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North Korean Economy

KDI FOCUS

The Quantitative Growth in North Korea's Trade : Is it Enough?

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  • Author KIM. Kyoochul
  • Date 2018/09/05
  • Series No. KDI FOCUS No. 93, eng.
  • Language English
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SUMMARY □ Despite international sanctions, North Korea’s trade has exhibited quantitative growth. However, the sanctions have also limited North Korea’s trade partners to China. The surging demand for anthracite in China has skewed North Korea’s trade structure, leaving it vulnerable to external shocks and possibly distorting the allocation of resources and diminishing the capital investment in other industries. In response, the South Korean government must make efforts to seek new measures for economic cooperation to encourage North Korea to foster other industries that have comparative advantage. In addition, assistance must be made available to enable North Korea to establish a balanced trade structure by diversifying its trade partners and trade portfolio.

- North Korea’s trade has grown in quantity since the 2000s.

- North Korea’s economic growth was unable to catch up with the growth in trade due to the qualitative decline.

- North Korea’s trade has been heavily dependent on China from the mid-2000s.

- From 2008, North Korea’s top export item has been anthracite and its export volume has expanded sharply.

- The spike in North Korea’s anthracite exports from the late 2000s was driven by demand factors including an increase in the demand for fossil fuels on China’s economic development and also supply factors including the difficulties in earning foreign currency.

- National income and economic growth are determined by qualitative aspects such as what items are being exported.

- The trends in North Korea’s physical and human capital investment helps to evaluate the quality of its export and to project the sustainability of its long-term economic growth.

- An anthracite-dependent export structure would reduce the investment in physical and human capital, possibly leading to longterm economic stagnation.

- Vietnam’s exports have grown in both quantity and quality, since consistently expanding its export of hightech products, contrary to North Korea whose trade quality has weakened.

- North Korea’s China- and anthracite-dependent trade structure is vulnerable to external shocks as well as reducing human and physical capital investment, diminishing long-term growth.

- The South Korean government needs to act as a bridge between North Korea and the world, helping North Korea discard the existing trade structure and transform itself into a normal member of the global economy.
KDI VOD Report
Despite sanctions from the international community, North Korea’s trade volume realized two decades of consistent growth starting from 1996.

However, while it is common for an economy to grow in line with the growth in trade, North Korea’s economy remains lackluster.

Quality as well as quantity is a vital factor in long-term economic growth. That is, “what” is exported is as important as “how much”.

And, North Korea has fallen short in this aspect.

Why? In order to find out, KDI first analyzed the changes in North Korea’s exports for the past 20 years.

Until 2001, North Korea’s largest trading partner was Japan, and its exports were diverse, including mineral products, electronic parts and seafood.

In 2002, however, China replaced Japan, intensifying North Korea’s dependency.

Indeed, in 2016, China’s share of North Korea’s overseas trade marked a staggering 90%. And the share of anthracite has grown rapidly since the late 2000s.

The boom in anthracite exports derives from the surging demand for fossil fuel products due to China’s rapid economic development.

Also, North Korea strategically expanded its anthracite export to China in response to international sanctions which have restricted the inflow of foreign currencies.

So, what does this trade structure-bias towards China and anthracite mean for the North Korean economy?

An examination was conducted into the level of physical and human capital input required to produce specific items and a comparison was made with Vietnam.

Vietnam has also seen a sharp increase in its export volume during the past 20 years. But, that is where the similarities end.

While North Korea’s quality of input has continued to decline since the mid-2000s, that of Vietnam’s has continued to increase.

The underlying source of the disparity lies in the changes in the items themselves.

Vietnam, whose economy underwent structural reform in the late 1980s, has achieved both quantitative and qualitative growth in its trade volume. It has upgraded its export items from agricultural products in the 1990s, apparels in the 2000s and electronic parts from 2010 onwards.

The fruits of such progress has been consistent economic growth.

On the other hand, North Korea seems to have moved in the opposite direction, from exporting diverse items including electronic products in the 1990s to exporting mainly anthracite, which requires little technology and capital, from the mid-2000s.

In fact, North Korea’s anthracite trade with China has concentrated production resources on the coal industry.

And, if this China- and anthracite-dependent export structure becomes a permanent fixture, it will weaken North Korea to external shocks in the short-term and distort the allocation of resources in the long-term, eventually diminishing the competitiveness of other industries.

[Interview with the author]
The Korean government must consider the changes in the trade structure of North Korea and seek economic cooperation measures which could drive North Korea’s long-term economic growth.
Specifically, after sanctions have been lifted, North Korea must cooperate with the international community to transition away from its one-sided trade with China to become a normal economy that trades in diverse items.
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