Fifteen Eighty Four

With all eyes turned towards North Korea, many are wondering if there is a solution that can prevent a potentially devastating war in the Korean peninsula and a way to achieve North Korea’s nuclear disarmament. My recently published book entitled “Unveiling the North Korean Economy” provides insight into one crucial and necessary policy decision that should be made: the North Korean economy needs to be hit, and hit hard. In this regard, the new economic sanctions adopted by the United Nations (UN) Security Council this month may be on the right track.

First, as discussed in my book, the ‘socialist’ North Korean economy can be regarded as an ‘open’ economy. It shows that North Korea’s trade dependence in the recent years exceeded 50%, which is similar to the average trade dependence of all capitalist countries in the world. As such, the North Korean economy, like any small market economy, is vulnerable to negative shocks in trade. The new sanctions, if fully implemented, should be able to reduce North Korea’s exports by more than 50%. Even my conservative estimate suggests that this should reduce North Korea’s economic growth rate to -2.5%.

Second, trade is the single most important source of foreign currency for the North Korean regime. North Korea greatly benefited from surges in the market prices of minerals and increases in the production of these minerals due to greater Chinese investment. The share of mineral exports including coal and iron accounts for more than 50% of North Korea’s total exports. Given a high profit margin of mineral exports, the new sanctions might decrease North Korea’s hard currency revenue by more than a third. . This would be a substantial hindrance to the regime’s nuclear and missile weapons programme. The book uses novel survey data of 176 Chinese firms doing business with North Korea, which show that most of the export revenue goes towards funding institutions responsible for developing nuclear weapons and missiles such as the military and the Workers’ Party.

Third, many North Korean households depend on the market rather than on official work for survival. This book uses surveys of North Korean refugees to understand the prevalence of market activities in North Korea. The data indicate that hourly income from markets is forty times higher than hourly wages from official jobs, and more than 70% of households are involved in market transactions, while only 50% work in official sectors. Importantly, both the demand and the supply of consumer goods and food transacted at markets depend largely on trade. Hence, North Korean market activity will be significantly affected by a shock to North Korea’s trade, and as the livelihood of the North Korean populace suffers from sanctions elicited by the regime’s military aggravation, the divide between Kim Jong-un and the people may deepen. While this form of domestic unrest may not be visible from outside, Kim Jong-un will have to find ways to mitigate the people’s unrest. This will place significant pressure on the regime to consider denuclearization at the negotiating table.

For the sanctions to be effective, however, China must be on board, as it is currently responsible for more than 90% of North Korea’s trade. While China may find ‘good excuses’ for not implementing some of the sanctions, the new sanctions do block loopholes in trading minerals and seafood. The previous sanction (UN Sanction 2270), which was adopted early last year after the 4^th test nuclear weapons test, had a loophole that exempted the trade of goods for ‘livelihood purposes’. This exemption was abused by China and North Korea and weakened the impact of the sanctions. The newer sanctions (UN Sanctions 2321 and 2371) eliminate any such discretion by the Chinese authorities, and should severely limit North Korea’s economic growth. Since March this year, China has stopped importing coal from North Korea, which reduced North Korea’s total export to China in the first half of the year by 25%. In addition, coal and iron are bulky items, which makes it difficult to conduct unofficial trade without being monitored, and the sanction act recently adopted in the United States (so called ‘secondary boycotts’) can be used to further penalise those who import North Korean goods.

Of course, economic sanctions alone cannot bring stability and peace to the Korean peninsula. Skillful diplomacy and productive dialogue with North Korea is necessary. However, these sanctions can help pave the way for dialogue to occur sooner and should help facilitate a more acceptable and long-lasting agreement. As such, these sanctions need to be strictly enforced, and also needs to be given time to have a meaningful effect. This is the important message of my book.