North Korea’s Economy Contracts, Despite Chinese Sanctions-Busting

The Donga Ilbo publishes a very interesting study finding that North Korea’s economy has contracted recent years, mostly due to the loss of South Korean aid and the effect of sanctions:

South Korean assistance to the North surged to raise the indicator to a high of 236.9 in 2007, a huge leap from the baseline score of 100 in 1995. The communist country`s trade volume also jumped 43.4 percent due to the expansion of trade with China. The North`s economy began to shrink from 2008, when the South halted aid. Notably, the indicator fell to as low as 86.5 in 2009 to tie the record-low set in 2000. Due to deterioration of inter-Korean relations, the volume of South Korean government assistance to the North tumbled over the period to 36.2 in 2009, down 84.7 percent from that in 2007. A decline in external trade except with China due to tougher international sanctions against Pyongyang also hastened the deterioration of the North Korean economy. Due to the participation by Singapore, one of the North`s top five trading partners, in the sanctions, the combined volume of the North`s trade fell about 10.7 percent, resulting in the indicator falling from 186.3 in 2008 to 166.3 in 2009. [Donga Ilbo]

The chief lesson I take from this is that a well-orchestrated campaign of international sanctions can still damage North Korea’s official economy enough to cause long-term decline, even despite China’s efforts to circumvent it.  Although all statistical analysis of the North Korean economy is inherently suspect, note that this study relies heavily on an analysis of government-to-government aid and official trade statistics, meaning that the majority of this impact is presumably felt by North Korea’s palace economy.  Downstream, that also affects some of North Korea’s population, but only that shrinking minority that still relies on salaries and benefits from the regime, rather than the black market.

The effect of those sanctions probably still isn’t enough to achieve one of its intended effects — to force the regime to actually dismantle its nuclear programs or allow meaningful verification — although I suspect that for a brief moment in 2006, it might have been.  That time, North Korea was saved from both extinction and negotiated disarmament by Chris Hill, Condi Rice, and George W. Bush.  This time, China has to do and pay more to offset not only the effect of sanctions, but the loss of South Korean aid and another, perhaps even more important factor — the self-inflicted wound of North Korea’s currency “reform,” a/k/a The Great Confiscation of 2009.  It would be interesting to see any decent translation of this study, but especially one that has data to measure the effects of that fiasco.

As if on cue, Marcus Noland provides additional evidence of the continuing effects of the Great Confiscation.  The Great Confiscation, of course, was intended to drive most of the commerce of ordinary North Koreans back under the regime’s economic control.  The G.C. certainly did terrible damage to the black market system temporarily, but it didn’t extinguish markets, and it has also had severe and adverse effects on the official economy, too.  The loss of confidence in, and inflation of, the North Korean currency has persisted, has recently been exacerbated by the succession of Kim Jong Eun, and has driven money out of the North Korean banking system and into people’s mattresses, or into the alternative black-market financial system.  To restore confidence in the currency, Noland suggests, Kim Jong Eun may be taking a tip from the economic policies of Ron Paul by minting gold coins (I’m glad that I haven’t lost my ability to savor ironies like this).  However, the minting of gold coins in North Korea is neither a new development nor, most likely, a hint of that North Korea is going on the gold standard.  See my comment to Noland’s post for an explanation.