Slowly but steadily, North Korea grows

Author: Rudiger Frank, University of Vienna

From nuclear and missile tests and dangerous rhetoric about mutual annihilation in 2017, events on the Korean Peninsula shifted to summit meetings and declarations of cooperation and denuclearisation in 2018. One explanation for this radical change is that US President Donald Trump’s ‘maximum pressure’ campaign on North Korea was successful and Kim Jong-un bowed to the overwhelming pressure of economic sanctions. But neither a look at North Korea’s long-term strategy nor an evaluation of evidence on the state of its economy supports this view.

North Korean cheerleaders before short-track speed skating events begin at the Pyeongchang 2018 Winter Olympics. (Photo: Reuters/Phil Noble).

North Korea went into crisis mode after the socialist bloc’s collapse and subsequent famine in the mid-1990s. The so-called military-first (songun) policy that arose during this period was officially ended by Kim Jong-un in 2013. It was succeeded by the byungjin line of simultaneously developing nuclear weapons and the economy. Five years later in April 2018, the byungjin line was declared a success and replaced by a policy of devoting all resources to economic development along the lines of a five-year plan that was announced at the seventh congress of the Korean Workers’ Party in 2016.

The most likely way by which North Korea would aim to achieve a rapid improvement of the economy is a form of the East Asian development model. Variations thereof could be observed in the development of Japan, South Korea, Taiwan and mainland China. The existence of a strong and repressive state, a preference for import-substitution, a cheap and well-educated workforce and something that can roughly be called Confucian work ethics cannot be denied in North Korea.

But there are other crucial ingredients of the East Asian model that are so far missing in North Korea: a strong export orientation and the massive import of technology and capital. None of these can realistically be implemented with the existing bilateral and multilateral sanctions regime on North Korea, which the United States plays a key role in upholding.

From this perspective, the diplomatic initiative that started with the Pyeongchang Olympics in January and was accelerated by the series of inter-Korean summits throughout the year seems to have the strategic goal of removing US opposition to North Korea’s long-term economic development through international economic exchange.

This strategic perspective differs from the conventional narrative of North Korea’s motives for rapprochement, which assumes that the economy experienced a crisis due to sanctions that brought Pyongyang to its knees and made it open for talks. But evidence on the state of North Korea’s economy to support this view is contradictory at best.

Figures published by South Korea’s Bank of Korea (BoK) in July 2018 suggest that the North’s economy shrank by 3.5 per cent in 2017, supporting the notion that economic decline forced Pyongyang to the negotiating table.

But the BoK estimates are closely correlated to North Korea’s foreign trade, the major source of which (and of related data) is China. Questions emerge over the trustworthiness of Chinese trade data, and over the impact of foreign trade on the economic situation of a country that has for decades (albeit not always as successfully as it claimed) pursued a policy of autarky and self-reliance.

A look at official North Korean data on state budget revenue, which for the largely state-owned economy can be used as a proxy for the country’s GDP, reveals a positive growth rate of 4.9 per cent for 2017. And in a series of rare interviews in October 2018, a North Korean economist claimed that his country’s GDP grew from US$29.6 billion to US$30.7 billion from 2016–17, which would be an increase of 3.7 per cent. Both figures stand in sharp contrast to the BoK’s estimate of minus 3.5 per cent.

Anecdotal evidence from on the ground in North Korea this year also shows no sign of an economic crisis. Major construction projects were observed, including not only mega-projects like the Wonsan coastal tourist area or Samjiyon county but also several new gas stations along the main business route from Pyongyang to Sinuiju at the Chinese border — indicators of expanding business activity. Small vans operating as taxis and trucks transporting goods on behalf of the new middle class, a growing number of affluent merchants and decentralised state-owned enterprises were frequently seen on these highways. Pyongyang as usual experienced a series of smaller traffic jams.

The two annual trade fairs were busy occasions for local residents and businesses, despite the notable absence of any major international companies. Brisk consumer activity could be observed at markets and in up-scale shopping centres like the Kwangbok Area Department Store. The price level as reported through well-established information networks such as Daily NK remains relatively stable and shows no sign of inflationary or deflationary pressure.

It seems that despite many difficulties, 2018 has been another relatively good year for a slowly but steadily growing North Korean economy that is still yet unable to fully use its potential. This is partly due to economic sanctions, the resolution of which could become a realistic scenario if the process of rapprochement that was started in 2018 does not get stalled again.

Rudiger Frank is Chair of East Asian Economy and Society and Head of the Department of East Asian Studies at the University of Vienna.

This article is part of an EAF special feature series on 2018 in review and the year ahead.