North Korea’s trade volume tripled over the past two decades despite sanctions from the international community. On the other hand, the country’s economic growth rate has not increased but has rather recorded negative values. While it is generally understood that growth in trade leads to growth in the economy, North Korea hasn't exhibited such a transition. What has happened in North Korea? Kyoochul Kim, a fellow at KDI, analyzed the long-term qualitative changes in North Korea’s trade from 1996 to 2016.
To understand the trade structure, an analysis was conducted on North Korea’s major trade partners and most commonly exported items by year. From 2002 onwards, China ranked as the top partner based on the trade volume, and its share exceeded 90% in 2016. With regard to the most commonly traded products (yearly), anthracite dominated from 2008, with its trade volume sharply expanding to 40%. It can be understood that this was driven by demand factors, including an increase in the demand for fossil fuels during China’s economic development, and also by supply factors, including the difficulties associated with the earning of foreign currency.
With regard to the export boom in North Korea’s anthracite to China, human and physical capital investments have been focused on anthracite, in which, little capital input is in fact required. This is, hence, diminishing the competitiveness of other industries. North Korea’s China-and-anthracite-dependent trade structure has distorted the allocation of resources in North Korea, and this has resulted in a decline in the quality of exported items.
While North Korea was able to expand its exports on the basis of its China-and-anthracite-dependent trade structure, this could shrink the human and physical capital investments needed for growth.
Kim conducted a comparison with Vietnam, a similar socialist country, to confirm whether changes in the trade quality have affected economic growth. Like North Korea, Vietnam has achieved quantitative growth. However, what differentiates Vietnam from North Korea is that its trade quality has also improved. It has upgraded its export items from agricultural products to apparel and electronic parts, along with an increase in physical and human capital input for export items. The fruits of such progress have been consistent with economic growth, contrary to the stagnant growth of North Korea.
North Korea’s heavily dependent export structure is highly atypical. This type of structure is vulnerable to external shocks given that it is sensitive to the fluctuations in the international price of anthracite and to China’s economy. This could have a negative impact not only on economic stability but also on long-term economic growth. To ensure and bolster sustained growth, measures must be examined to induce North Korea to reduce its share of exports of low-value-added products such as anthracite and instead to foster other exporting industries, such as apparel, electronics, and software, using high-tech equipment through which capital investment can be vitalized.