Sanctions Deal Harsh Blow to N.Korean Economy

  • By Lee Yong-soo

    February 24, 2018 08:28

    International sanctions seem to be dealing a hard blow to the North Korean economy, which may have acted as a spur to North Korean leader Kim Jong-un's charm offensive toward South Korea.

    The sanctions have left the North short of hard currency just as a degree of marketization was starting to improve the lives of some ordinary North Koreans. Kim's slush funds are being rapidly depleted, which means that regular handouts to the elite to buy their loyalty are also drying up, and even some in the ruling class are turning to open-air markets for their basic needs.

    Even just a couple of years ago, the predominant views was that sanctions were mostly toothless because North Korea's economy is closed, but that underestimated the progress of marketization and dependence of goods imported mostly from China.

    The North's trade-to-GDP ratio has risen significantly since 2010 and is now close to 50 percent, compared to the global average of about 60 percent. Its trade dependence on China is near-total at over 90 percent. "This shows how rapidly Pyongyang has increased coal and iron ore exports to China since sales of agricultural and fishery products to South Korea were banned in 2010," a researcher with a government-funded think tank here said.

    The number of open-air markets has jumped from some 200 in 2011, before Kim took power, to more than 400. They mostly sell Chinese goods, and the informal currencies are dollars and yuan earned somehow from other trade. That means the North's real economic structure depends on international trade to keep functioning.

    This is why the UN Security Council has shifted from banning weapons parts to broader trade transactions. In March 2016, the UNSC resolution banned member states from importing coal, iron and iron ore from the North except for civilian purposes. A series of follow-up resolutions banned member states from importing North Korean coal, underground resources, fishery products and textiles and asked the North to recall all its slave laborers from overseas within 24 months. This amounts to a full-fledged economic blockade.

    China's attitude is hardening, and the biggest blow is that it is at least officially on board with most of the sanctions.

    "The North's exports to China dwindled 37 percent last year, and once all sanctions kick in they are expected to drop more than 90 percent this year," said Prof. Kim Byung-yeon of Seoul National University.

    Shrinking exports have also depleted Kim's loyalty funds from trading companies. "The living of the power elite, who used to line their pockets through exports, has become difficult," a source said. "This seems to be the reason why the regime has launched a charm offensive toward the South early this year."

    Kim in his New Year's address admitted the country faces “the worst situation” because of the sanctions. Oil prices have soared and power supply is intermittent-to-rare. Once the open-air markets crumble, there will be hardly any lifeline left.

    "The regime's imports will begin dropping this year because its purchasing power has dwindled due to shrinking exports," Prof. Kim added. "The sanctions will be a 'delayed bomb' in the markets."

    But it remains to be seen whether the regime will make any real concessions even if another famine strikes.

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