North Korean Economy Shrinks 3.5 Percent Under Sanctions Pressure

According to a report from South Korea’s central bank on Friday, the North Korean economy contracted 3.5 percent in 2017 under pressure from international sanctions. It was the largest contraction of the North Korean economy in two decades.

The contraction was even more significant because North Korea’s economy grew by 3.9 percent the previous year. The South Korean economy grew by 3.1 percent in the same year North Korea’s contracted by 3.5 percent.

“The negative growth is attributable to a drop in its mining output and a retreat in its heavy and chemical industries, as the United Nations imposed tougher sanctions over its nuclear and missile activities,” said a Bank of Korea (BOK) official.

Yonhap News published some key details from the report:

Last year, the mining industry in North Korea tumbled 11 percent due to a drop in coal production, a sharp turnaround from a 8.4 percent growth in 2016. Its agricultural and fisheries output fell 1.3 percent on-year, according to the data.

The manufacturing sector also suffered a 6.9 percent decline, compared to a 4.8 percent increase in 2016. Though light industry inched up 0.1 percent, the heavy and chemical sectors sank 10.4 percent, the bank said.

The electricity, gas and tap water business shed 2.9 percent in 2017 due to a fall in hydroelectric power production, and the construction field posted a 4.4 percent decrease. But the service sector went up 0.5 percent.

The BOK put the North’s gross national income (GNI) in 2017 at 36.6 trillion won ($32.2 billion), which is 2.1 percent of that of South Korea. Its per-capita GNI stood at 1.46 million won, which is 23-times less than the South’s.

The communist country’s trade volume stood at $5.55 billion last year, down 15 percent from a year earlier, the BOK said.

Exports tumbled 37.2 percent to $1.77 billion, while imports inched up 1.8 percent to $3.78 billion.

The volume of inter-Korean trade collapsed 99.7 percent on-year to log $900,000 in 2017, after the Seoul government shut down the joint industrial complex of Kaesong the previous year.

It should be noted that all of these figures rely on some guesswork because North Korea does not publish reliable economic statistics and (to put it mildly) discourages the careful study of its economy by outside analysts.

The International Monetary Fund attributed a good deal of the massive drop in North Korea’s export volume to reduced Chinese purchases of resources such as coal. China’s compliance with sanctions has been far less than perfect, but reduced Chinese trade with North Korea apparently still exerted a profound effect on the North Korean economy.

“The sharp decline in North Korea’s exports last year is a direct effect of the sanctions. The sanctions imposed by China last year, the biggest export destination of North Korean products, dealt a huge blow,” judged North Korea expert Kim Byung-yeon of Seoul National University, as quoted by the Washington Post.

The Post notes that maintaining full sanctions pressure may be difficult moving forward since Russia is lobbying the U.N. to lift some sanctions as a reward for its ostensible good behavior, while China and Russia are blocking efforts to tighten sanctions on petroleum products. U.S. policymakers familiar with North Korea’s standard game of pocketing concessions granted for symbolic and temporary “concessions” want full sanctions maintained until North Korea actually terminates its nuclear missile program.

Keeping the pressure up is important because some experts believe 2018 will be even harder for North Korea than 2017 was. In this view, the mildly encouraging steps Pyongyang has taken so far were prompted more by dread of the years to come than by the pain sanctions have inflicted so far. Things would have to get considerably worse before the North Korean elite truly felt the pinch and began worrying about maintaining its grip on power.

“The economy is likely to get worse. I estimate this year’s growth rate can be at least minus 5% if the sanctions are fully and thoroughly implemented,” said Seoul National University’s Kim.

Watchdog group 38 North argued on Wednesday that despite visible signs of pressure on its economy, North Korea is slowly winning its latest staring contest with the Western world.

In 38 North’s analysis, the “concessions” Russia is so eager to reward dictator Kim Jong-un for making are actually less significant than measures North Korea has taken in the past, and many of those turned out to be easily reversible. The Trump administration’s stated goal of “complete, verifiable, irreversible denuclearization” (CVID) remains a non-starter in Pyongyang; a significant reduction of visible nuclear activities while secret work continues and stockpiled nukes are hoarded is the best that can be realistically hoped for at present.

From this perspective, counting the North Korean economy’s rough year in 2017 as a major accomplishment and rewarding Kim Jong-un for the paltry concessions made thus far would give Kim a major victory in the showdown, as he would emerge stronger than ever at the bargaining table, and poised to reap the rewards of increased economic engagement with the outside world. North Korea is clearly taking steps to cash in on post-sanctions euphoria at this very moment. The result could make 2017’s gloomy economy seem like a minor investment in riches to come, rather than a punitive experience that forced Kim to the bargaining table.

This suggests two possible courses for U.S. policy: either keep sanctions pressure tough, dismiss everything North Korea has done so far as pure theater, and wait for even worse economic hardship in the years ahead to truly begin the CVID process, or devise a strategy to transform North Korea through engagement into the kind of state that presents less of a threat.

There is evidence to suggest both options are on the Trump administration’s mind. Both could explain why President Donald Trump keeps referring to North Korean denuclearization as a “long process” with “no time limit,” whereas he previously portrayed it as a matter of breathless urgency. Getting maximum pressure in place and bringing the Kim regime to the table was urgent, but now it will either take another year or two to break Pyongyang’s will, or the objective all along was to reduce the overall threat posed by North Korea rather than just neutralizing its nuclear missile program. South Korea certainly has little reason to feel safer just because North Korea hypothetically gives up its nukes but keeps thousands of conventional guns pointed at vulnerable South Korean cities.

In either case, it should be clear that every act in the North Korean nuclear drama over the past year was merely part of the prologue. If the Trump administration and international community it as anything else, then Kim Jong-un is indeed winning, no matter how lousy the outlook for North Korea’s economy might be today.