Economy

North Korea's Secret Weapon? Economic Growth.

Rising living standards will limit the effect of sanctions.

Things are looking up. Sort of.

Photographer: Ed Jones/AFP

With the United Nations imposing yet another round of sanctions on North Korea for its nuclear provocations, it's worth asking why such penalties have been failing for more than a decade. One reason is that the North Korean economy is improving more than is commonly understood -- and that will make altering its behavior through trade barriers significantly harder.

The current approach to sanctions is partly based on the assumption that North Korea's economy is a socialist nightmare, but that's no longer really true. Although the country is still poor, its gross domestic product grew by an estimated 3.9 percent in 2016, to about $28.5 billion, the fastest pace in 17 years. Wages have risen quickly, and per-capita GDP is now on par with Rwanda, an African economic exemplar.

This progress is partly due to continued trade with China, which remains reluctant to crack down on its neighbor, despite calls for tighter sanctions. Although China agreed in February to ban North Korean coal imports, iron imports have surged and total trade increased by 10.5 percent in the first half of the year, to $2.55 billion. 

At the same time, economic reforms made in 2011 have begun to take hold, allowing factory managers to set salaries, find their own suppliers, and hire and fire employees. Farming collectives have been replaced by a family-based management system, which has led to far greater harvests. The government has even come to tolerate private enterprise on a limited basis.

The results are striking. Street vendors, once rare, are now a common site in Pyongyang. Some neighborhoods have new luxury high-rises, modern supermarkets, fashionable shops, and streets busy with Mercedes-Benzes and BMWs. Although the government denies having abandoned the old socialist system, the evidence is undeniable: By some estimates, the private sector now accounts for up to half of GDP.

Meanwhile, given the country's still-widespread impoverishment, simple improvements in agriculture and natural-disaster management are enough to yield significant new growth. Last year's impressive GDP gains were due largely to recovery from a bad drought in 2015.

For North Koreans, rising living standards are obviously a good thing. The problem is that the economy still has plenty of room to grow before further progress will require the removal of trade barriers. That means it could be years before new sanctions would hurt enough to cause a significant change in behavior. Until then, the nation's ideology of self-reliance, known as juche, seems almost plausible.

Kim Jong-un, North Korea's dictator, looks to be fashioning himself after South Korea's Park Chung-hee or China's Deng Xiaoping -- that is, as an iron-fisted economic reformist. Despite rampant human-rights violations, Park still stands tall in the memory of many South Koreans for bringing the country into economic maturity. Deng is largely responsible for turning China into the economic powerhouse that it is today. It's easy to imagine that if Kim's nuclear arsenal keeps the U.S. military at bay long enough, he's got a shot at a similar legacy. 

Of course, he still faces some enormous challenges, not least being cut off from the global system of trade. Hidebound apparatchiks may object to further reforms, a wealthier public may question the legitimacy of Communist rule in an increasingly capitalist state, and market bubbles could prove destabilizing. But faced with excruciating pressure and scant resources, North Korea has nevertheless been steadily achieving its goals for years. Further economic growth is likely to only help.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    David Volodzko at volodzko@gmail.com

    To contact the editor responsible for this story:
    Timothy Lavin at tlavin1@bloomberg.net

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