North Korean Economy in Crisis as UN Imposes Tough New Sanctions

Photo by NDTV

by Rajiv Biswas, Asia Pacific Chief Economist for IHS Markit

  • The United Nations Security Council passed Security Council Resolution 2371 on 5 August to impose tough new economic sanctions on North Korea that would completely ban North Korean exports of coal, iron and iron ore, lead ore, as well as seafood exports.
  • China is North Korea’s largest export market and in 2016, coal, ores and seafood accounted for around 61 percent of total North Korean exports to China. Therefore, China’s earlier decision to suspend coal imports from North Korea together with the additional new sanctions under UN Security Council Resolution 2371 will severely reduce total North Korean exports to China.
  • The new UN sanctions also go far beyond sanctions on North Korean exports of goods, and include a ban on UN member states increasing the number of North Korean guest workers allowed to work in their countries, in order to cut off the flow of foreign exchange to North Korea.
  • The new United Nations sanctions also bans the establishment of any new joint ventures or cooperative entities with North Korean entities or individuals.
  • The UN also imposed an assets freeze on four North Korean entities, including North Korea’s foreign exchange bank, the Foreign Trade Bank. Asset freezes were also imposed on Korea National Insurance Company, Koryo Credit Development Bank and the Mansudae Overseas Project Group of Companies. The Mansudae Overseas Project Group of Companies has been involved in arranging the export of North Korean workers abroad, often for construction projects, notably in Africa as well as in Malaysia. Malaysia has already taken unilateral action by deciding to stop renewing work permits for North Koreans, which has already resulted in significant numbers of North Korean guest workers who were working in Malaysia having returned to North Korea.
  • The new UN sanctions also ban any vessels that have been involved in transporting North Korean goods in breach of UN sanctions from entering the ports of any UN member countries. UN member states are also required under the new resolution to prevent their nationals or entities from owning, leasing or operating any vessel flagged by North Korea.
  • US Secretary of State Rex Tillerson is attending the ASEAN Regional Forum that is being held in Manila, and will press ASEAN member countries to rapidly implement the new UN sanctions against North Korea.

North Korean Economic Crisis Will Intensify Following the Tough New UN Sanctions

China’s support for the new UN Security Council Resolution 2371 and its tough new economic sanctions is an important signal of China’s intent to intensify pressure on North Korea to resume Six Party Talks. China is North Korea’s most important export market and also a key host country for North Korean guest workers. The Chinese government had previously announced on 18 February 2017 that it had suspended coal imports from North Korea, with effect from 19 February to 31 December 2017, in line with United Nations Security Council’s Resolution 2321, which had restricted North Korean coal exports, effective on 1 January 2017, to a maximum of $401m or 7.5 million tonnes. China has been the largest importer of North Korean anthracite which accounted for 85 percent of China’s coal imports from North Korea in 2016. In 2016, China’s anthracite imports from North Korea totaled 22.4 million tonnes, up 15% from 19.6 million tonnes in 2015. The main use of anthracite is for the steel industry, which uses the anthracite to produce coke, which is an important raw material for steelmaking.

IHS Markit Global Trade Atlas data shows that total Chinese merchandise imports from North Korea fell by 52 percent in the three months from March to May 2017 compared to the previous three months from December 2016 to February 2017. This sharp decline mainly was due to significantly lower Chinese imports of North Korean anthracite. Following the Chinese government’s implementation of UN sanctions against North Korea in February 2017, anthracite imports from North Korea dropped to zero in March.

The impact of the sharp cut in Chinese imports of North Korean anthracite has already had a negative impact on North Korean mining production as well as total North Korean exports for the period from March to July 2017. The new UN sanctions announced on 5 August will further intensify the North Korean export slump, and is likely to contribute to negative growth in North Korean GDP in 2017.

At the same time as North Korean exports are slumping due to UN economic sanctions, a severe drought during April to June 2017 has reduced North Korean agricultural production, which will also contribute to the expected contraction in North Korean GDP in 2017, with the United Nations Food and Agricultural Organization having estimated that early season crop production is down 30% compared to last year.

The North Korean economy is still mired in poverty with GDP per capita still only at 5 percent of South Korean per capita GDP, a savage indictment of the failed isolationist, centrally planned economic model of the North Korean totalitarian dictatorship which has brought misery and extreme poverty to its population for many decades. In 2016, the per capita GDP of North Korea was $1,355 compared with South Korean per capita GDP of $27,942.

An estimated 40 percent of the total population of North Korea are undernourished and an estimated 70 percent of the total population are reliant on food aid, including significant international humanitarian assistance that has been provided by the UN and also various bilateral donor food aid programs. In 1995 to 1997, North Korea was hit by a severe famine that resulted in an estimated 2.5 million deaths, reflecting the utter failure of its Stalinist centrally planned management of agricultural production compounded by harsh government policies that diverted food resources to the Pyongyang elite.

Since 2009, the North Korean economy has grown at a feeble annual average rate, with GDP contracting in three of the past eight years and showing growth of around 1 percent for four of these years. The only year of rapid growth was 2016, when North Korean GDP growth rose to 3.9 percent, mainly due to rapid growth of 8.4 percent in mining output, mainly of coal, lead and zinc. However, due to the impact of UN economic sanctions on exports of coal and lead imposed in 2017, North Korean mining output is expected to contract sharply this year. With both mining and agriculture expected to contract in 2017, around 34 percent of the total economy of North Korea will be experiencing output declines, while growth in the remaining manufacturing, services and construction sectors of the economy will also be weak.

Meanwhile, foreign exchange inflows into North Korea are expected to be severely hit by the slump in exports and new measures to curtail North Korean worker remittances from abroad, which will widen North Korea’s trade deficit and accelerate the erosion of North Korea’s limited foreign exchange reserves.