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Whither North Korea's economy?

Jo Harper
June 12, 2018

In a recent speech in Berlin, South Korean President Moon Jae-in said his vision of unification with the North could follow the example of Germany. But with China next door, not many see that happening any time soon.

Nordkorea Chinas Außenminister Wang Yi in Pjöngjang
Image: Getty Images/AFP/Kim Won-Jin

After Tuesday's historic agreement with the US, North Korea may well be looking for a way out of its communist isolation. But questions abound — and not only in Pyongyang — as to which model(s) might best suit the isolated and backward economy as it weens itself off the facade of nuclear aggrandizement.

The North has said it does not want to be like East Germany, swallowed up by a richer and bigger neighbor, but what other options exist as the US, South Korea and of course the North's traditional ally and economic savior, China, eye up business possibilities in the mineral rich, but bealeaguered North?

Shortly after his father Kim Jong Il died in 2011, Kim Jong Un lifted many of the restrictions on local markets and has toned down his anti-capitalist rhetoric somewhat.

Read moreNorth and South Korea 'suspicious' of China

Ditching the policy of byungjin, or "parallel advance" — pursuing both economic gain and nuclear weapons — is very significant, observers agree.

But despite this and the added lure of US investment, Pyongyang may well opt for an economic model where top-down political control is retained in concert with controlled international economic opening. 

Kaesong is situated very close to the border
Kaesong is situated very close to the border

Deng's baby brother

Any initial opening up of North Korea will likely focus on special economic zones like Kaesong, similar to the model of reform followed by China in the 1990s under Chinese Communist Party Chairman Deng Xiaoping.

Pyongyang has some experience of combining its cheap labor with external capital and know-how. The suspended inter-Korean factory park in the border city of Kaesong and near the demilitarized zone (DMZ) provided the regime with $120 million (€101 million) in workers' wages in 2015, the last full year it was in operation.

Most companies in Kaesong were textile and clothing companies, with others producing electronics and chemical goods. The 52,000 North Korean workers employed there were paid $180 a month, compared with South Korea's minimum wage of $900 per month at the time.

The South's Unification Ministry said Pyongyang had used the income from the zone to bankroll its nuclear and long-range missile programs and the conservative government in Seoul halted the South's involvement in early 2016.

North Korean economy grows nearly 4%

South Korean eyes on the prize

This May, however, Hyundai, a former Kaesong investor, said it was setting up a task force to prepare for restarting economic projects in North Korea. 

South Korean Deputy Prime Minister Kim Dong-yeon said at the time that Seoul has been "considering various scenarios" for greater economic cooperation with the North.

South Korea is most interested in North Korean mineral reserves. Its Ministry of Land, Infrastructure and Transport in 2017 invited bids on a plan to develop the North's mining industry, power generation and transport infrastructure.

North Korea sits on an estimated $6 trillion worth of mineral reserves, including iron, gold, zinc, graphite and other rare materials used in the production of smartphones.

Another key will be restoring transport links between South and North and into China and the rest of the Eurasian continent. There are plans to reconnect the inter-Korean railway and projects in northeast Asia, such as a gas pipeline project connecting the two Koreas and Russia.

South Korean speculators are also reportedly buying up property on their side of the DMZ, while property prices in the Chinese cities of Dandong and Hunchun have also risen in recent months. Stagnating growth in China's northeastern rustbelt has driven interest in increasing Chinese economic ties with North Korea.

Another China-US proxy

China is also gearing up to invest in North Korea and is anxious that possible economic collapse in the North or reunification could create a unified and US-allied Korea.

US President Donald Trump promised North Korea will become "very rich" on the back of American investment if Pyongyang ditches its nuclear arsenal. But he does not want the US to provide aid to North Korea, rather offering private American investment to the North, mainly in reconstructing its energy grid and modernizing agriculture.

South Korea hikes intest rates amid upswing

Some facts and figures

  • Size isn't everything, but...

The South Korean economy is a mighty 36.7-fold bigger than that of North Korea in GDP terms. The output of the North is estimated at $33 billion, while that of South Korea is $1.19 trillion, with GDP per capita $33,200 in South Korea and $1,800 in the North. The South has noted an average annual growth rate of 7 percent in recent years and is ranked as the world's twelfth-largest economy in GDP terms. According to estimates from the South Korea-based Bank of Korea, the North's economy grew 3.9 percent in 2016, its best year in over a decade, although it is difficult to collect accurate data on the country.

  • Sectoral balance

The contribution to GDP by agriculture, industry and services was 23.4 percent, 47.2 percent, and 29.4 percent respectively in North Korea and 6.9 percent, 23.6 percent, and 69.4 percent in South Korea, according to the CIA World Factbook.

  • Trade

South Korea's trade volume was $1.07 trillion in 2013, while North Korea reported $7.3 billion. North Korea runs a large trade deficit while exports play a key role in South Korea's growth story. From 2009 to 2013 official North Korean trade tripled, from about $1 billion to over $3 billion. The country's main exports are coal and textiles. China accounts for 90 percent of Pyongyang's trade, making it North Korea's overwhelming economic lifeline. In 2017, US sanctions pushed the North's exports to under $2 billion, mainly after China decided to buy fewer North Korean exports aiming to bring it to negotiating table over its nuclear weapons.

  • Population

The population of North Korea is 24.54 million, roughly half that of the South (50.22 million).

  • Mortality rates

Life expectancy is 10 years lower in North Korea (69.2 years vs. 79.3 years in South Korea). The infant mortality rate in South Korea is 4.08 per 1,000 live births, while its shoots up to 26.21 in North Korea (2012 figures).

No peace premium just yet

It is estimated that dismantling North Korea's nuclear weapons program could last up to 10 years and cost $20 billion. A Kookmin University study has estimated that dismantling the North's nuclear weapons would cost $5 billion, with another $5 billion needed to build two nuclear reactors for electricity and a further $10 billion help rebuild the North Korean economy.

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