PIIE Blog | North Korea: Witness to Transformation
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
Subscribe to North Korea: Witness to Transformation Search
North Korea: Witness to Transformation

Growth in North Korea: Better Late than Never

by | September 18th, 2013 | 09:15 am
|

North Korean growth

Unpacking some material that I had hauled back from the East-West Center at the end of August, I stumbled across a notated copy of the Bank of Korea’s report on the North Korean economic performance in 2012. Oops.  Well, better late than never. The bottom line is that while North Korea appears to be muddling through, there are reasons for concern. Maybe that’s why they are making nice.

Given the opacity of the derivation of these figures, one always has to interpret the BOK’s reports with a large grain of salt.  The head line number shows the North Korean economy expanding by 1.3, led by agriculture at 3.9 percent.

The manufacturing sector is estimated to have grown by 1.3 percent, with light manufacturing growing at 4.7 percent, and heavy industry, including chemicals, virtually flat.

Mining—usually cited as a booming sector—at 0.8 percent growth is estimated to have expanded more slowly than the overall economy, but it is unclear whether this reflects slow growth in output or simply slumping prices. Coal production is estimated to have increased 1.2 percent, but metals were down 0.5 percent.

Reputedly the South Korean government relies heavily on satellite photography and other physical counting methods when constructing these estimates.  The analysts probably have a greater degree of confidence in their ability to estimate output in agriculture and industry which are more amenable to counting physical output, and less for services. Consequently growth estimates for these sectors have tended to exhibit greater variability than those for service sectors. In this year’s report, the service sector is estimated to have grown 0.1 percent, reflecting a decline in government services (0.1 percent) and increases in transportation and communication (2.0 percent), wholesale and retail trade (including restaurants and accommodation), also 2.0 percent. The report does not provide any figures for tourism.

Electricity, gas, and water production was up 1.6 percent, while construction contracted by the same amount. Building construction was up 3.4 percent, but civil engineering was down 9.9 percent.  Maybe it was the post-Kim Il-sung centennial construction boom let-down.  Maybe the Masik Pass ski resort can turn it around this year.

Trade, inclusive of North-South trade, was up 8.8 percent. But there are some worrying signs evident.  Inter-Korean trade, which is almost entirely Kaesong trade (99.5 percent), grew much more quickly than trade with the rest of the world, and given the disruption of the KIC, one can confidently predict that inter-Korean trade will be down sharply in 2013.  Moreover, in trade with the rest of the world, effectively China, minerals exports were down in 2012.

As I have argued elsewhere, while North Korea appears to be muddling through, its greatest vulnerability is to a downturn in global metals and ores prices.  A financial crisis in China’s shadow banking system seems increasingly likely; the issues are timing, severity, and the Chinese government’s capacity to manage. It is possible that such a crisis could trigger a sell-off in commodities markets. North Korea could then find itself facing a large trade shock and worsening economic circumstances with few conventional policy levers after a period of relative prosperity and rising expectations. Not the greatest recipe for political stability. Such developments could encourage a tempering of behavior toward South Korea and other partners, though. Maybe this process has already started.