Why the North Korean economy is growing

By M.F.

NORTH KOREA has become increasingly antagonistic over the past year. The tragic death on June 19th of Otto Warmbier, an American student who was held by North Korea for over a year and who subsequently fell into a fatal coma, was only the latest provocation (see article). North Korea has carried out missile tests about every two weeks since the start of the year. Western sanctions and promises of action from China have failed to rein in its nuclear programme. Less remarked upon but perhaps more surprising is that sanctions have also not had much effect on the North Korean economy. Though measuring the impoverished country’s economy remains educated guesswork at best, most experts agree that it is probably growing at between 1% and 5% a year. What makes it so resilient?

In part this is because not all sanctions are meant to cripple the economy. Many are more narrowly targeted. Asset freezes and travel bans target individuals close to the regime; prohibiting the sale of military supplies is meant to hobble the army. But even those that are broad-based have not always been effective. The UN has attempted to block North Korea’s access to hard currency by capping the amount of coal the state can export, potentially depriving it of more than a quarter of its total export revenue. China, the buyer in 99% of North Korea’s reported coal sales, went further in February, saying it would suspend all imports. Yet North Korean vessels have continued to dock at China’s coal ports. And the North can earn foreign currency in other ways: using foreign agents as a front, the regime sells drugs, weapons and counterfeit goods. Mr Kim’s government also earns more than $1bn a year by forcibly sending labourers abroad.

A weak enforcement framework limits efforts to crack down on illegal trade. And sanctions could be broader still. Countries or individuals that help North Korea do business have not been subject to “secondary sanctions” that would further isolate the country. Such sanctions were instrumental in persuading Iran to seek a deal over its own nuclear plans in 2015. Yet blacklisted North Korean entities continue to enjoy access to the international banking system through the help of Chinese networks and front companies, says Anthony Ruggiero, a former Treasury official who advised Americans during the last round of negotiations with North Korea. Efforts are being made to plug the holes. Rex Tillerson, America’s secretary of state this month told Congress that the administration was moving closer to placing sanctions on countries that do not comply with UN measures.

Yet the North Korean economy may be able to withstand some increased pressure. Though still officially illegal, private enterprise has grown since reforms encouraged by Mr Kim made it possible for individuals to generate profit. Beyond what they must produce for the state, farmers and factories now have some liberty to find customers of their own. Satellite imagery shows markets growing both in size and number across cities. Small and medium businesses are proliferating, says Rüdiger Frank of the University of Vienna, noting that six taxi companies now operate in Pyongyang. Miniso, a home-goods store, became the first foreign chain to open in North Korea, in April. Limited reforms have also allowed the regime to plug part of its dollar deficit: the donju, North Korea’s new class of traders and businessmen, buy themselves protection by making hard-currency “donations” to the government.

Further reading
The outrageous death of Otto Warmbier (June 2017)
A trendy Asian lifestyle chain opens in North Korea (June 2017)