North Korea Likely Suffering Worst Downturn Since 1990s Famine
The South Korean central bank’s annual report on its northern neighbor will provide a fresh look at the impact of U.S.
(Bloomberg) -- How much are sanctions hurting Kim Jong Un? North Korea’s economy hasn’t been in such bad shape since his father was battling floods, droughts and a famine that some estimates say killed as much as 10% of the population.
The South Korean central bank’s annual report on its northern neighbor -- due for release later this month -- will provide a fresh look at the impact of U.S. President Donald Trump’s pressure campaign just as the two sides prepare to restart talks. While North Korea’s isolation, secrecy and dearth of official statistics make estimates difficult, the economy probably contracted more than 5% last year, according to Kim Byung-yeon, an economics professor at Seoul National University.
“As long as sanctions remain, time is on the U.S. side,” said Kim Byung-yeon, who also wrote the book “Unveiling the North Korean Economy.” “Sanctions are the most effective means to draw North Korea into negotiations, so they should not be lifted or eased without major progress on denuclearization.”
A decline of 5% would mean that international curbs on North Korean trade -- measures crucially backed by China -- have put the country on its weakest economic footing since 1997. Back then, the isolated nation was reeling from policy missteps under Kim Jong Il and a famine so bad some defectors reported rumors of cannibalism.
The Bank of Korea estimated a 3.5% contraction in 2017, leaving North Korea an economy roughly the size of the U.S. state of Vermont. Park Yung-hwan, a BOK official in charge of North Korean growth data, declined to comment on the central bank’s latest calculations since the work was still underway.
One thing sanctions aren’t doing: stopping Kim from developing the nuclear arsenal that prompted his showdown with Trump. The cost launching the more than 30 ballistic missiles Kim Jong Un has tested since taking power in 2011 comes in at about $100 million, according to estimates by South Korea’s defense ministry.
Nevertheless, Trump is counting on the economic pressure to compel Kim to compromise after the two leaders agreed in a historic meeting at the Demilitarized Zone last month to resume working-level talks. The president had earlier rejected the North Korean leader’s offer to dismantle his aging nuclear complex at Yongbyon in exchange for the removal of the toughest sanctions.
“We will look forward, of course, to resuming those negotiations, and we hope to talk about all ways that we can advance progress on these commitments,” U.S. State Department spokeswoman Morgan Ortagus told a briefing Tuesday in Washington.
Here’s a look at some indicators of North Korea’s current slump:
China Freeze
North Korea is heavily reliant on China, which accounts for about 90% of the country’s trade. And Beijing’s decision to support tougher international sanctions against North Korea following its sixth nuclear test in September 2017 has put severe pressure on the economy.
Sanctions imposed by the UN Security Council hit everything from North Korea’s exports of raw materials, minerals and clothes to the movement of manual-laborers and software engineers. The drying up of hard currency due to plunging trade is potentially creating an “economic crisis” for Kim, the state-run Korea Development Institute in Sejong, said earlier this month.
China’s imports from North Korea have slowed to a trickle, falling about 90% year on year to just $195 million in 2018, according to the Korea International Trade Association. Meanwhile, exports of food and fuel from China to the North have also tumbled.
Fuel Shortages
Before sanctions were in place, North Korea imported about 3.9 million barrels of oil in 2015, according to the Central Intelligence Agency’s The World Factbook. Sanctions capped the country’s imports to a 500,000 barrels of oil last year.
But Kim’s regime has found ways to evade the sanctions, using illicit high seas transfers to obtain oil and export its goods, the U.S. and its allies have said. The country’s ports received at least 263 tanker deliveries of refined petroleum, according to U.S. estimates, enough to bring as much as 3.78 million barrels of fuel.
The fuel crunch has exacerbated decades of economic stagnation. North Korea’s oil consumption has fallen by about 80% from 1991 to 2017, according to the United Nations World Food Program, one of the few international bodies with access to on-the-ground reporting and statistics in the country.
Agricultural Declines
Less fuel has meant less diesel to run farm tractors and irrigation pumps, hitting farms already affected by droughts last summer. Last year, farmers had a little less than 90 milliliters (3 fluid ounces) of fuel a day to farm an area about the size of two soccer fields, according to calculations based on WFP data.
The sanctions have led to shortages of other necessary agricultural items, including machinery and spare parts, and farm output has dropped in the provinces that make up North Korea’s southern and western breadbaskets, the World Food Program and Food and Agricultural Organization of the United Nations said in a May assessment.
Paddy production declined at least 17% last year in South Hwanghae and North Pyongan provinces, regions that together account for half of North Korea’s rice. “The unintended negative impact sanctions can have on agricultural production, through both direct and indirect impacts, cannot be ignored,” the report said.
In April, Kim replaced his prime minister and leading technocrat Pak Pong Ju with Kim Jae Ryong, a veteran overseer of one of North Korea’s most impoverished provinces whose reputation for weathering tough times suggests leader Kim may also see a need to dig in rather than experiment should the sanctions continue.
--With assistance from Jiyeun Lee.
To contact the reporters on this story: Sam Kim in Seoul at skim609@bloomberg.net;Jon Herskovitz in Tokyo at jherskovitz@bloomberg.net
To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, ;Malcolm Scott at mscott23@bloomberg.net, Paul Jackson
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