Macro Weekly – North Korea: the untold story

by: Han de Jong , Arjen van Dijkhuizen

  • While geopolitics are driving the news flow on North Korea, …
  • … and economic data on the country are scarce and unreliable,
  • … we try to give some insights into economic developments
  • Coal exports to China have stopped completely …
  • … but total imports look to have been quite unaffected so far
  • Rising trade deficit will likely put more pressure on the regime
170901-Macro-Weekly.pdf (135 KB)

North Korea has been in the news a lot in recent months, with renewed focus after its missiles crossed Japanese air space last week. Most of the coverage obviously relates to the geopolitical including ballistic issues surrounding the country and what that means for relations with the US, South Korea, Japan and the rest of the world.

Yet, very little is known about the North Korean economy other than that the country is poor and it is not visible from space at night. As far as we are aware, very few commentators even try to gather information on the economy. While we certainly do not claim to be North Korea experts, we thought it could be interesting to try to focus on some recent economic developments. We should add that economic data are extremely scarce and probably not very reliable. So, decent economic analysis is out of the question. Nevertheless, we would like to give it a shot. Just because hardly anyone does …

An economic transformation?

The well-respected Financial Times recently published a one page article on North Korea’s economy in its The Big Read series. The tone was a surprise to us. The article suggested that North Korea has enjoyed an economic upturn, at least in the recent past, caused by some liberalisation measures for which the FT credits Kim Jong-un. Based on interviews from people that have defected, the picture was presented that ‘the North Korean leader had put economic growth at the heart of his agenda, alongside the development of nuclear weapons’. Another observation made in the article was that the country was slowly moving from a very tightly controlled state socialist economy to a more market oriented one.

A poor country and a growth acceleration followed by a slowdown …

According to the Economist Intelligence Unit, nominal GDP amounted to USD 15 billion in 2015. That’s a couple of billions lower than that of Afghanistan. And comparable to the Dutch province of Drenthe, one of the smaller provinces in the Netherlands. It is not clear to us to what extent this number adequately captures all economic activity in the country.

With a population of around 25 million, the EIU estimates GDP per capita at some USD 600 in 2015 (in nominal terms that is, not in PPP terms). That is low, but it was below USD 500 at the turn of the century, and thus an improvement. According to data from the EIU, economic growth has averaged around 2% since the turn of the century, without any particular trend throughout most of this episode. The EIU data indeed suggest a clear acceleration of growth in 2016 (to around 4%), following by an expected slowdown in 2017 (to around 1.5%) and a contraction (-1%) in 2018.


… with a rising trade deficit

The most up-to-date ‘high frequency’ data that we can find is related to the country’s international trade and we find some interesting developments here. According to IMF data, North Korean exports (FOB) amounted to USD 2,969 million in 2016, of which USD 2,554 mln (or 86%) went to China. Coal seems to be the most important product. China imported USD 1,012 million worth of coal from North Korea last year, or 40% of what China imported from this neighbour. North Korea imported (CIF) for a total of USD 3,733 million, of which USD 3,389 million or 91% came from China.

This leaves an overall trade deficit of USD 764 mln last year. No data is available about how this was financed. There are no data available on the capital account or FX reserves. And with the country running a structural deficit on the trade balance and having no access to global capital markets, it is hard to imagine how North Korea could have built up foreign reserves. So maybe we should assume that the country’s closest economic partner, China, provides the financial means for this deficit to be covered.

Coal exports to China stop completely

In the course of 2017 something interesting has happened to North Korean trade. Export values have fallen very sharply: some 27% yoy during the first five months of the year, according to IMF data. The fall in export earnings occurred particularly after February. The available IMF data for the March-May period shows a 40% yoy decline. This seems to be the direct result of sanctions taken by the UN against the country, or rather, by Chinese compliance with these sanctions. The UN adopted sanctions against North Korea in November 2016, capping the country’s coal exports and banning exports of copper, zinc, nickel and silver.

The problem with all sanctions against North Korea is that the effectiveness crucially depends on China. In the past, China is thought not to have been particularly compliant with UN sanctions against North Korea. However, in February 2017, the big neighbour announced a total stop of coal imports from North Korea for the rest of the year. According to the official statistics, these imports have, indeed, completely stopped from March 2017 on. Whether the import ban is really aimed at putting Pyongyang under pressure or because it was convenient for China to reduce its coal imports given the building up of peer pressure, particularly from the US, we do not know, obviously. Remarkably, China looks to have first significantly increased its coal imports from North Korea around the time the UN adopted the coal ban. It is also unclear if the Chinese import ban will be continued next year. We have no data on Chinese imports of copper, zinc, nickel or silver, so we do not know if these imports have also stopped.

With coal being North Korea’s most important single export product and China its biggest customer, the Chinese coal ban must be a big economic blow to North Korea (that would explain the sharp slowdown in 2017 and contraction in 2018 predicted by the EIU). The pain appears to have been lessened somewhat by a rise of China’s imports from North Korea of iron ore and lead ore. Nevertheless, assuming that North Korean imports continue to run at current levels, the country’s trade deficit is set to rise to the 1.5-2.0 bn range. That is large on a total export base worth of around USD 3-5 billion (data vary among different sources).


North Korean imports unaffected…so far

In any ‘normal’ economy such a collapse in exports earnings would put huge pressure on the foreign exchange position of the country, most likely forcing imports down sharply, causing a serious economic downturn. So far, that does not seem to be happening. North Korean imports appear to be totally unaffected. In fact, total imports from China during the first seven months of the year are actually up 22% yoy.

There are four explanations for imports to have remained unaffected. First, it is possible that the statistics are wrong and that Chinese imports of North Korean coal have not stopped at all. It seems unlikely that the Chinese could or would lie about this. Second, it is possible that North Korea has cash reserves and is running them down to fund its rising trade deficit. This also seems unlikely to us and if that would be the case, it cannot be sustained for long. Third, it is possible that the Chinese are putting up the money through additional loans or transfers. If this is the case, the Chinese are mitigating the effects of the sanctions it now appears to comply with. This could offer an explanation and also would give China other forms of leeway to put pressure on Mr. Kim Jong-un. The fourth possibility is that it is just a matter of time before the drop in export earnings starts to bite and imports are also squeezed. That would put pressure on the economy and therefore on the leadership in Pyongyang.


North Korea is a poor, closed and secretive country. Little is known about its economy. According to the Financial Times, the country has enjoyed some economic revival on the back of some liberalisation. Still, North Korea has been hit by a series of economic sanctions by the UN, the US, the EU and others since its first nuclear test in 2006.

International trade data is the most up-to-date information on the economy. This data shows that North Korea has been running a structural trade deficit. It also shows the dominance of China in the country’s trade relations as well as the importance of coal as an export product.

Chinese imports of North Korean coal completely stopped after February, in compliance with the UN’s November 2016 sanctions. One would expect this to put huge pressure on the economy. Judging by the behaviour of imports, that does not appear to be happening straight away. This could either be a matter of time or it is the result of China substituting to other imports or supplying funding, in which case China would reduce the effectiveness of the sanctions. We must keep a close eye on these trade developments. Pressure on the North Korean economy could force the leadership into submission or it could lead to dangerous, desperate actions. Although, as is often the case, the truth lies probably somewhere in the middle.