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[Dialogue on the North Korea Economy] Macroeconomic Trends in the Kim Jong-un Era: Continuation or Break?

Review of the North Korean Economy General(Other)

December 30, 2019

 Many agree that the economy of North Korea has changed under the Kim Jong-un regime, but there are often different interpretations as to whether these changes are in line with the continued transformation from the 1990s or they should be seen as a completely separate trend. And the way of understanding the shift varies on which side you stand.

  In this context, the KDI Review of the North Korean Economy September edition chose “Macroeconomic Trends in the Kim Jong-un Era: Continuation or Break” as the first theme of its new section, ‘Dialogue.’ The section covers expert interviews devoted to exploring fundamental and diverse research questions about the North Korean economy in the aspects of economics. We hope that readers find this article interesting and informative.

 
♦ Interviewer: Lee, Suk (Senior Fellow at KDI)
♦ Interviewee: Kim, Kyoochul (Associate Fellow at KDI)
♦ Editor: Kim, Soyoung (Reporter at the Farmers Newspaper)
 




Are there any methods to find out whether there was continuation or break in the macroeconomic trends of North Korea after Kim Jong-un rose to power? If so, please introduce them.

Many argue that the North Korean economy has gone through significant changes since 2012-2013, the initial period of the Kim Jong-un regime. However, it is hard to find substantial discussions on what the changes are or if the changes are real. It seems that most of them tend to argue with their own personal experiences or based on media reports. They often lack strong objective grounds although clear evidences and concrete facts are critical to such arguments.

Economists use Chow test to verify a structural change of an economy. Please see Figure 1 below and imagine that the thick solid lines do not exist. Then, the remaining dots would appear to present similar upward patterns. The patterns, however, are quite different from each other when compared before and after the thin solid line rising from T (time). If one does not pay enough attention, s/he may easily think that the trends of dots follow the dashed line that crosses the chart. This observation will lead to a wrong conclusion on the relationship between axes x and y. Therefore, it is critical to verify the difference in the trends before and after T if the value of T is available. Here comes the Chow test, which is a statistical method used to verify the difference in the gradient and intercept of a trend before and after T.

Everyone agrees that the structure of the South Korea economy has changed in many aspects including employment stability and corporate accounting practices, since 1997 IMF financial crisis. Before the crisis, the concept of a ‘life-long employment’ had been held; but employment stability has deteriorated and corporate accounting practices have greatly improved since the crisis. Data also confirm that there was a break in the trends of many economic variables before and after the crisis. The break is not only observed intuitively in charts but can also be verified through statistical analysis.

Likewise, it is possible to determine if there has been a break in the trends of North Korean economy before and after the inauguration of Kim Jong-un in 2012 by first intuitively interpreting graphs and then confirming through a statistical verification.

I would like to take this interview as an opportunity to explain the results of statistical verification of any change that arose in the trends of the North Korean economy under the Kim Jong-un regime based on data of various sectors that comprise the economy.

You are saying that it is possible to objectively determine whether an economy has experienced a structural change using classic quantitative methods such as the Chow test, and this applies to the North Korean economy under the Kim Jong-un regime. Then, how does that work? For example, what data do you use for Chow test? Is there one or multiple data to use? Please tell us about it in detail.

If one judges the general situation of North Korea only from the aspects of Pyongyang s/he may believe that the North Korean economy has made more progress than expected. According to visitors, Pyongyang has a number of skyscrapers and stores that sell luxury goods not easily affordable even for South Koreans. However, according to the World Food Programme reports, one out of five North Korean children are malnourished and 40% of all North Korean people suffer from poor nutrition. If this is true, North Korea is still one of the poorest countries in the world.

The contradiction raises a question, ‘What life is really like in North Korea?’ I believe both sides reveal a bit of truth. From the perspective of observers on North Korea, especially researchers, information about North Korea seems partial as it usually derives from personal experience like mentioned above. Also, when they choose information on North Korea, bias sometimes plays in depending on their political orientation. The contradiction seems to incur unnecessary costs such as the so-called South-South conflicts when establishing policies on North Korea. What I would like to emphasize here is that the assessment of the North Korean economy should be based on objective data and hard facts while excluding fragmented information and bias as much as possible.

Some assess the North Korean economy based on their own personal experiences because, they say, statistics on the economy are hard to obtain, and, if any, they are unreliable. Recently, however, the reliability and the availability of data on the North Korean economy have gradually improved as international organizations provide reliable statistics on North Korea, and new kinds of data become available. Of course, it is too early to say that statistics on North Korea are equally diverse, reliable, and of high quality as those on such advanced countries as South Korea and the US. Still, analyzing indicators that are considered reliable should come first when we understand the North Korean economy.

 

the assessment
of the North Korean economy
should be based
on objective data and hard facts

There are many components that form an economy, and the North Korea economy also consists of diverse sectors. Trade data tells us much about the economy, but they are not enough to represent the whole. Likewise, jangmadang is essential part of the economy, but it would be ridiculous to try to explain the economy in general only using the data of jangmadang. The reality of the North Korean economy would become comprehensible only after reaching a general conclusion based on the analysis of various components.

In this sense, I would like to review four types of economic indicators of the North Korean economy for this interview. First, I reviewed aggregate economic indices such as gross domestic product(GDP) and economic growth rates. Second, North Korea’s foreign trades including the scale, trends, the structure of trades and export items as well as trade partners were reviewed. Moreover, I researched what impacts export items would have on the economy in the long term, in other words, how the quality of North Korea’s trades transformed over time.

Then, I examined informal sectors of the economy, i.e. jangmadang or markets. Specifically, currency-related factors including the market prices of rice and market exchange rates between North Korean won and US dollar were examined. Finally, public health and welfare indicators including life expectancy, neonatal mortality rate, infant mortality rate, under-five mortality rate, and immunization rates were analyzed. The comprehensive analysis of the four indicators provided a basis to understand changes the North Korean economy has experienced and whether the economy has become any different from the past under the Kim Jong-un regime. The kinds of statistics mentioned above have been recognized for their verified reliability thus used by most researchers who study North Korea. The producers of those statistics include the South Korean government agencies such as Bank of Korea, Statistics Korea; international organizations such as the Food and Agriculture Organization, the United Nations International Children's Emergency Fund; and customs offices of other countries that trade with North Korea.

What you explained would be like the following. There are diverse methods to verify the characteristics of the trends of the North Korean economy under the Kim Jong-un regime, and Chow test is one of the most common quantitative methods. To conduct the test, objective statistical data should be available. Although still controversial, it is true that the quantity and quality of statistical data on the North Korean economy have been improving. Thus, it is possible now to thoroughly examine and verify diverse economic indicators such as GDP, growth rates, and those for trades, markets, agriculture, public health and welfare to reach a conclusion on whether there is a break in the trends of the North Korean economy. This sounds very interesting and scholarly. I wonder what the outcome of that process are. Please tell us about the outcome of the statistical verification of GDP and economic growth rates, the two most representative macroeconomic indicators.

An economic growth rate is a representative indicator that shows a country’s economic development and growth. As North Korean authorities do not release economic growth rates, the estimates provided by the Bank of Korea are used most widely. The estimates are virtually the only data on the North Korean economy available since the United Nations also cites the BOK data for its reports on the economy.
 
Figure 2 shows the economic growth rates of North Korea from 1990 to 2018 based on BOK’s data. During the period, North Korea recorded negative growth rates from 1990 to 1998, an exceptional phenomenon for a normal economy—meaning that the North Korean economy contracted for a long period of time. Then, the rates shifted to the positive territory in 1999 and remained there before beginning to alternate between the negative and positive territories from the mid-2000s. The alternation means that the North Korean economy has experienced stagnation or a slow growth since then. Because the growth rates show no particular moves right after 2013 when Kim Jong-un seized power, it is hard to argue intuitively that the economy improved significantly under the Kim Jong-un regime. Recently, the growth rates have fluctuated from 3.9% in 2016 to -3.5% in 2017 and then to -4.1% in 2018. Given these, an answer to the question, “Has the North Korean economy changed since the inauguration of Kim Jong-un?” would be, “No, it has not.”

For more, please refer to the attached file.

 
 
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The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

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