International Sanctions and North Korea’s Economic Future Implications of International Sanctions on North Korea’s Balance of Foreign Exchanges between 2016 and 2020 March 27, 2023
International Sanctions and North Korea’s Economic Future
Implications of International Sanctions on North Korea’s Balance of Foreign Exchanges between 2016 and 2020
March 27, 2023
Implications of International Sanctions on North Korea’s Balance of Foreign Exchanges between 2016 and 2020
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Hyoungsoo Zang
Korea Development Institute
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March 27, 2023
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[Section 1. Introduction]
The prevalent perspective among scholars studying the economy of the Democratic People's Republic of Korea (North Korea) suggests that the United Nations Security Council's imposition of sanctions against the country's nuclear and missile programs had minimal impact until 2016. Prior to this, the United Nations Security Council's imposition of sanctions on North Korea was frequently labeled as "smart sanctions," due to the numerous loopholes in the measures, resulting in the moniker being viewed with derision. Meanwhile, North Korea expedited its nuclear and ballistic missile capabilities development.
Since 2016, the United Nations Security Council has passed six resolutions imposing sanctions on North Korea. Notably, Resolution 2321, issued on November 30, 2016, resulted in a substantial reduction in North Korea's coal exports, which had been its primary foreign currency revenue source. As a result, North Korea's coal exports declined from $1.2 billion in 2016 to $400 million in 2017, equivalent to the levels observed in 2010. Following Donald J. Trump's election to the US presidency, the UN Security Council issued Resolution 2371 on August 5, 2017, completely prohibiting North Korea's exportation of mineral products while also blocking the exportation of fishery products. Subsequently, in response to North Korea's sixth nuclear test, the UN Security Council passed Resolution 2375 on September 11, 2017. This measure prohibited North Korea from exporting textile products and limited the exportation of refined petroleum products to the country to a maximum of two million barrels annually. Additionally, all new joint ventures with North Korea were forbidden, and any preexisting projects were compelled to terminate operations within four months.
In November 2017, North Korea proclaimed that it had achieved "nuclear capability." In response, the UN Security Council passed Resolution 2397 on December 22, 2017, sharply reducing the maximum yearly supply of refined petroleum products to North Korea from two million barrels to five hundred thousand. The resolution further prohibited the sale of North Korea's fishing rights, while UN member states were required to repatriate all North Korean workers employed in their respective countries by the end of 2019. The Security Council's resolutions against North Korea, issued during the 2016-2017 period, effectively imposed a comprehensive trade embargo by blocking many of North Korea's sources of foreign exchange revenue, including major exports, joint ventures, and overseas dispatched workers.
Therefore, the potential repercussions of the more stringent sanctions imposed on North Korea were considerably more severe than those of prior sanctions before 2016. While the lack of official statistics on North Korea's economy makes it challenging to precisely determine its economic conditions, it appears that the situation was not as dire as most researchers studying the North Korean economy in South Korea had anticipated between 2017 and the end of 2020. Despite sanctions, the fluctuations in food prices such as rice and corn, which serve as indicators of North Korea's prices, were less severe than expected. The prices of refined oil products, including gasoline and diesel, have experienced significant fluctuations, yet overall, they have not indicated a severe oil shortage within the country. Moreover, foreign exchange rates, which reflect the circulation of foreign exchanges within North Korea, have exhibited a relatively stable trend. Although there was an abrupt increase of more than 20% in the value of the North Korean won at the end of 2020, such observations remain perplexing since the sanctions have negatively impacted the North Korean economy, consequently impeding its trade since 2017. In light of this seeming contradiction, can we gain any insights into the North Korean economy by scrutinizing its balance of foreign exchanges?
In the study of developing economies, the International Monetary Fund (IMF) and the World Bank rely on fundamental data pertaining to either the balance of payments or the balance of foreign exchanges. Developing countries often experience a persistent deficit of foreign exchange, which is crucial for importing equipment and materials necessary for their economic and infrastructural development. Hence, the balance of foreign exchanges assumes a pivotal role in shaping national economic policies. Typically, when advising developing member states on economic policies, the IMF and the World Bank undertake a continuous evaluation of the targeted growth rates for these countries over a three-year horizon along with their foreign exchange balance. Following the assessment of foreign exchange deficits, the two entities establish strategies aimed at attaining growth targets for individual countries. Given that most nations face constraints in independently securing foreign exchange, the IMF and World Bank conduct comprehensive evaluations and provide recommendations on how to obtain foreign exchange by leveraging multilateral international financial institutions and official development assistance (ODA) provided by developed donor nations. Similarly, the initial phase of research and analysis of North Korea's economy involves an evaluation of its balance of foreign exchanges.
The balance of foreign exchanges in North Korea exerts a significant impact on its economy via various channels. To begin with, the country's GDP is influenced by the export of commodities, which does not deplete its inventory, and the import of producer goods, machinery and equipment, intermediate goods, fertilizers, and crude oil, which gradually boosts GDP over time. Depending on which stage of the production process the imported goods are utilized in, the resulting effect on GDP for that year may vary. Conversely, consumer goods such as food and medicine do not have a direct impact on GDP. However, as imported consumer goods circulate throughout the country, they could spur growth in the service sector, indirectly influencing GDP. Additionally, foreign currency remittances sent to North Korea by overseas workers, including restaurant workers, may contribute to the marketization of its informal sector, consequently increasing its informal GDP.
The academic literature on North Korea's balance of foreign exchanges comprises several studies, including those conducted by Zang (2009, 2013) and Zang and Kim (2019). This paper seeks to systematically examine the significant implications of these previous studies. Subsequently, it reevaluates North Korea's balance of foreign exchanges over a five-year period between 2016 and 2020, using newly published data from both domestic and foreign sources, as reported by Zang and Kim (2019). Since the imposition of intensified international sanctions against North Korea in 2016, the country has engaged in illicit activities such as cyberattacks and smuggling to augment its foreign exchange reserves. This study encompasses an assessment of the effects of the COVID-19 pandemic on North Korea's foreign exchange earnings, which have impacted nations worldwide. The subsequent estimation of North Korea's foreign exchange reserves as of the end of 2020 is based on the country's annual earnings from 1991 to 2020. Finally, this analysis presents implications for the North Korean economy derived from the outcomes of its estimated foreign exchange earnings and reserves for the five-year interval spanning from 2016 to 2020.
Since 2016, the United Nations Security Council has passed six resolutions imposing sanctions on North Korea. Notably, Resolution 2321, issued on November 30, 2016, resulted in a substantial reduction in North Korea's coal exports, which had been its primary foreign currency revenue source. As a result, North Korea's coal exports declined from $1.2 billion in 2016 to $400 million in 2017, equivalent to the levels observed in 2010. Following Donald J. Trump's election to the US presidency, the UN Security Council issued Resolution 2371 on August 5, 2017, completely prohibiting North Korea's exportation of mineral products while also blocking the exportation of fishery products. Subsequently, in response to North Korea's sixth nuclear test, the UN Security Council passed Resolution 2375 on September 11, 2017. This measure prohibited North Korea from exporting textile products and limited the exportation of refined petroleum products to the country to a maximum of two million barrels annually. Additionally, all new joint ventures with North Korea were forbidden, and any preexisting projects were compelled to terminate operations within four months.
In November 2017, North Korea proclaimed that it had achieved "nuclear capability." In response, the UN Security Council passed Resolution 2397 on December 22, 2017, sharply reducing the maximum yearly supply of refined petroleum products to North Korea from two million barrels to five hundred thousand. The resolution further prohibited the sale of North Korea's fishing rights, while UN member states were required to repatriate all North Korean workers employed in their respective countries by the end of 2019. The Security Council's resolutions against North Korea, issued during the 2016-2017 period, effectively imposed a comprehensive trade embargo by blocking many of North Korea's sources of foreign exchange revenue, including major exports, joint ventures, and overseas dispatched workers.
Therefore, the potential repercussions of the more stringent sanctions imposed on North Korea were considerably more severe than those of prior sanctions before 2016. While the lack of official statistics on North Korea's economy makes it challenging to precisely determine its economic conditions, it appears that the situation was not as dire as most researchers studying the North Korean economy in South Korea had anticipated between 2017 and the end of 2020. Despite sanctions, the fluctuations in food prices such as rice and corn, which serve as indicators of North Korea's prices, were less severe than expected. The prices of refined oil products, including gasoline and diesel, have experienced significant fluctuations, yet overall, they have not indicated a severe oil shortage within the country. Moreover, foreign exchange rates, which reflect the circulation of foreign exchanges within North Korea, have exhibited a relatively stable trend. Although there was an abrupt increase of more than 20% in the value of the North Korean won at the end of 2020, such observations remain perplexing since the sanctions have negatively impacted the North Korean economy, consequently impeding its trade since 2017. In light of this seeming contradiction, can we gain any insights into the North Korean economy by scrutinizing its balance of foreign exchanges?
In the study of developing economies, the International Monetary Fund (IMF) and the World Bank rely on fundamental data pertaining to either the balance of payments or the balance of foreign exchanges. Developing countries often experience a persistent deficit of foreign exchange, which is crucial for importing equipment and materials necessary for their economic and infrastructural development. Hence, the balance of foreign exchanges assumes a pivotal role in shaping national economic policies. Typically, when advising developing member states on economic policies, the IMF and the World Bank undertake a continuous evaluation of the targeted growth rates for these countries over a three-year horizon along with their foreign exchange balance. Following the assessment of foreign exchange deficits, the two entities establish strategies aimed at attaining growth targets for individual countries. Given that most nations face constraints in independently securing foreign exchange, the IMF and World Bank conduct comprehensive evaluations and provide recommendations on how to obtain foreign exchange by leveraging multilateral international financial institutions and official development assistance (ODA) provided by developed donor nations. Similarly, the initial phase of research and analysis of North Korea's economy involves an evaluation of its balance of foreign exchanges.
The balance of foreign exchanges in North Korea exerts a significant impact on its economy via various channels. To begin with, the country's GDP is influenced by the export of commodities, which does not deplete its inventory, and the import of producer goods, machinery and equipment, intermediate goods, fertilizers, and crude oil, which gradually boosts GDP over time. Depending on which stage of the production process the imported goods are utilized in, the resulting effect on GDP for that year may vary. Conversely, consumer goods such as food and medicine do not have a direct impact on GDP. However, as imported consumer goods circulate throughout the country, they could spur growth in the service sector, indirectly influencing GDP. Additionally, foreign currency remittances sent to North Korea by overseas workers, including restaurant workers, may contribute to the marketization of its informal sector, consequently increasing its informal GDP.
The academic literature on North Korea's balance of foreign exchanges comprises several studies, including those conducted by Zang (2009, 2013) and Zang and Kim (2019). This paper seeks to systematically examine the significant implications of these previous studies. Subsequently, it reevaluates North Korea's balance of foreign exchanges over a five-year period between 2016 and 2020, using newly published data from both domestic and foreign sources, as reported by Zang and Kim (2019). Since the imposition of intensified international sanctions against North Korea in 2016, the country has engaged in illicit activities such as cyberattacks and smuggling to augment its foreign exchange reserves. This study encompasses an assessment of the effects of the COVID-19 pandemic on North Korea's foreign exchange earnings, which have impacted nations worldwide. The subsequent estimation of North Korea's foreign exchange reserves as of the end of 2020 is based on the country's annual earnings from 1991 to 2020. Finally, this analysis presents implications for the North Korean economy derived from the outcomes of its estimated foreign exchange earnings and reserves for the five-year interval spanning from 2016 to 2020.
[Section 2. Balance of Foreign Exchanges before 2016]
The estimation of a country's balance of payments or foreign exchanges necessitates access to data on numerous specific components that constitute the balance of payments. Given North Korea's infrequent release of official statistics, the data available to determine its foreign exchange balance is limited. Nonetheless, the fragmented information on North Korea's foreign exchange balance that can be gleaned from various publicly accessible sources, both domestic and foreign, is more extensive than anticipated (Zang 2021, 3-15). With careful examination through repeated cross-checking, the data required to estimate the specific components of the balance of payments, albeit with incomplete time-series, can be obtained.
It is widely recognized that data can also be obtained through the application of the mirror statistics method, which entails the examination of a trading partner's data. In this regard, the primary sources used for this approach are the compilation statistics of Korea Trade and Investment Promotion Agency (KOTRA) and the modified statistics of Korea Development Institute (KDI).
KOTRA statistics are widely utilized owing to their easy accessibility, complete time-series format spanning from 1990 to the present, and the familiarity they have garnered among the general public through media coverage. Consequently, previous studies examining North Korea's balance of foreign exchanges typically commence their analysis with the KOTRA compilation statistics. These statistics, however, possess a notable drawback, as they exclude an entire country's trade statistics from the sample if its trade with South Korea is suspected of being mistaken for trade with North Korea in the UN trade statistics. To tackle this issue, Lee Suk et al. (2010) reconstructed North Korean trade statistics by identifying trade patterns between North Korea and South Korea, China, and Japan (less possible confusion about South and North Korea) and excluded from the UN statistics any trade transactions that significantly deviated from these patterns. These reconstructed statistics, referred to as the KDI modified statistics, are deemed to be more reliable than KOTRA's compilation statistics with a high degree of confidence. Nevertheless, they have a limitation, as their time-series data only exist between 1990 and 2008. This study commences its analysis with the KOTRA compilation statistics and endeavors to enhance the analysis's accuracy by employing the KDI modified statistics.
Inter-Korea economic cooperation, comprising transactional trade, consignment processing trade, Mt. Kumgang tourism, and the Gaeseong Industrial Complex, represents a critical component of North Korea's balance of foreign exchanges. The South Korean government releases official statistics on this economic cooperation that are deemed both comprehensive and reliable. Additionally, the South Korean National Intelligence Service provides unofficial data to the National Intelligence Committee of the National Assembly, with certain details occasionally disclosed to the public when the committee's secretaries respond to questions from reporters. Although there have been instances of inaccurate relay of the National Intelligence Service reports, most experts can distinguish between accurate and inaccurate information, rendering the National Intelligence Service a valuable source of information. This is exemplified by the data on the number of North Korean workers overseas and North Korea's imports.
Official statistics on grants and loans are released by several countries, including South Korea, the United States, and China. Moreover, the UN Office for the Coordination of Humanitarian Affairs (UNOCHA) annually reports the amount of humanitarian aid directed towards North Korea. International organizations such as the International Fund for Agricultural Development (IFAD), OPEC Fund, the Kuwait Fund, and the Korean Peninsula Energy Development Organization (KEDO), as well as investment companies such as Orascom, provide publicly available reports. In addition, investment statistics and customs statistics are obtainable from the Commerce Department of China, which represents the most significant investor in North Korea. The Stockholm International Peace Research Institute (SIPRI) provides statistics on North Korea's arms trade, while the UN Security Council's Panel report on North Korea contains import estimates of refined petroleum products via ship-to-ship transfers, estimates of foreign currency revenue derived from coal, sand, and fishing rights smuggling, and estimates of illicit revenue generated from cyberattacks. Additionally, statistics on North Korea's overflying fees and the Japanese government's estimates on the pro-North Korea group's remittances to North Korea, based in Japan, are also available. Occasional disclosure by the North Korean authorities on the number of tourists visiting North Korea and tourism revenue and data from Chinese travel agencies specializing in North Korea trips constitute additional sources of reference.
It is widely recognized that data can also be obtained through the application of the mirror statistics method, which entails the examination of a trading partner's data. In this regard, the primary sources used for this approach are the compilation statistics of Korea Trade and Investment Promotion Agency (KOTRA) and the modified statistics of Korea Development Institute (KDI).
KOTRA statistics are widely utilized owing to their easy accessibility, complete time-series format spanning from 1990 to the present, and the familiarity they have garnered among the general public through media coverage. Consequently, previous studies examining North Korea's balance of foreign exchanges typically commence their analysis with the KOTRA compilation statistics. These statistics, however, possess a notable drawback, as they exclude an entire country's trade statistics from the sample if its trade with South Korea is suspected of being mistaken for trade with North Korea in the UN trade statistics. To tackle this issue, Lee Suk et al. (2010) reconstructed North Korean trade statistics by identifying trade patterns between North Korea and South Korea, China, and Japan (less possible confusion about South and North Korea) and excluded from the UN statistics any trade transactions that significantly deviated from these patterns. These reconstructed statistics, referred to as the KDI modified statistics, are deemed to be more reliable than KOTRA's compilation statistics with a high degree of confidence. Nevertheless, they have a limitation, as their time-series data only exist between 1990 and 2008. This study commences its analysis with the KOTRA compilation statistics and endeavors to enhance the analysis's accuracy by employing the KDI modified statistics.
Inter-Korea economic cooperation, comprising transactional trade, consignment processing trade, Mt. Kumgang tourism, and the Gaeseong Industrial Complex, represents a critical component of North Korea's balance of foreign exchanges. The South Korean government releases official statistics on this economic cooperation that are deemed both comprehensive and reliable. Additionally, the South Korean National Intelligence Service provides unofficial data to the National Intelligence Committee of the National Assembly, with certain details occasionally disclosed to the public when the committee's secretaries respond to questions from reporters. Although there have been instances of inaccurate relay of the National Intelligence Service reports, most experts can distinguish between accurate and inaccurate information, rendering the National Intelligence Service a valuable source of information. This is exemplified by the data on the number of North Korean workers overseas and North Korea's imports.
Official statistics on grants and loans are released by several countries, including South Korea, the United States, and China. Moreover, the UN Office for the Coordination of Humanitarian Affairs (UNOCHA) annually reports the amount of humanitarian aid directed towards North Korea. International organizations such as the International Fund for Agricultural Development (IFAD), OPEC Fund, the Kuwait Fund, and the Korean Peninsula Energy Development Organization (KEDO), as well as investment companies such as Orascom, provide publicly available reports. In addition, investment statistics and customs statistics are obtainable from the Commerce Department of China, which represents the most significant investor in North Korea. The Stockholm International Peace Research Institute (SIPRI) provides statistics on North Korea's arms trade, while the UN Security Council's Panel report on North Korea contains import estimates of refined petroleum products via ship-to-ship transfers, estimates of foreign currency revenue derived from coal, sand, and fishing rights smuggling, and estimates of illicit revenue generated from cyberattacks. Additionally, statistics on North Korea's overflying fees and the Japanese government's estimates on the pro-North Korea group's remittances to North Korea, based in Japan, are also available. Occasional disclosure by the North Korean authorities on the number of tourists visiting North Korea and tourism revenue and data from Chinese travel agencies specializing in North Korea trips constitute additional sources of reference.
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