How does North Korea sustain its economy?

Deceased leader Kim Jong-il’s regime is financially supported by a mix of Chinese trade, cheap labour and illegal activities.

Matt Lundy 0
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Kim Jong-il (left) makes a state visit to Russia in August. (Photo: www.kremlin.ru/Wikimedia Commons)

Under the rule of Kim Jong-il, the tracksuit-wearing dictator of North Korea who died from a heart attack on Saturday, the country’s economy was repressed by its self-reliance and international sanctions. CIA estimates from 2009 valued GDP at US$29 billion, though other sources put GDP about $10 billion higher. The Wall Street Journal says the country’s economic output is roughly equal to the GDP of Albany, New York. Peter Beck, fellow at the Atlantic Council, says: “Each year the dollar value of South Korea’s GDP expansion equals the entire North Korean economy.”

So how does North Korea make money? How does a closed-off, totalitarian regime sustain its economy?

“Dear Leader” had several ways of pumping at least some cash into its flat-lined economy, ranging from restaurant endeavours and its trade with South Korea, to morally dubious and alleged illegal activities.

But perhaps North Korea’s most crucial support system comes from China, its biggest trading partner and ally. According to the Council on Foreign Relations, China provides North Korea with up to 80% of its consumer goods and 45% of its food. (Other estimates put Chinese food support as high as 70%.)

The same article says there’s a massive trade imbalance between the two: in 2008, Chinese imports amounted to $2.08 billion, whereas North Korean exports totalled $750 million.

“As far as exports are concerned, North Korea is very rich in minerals and the Chinese have recently entered into a number of very large mining deals for zinc and coal and other products,” says Donald Rickerd, an associate fellow at the University of Toronto’s Centre for the Study of Korea.

The CFR says experts view this trade imbalance “as an indirect Chinese subsidy, given that North Korea can’t finance its trade deficit through borrowing.”

In propping up a regime on the brink of economic collapse, China also gets port access and a military ally. “In any collapse of North Korea,” says Rickerd, “you might well see South Korean troops and possibly American troops on the Yalu River, and I think China is not averse to the present situation (acting) as a buffer.” But it also safeguards China against another nightmare scenario: if North Korea’s economy collapsed, thousands of refugees would undoubtedly flee into northeast China.

Inter-Korean support has also increased in recent years. According to the OECD, South Korea projects that its economic cooperation with the North will increase from 0.1% of its GDP in 2005 to 1% in 2030. Between 2000 and 2006, inter-Korean trade tripled to $1.6 billion. Thousands of North Koreans are also employed in Kaesong Industrial Park, a special economic zone used for manufacturing by numerous South Korean firms because of its cheap labour. (The North Korean government also rents out labourers to Russia.)

But the most salacious—and illegal—news about North Korea’s economy comes from National Public Radio. In an audio piece published yesterday, two reporters introduce us to a North Korean defector who formerly worked as a spy for the regime. She claims the government converted potato fields into opium fields, processed drugs and then smuggled them out of the country through China in the 1980s. Nowadays, North Korea is known for its methamphetamine export industry.

The same woman says that counterfeit bills have been sold to Chinese dealers, who pay US$60 for a $100 banknote. The NPR piece also notes that North Korea allegedly deals weapons and nuclear technology. Speaking with The Diplomat, Mark Fitzpatrick, a program director at the International Institute for Stategic Studies, said that “North Korea [has] provided Syria with a plutonium producing reactor and provided the AQ Khan network with uranium hexafluoride that ended up in Libya.”

The North Korean government also operates a restaurant network—located mainly in Chinese cities, though outposts have popped up across Southeast Asia and Russia—that funnels money into state coffers. Diners enjoy a kitschy mix of traditional North Korean fare and waitresses performing song and dance numbers, followed by boozy karaoke sessions. In Cambodia, the restaurants have been popular with Korean tour groups and businessmen. The Chosun Ilbo, a Korean daily newspaper, estimates that over 100 restaurants are operated by the regime, each sending back between $100,000 and $300,000 per year.

The transition of leadership from Kim Jong-il to his son, Kim Jong-un, presents a time of uncertainty in the region. Apart from the obvious problems and threats—food and electricity shortages, political instability and nuclear arms testing—the economic fallout could be catastrophic for the regime’s neighbours, especially South Korea.

Last year, Korean President Lee Myung-bak proposed a “reunification tax” to financially prepare his country for the possibility of absorbing its poverty-stricken neighbour. By increasing cooperation with the North, the Korean government is already hedging against the massive price of integration, which some analysts estimate at $1 trillion.

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