Studi Economici
North Korea

North Korea

Population 25.5 Million
GDP 1,282 $ USD
E
Country risk assessment
E
Business Climate
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Synthesis

MAIN ECONOMIC INDICATORS

 

 

  2017 2018 2019 (e) 2020 (f)
GDP growth * (%) -3.5 -4.1 -1.0 1.0

(e): Estimate. (f): Forecast. *Approximate data based on available sources.

STRENGTHS

  • Bilateral talks with the United States and South Korea increase likelihood of economic integration
  • Youthful population; low labour costs
  • Borders with China and Russia
  • Extensive mining resources remain largely untapped

WEAKNESSES

  • Economically and politically isolated
  • Chronic food and electricity shortages
  • Military spending dwarfs investment in productive sectors
  • Extreme poverty (half of the population)
  • Severe lack of infrastructure

Risk assessment

International isolation persists despite recent diplomatic progress

Supreme Leader of North Korea Kim Jong Un succeeded his father in 2012. He controls the country’s three main administrative bodies: the Workers Party of Korea (WPK), the Korean People’s Army, and the State Affairs Commission. Kim Jong Un has a strong grip on power, which was strengthened by the execution of his uncle Jang Song Thaek in 2013 and the assassination of his step-brother Kim Jong Nam in Malaysia in 2017. The people of North Korea are under total control, and individual freedoms are very restricted.

In 2017, North Korea tested long-range missiles that could reach US territories and continued to enhance its nuclear capacities. In response, the US led a “maximum pressure” strategy to force North Korea to denuclearize. The UN Security Council voted for sanctions to cut exports by 90% (coal, iron ore, seafood and textiles) and oil imports by 55%, thus curtailing North Korean revenues and the country’s most crucial imports. Moreover, the US consolidated the economic isolation by denying US market access to third countries not complying with UN sanctions. This unprecedented pressure (China and Russia have also applied sanctions) has led to two years of severe economic contraction. US President Donald Trump relaunched diplomacy efforts in March 2018 and met with the North Korean leader three times. However, by the end of 2019, the two parties had not been able to reach an agreement, as discussions were at a standstill. Pyongyang rejects the “final and fully verified” denuclearization process requested by Washington, as long as international sanctions are not eased. North Korea is also upset by joint military exercises by the US and South Korean armies, which it perceives as provocations. However, an agreement could yet be reached in 2020, mainly because both leaders would have an interest in this. President Trump could tout this foreign policy success during his campaign for re-election in November 2020, while Kim Jong Un is looking to take advantage of this unprecedented rapprochement with the US administration to reduce his country’s economic isolation and promote its development.

At the same time, relations with China and South Korea have improved slightly. South Korean President Moon Jae-in has set an ambitious agenda for increased economic integration and cooperation on social and military issues, which was advanced in 2018 as he met with Kim Jong Un on three occasions. Under the Panmunjom Declaration adopted in April 2018, both sides agreed to work together to end the Korean War and promote the denuclearization of the Korean Peninsula.

 

The economy remains fragile and hurt by international sanctions

The North Korean economy remains marked by significant structural weaknesses, which hamper its development. Moreover, in the absence of an agreement, international sanctions will continue to weigh heavily on foreign trade. Imports are estimated to have fallen by 31% in 2018, exacerbating the frequent shortages of oil and consumer goods. At the same time, exports are also estimated to have collapsed by more than 80%, particularly in textiles, ores and machinery. In addition, trade with South Korea remains very limited and continues to be adversely affected by the closure of the vast Kaesong industrial complex located on the border between the two countries, which was shut down in 2016 after Pyongyang conducted its fourth nuclear test.

The country’s economy is characterised by central planning and strict state ownership of capital and resources. The agricultural sector still accounts for a substantial share of production (nearly 25% of GDP) and remains largely state-owned and unproductive. In the services sector (33% of GDP), three-quarters of the value added produced is directly linked to State activity. However, increasing economic liberalization is likely, as Kim Jong Un has suggested that North Korea should pursue a model similar to the Doi Moi policy implemented by Vietnam in the 1980s, combining market reforms and better links with the West while guarding political control. This is in line with the policy of byungjin, which is designed to promote the simultaneous development of the economy and the nuclear arsenal. In addition, since the late 1990s, a market economy has begun to emerge through illegal bartering and smuggling initiatives. Moreover, since Kim Jong Un came to power, the State has grown more tolerant of markets (jangmadangs), which have increased significantly in size and number, paving the way for some entrepreneurship and allowing people to supplement their incomes. The tourism sector, which is still very marginal due to isolationism, has nevertheless benefited from an increase in the number of Chinese tourists in recent years, particularly in Pyongyang. A rapprochement with South Korea would stimulate FDI and manufacturing, but would also boost the construction sector, with both countries planning to build connectivity infrastructure (rail and road). Inflation will remain extremely volatile, given the high level of external dependency and weak agriculture. The won should continue to be subject to downward pressure (it is mainly traded on the black market).

 

Last update : February 2020

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