The Koreas | Economy | East Asia

Coronavirus: The Economic Costs for North Korea

The outbreak, and Pyongyang’s response, will seriously strain the North Korean economy.

Coronavirus: The Economic Costs for North Korea
Credit: Flickr/ (stephan)

Despite Pyongyang’s efforts to insulate itself from the spread of the coronavirus, North Korea will not be able to insulate its economy from the consequences of the infectious disease.

Cognizant of its vulnerabilities, North Korea was one of the first countries to take steps to stop the spread of the coronavirus known as COVID-19. In late January, Pyongyang ended foreign tourism and reportedly closed its borders with Russia and China shortly thereafter (though there are indications that some goods are still being imported). These decisions have had economic consequences.

The proactive response demonstrated the regime’s heightened sense of concern about COVID-19 compared to prior contagious outbreaks such as SARS, MERS, H1N1, and Ebola. During the SARS outbreak in 2002-2003, North Korea shut down tourism at Mount Kumgang for two months and put in place restrictions that slowed trade. While North Korea did restrict the access of foreigners during other outbreaks, it did not go to the same extent to close its borders.

With North Korea’s border closed, its economy will see negative effects from reduced external economic connections. Early estimates suggest that the coronavirus could result in a first quarter contraction in Pyongyang’s largest trading partner, China, while the OECD warned that a longer lasting outbreak could cut global growth in half this year. North Korea will also likely face slowing internal economic activity as it loses access to needed external inputs and potential domestic constraints on economic activity.

North Korea’s refusal to publicly publish economic data makes it difficult to understand how these restrictions are exactly impacting the North Korean economy. One way to better understand North Korea’s challenges may be to frame these issues in terms of the external and internal challenges.

The External Challenges for the North Korean Economy

The SARS outbreak is the most analogous case that can help us assess the economic impact of the ongoing coronavirus crisis.

There are key differences that make it difficult to tabulate an exact estimate. During the SARS outbreak in the winter of 2002-2003, North Korea had a more diverse range of trading partners and was less dependent on China. China itself was also a smaller part of the world economy and didn’t see an overall decline in GDP growth in 2003, something which may not be the case with the coronavirus.

Nonetheless, some statistics from the SARS outbreak provide a baseline for understanding how the coronavirus might impact the North Korean economy. China in the coming weeks will release official trade data for February and those figures will give us a better understanding of how tightly North Korea has restricted trade in an effort to contain the virus.

We can get a feel for those costs by looking at the overall trajectory of trade between the two countries in the past two years. With UN sanctions restricting North Korea’s licit trade, exports to China in February of 2019 were a little less than $18 million, according to China’s General Administration of Customs. This was up from $9.4 million in 2018. Imports from China in February over the last two years ranged from $89 million to $102.7 million.

In short, exports and imports with China have settled into fairly stable ranges under the current sanctions, admittedly with some monthly variation. However, with February being a short month with reduced production the last two years due to the Lunar New Year, the potential losses in February of this year may be slightly higher. Losses will rise if the border remains closed in March and April.

One significant legal source of hard currency for North Korea is tourism. Low range estimates suggest that North Korea earns at a minimum $105 million a year from foreign tourists, or an average of $8.75 million a month. This figure is likely to be lower during winter months when tourism is slower, but North Korea will lose irreplaceable revenue the longer the ban on foreigners persists.

North Korea also engages in smuggling. The UN has estimated that Pyongyang earned $370 million from illegal coal shipments through the first eight months of 2019, for an average of $46.25 million a month. Reports suggest that smuggling across land and rivers has largely come to a halt with North Korea threatening to use force against those crossing the border and China instructing its citizens to avoid the border. Pyongyang has also implemented strengthened quarantine measures at sea ports that appear to have slowed shipments in and out of North Korea. These include 10 day restrictions on goods entering. These measures have likely begun to slow illegal shipments of coal and other goods such as sand via land and sea.

Simultaneously, with restaurants and factories closed in China, North Korean workers who are employed in the country (in violation of UN sanctions) have not been able to work for the past month. The regime is reportedly insisting that its workers in China still pay their loyalty fees (around 1,000 RMB), but generally we can assume that Pyongyang will lose access to this critical source of revenue while the quarantine remains in place.

The Domestic Impacts on the North Korean Economy

North Korea’s domestic efforts to stop the spread of the coronavirus will also have economic consequences. What we don’t know is how restrictions on trade and domestic travel are impacting domestic markets, specifically ones that largely trade in domestically produced goods.

If the reductions in travel and their impact on small and medium sized enterprises (SMEs) in China are reflective of the situation in North Korea, North Korean SMEs are also likely facing pressures from labor shortages, supply chain disruption, declining orders, rising costs, and expectations of further declines in revenue.

Some of this can be seen in SMEs that rely on trade with China, which are now experiencing a version of the supply chain disruption impacting industries in other countries. North Korea had shifted some of its manufacturing toward nonsanctioned items in recent years to earn hard currency. As a result, parts for watches and synthetic fibers have become major import items from China, which North Korea then assembles into finished watches and wigs to be exported to China. Those companies now face input shortages and no market for their final products.

Despite sanctions, North Korea has seen relatively stable prices for goods in informal markets. However, recent data from DailyNK suggests that the scarcity is starting to cause inflation. Prices for staple items imported from China such as rice, sugar, soybean oil, and fuel have all seen inflation. To combat the increase in prices, the government has resorted to price controls and releasing some of its stores, but has also told major organizations, including military-run factories, that they should secure their own supplies of food for the next month.

With trade curtailed North Korea will also be less able to stabilize its economy than other countries. State banks reportedly do not play a role in the economy and money is transferred by market participants either via cash, mobile phone, or a combination of both. As small businesses begin to struggle from declining domestic demand they will be unable to make payment on their loans. Without a role in the private sector it is unclear if state banks could step in to provide bridge loans to struggling firms or if the donju (private money lenders) have the will and capacity to do so.

Additionally, being outside of the broader set of international institutions limits the international support North Korea could receive. The World Health Organization, International Monetary Fund (IMF), and the Asian Development Bank are coordinating to provide technical advice, policy recommendations, and financial support. These are resources that Pyongyang will be unable to draw on, though they would be likely to provide policy advice or technical assistance if requested.

The Medium-Term Implications for the North Korean Economy

Once the coronavirus is under control and economic activity can return to normal in China and other countries, the medium-term implications for North Korea will depend on whether there is a rapid (or V-shaped) recovery in key trading partners like China or whether growth remains depressed for the rest of the year.

Over the last century, economic recoveries from an epidemics have been V-shaped and both the IMF and the People’s Bank of China assume that the containment of the coronavirus will lead to similar outcomes.

If the recovery is V-shaped, North Korea will be able to quickly resume both its legal exports but also its smuggling of high-value items such as coal. While there may be temporary losses of revenue, North Korea might be able to make up for most of those losses from commodities and finished goods as the economy recovers, but losses in service sector areas such as tourism are likely to be permanent. It would also likely be able to quickly resume imports of commercial goods, agricultural products, and inputs for the production of its licit exports of items such as watches. In that case, the overall losses to the regime in Pyongyang from the coronavirus might be moderated by the end of the year.

However, central bank researchers and some policymakers are suggesting that a V-shaped recovery may not be realistic. A slower economic recovery in other countries would have a more severe impact on North Korea. It could face slowing demand for its licit and illicit exports, weakening an economy that seemed to be weathering sanctions fairly well.

In the past, North Korea was able to turn to China for help. In the immediate term, that option may be limited. While the Chinese government is taking steps to restart the economy and continue to reduce the spread of infections, initial economic indicators suggest that manufacturing has significantly declined as the manufacturing purchasing managers’ index fell to an all-time low of 35.7 in February. Anything below 50 indicates a decline in manufacturing activity from the prior month and the current level is slightly below where the index was during the global financial crisis.

This slowdown has hit one of Pyongyang’s most important smuggling commodities. North Korea was able to earn a significant amount of hard currency from smuggling coal, but coal consumption remains below baseline levels for the Lunar New Year holiday, when most manufacturing shuts down, and well below normal economic levels. Even if North Korea were to reopen its borders with China and normalize trade it would likely face reduced demand and lower prices for coal smuggled across the border if there were not a V-shaped recovery.

One partial coping mechanism would be for North Korea to engage in cyberattacks on financial institutions and cryptocurrency exchanges to make up for some of the financial losses. However, as long as China remains in an economic slowdown and the border remains largely sealed, cyberattacks cannot help North Korea deal with any shortages of goods that develop in the near term. Those activities could help North Korea more quickly resume purchases of needed supplies once trade returns to normal.

While exact data for North Korea may not be available, we do know that the North Korean economy has not been able to avoid the economic consequences of the coronavirus. International trade is likely minimal at most, but that decline in trade is likely also filtering through the domestic economy in the form of inflation and reduced supplies of food and raw materials for manufacturing. The economy is also likely facing financial pressures. Ultimately, this is not a situation that Pyongyang can control and its impact on the North Korean economy will likely depend on how long the coronavirus persists and how quickly the economy in China is able to recover.