
mission in terms of ideology. To become a
strong military power, North Korea is attempting to arm itself with nuclear weapons. To
achieve this end, the country has continuously
conducted nuclear tests. Based on its judgment
that a trade off between security and a growing
economy is impossible, North Korea is deploying a two-pronged strategy. On one hand, it is
attempting to maintain security through deals
with the US; on the other, it is relying on China,
Russia and South Korea for economic support.
The Obama administration has made overcoming the economic crisis its top priority and, even
among the foreign policy goals, North Korea
has become less important. North Korea is thus
taking overt actions (including provocative military acts) to establish a new framework for relations with the US. In recognition of the lessons
of history that provocative actions should not
damage the vital interest of its enemy if it cannot be eliminated, North Korea is expected to
antagonize mostly on a politically rhetorical level. North Korea is also attempting to shake
South Korea, to try to convince the South Korean people that the South Korean government’
s current foreign policy is misguided. Even from
an internal point of view, North Korea must
take a hard-line stance as military authorities,
whose support is much needed to establish a
post-Kim Jong-Il system, attempt to paint
North Korea as an internationally-acknowledged country of nuclear arms.
Although China displays considerable uneasiness about recent provocations, North Korea
seems to believe such actions are better than remaining calm. It likely believes that this will
drive China, which is a rival of the US and is less
likely to join hands with the US against North
Korea, towards intervening more actively.
North Korea’s political and economic position
is expected to be weakened further due to the
global economic crisis and its political brinkmanship. This will end up making the country
even more dependent on China. For China, it
would be increasingly necessary to manage and
prevent North Korea from exerting any harm
to China’s own economic development. This explains why China is opposing North Korean
nuclear tests more firmly now.
The overall situation has been complicated further by the new UN Security Council resolution
adopted recently. The new resolution represents
a clear and substantial expansion of economic
and financial sanctions compared with the previous UN resolution. The new sanctions will exacerbate further the impact of the global economic crisis on the North Korean economy by
hindering its foreign cash business. However, it
will likely be the case that the regime considers
the shaping of the post-Kim Jung-Il era to be
far more important than managing the economy, as it is the Shakespearian question of “to be
or not to be,” especially when Kim’s health is in
doubt. The regime could well increase its brinkmanship.
LEE Han-Hee is a research fellow at SERI. He was a former
staff member of the World Bank, in charge of North Korea development planning. He received his Master’s degree in Public
Policy from the John F. Kennedy School of Government at Harvard University and completed the Ph.D program at University
of North Korea. Contact: [email protected]
July 2009 | SERI Quarterly | 119