Amid mounting international sanctions and slowing Chinese growth, North Korea’s economy will tread a tough road this year and beyond, experts noted in early February.

North Korea, where markets have largely supplanted the planned economy, has relied extensively on exporting coal and iron to China and extracting earnings from laborers abroad.

Since its golden days of the early 1970s, when the country’s gross domestic product per capita was around $3,000, the communist state’s allocative economy has shrunk steadily, to $1,000 where it stands today.

“Good times have gone for North Korea,” said Seoul National University professor Kim Byung-yeon at a seminar hosted by the East Asia Foundation. “Slowing growth, a decrease in currency revenue and a lack of economic understanding and willingness to reform will drag on the North’s fledgling private economy.”

Describing the bifurcated economy as “peculiar,” Kim, who has a doctorate in Soviet economics, indicated that market activity has grown rapidly to occupy 70-80 percent of national wealth. Based on his own data, he claimed that the growth rate between 2011 and 2014 was about 2.3 percent (1.1 percentage points by foreign trade, 0.5 percentage points by agricultural reform and the remainder by marketization), while last year it was minus 1 percent due to the aforementioned limitations. 


Contrary to common assumptions, the scholar said, the North Korean economy is highly open, with trade making up half of GDP, close to the average of the Organization for Economic Cooperation and Development member nations.

On foreign trade, China makes up 70 to 80 percent of the North’s total trade volume, with North Korea’s exports to China more than doubling to $2.8 billion between 2010 and 2014. South Korea’s share of North Korean trade, which has steadily fallen since 2007, fell to just over 20 percent last year, according to the Korea Trade-Investment Promotion Agency.

Agricultural reforms since 2012 have given autonomy and incentives to individual households, allowing them to keep 60 to 70 percent of yields and leading to an annual 4 percent increase since 2010.

On marketization, “donju,” meaning private financiers, play the role of banks in funding private businesses for trade, transportation and services, and government projects for construction, mining and other nonmanufacturing activities. According to the professor, Kim Jong-un protects and assists donju, and firms are affiliated with the party, military and cabinet.

Nowadays in the North, Kim said, most households and party members rely on the market to survive.

“With an official monthly income of only about $30 to $60, they cannot make ends meet without resorting to informal market activities, which account for 70 to 90 percent of household incomes,” he said.

Ten percent of household expenditure is spent on bribes and a large portion of food allocated for rationing is stolen and sold in the market, Kim said, adding that the level of bribery is more than twice that in erstwhile Soviet Union during the late perestroika period in the 1980s.

As a principal cause, the scholar stressed: “The market economy is not compatible with dictatorship. In the long run, the system will be difficult to sustain, as self-enriching elites will be less loyal to Kim Jong-un over their material interests.”

As proof, Kim mentioned Kim Jong-un’s once-powerful uncle, Jang Song-thaek, who was executed in late 2013 on charges of treason and amassing wealth by trading with China.

“Market activities have changed people’s social norms and mentality. That may be why Kim is resorting to fear politics of purge and execution,” the professor explained.

In a separate venue hosted by the Korea Policy Foundation, Cho Bong-hyun, senior analyst at the Industrial Bank of Korea Economic Institute, emphasized: “North Korea’s young elites are very different from their predecessors. Whereas it was all about Kim Il-sung (Kim Jong-un’s grandfather and founder of the North), the party and loyalty before, it is now about all money, business and dreams.”

Pyongyang is shifting its focus from the military to the party to the economy, Cho highlighted, referring to priority areas of electricity, coal, iron, railroads, agriculture, fisheries, livestock, light industries, construction, science and technology and forestry.

“There is a comprehensive institutionalization of the market economy, spurred by over 400 markets across the country.”

Cho noted that the value of Pyongyang’s exports of underground resources to China, mainly iron and coal, dropped 13 percent last year from the previous year due to falling international prices. Agricultural production also decreased by 14 percent during the same period due to drought, while revenue from dispatched workers abroad -- Russia for timber and construction and China for textiles and fishing -- declined sharply from depreciation of the ruble and yuan.

Um Jong-sik, former vice minister of unification and senior adviser at the foundation, underlined that unofficially tallied laborers near Chinese and Russian borders, working as cash cows for the regime, were estimated to be some 500,000.

Regarding the recent closure of Gaeseong industrial park, Yoo Wan-young, chairman of SGI Consulting Corporation, said: “Pyongyang has long said it was OK to close the complex. It has blazoned since last year that it would supply the displaced skilled workers to China, particularly to factories in Dandong and Sinuiju, which are suffering from manpower shortages as ‘joseonjok (ethnic Koreans in China)’ have all moved to Korea.”

South Korean companies will suffer the most, Yoo argued, adding that purges and executions of most pro-China figures in North Korea are complicating Seoul’s unification diplomacy.

“As Seoul is readying for the general election in April and Washington is gearing for the presidential election, there is really no country that can chasten Pyongyang,” Yoo said. “Kim Jong-un is in firm control of his regime.”

By Joel Lee (joel@heraldcorp.com)