[South Korea's North Korea Strategy] III. Structural Vulnerabilities Behind Recent North Korean Economic Recovery and Policy Implications

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Video Transcript

The Underlying Aspects of North Korea's Economic Recovery: Diagnosis of Structural Vulnerabilities

Hello, it is a pleasure to meet you. I am Lee Jong-min, working at the National Defense University. The research topic I will present today is the structural vulnerabilities and policy implications underlying the recent recovery of the North Korean economy. You may have heard a lot about the improving North Korean economy recently. It has been widely reported in articles as well. Considering inter-Korean relations, it can be interpreted that North Korea has reached a structural condition where it no longer seeks improvement in relations with South Korea as it has nothing more to gain. North Korea itself has been expressing this sentiment verbally as well. The question I would like to raise is whether this situation will continue in the future.

As mentioned, it appears that the North Korean economy has been rebounding since the second half of 2022 following the pandemic. The most commonly cited data on macroeconomic trends in North Korea is the estimated real GDP figures from the Bank of Korea. The year 2016 is a point before the intensification of sanctions against North Korea. This figure illustrates the scale of the North Korean economy since 2016.

From 2017 to 2022, the North Korean economy experienced a stepwise decline due to sanctions and COVID-19. However, in 2023, a rebound of around 3% was recorded, and in 2024, it rebounded to 3.7%. This indicates a recovery to pre-COVID-19 levels, and the recovery to levels prior to the sanctions is not far off. If this growth trend continues for about two years, it is expected that the scale of the North Korean economy will return to its pre-sanctions level.

The driving forces behind this economic recovery appear to be twofold. First is the resumption of trade with China. Due to COVID-19 lockdowns, North Korea's trade with China was nearly halted in 2020 and 2021. Starting in the second half of 2022, trade with China has increased as reopening occurred. Imports have recovered to about 90% of the levels seen in 2019, and exports have already doubled compared to pre-2019 levels. While this is still below the levels before the sanctions, it is significantly higher than before COVID-19.

Second is the unique situation arising from the Russia-Ukraine war. Since 2023, North Korea has been supplying military supplies such as shells and missiles to Russia. In return, it has been confirmed that food and refined oil have been received. Military cooperation has expanded into the economic realm, with the dispatch of soldiers and workers also taking place. Previously, it was speculated that goods were received, but recent observations suggest that cash is now being received from Russia.

Sustainability of the Recovery: Limitations of Dependence on China and Russia

I would like to raise the question of whether this recovery is a sustainable growth path or merely a temporary rebound. The core driving force of the recovery relies on a single market, China, and is largely attributed to temporary demand arising from the war, suggesting that something more is needed for it to transition into a sustainable growth driver. Additionally, although exports have increased significantly, there is a vulnerability in that they are limited to a few items and focused on short-term demand.

This report aims to diagnose the sustainability of the recovery by analyzing structural qualitative factors beyond the quantitative changes in trade and to derive policy implications. The analysis will focus on the period when the North Korean economy was performing well, specifically up to the mid-2010s before the sanctions. The reason for analyzing a past period is that there are many loopholes in the current sanctions through China and Russia, and North Korea may continue to attempt to undermine the sanctions by utilizing these loopholes. In this context, the analysis period has been set to provide implications on whether the North Korean economy can embark on a path of sustainable development and growth.

While updates are possible, the most significant implications are found in the situation until the mid-2010s, which is why I have chosen this period for analysis. The qualitative level of North Korean exports since the 2000s has been evaluated using three indicators: first, the diversity of export items; second, the qualitative advancement of the export item structure; and third, the price conditions of export items.

Changes in North Korean Economic Policy and Foreign Strategy Since Kim Jong-un's Ascendancy

Before delving into the analysis, I would like to discuss North Korea's economic policies. In the early years of Kim Jong-un's rule, there was significant acceptance of markets and many reformative attempts through limited liberalization. In the industrial sector, the socialist enterprise responsibility management system was implemented to enhance corporate autonomy, while in the agricultural sector, the farm responsibility management system was introduced to subdivide farms into smaller units and grant them autonomy. Additionally, economic development zones were established in various regions to lay the groundwork for joint ventures with foreign entities.

During Kim Jong-il's era, there were also policies aimed at expanding autonomy, but Kim Jong-un's measures are evaluated as significantly more progressive in terms of expanding autonomy and institutionalizing the market economy system. However, a major change occurred with the Hanoi summit in 2019. Kim Jong-un's journey to Hanoi by train, showcasing a performance, was interpreted as reflecting high expectations for the summit's outcome. However, it ultimately ended in failure, leading to a shock. Following this, a policy shift occurred.

After the failure of the Hanoi summit, North Korea has adopted slogans such as 'self-reliance' and 'head-on breakthrough,' abandoning attempts to seek a breakthrough through short-term improvements in foreign relations or negotiations with the United States. It has shifted to an approach of seeking breakthroughs under the condition that the current structure persists for the time being. In terms of economic management, there have been attempts to strengthen central control, counter to the previous decentralized policies. Policies prioritizing controllability over efficiency are emerging across all sectors, including enterprise management, foreign trade, commercial distribution, and finance.

The same applies to foreign strategy. Economic and military cooperation with China and Russia has emerged as a core axis. In particular, North Korea is actively leveraging the external situation, such as the Russia-Ukraine war and the US-China strategic competition, to promote a 'new cold war' framework. In contrast, relations with South Korea are moving toward significant disconnection.

Considering the economic background, the benefits North Korea could gain from improving relations with South Korea include economic cooperation profits, international aid from South Korea, and attracting foreign investment. On the other hand, the costs include the loosening of social control due to the infiltration of South Korean culture. However, it has been confirmed that under the ongoing sanctions, the realization of benefits is difficult, while costs continue to arise, leading to the judgment that there is no need to maintain relations with South Korea.

Qualitative Analysis of North Korea's Trade Structure: Diversity, Advancement, and Price Conditions

Now, I will present the results of the analysis on the qualitative aspects of the trade structure. As background knowledge, it has not been long since the dependence of North Korea's trade structure on China has increased. It has been around 15 to 20 years. Prior to that, the trade volume with neighboring countries such as South Korea and Japan was considerable. The current one-sided structure with China arose because of external conflicts with South Korea and Japan, which led these countries to halt trade with North Korea.

Although trade with China significantly decreased due to sanctions and COVID-19, it has rapidly recovered since the reopening in 2022. North Korea's exports to China have a structure concentrated on a few items. Before the sanctions, major exports included coal, iron ore, clothing, and seafood. After the sanctions made these exports difficult, alternative export items were discovered. North Korea has been exporting items such as eyelashes and minerals like talc and molybdenum that are not subject to sanctions. The quality of exports has been measured by three indicators: first, diversity; second, upward movement of added value; and third, improvement of trade conditions.

Diversity indicates how widely the export items are distributed. The greater the diversity of export items, the greater the buffering capacity against external shocks. Just as there are concerns about risks due to concentration in semiconductors in South Korea, it can be seen that greater diversity increases the buffering capacity against external shocks. The calculation method weighs the number of export items by the importance of each item.

The red graph represents North Korea's export item diversity index. A value closer to 1 indicates greater diversity. Compared to other Southeast Asian countries, while other Southeast Asian nations show a steadily upward trend, North Korea has exhibited a very stagnant pattern since the mid-2000s. This contrasts with the expansion of diversity seen in Southeast Asian countries as they achieve economic development through exports.

This appears to be due to North Korea's trade being limited to specific demands from China, which structurally blocks the expansion of items. Second is the advancement of export industries. This indicates how technologically advanced and similar the composition of export items is to those of developed countries. The intensity of current factors is a weighted average of the capital and technology levels required by export items, representing the level of human and material capital needed for the production of those items. The export advancement index indicates how similar the export structure of the country is to that of high-income countries.

Since the late 2000s, there has been a sharp decline in the intensity of current factors. This phenomenon is observed in North Korea's overall exports, and when divided into exports to China and to other countries excluding China, this phenomenon is only evident in exports to China. Summing these findings reveals a qualitative decline in North Korea's overall exports.

The same is true when examining how similar the composition of export items is to those of developed countries. The red graph represents North Korea, which shows a decline since the mid-2000s. Other countries, whether Southeast Asian or developed, all exhibit upward trends, while North Korea uniquely shows a decline in the level of export advancement since the mid-2000s. Finally, we examined relative prices. Relative prices are calculated by dividing the unit price North Korea receives when exporting to China by the unit price China pays when importing from other countries. A value of 1 indicates that the two prices are equal, while a value less than 1 indicates that North Korea's export prices are cheaper.

In this regard, since the early to mid-2000s, North Korea's relative price index for exports to China has declined, maintaining an average of 60-70%. The reasons are as follows. North Korea originally traded significantly with South Korea and Japan, but as trade with Japan and South Korea has been blocked, China has become almost the sole buyer. This leads to a situation where North Korea's bargaining power as a seller is greatly diminished. In simple terms, it can be interpreted that China is driving down North Korea's export prices.

Expansion of Cooperation with Russia and New Opportunities

Overall, North Korea's economy is not expanding in terms of diversity, and the qualitative level of its export structure is regressing. Additionally, China is lowering North Korea's export prices, leading to difficulties in terms of pricing as well. The fundamental cause of these three phenomena is the extreme dependence on China. However, the current increase in cooperation with Russia is opening up new opportunities.

Since 2023, North Korea has been supplying millions of shells and missiles to Russia annually, and it has been confirmed that around 15,000 troops have been deployed. In exchange for military cooperation, North Korea appears to be receiving food, crude oil, refined oil, and possibly military equipment that has yet to be confirmed. The benefits North Korea can gain from cooperation with Russia are diverse. Russia is a major exporter of food, oil, and fertilizers that North Korea needs, allowing North Korea to secure a supplementary channel to alleviate its dependence on China. Additionally, North Korea is dispatching workers to both China and Russia.

While the scale of dispatch to China is larger, the per capita income is reported to be significantly higher in Russia. This is due to differences in industries, as workers dispatched to China primarily engage in low-wage service sectors such as light industry factories or restaurants, while those dispatched to Russia often work in construction. Therefore, the per capita income of workers dispatched to Russia is estimated to be two to three times higher than that of workers dispatched to China.

However, structural limitations also exist. While Russia can provide many goods to North Korea, there are not many items that North Korea can import from Russia. In terms of infrastructure cooperation, there is also the issue that there are not many projects that can generate enough profit for Russia to recoup its investments in North Korea. Furthermore, there is uncertainty about how the situation will change if the Russia-Ukraine war comes to an end.

Three Pillars of North Korean Economic Policy and Future Variables

Currently, North Korea's economic policy consists of three pillars: economic recovery through the expansion of trade with China, establishing a supplementary measure through military-economic cooperation with Russia, and internally strengthening centralized control and state oversight. In the short term, these two economic drivers are showing signs of recovery, but as mentioned earlier, both pillars contain structural vulnerabilities.

Future Prospects and Policy Implications

Economic difficulties do not necessarily lead to policy changes, and this has been the case thus far. Therefore, there are four variables to pay attention to in the future. First is whether the Russia-Ukraine war will come to an end and whether cooperation with Russia will continue afterward. Second is the question of how China will assess and utilize North Korea's strategic value amid the U.S.-China conflict. Currently, North Korea is viewed merely as a bargaining chip, but if it comes to the negotiating table, the situation may change.

Third is the internal economic situation. Given the skyrocketing market prices in North Korea, the question arises as to whether this market instability will translate into political pressure. Finally, there is North Korea's national competitiveness in the era of AI. Currently, low national competitiveness may lead to a loss of industrial competitiveness due to the widening technological innovation gap in the AI era, which could pose serious risks not only economically but also militarily. In this situation, how North Korea will respond is a crucial variable. From a policy perspective, even if the sanctions against North Korea are neutralized, I am skeptical about whether North Korea can achieve continuous economic growth or development through this.

Therefore, it is necessary to closely monitor the four variables mentioned above while ensuring policy flexibility over the long term. Additionally, we should not overestimate the adaptability or resilience of the North Korean people, but it is also an excessive interpretation to assume that the current situation will persist. Thus, it is essential to keep the possibility of change open and to prepare in advance for how to engage at the moment of change. This concludes my presentation. Thank you.