DPRK Briefing Book: International Economic Linkages of North Korea
L. Gordon Flake, Nautilus Institute Special Report, August 1995.
While the dearth of available statistics on the DPRK makes studying its economy particularly difficult, a survey of the DPRK’s international economic linkages offers a relatively focused picture. Not only do “mirror” or recipient country statistics provide reliable data on North Korea’s trade patterns, but the limited nature of the DPRK’s external linkages narrows the scope of the discussion. The DPRK has been in default of its international loans since 1987 and has no ties to international financial institutions such as the World Bank, the ADB or the IMF. It has no stock market and thus no foreign portfolio investment. Investment in North Korea is limited both in scope and in location. Since 1990, the trade picture has become increasing simplified. In short, North Korea’s international linkages are limited to some trade, even less investment and remittances from Korean residents in Japan.
The DPRK economy is widely recognized to have suffered a slowdown in the 1980s due the inherent inefficiencies of its centrally planned economy and the onerous burden the maintaining the world’s fourth largest standing army. However, the real shock to the DPRK economy has been external in nature. When the Soviet Union normalized relations with the ROK in August of 1990, the DPRK’s time tested strategy of playing the Soviet Union and China off against each other for assistance fell apart. Coupled with the loss of socialist country solidarity and markets, this external shock fully manifest itself by 1991. The most severe blow was in the loss of energy inputs from the Soviet Union. Unable to obtain sufficient supplies of oil and coking coal essential to industry, DPRK industrial output slumped. On the economic front, the DPRK’s greatest challenge is adjusting to this external shock. At its root, the problem the is a shortage of capital. Though China has taken up some of the slack of lost Soviet imports, without hard currency the DPRK is under increasing pressure to maintain even past levels of output.
The impact of these external factors suggests that North Korea was never as self reliant as it claimed. Still, this is not a complete indictment of Juche. The DPRK is also apparently more self reliant that in has previously been credit for. While the economic difficulties faced by DPRK are indeed severe, DPRK is holding up quite well given the magnitude of the shock it has faced. Outside the political realm, little credence is given to reports that North Koreans are starving and their economy is the brink of collapse.
That said, economic pressures on the DPRK are indeed mounting. After peaking at about $5.2 billion in 1988, North Korean trade has contracted by over 50 percent to about US$ 2.1 billion in 1994. Since the DPRK does not release data, researchers must rely on “mirror” statistics from recipient countries. While there are some discrepancies in the DPRK trade figures released by KOTRA, JETRO, and the IMF, the differences are minor in comparison with the magnitude of the change in the DPRK trade patterns over the past five years. This does, however, create some confusion as to the current state of DPRK trade. Earlier this Spring, the ROK National Unification Board reported total DPRK trade of 1.8 billion. KOTRA, which conducts a wider survey of recipient countries, released a more authoritative estimate just this month. (See Chart #1 & Chart #2.) There is also the case of the mystery surplus. IMF figures for the year initially show a DPRK trade surplus for 1994. This is quite out of character for the DPRK, a country that has traditionally run deficits as a way of obtaining goods without paying for them. The culprit in this case appears to be some misreporting in Mexico of imports from South Korea as imports from North Korea. When the Mexican trade is subtracted, the IMF figures also show a continued deficit for the DPRK in 1994. There are other discrepancies in the IMF figures that can perhaps be explained by the double counting of transhipments. With total trade of around US$2 billion, even small miscalculations can indicate misleading changes in DPRK trade patterns.
The Big Four
The extent of the external shock to the DPRK economy is not so much evidence of the importance of trade to the DPRK economy as it is of the importance of imports. International economic linkages have been historically de-emphasized by North Korea. Trade only accounts for roughly 13 percent of the North GNP, compared to around 50 percent in the South. Much of the trade that took place with the former Socialist Bloc countries was merely the exchange of junk for junk. Still, the DPRK remained heavily reliant on the Soviet Union and China for oil, some grains, and military supplies. Exports are only now increasingly important because DPRK sees them as a method of obtaining needed capital. (See Chart #3.)
North Korea’s four major trading partners, China, Russia, Japan and South Korea together account for almost 70 percent of DPRK trade. In 1994, $1.45 billion of the DPRK’s total trade of $2.1 billion was with “the big four.” Recent changes in the relative importance of these four countries gives added insight into the changing environment in Northeast Asia.
The Soviet Union surpassed China to become the DPRK’s leading trade partner in the mid 1980s. However, when that relationship imploded following Russia’s recognition of South Korea in August of 1990, China reassumed its prominence. In 1994, China remained North Korea’s largest trade partner with overall trade of US$ 624 million. Although, according to KOTRA this figure marks a 30 percent decline from 1993, China remains the DPRK primary economic lifeline. In 1993 North Korea received approximately 72 percent of its food imports, 75 percent of its oil, and 88 percent of its coking coal from China.
Therein lies the Chinese dilemma. China wants to avoid a collapse of the system in the DPRK. In addition to the instability that such a collapse would cause in the region, China is undoubtably concerned about the possibility of Korea refugees flooding into its Northern provinces where there is already an autonomous Korean prefecture. On a policy level, China has consistently attempted to minimize pressure on the DPRK regime.
At same time, China’s efforts to support the DPRK are threatened by China’s own economic necessities. China is itself a net oil importer, and as China s domestic energy requirements grow, the Central government is likely to find it difficult to pressure the increasingly independent provinces to provide oil and grain to the DPRK on concessionary terms. This is also true of China’s state enterprises which are under growing pressure to be profitable. Early reports from 1994 indicate that China’s own belt tightening in its attempt to control inflation is partially responsible for a decline in trade with the DPRK. On the investment front, China is itself the world s largest destination for foreign direct investment and if thing a competitor of North Korea rather than a potential source of investment.
There are also a number of unknown factors in Chinese-DPRK economic ties. Smuggling is thought to be rampant yet is not constant nor quantifiable. For example, used automobiles are big ticket items known to be exported to the DPRK from Japan and even Europe, presumably for transhipment to China. Yet there is no record of automobile trade between North Korea and China. Yet another question is the amount of control Beijing wields over the provinces. There could conceivably be large amounts of unaccounted for trade along China’s border with the DPRK. Hence, declining official trade figures may be more an indication of declining government control over trade than of declining economic exchange.
China’s increasingly close relationship with ROK is another important issues. In the era after Kim, Il-Sung, North Korea’s “close as lips and teeth” relationship with China may require a dentist. Premier Li Peng has visited South Korea and Chinese President Jiang Zemin has also recently committed to a trip to Seoul. Chinese – ROK has skyrocketed since 1992 and now far exceeds Chinese – DPRK trade. North Korea has not been idle either. If recent events are any indication, the DPRK is moving closer to the United States, Japan and the West. Sources close to Pyongyang say that although the DPRK recognizes that China is an essential lifeline at present, it is committed to closer ties with the West.
In 1988 the former Soviet Union was responsible for 60 percent of all imports entering the DPRK. Although not reported as such, a large portion of this was military equipment. In 1994 Russian imports made less than 10 percent of the DPRK’s total. According to KOTRA, overall trade between Russia and the DPRK declined 38 percent from 1993 levels to a total of 140 million, falling behind South Korea for the first time.
As Russia continues to focus on its own economic difficulties there is little likelihood that this trend will reverse in the near future. Furthermore, Russia too has become increasing close with the ROK. Just recently, Russia has agreed to pay off some of its debts to the ROK with military equipment.
Although Japan has long standing economic ties with the DPRK, these ties are primarily with the Chosen Soren, the pro-Pyongyang group of Korean residents in Japan. Korean residents in Japan are believed to be responsible for the great majority of the estimated 140 joint-venture projects in North Korea since the DPRK first allowed such investment in 1984.
While Japan was the DPRK second largest trading partner in 1994 with estimated total trade of US$ 493 million, Japanese businessmen have yet to express serious interest in the DPRK. Still among North Korea s trade partners, Japan has remained the one constant.
While remittances from Korean residents in Japan are often considered to be a vital source of hard currency for the DPRK, the often quoted US$500 million figure for the amount of these figures has come to exemplify the type of guesswork that characterizes so much of the available numbers on the DPRK economy. The $500 million figure was reportedly derived by multiplying the maximum amount of currency legal to carry out of Japan by the annual number of visitors to the DPRK. Other more careful enquiries have been hard pressed to come up with a total that exceeds 200 million. The Chochongryun (General Association of Korea residents in Japan) is thought to be decline. The end of the cold war and the Japanese recession have also certainly impacted upon the amount of support Pyongyang receives from Japan.
One significant aspect of DPRK/ Japan trade however is that the DPRK is one of the few countries in the world that runs a trade surplus with Japan. Japan has been an early leader in the processing on commission trade with the DPRK. A large portion of the DPRK s exports to Japan have been textiles.
At the end of 1993 the DPRK announced a period of adjustment prior to entering into a new seven year plan. This adjustment was necessitated by the external shock to the DPRK economy and the failure of the third seven year plan to meet its objectives. Accordingly, Pyongyang announced a new emphasis on agriculture, light industry, and trade. In 1994, North Korea exported textiles worth US$ 200 million, a full quarter of its total exports.
The prospects for increased and significant Japanese trade and investment in North Korea depends heavily on the political process. The normalization of relations between Japan and the DPRK is expected to involve war reparations. In fact many Japanese companies maintain a presence in Pyongyang just waiting for this eventuality.
Given the at times hostile relationship between the ROK and the DPRK, it is surprising to many that the ROK is one of DPRK leading trade partners. By KOTRA’s count, inter-Korean trade totaled US$ 195 million in 1994, moving the ROK ahead of Russia and into the position of the DPRK’s third largest trade partner and largest source of foreign currency.
Inter-Korean trade began through third countries and has been primarily one-way, South Korean imports of North Korean primary products. However, the trend is towards increasing direct trade and to processing on commission.
This processing on commission trade appears to be evolving. Just this month the Daewoo group secured ROK government approval for a US$ 5.12 million joint venture investment in Nampo. While Daewoo heralds the construction of factories in North Korea under this joint venture as the next step in ROK / DPRK economic relations. Competitors are quick to point out that the Daewoo project is essentially processing on commission with an added capital dimension. A true next step would involve South Korean technician and managers on the ground with the investment in North Korea.
Ultimately, South Korea is the only solution to DPRK economic problems. Only, South Korean firms are likely to invest significantly in the DPRK, and even they remain wary. Of course, the DPRK would rather have other investors, but ironically the level of attractiveness in DPRK to other countries may depend on success of inter Korean economic contacts.
The Rest of the World
DPRK ties with the rest of Asia vary greatly. The DPRK obtains some rice from Thailand and has been improving ties with Nations such as Taiwan and the Philippines. The DPRK appears committed to improving ties with Capitalist Asia. This is evidenced by the establishment of the Asia-Pacific Peace Committee headed by Kim, Young-Sun. If the ultimate goal is to integrate the DPRK into the world economy, Asia is the place to start.
In addition to its general mission to Paris, the DPRK has opened missions in 5 European Countries outside the former Socialist bloc including: Sweden, Finland, Denmark, Austria and Portugal. In March, the DPRK and the DCCG, a German barter trade company reached an agreement to conduct some US$100 million in barter trade annually. In addition, Germany s Korean Economic Information Bureau and 10 german companies signed a memorandum of agreement in April open trade office this June. Other notable developments with European companies include an agreement with the Dutch bank ING to set up joint venture bank and an accord signed with Peregrine Investment & Holding of Britain.
To date, U.S. – DPRK economic linkages have been limited to small amounts of humanitarian aid such as recent shipments of corn. While there is some U.S. business interest (a delegation including MCI and GM visited Pyongyang in February) the legal barriers to trade with North Korea are significant
Furthermore, given the close U.S. alliance with the ROK the possibility if U.S. economic ties with the DPRK is inexorably linked to the North/ South dialogue and the political situation on the peninsula. Still, North Korea appears to be committed to a strategic opening with the U.S.
There is a presumably significant amount of trade between the DPRK and countries like Libya, Iran, Iraq, Syria. This is presumably DPRK arms sales in exchange for oil.
The pace of economic and systemic reform in North Korea will likely be determined by the inherent conflict between economic and political necessities for the DPRK. North Korea s economic survival depends upon opening, yet such opening threatens its political system which requires almost complete control of information. This challenge is heightened by the fact the Korea is still a divided peninsula. Unlike Cuba, Vietnam, or China, the regime in North Korea must establish and maintain its legitimacy not only independently, but also in comparison with the regime in the South. It is a fear of this comparison with South Korea that more than any other factor mandates that North Korea limited its opening.
The DPRK s likely approach to this challenge will be a determined, yet comparatively slow opening. As the reforms are being driven from the top, they are more likely intended to preserve or improve the current system rather than change it entirely. Dr. Namkung Young at the Research Institute for National Unification in Seoul has refereed to such opening as system defensive rather than reform oriented.
Following the collapse of the Soviet Union, North Korea has had to, with the possible exception of its trade with China, interface with markets. Its greatest challenge is to change the structure of its industry to produce sellable goods. Processing on commission is a step in this direction. However, processing on commission represents low risk exchange and thus relatively low profitability. In order to attract more significant investment North Korea will have to further reform its system.
Obviously, the DPRK s greatest natural trade partner in the ROK. Its ultimate success will likely depend on the how fully the two Korea s are able to interact.
At first glance, North Korea s attempts to garner foreign direct investment to date may seem to be indicative of the overall pace of reforms. Special economic zones in China, South Korea and Taiwan are natural comparisons. However, North Korea has also studied these precedents and is aware of the social change that has accompanied them. While they may eventually evolve into something more, at present the DPRK s Free Trade and Economic Area are a specific solution to a specific problem. As mentioned earlier, at its roots the North s greatest challenge is a capital problem. A lack of capital prevents the DPRK from obtaining needed energy inputs into its economy and thus production is severely curtailed in a vicious circle which then makes it even more difficult to obtain capital. The DPRK s solution to this is the FTEA s. They are intended as sources of needed hard currency. The DPRK appears prepared to use as much barbed wire as necessary to ensure that they remain isolated and separate. While China and others arguable had the same intentions, the DPRK claims to have learned from the Chinese mistakes. While Chinese SEZ were established in highly populated areas near natural trading partners, the DPRK has chosen the remote and undeveloped area of Najin-Sonbong for its experiment. This is not difficult to understand, given the North s political necessities, free investment throughout the country would be unacceptable.
While the North Korean press is full of accounts of unnamed delegations visiting the FTEA, to date there remains little significant investment. North Korea faces severe competition for investment dollars. In addition to the nuclear issue and other political tensions that dissuade investment, North Korea is arguably the most closed country in the World. China, Vietnam, ASEAN, India and even Burma all offer competing destinations for investment. In the end, the most significant investor will be the country with the most interest in the area, South Korea.
It is often said that unification is an issue that must be worked out between the two Koreas. That is equally true of the success or failure of the DPRK efforts to revive its economy.
1. Korea Trade Promotion Corporation (KOTRA). KOTRA figures are generally in line with those released by the Hong Kong Trade and Development Office.
2. For a detailed analysis of the legal barriers to economic relations with North Korea see Korea: Procedural and Jurisdictional Questions Regarding Possible Normalization of Relations with North Korea. CRS Report for Congress, #94-933 S, Congressional Research Service, The Library of Congress, November 29, 1994.