Author: Marco Zecchillo (Senior Researcher GEO – Economics)
Abstract
North Korea’s past is very similar to its present and, perhaps, its future, in economic terms. The centrally planned economy that it hosts was non-receptive to global changes and to the regional trends of development (which underwent various phases), signalling a unique trend of constant wealth decline, started at least in the mid-1990s. 2022 saw North Korea resuming its nuclear programme tests in a way it had not done after 2017. This has re-ignited the debate for the application of sanctions, and whether these are truly effective in a sealed-off economy. Sanctions can be of different natures: import and export bans or quotas in some sectors or direct targeting of corporations closely linked to the party leadership. As far as the former are concerned, different rounds of sanctions are producing encompassing effects on types of commodities for which DPRK has a particular demand (as tobacco or petroleum). Are these effects, in their respect, significant in establishing a negotiating leverage or in applying pressure on the regime? This depends on several factors, such as the precise destination of sanctions, the coordination of the international community and the role played by China in controlling the shadow market in its trade relation with North Korea.
North Korea as a Relic of World War Two: Historical Views
The Second World War might be easier to insert in a timeframe in its European theatre. In the Old Continent, World War Two appeared in a moment in which no major fighting between powers had taken place in the previous decades, the years following the end of the first major global confrontation. As several scholars acknowledge, World War Two in Asia is a more nuanced phenomenon, making it harder to specifically define its start and its end. Before 1939, for Korea (and the rest of the East Asian region), Imperial Japan had undergone a process of rearmament and all-out nationalism, a slow pile up of capabilities spread across the decades following the Meiji Restoration period, epitomised by the earliest confrontation with the Korean Peninsula. After the end of the First Sino-Japanese War (ended with the Shimonoseki Treaty) and the watershed victory over Tsarist Russia (1905), Japan was able to develop a full-blown rule over the peninsula. In the previous centuries, Korea, known by political scholars as the Hermit Kingdom, could be interpreted as a monolithic agent, fully siding with Chinese trade and political influence. The organic character of the peninsula before these events presents itself as steeply contradicting the current configuration of the area. Similarly, as WW2 ended with Germany’s annihilation (the Stunde Null, its Year Zero), marked by particular breakthrough and pinned events (as the deaths of the two dictators, which occurred across the span of 3 days, from April 28 to April 30 1945; or Germany’s final surrender officially formalised on May 8), the end of the war in East Asia is more nuanced and gradual, if it ended at all.
So-called “hallmarks” still define the politics and economic relations of the area, as South Korea’s alert stance vis à vis Japan, seen all the scars deriving from the heavy handed imperial rule in the early 1900s. However, most paradigmatically, one of the key vestiges of that past is the encompassing presence of Communist politics and economic practices which still characterise the People’s Republic of China and North Korea. The Soviet Union and PR China are, de facto, World War Two winner powers, with all the due differences in economic and ideological terms, making the Socialist World the farthest away from the definition of Monolith. The incoming bipolar moment in international relations is, therefore, clearly defined by the emerging order of the winners, or better, survivors of the second global confrontation. If, in Europe, this is less visible, in Asia it does still produce significant effects. The Korean War and the subsequent North-South divide of Korea are, in this respect, an evident symptom of these developments that stills defines today’s world, which further constrain domestic policymakers’ choices in the United States of America. Provided the enormous cleavages that are presented in the region, a different US stance is met by diverse answers by its the historical allied dyad (Japan and South Korea). In Cold War terms, the hub-and-spokes system set in place by the USA in the region may still be relevant nowadays.
North Korea stems out of this discourse, seen all these premises, as a direct by-product of World War Two. Its apparently constant leadership held by the Kim Dynasty makes DPRK (Democratic People’s Republic of Korea) the state of the area that has possibly mutated the least, embodying an anachronistic relic of this war torn past. China, albeit still in the hands of its Communist Party, has evolved its standing in global affairs and markets, by uniting the Confucian legitimising tradition and newer ideals to envision its rise. Japan exited the war as dust and rubble, but it was able to strongly emerge as the world’s second largest economy in the 1970s and develop “niche” markets in which it could enjoy a comparative advantage, as the electronic sector.
Nevertheless, the most astonishing instance of economic stagnation of the DPRK appears when compared with its Southern neighbour. A stagnating output, in a context of sustained growth (at alternate phases) of the neighbours does entail, per se, a relative decline. As a country struggles to converge, for a variety of reasons later specified, it is likely that the longer the relative decline is, the less likely it is for that state to ever fill that gap.
Visualising Relative Decline of DPRK after the Korean Peninsula Split
We further the analysis by taking into consideration the GDP growth rates of the two countries, by utilising the data from The Maddison Project. Noticeably, the Koreas appear to be starting their path at comparable levels. In the South, the GDP per capita of 1955 was 64$ (Choi, 2017), in a country plagued by hunger, poverty and starvation. As Japan fully emerged in the 1960s, due to the security umbrella of the US, which allowed the nation to focus only on economic output growth, South Korea lagged around 15 years back. We hereby display the estimated GDP (in US dollars, purchasing power parity adjusted) in 1960, 1975, 1990, 2005 and 2020 for South and North Korea, as to shed light in a visual manner on the prolonged status of stagnation of the economy. An analysis of GDP per capita would be more well-placed, but data for North Korea are lacking. In order to better see the graph, provided the extensive differential in the values, we take the respective logs of the observations. Each unit change underlines a 10-fold increase of the value.
Figure 1. Source: The World Bank, 2020. Graph: Mondo Internazionale, 2022
As soon as the conglomerates (chaebol) started gaining traction in the nation, focusing on the electronic sector (which became and still is the most exported set of goods, at an estimated level of 160 Billion USD per year, in 2020) (COMTRADE, 2020), these were able to develop efficiency to exploit upcoming economies of scales. Moreover, also the impact of remittances from Vietnam has been deemed as significant (Kim, 1970) and accounting for a GDP effect of 1-2%.
These factors are in stark contrast to the developments experienced by the Southern counterpart. Its economic staggering growth will be later known, in the literature, as the Miracle on the Han River, as an oriental reminiscence of Germany’s Miracle on the Rhine River (Rok Center, 2019).
The following chart provides information on the relatively faster pace of South Korean convergence with respect to other countries. In this regard, the GDP per hour worked estimates may be instrumental in grasping what the “Miracle” was really about. The productivty figure of 2015 for each country was equalised to 100, to evaluate the approachment to that observation and the rate of approximation to that value.
Figure 2. Source: The World Bank, 2020.
The graph does not, per se, inform that South Korea is more productive than the USA. It allows, nevertheless, to notice that the southern economy had the largest relative percentage increase in labour productivity amongst the nations taken as a sample. For North Korea, data are hardly retrievable. However, provided that Figure 1 is informative of the fact that DPRK’s GDP per capita has been titling downwards for the last thirty years, it may be reasonable to infer the same idea for labour productivity, given that the latter is an endogenous determinant of the former index (Mariniello, 2015).
In the different waves of developments of the various states, North Korea appears to never take part in the regional trends and demonstrates a particular degree of secludedness, which can be ascribed to the Juche ideal, the signature element of the Kim dynasty.
Waves of growth inaugurated by Japan, followed by South Korea and the People’s Republic of China, did not produce the positive contagion effect usually associated to a more efficient regional – international division of labour (Connolly, 2015). Apparently, the high economic walls being drawn around DPRK, following the Juche’s main ideal of full self-reliance and domestic self-sufficiency, produced an economy which appears unable to fulfill the basic needs of its participants (UN, 2020). Another interesting operation to evaluate the relative decline of the North, is to see which share of the world total output is produced within that country. DPRK’s share, in 2019, was 0.02% (COMTRADE, 2019), accounting for around 18 billion dollars, whereas South’s figure was estimated to be 1.74% (The World Bank). Data reveal a substantial difference, considering that the two areas started from comparable levels of economic advancement. As the previous graph underscores, a substantial decoupling has occurred between the North and the South, with more favourable economic terms for the latter.
North Korea, therefore, displays an almost complete neglect of the international market system, with small and brief experiences of opening mainly related to cross-border industrial initiatives (as in the case of South Korea’s softer stance during the Sunshine Policy period). Apart from these short-lived experiences, the economic standing of the country remains very closed with respect to the external world. All of these aspects have caused the country to never come into contact with competitiveness and the ability to build comparatively more efficient industries. An ulterior issue to expand is that of excessive internal protection, which may cause, in this case, state firms to end up in an inefficiency spiral. With its well-known inward-looking posture, DPRK has inherently stressed the attention on protecting its internal industry. Nevertheless, a constant and endless protection may cause enterprises to grow accustomed to a favourable treatment, and free-ride on government’s endowments of resources, to never develop a sufficient degree of competitiveness (OECD, 2019).
It is also worth noting that the North had suffered a significant blow in the early 1990s, with a series of events that will result in one of the worst famines in human history, leaving an estimated 600,000 dead (US Census Bureau, 2011). As seen in Figure 1, the North appears as a singular phenomenon in world economics, provided the general consensus that economies tend to expand in the overall long-term. Differently from the Japanese, the Chinese and, most importantly, the Southern experience, DPRK seems to have reached its peak GDP in the late 1980s and to have never recovered. . Paradoxically, the Juche thought inherently pushed for self-reliance, but it had produced an economy crippled by low wages and a non-existent system of incentives to boost productivity. Moreover, it is debatable whether the strand of thought of the Northern policymakers has effectively been able to produce a shield on foreign fluctuations. The latter interpretation appears misplaced, in a scenario in which it is the policy itself being more harmful than the actual threat. A lack of flexibility of the North Korean economy has plunged the nation into deep depression and famine, for a variety of factors that were not under its immediate control (and, also, hard to curb with its self-reliance rationale), as the cutting of the link with USSR (due to its dissolution) and the series of floods that plagued the Korean countryside in 1995.
Moreover, the nation, as previously argued, has struggled to maintain its full isolation, by welcoming capital investment flowing in from China and USSR, throughout different moments of the Cold War. In this regard, the country found itself in a position of effective reliance on the Soviet Union’s aid for the first decades of the Cold War. The extensive investment of the early years was replaced with a renewed closeness to the People’s Republic of China, during the period of the Sino-Soviet split (Park, 1983). In this context, the Juche ideal is not to be interpreted as full-blown seclusion from foreign initiatives, given that, in many occasions, foreign investment entered the country, mostly in the resources sector (Bajpai, 2021). However, the effects of these opening forces appear negligible, highlighting a sealed-off system of military rents and full control of the ruling party (Heritage Foundation, 2022).
Provided the latest events pointing to renewed heated situation in the Peninsula, and the ensuing sanctions adopted by the United States, the debate shifts to whether these provisions are truly effective in producing an effective deterrent force. Arguably, North Korea’s isolation could be the key for its regime survival, given that it could hardly be affected by sanction provisions. Nevertheless, by analysing the sectors being targeted, it may be possible to evaluate potential effects, keeping into consideration the pivotal role played by China in North Korea’s trade possibilities.
2022 Developments and Sanctions
The DPRK, since March 24, 2022, was found again speeding up the tests for autochthonous nuclear weapons, in a way which was never seen after 2017 (The New York Times, 2022), one of the most tense and complex years in the history of US-North Korea relations. Suppositions refer that the renewed capability increase could have started even earlier, on February 26. The motives underlying the US involvement in the issue may arise from the long-term stake of the States with respect to the region. Having a nuclear power, capable of leveraging the neighbours, but similarly the United States directly (provided the quest to develop highly advanced long-radius Inter-Continental Ballistic Missiles, or ICBMs), threatens to change the rules of the game inside a fundamentally contested pattern of regional politics. However, after a period of rapproachment, it appeared that the missile programme would be freezed, at least in the short run. Despite these high expectations on the side of external negotiators, North Korea has allegedly resumed its project (Kim, 2022). Direct US sanctions have been applied for five entities suspected of supporting the development of WMDs in the country, in order to exert substantial pressure on the main actor, supposedly embodied by the Minsitry for Rocket Industry of DPRK (Reuters, 2022).
The targeted corporations are thought entertaining a direct link with governmental actors, following the approaches later adopted by other countries such as Japan. Also export bans, quotas or price provisions are usually regarded as a pressuring policy, as it had occurred when North Korea firstly boosted the pace of its nuclear development programme, in 2006-2007 (under Resolution 1718) (Australian Department of Foreign Affairs, 2018).
Are Sanctions Effective on Sealed-Off States?
In a context of missing data, it is challenging to robustly verify whether sanctions have been comprehensively effective in producing a deterrent or a negotiation leverage with respect to the Northern ruling class.
At the time of writing, no comprehensive package of sanctions was passed at the UN General Assembly to respond to the 2022 developments. However, as shown in past sanction-enabling acts of the United Nations framework, the agreed upon target categories of goods leave each state with a broad range on interpretation on which products are effectively sanctioned (Noland, 2008). Given the obscurity surrounding the economic context of North Korea, it is difficult to devise whether the sanctions have triggered an increase of import prices. As relative price of imports grow (Price of Imports / Price of Exports), North Korea may find itself facing a situation in which it can no longer afford certain products, reducing the domestic consumption possibilities. DPRK is, inherently, a price taker in the global markets, which makes it vulnerable to bans or quotas for its exports. In the case of an export tariff, the main effect would be applicable to the producers, which would experience a decline of the price of the good they supply (Economic Development Council, 2020). This might unleash higher unemployment, which, in a centrally controlled economy as that of the Kim’s, may translate into even lower productivity and lower wages, whatever the nature of the retribution to labourers. On the other side, for an importer of North Korean goods, sanctions imply a higher risk premium on their proceedings, given the volatility of prices (Nolan, 2008).
To envision whether sanctions may have a particular toll and be effective in pressuring Kim Jong-Un’s regime, it may be useful to verify which are the sectors bound to be struck by price provisions and evaluate their significance for North Korea’s exports and imports. Generally, the new US-backed sanctions proposal to the UN General Assembly go in the direction of confirming the 2017 and earlier provisions, but with a strengthened attitude, as in the words of Linda Thomas-Greenfield, the American ambassador to the UN (Reuters, 2022).
Thus, in a provisional view, the main targeted areas would be that of arms, aviation, fuel, gold and luxury goods, as these are the sectors that, across the years, have been, in different manners, restricted or fully banned. Since 2006, luxury good supply to the regime is prohibited. This particular sector was targeted provided the extensive reliance on the People’s Republic of China, for the national supply of these commodities. However, as previously mentioned, the definition of luxury good was left to states’ discretion, with the respective different ideas of what it constitutes. In broad terms, however, tobacco and high-quality food items were subjected to provisions, which are still in place at the time of writing (East West Center, 2008).
As data on import and exports by category are lacking, other sources may shed light on possible impacts, as the dependence the country has been entertaining with respect to China. Despite this case, cross-border trade has underwent an allegedly significant decline (Brown, 2022) after 2020, with a small uptick for January 2022 figures (China Customs, 2022). The pandemic has contributed in speeding up an already existing trend of diminishing volumes in trade relations.
The volume of goods traded (particularly as far as Chinese imports from North Korea are concerned) remain meagre if compared to other cross-border flows existing in Asia. However, the estimated 50-60 million USD worth of Chinese goods flowing beyond the border on a monthly basis may result significant for the small North Korean economy. Furthermore, the datum hereby reported may represent the peak of the iceberg, covering a much larger amount of trade in sanctioned sectors (Haggard, 2021).
Conclusion
This analysis was aimed at defining the broad terms that characterise North Korea’s economy, underscoring the presence of a relative decline with respect to all neighbours and its uniqueness in GDP per capita growth trends. North Korea is one of the very few nations in the world which had their GDP per capita declining, a singular case for the general Asian economic boom of the 1990s (temporarily halted by the 1997 crisis), which was further confirmed by later trends, for several states (but not for Japan). Some reasons underlying the non-existing receptivity to the regional-internal allocation of factors, due to structural aspects dating back to the early Cold War, North Korea has become a relic of the past. A past that East Asia has been able to depart from in purely economic terms, given that pre-WW2 and Cold War hallmarks still direct regional equilibria.
Recent developments have made North Korea salient again, after a relatively calm period after the heated 2017-2018 biennium.
By drawing conclusions, it may be stated that sanctions widen their impacts the more coordinate and the least “minimum common denominator” provisions are adopted, in order to avoid state’s discretionary behaviour. Moreover, shadow activity prevention needs to be thoroughly strengthened. Lastly, the role of China remains of enormous relevance, for all of the reasons previously discussed.
Sources
Data on GDP across years:
www.countryeconomy.com/gdp?year=1960
www.countryeconomy.com/gdp?year=1975
www.countryeconomy.com/gdp?year=1990
www.countryeconomy.com/gdp?year=2005
www.countryeconomy.com/gdp?year=2020
Data on Labour Productivity:
www.data.oecd.org/lprdty/gdp-per-hour-worked-htm
Indicators on North Korea Governance
www.heritage.org/index/country/NorthKorea
Australian Department of Foreign Affairs and Trade, 2018. Sanctions: Democratic People’s Republic of Korea (North Korea). Rank: A-2.
Brown W., 2022. China’s Trade with North Korea Rises Slightly in January and February. In Domestic Affairs, 38 North. Rank: B-2
Connolly M., 2015. How Much of South Korea’s Growth Miracle can be Explained by Trade Policy? In American Economic Journal, volume 7, number 4, pp.188-221, American Economic Association. Rank: B-1.
Economic Development Centre, 2020. Welfare Effects of a Tariff: Small Country. Online Paper available at: www.edc.gov.bz. Rank: A-1.
Haggard S., et alia, 2021. North Korean Sanctions Evasion: the Un Panel of Experts Report. in The
Peninsula, KEI. Rank: B-2
Lee C., 2022. New Sanctions Unlikely to Deter North Korea from Nuclear Path. In East Asia, VOA. Rank: B-2.
Nichols, M., 2022. US Pushes to Update UN Sanctions on North Korea. Reuters. Rank: A-2. Available at: www.reuters.com/world/china
Nikkei Asia, 2022. China-North Korea Trade Down 90% from Before Pandemic. Online article available at: www.asia.nikkei.com/Economy/Trade/China-North-Korea-trade-in-2021-down-90-from-before-pandemic. Rank: B-1.
Noland, M., 2008. The Non Impact of Sanctions on North Korea. In Economic Series, n.98, East-West Centre Working Papers. Rank: B-2.
Park, M., 1983. North Korean Relations With China and the Soviet Union: Impacts of Changes in the Leadership. Online MSc thesis available at: www.thekeep.eiu.edu/theses/2892. Rank: C-1.
Rok Center for Korean Studies, 2019. The Miracle on the Han River. Online briefing at www.Korea.lit.uaic.ro/en/the-miracle-on-the-Han-river. Rank: B.1.
The New York Times, 2022. What we Know About North Korea’s Missile Launch. B-1. Available from www.nytimes.com/live/2022/03/24/world/north-Korea-icbm-launch
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