The Koreas

Can North Korea’s Economy Endure China’s Slowdown?

Pyongyang’s economy has quietly grown in recent years. China’s economic rebalance promises to reverse this trend.

Yong Kwon
Can North Korea’s Economy Endure China’s Slowdown?
Credit: Flickr / yeowatzup

Last year was a relatively good one for North Korea.

The UN Crop and Food Security Assessment Mission (CFSAM) estimated that the overall crop production for the 2013-14 harvest season increased about 5 percent from the previous year. With the agricultural sector accounting for about a fifth of North Korea’s GDP, analysts believe the country’s economic growth exceeded the 1.3 percent growth the country experienced in 2012, according to the Bank of Korea. In addition, according to the Korea Trade Promotion Corporation (KOTRA), North Korea’s total external trade (excluding that between the Koreas) in 2013 increased by 7.8 percent from the previous year, reaching the highest recorded trade volume since KOTRA began collecting the data in 1990.

Reviewing these figures, there is no doubt that the North Korean economy is gradually rebounding from the catastrophic famine of the 1990s, and the instability that followed the 2009 currency revaluation.

Nonetheless, there is a looming problem that threatens this promising, albeit feeble, pace of growth. Namely, the economic upswing over the past few years has been, in no small part, driven by North Korea’s expanding trade with China. While China’s seemingly unquenchable demand for raw materials in the last decade provided Pyongyang with the means to service valuable imports, it left the economy highly exposed to its northern neighbor. Now, with Beijing committed to rebalancing its economy, North Korea’s dependence on China will cause significant economic turmoil moving forward.

Pyongyang itself is most likely cognizant of this problem. Although never explicit, the North Korean state has dropped several hints alluding to this serious issue. One of the many charges leveled against Jang Sung-taek during his purge in December 2013 was that he exported “coal and other precious underground resources at random.” Pyongyang alleged that the indebtedness of the mineral extraction industries, resulting from corruption and mismanagement by Jang and his associates, was part of a larger conspiracy to destabilize and overthrow the regime. While the validity of this claim is difficult to assess, the accusation itself reveals Pyongyang’s concern with the sector’s performance in recent years.

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Indeed, mineral exports plays a significant role in the North Korean economy. According to KOTRA, North Korea exported around $1.65 billion worth of minerals in 2011, a 33-fold increase from a decade before and almost 60 percent of Pyongyang’s total exports in that year. In many cases, like anthracite and iron ore, 100 percent of these minerals were exported to China.

KOTRA has also noted that 89.1 percent of North Korea’s entire foreign trade in 2013 (excluding that with South Korea) was with China. While analysts have long pointed to Beijing as the North Korean regime’s key economic patron, Pyongyang’s rising level of dependence in recent years has been unprecedented. In 2005, only 52.6 percent of North Korea’s external trade was with China. Last year, China accounted for close to 90 percent of all North Korea’s trade. At the same time, the country’s total trade volume nearly doubled from $3.816 billion in 2008 to $7.34 billion dollars in 2013

However, as Jang Sung-taek’s purge partly revealed, this intimate trade relationship between China and North Korea is under threat as Beijing is slowing down its breakneck pace of growth to rebalance the economy toward greater domestic consumption. Already, analysts expect overall demand from the Chinese market to slow as infrastructure spending falls and domestic resources like cement, steel, and other materials remain underutilized.

In recognition of the dangers of its heavy dependence on China, North Korea appears to be branching out in order to stave off a plunge in mineral export revenues. Most recently, Russia and North Korea signed an agreement to boost the annual bilateral trade to $1 billion by 2020. Despite this ambitious goal, it is unlikely that demand from Russia, with its economic growth expected to stagnate or even decline this year, will be able to adequately substitute for China as an importer of North Korean natural resources. This is especially true given that Russia already produces many of the minerals North Korea seeks to export.

This places Pyongyang in an extremely difficult position, both economically and politically. You can only go so far in scapegoating a man you already executed for all the country’s social and economic woes. And while the changing dynamics of China’s economy will also provide some new opportunities, the North Korean economy has never excelled at innovation. All things considered, it seems safe to say that North Korea will not be clear of economic troubles in the near future.