International Sanctions and North Korea’s Economic Future Impact of Strengthening Sanctions on the North Korean Market April 10, 2023
International Sanctions and North Korea’s Economic Future
Impact of Strengthening Sanctions on the North Korean Market
April 10, 2023
Impact of Strengthening Sanctions on the North Korean Market
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Choi, Ji Young
Korea Institute for National Unification
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April 10, 2023
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[Section 1. Introduction]
The North Korean economy is of great interest for various reasons, including the detection of any humanitarian crisis and the evaluation of the regime's stability and economic reforms. Since 2016, there has been an added interest in assessing the impact of sanctions and predicting their effectiveness.
Assessing the impact of sanctions on the economy alone is insufficient in predicting their effectiveness since the ultimate goal of sanctions is to induce policy changes in target states. Sender states impose economic pressure on target states by severing trade ties and thus exerting pressure on their policymakers. Therefore, sanctions have both economic and political consequences, making it challenging to evaluate their overall effectiveness by solely examining the economic conditions of the target state. The effectiveness of sanctions is determined by various factors, and theoretical discussions aim to identify these variables. Initially, studies evaluated the success rate of sanctions through case studies, while subsequent studies focused on identifying the factors that influence effectiveness. Factors that affect the success rate of sanctions include the political system of the target state, the extent of their trade dependence on sender states, and the involvement of third parties that may weaken or strengthen the sanctions' impact. These variables also reflect the unique characteristics of the target state.
If the effectiveness of sanctions is determined by the individual characteristics of target states, then it is important to consider these factors when evaluating the economic impact of sanctions. Previous studies have suggested that the success rate of sanctions is influenced by major variables such as the political system of the target state, their economic dependence on the sender states or the global economy, and the existence of third countries. When applying these variables to North Korea, it is possible that the effectiveness of sanctions against the country is low due to its non-democratic political system. However, it should be noted that the greater the negative impact of sanctions on the people's livelihood, the more pressure there may be for policy changes. In terms of economic dependence, North Korea's reliance on the international economy increased significantly under Kim Jong Un's leadership and remained high until just before the imposition of sanctions, which could boost the effectiveness of sanctions against the country. Finally, China is a critical player in the impact of these sanctions, as it has the potential to either strengthen or weaken their influence on North Korea.
The second and third factors identified present conflicting implications for the effectiveness of sanctions on North Korea. Although North Korea's dependence on the global economy increased significantly prior to the implementation of sanctions, this was primarily due to trade ties with China, which could play a decisive role in the impact of the sanctions. In this sense, the effectiveness of sanctions is largely contingent on China's compliance. The first and second factors are interconnected since the impact of sanctions on the people's livelihood is determined by the external dependence of relevant industries.
The North Korean market plays a critical role in determining the country's individual characteristics. Firstly, an analysis of North Korea's market conditions is essential in understanding how sanctions affect the livelihoods of its citizens. While policy decisions in response to sanctions are not democratically made, it is evident that hardships in livelihoods have significant political implications. Secondly, the effectiveness of sanctions is closely linked to the extent of foreign trade dependence in sustaining the livelihoods of North Koreans. The allocation of resources for consumer goods, including food, is partially done through markets. Although the domestic production of major foods is high, the proportion of imported goods, particularly processed and durable goods, was relatively significant before the imposition of tougher sanctions, with most imports sourced from China. Lastly, the North Korean market operates under the unique dual economic structure of the regime, which requires careful consideration to fully comprehend its operations. North Korea has maintained a classical socialist system for an extended period of time, but since the mid-1990s, it has operated under a dual economic structure consisting of a formal planning sector and an informal market sector. While the official regime seeks to maintain a socialist planned economy, self-sustaining economic activities also take place on an informal basis. However, government intervention and control in resource allocation of the national economy have significant effects on market conditions. Policy interventions in the market are sometimes implemented to alleviate the difficulties faced by residents, but they are also bolstered to focus resources on the planned sector. As sanctions against North Korea continued in 2020, changes were detected in the regime's policy toward market intervention and control. This chapter evaluates how the economic impact of sanctions has been reflected in the market under North Korea's unique dual economic structure, taking into account the changes in the regime's policies toward market intervention and control.
Assessing the impact of sanctions on the economy alone is insufficient in predicting their effectiveness since the ultimate goal of sanctions is to induce policy changes in target states. Sender states impose economic pressure on target states by severing trade ties and thus exerting pressure on their policymakers. Therefore, sanctions have both economic and political consequences, making it challenging to evaluate their overall effectiveness by solely examining the economic conditions of the target state. The effectiveness of sanctions is determined by various factors, and theoretical discussions aim to identify these variables. Initially, studies evaluated the success rate of sanctions through case studies, while subsequent studies focused on identifying the factors that influence effectiveness. Factors that affect the success rate of sanctions include the political system of the target state, the extent of their trade dependence on sender states, and the involvement of third parties that may weaken or strengthen the sanctions' impact. These variables also reflect the unique characteristics of the target state.
If the effectiveness of sanctions is determined by the individual characteristics of target states, then it is important to consider these factors when evaluating the economic impact of sanctions. Previous studies have suggested that the success rate of sanctions is influenced by major variables such as the political system of the target state, their economic dependence on the sender states or the global economy, and the existence of third countries. When applying these variables to North Korea, it is possible that the effectiveness of sanctions against the country is low due to its non-democratic political system. However, it should be noted that the greater the negative impact of sanctions on the people's livelihood, the more pressure there may be for policy changes. In terms of economic dependence, North Korea's reliance on the international economy increased significantly under Kim Jong Un's leadership and remained high until just before the imposition of sanctions, which could boost the effectiveness of sanctions against the country. Finally, China is a critical player in the impact of these sanctions, as it has the potential to either strengthen or weaken their influence on North Korea.
The second and third factors identified present conflicting implications for the effectiveness of sanctions on North Korea. Although North Korea's dependence on the global economy increased significantly prior to the implementation of sanctions, this was primarily due to trade ties with China, which could play a decisive role in the impact of the sanctions. In this sense, the effectiveness of sanctions is largely contingent on China's compliance. The first and second factors are interconnected since the impact of sanctions on the people's livelihood is determined by the external dependence of relevant industries.
The North Korean market plays a critical role in determining the country's individual characteristics. Firstly, an analysis of North Korea's market conditions is essential in understanding how sanctions affect the livelihoods of its citizens. While policy decisions in response to sanctions are not democratically made, it is evident that hardships in livelihoods have significant political implications. Secondly, the effectiveness of sanctions is closely linked to the extent of foreign trade dependence in sustaining the livelihoods of North Koreans. The allocation of resources for consumer goods, including food, is partially done through markets. Although the domestic production of major foods is high, the proportion of imported goods, particularly processed and durable goods, was relatively significant before the imposition of tougher sanctions, with most imports sourced from China. Lastly, the North Korean market operates under the unique dual economic structure of the regime, which requires careful consideration to fully comprehend its operations. North Korea has maintained a classical socialist system for an extended period of time, but since the mid-1990s, it has operated under a dual economic structure consisting of a formal planning sector and an informal market sector. While the official regime seeks to maintain a socialist planned economy, self-sustaining economic activities also take place on an informal basis. However, government intervention and control in resource allocation of the national economy have significant effects on market conditions. Policy interventions in the market are sometimes implemented to alleviate the difficulties faced by residents, but they are also bolstered to focus resources on the planned sector. As sanctions against North Korea continued in 2020, changes were detected in the regime's policy toward market intervention and control. This chapter evaluates how the economic impact of sanctions has been reflected in the market under North Korea's unique dual economic structure, taking into account the changes in the regime's policies toward market intervention and control.
[Section 2. North Korea’s Dual Economic Structure]
The study of North Korea's economy places significant emphasis on the discussion of marketization, which is approached with the understanding of a dual economic structure. The North Korean marketization process is characterized by two distinct features, namely "marketization from the bottom" and the "complex interdependence of the plan and the market." In contrast to China and Vietnam's "marketization from above," which involved a state-led gradual economic reform while maintaining a communist political system, North Korea's marketization began with spontaneous market activities of households in the mid-1990s as the planned economy partially collapsed. The acceptance of marketization was institutionalized ex-post in the 2000s, as previously discussed in the works of Lee (2005) and Lee et al. (2009).
The North Korean market is characterized by "marketization from the bottom" and a "complex interdependence of the plan and the market." Unlike China and Vietnam, which implemented state-led gradual economic reforms while maintaining a communist political system, marketization in North Korea began with the spontaneous market activities of households in the mid-1990s when the planned economy was partially paralyzed. Institutional acceptance of marketization occurred ex-post in the 2000s. Another unique characteristic of the North Korean market is the "complex interdependence of the plan and the market," which distinguishes it from the black market and the second economy of the old purely socialist economy. In the socialist state, the dual economic structure was clearly divided according to the type of ownership of the production unit and the resource allocation method. Resources were allocated by planned prices when the production unit was state-owned or cooperatively owned, and by market prices when privately owned. However, such a symmetrical distinction is difficult to observe in the North Korean economy today. State-owned enterprises procure raw materials at planned prices and sell the products they produce at both planned and market prices. When procuring raw materials from the planned sector is difficult, they turn to the market sector. Thus, activities for "public purpose" to achieve the goals of the planned sector within state-owned enterprises and "private interest seeking" activities in the market sector are carried out together. Privately owned units, on the other hand, rely entirely on market mechanisms and engage in "private interest seeking" activities. Kim and Yang (2014) define both "personal profit-seeking" activities through planning and market mechanisms in state-owned and cooperative-owned units and those by privately owned production units as the "informal sector." Such a complex plan-market interdependence relationship also makes it difficult to analyze the North Korean economy. Examining the characteristics of the North Korean dual economic structure is necessary to understanding the impact of stronger sanctions on the market, that is, the informal sector. Figure 1 shows the circulation of income within North Korea’s dual economic structure.
The North Korean market is characterized by "marketization from the bottom" and a "complex interdependence of the plan and the market." Unlike China and Vietnam, which implemented state-led gradual economic reforms while maintaining a communist political system, marketization in North Korea began with the spontaneous market activities of households in the mid-1990s when the planned economy was partially paralyzed. Institutional acceptance of marketization occurred ex-post in the 2000s. Another unique characteristic of the North Korean market is the "complex interdependence of the plan and the market," which distinguishes it from the black market and the second economy of the old purely socialist economy. In the socialist state, the dual economic structure was clearly divided according to the type of ownership of the production unit and the resource allocation method. Resources were allocated by planned prices when the production unit was state-owned or cooperatively owned, and by market prices when privately owned. However, such a symmetrical distinction is difficult to observe in the North Korean economy today. State-owned enterprises procure raw materials at planned prices and sell the products they produce at both planned and market prices. When procuring raw materials from the planned sector is difficult, they turn to the market sector. Thus, activities for "public purpose" to achieve the goals of the planned sector within state-owned enterprises and "private interest seeking" activities in the market sector are carried out together. Privately owned units, on the other hand, rely entirely on market mechanisms and engage in "private interest seeking" activities. Kim and Yang (2014) define both "personal profit-seeking" activities through planning and market mechanisms in state-owned and cooperative-owned units and those by privately owned production units as the "informal sector." Such a complex plan-market interdependence relationship also makes it difficult to analyze the North Korean economy. Examining the characteristics of the North Korean dual economic structure is necessary to understanding the impact of stronger sanctions on the market, that is, the informal sector. Figure 1 shows the circulation of income within North Korea’s dual economic structure.
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