The prospect for a round of talks with North Korea has come up this week, in what we might see as a small respite in the war rhetoric coming from the peninsula in recent months; however, new threats against the South and possible conditions by North Korea on these talks make the prospect of them taking place dim at this point.
In realpolitik terms, North Korea is behaving predictably, but it is doing so at the price of an expensive military and the lives of millions of average North Koreans. From a fiscal point of view, the North Korean economy is severely imbalanced towards the military, and suffers from a lack of investment in services and industry and the ever-present threat of famine. Nuclear energy and vast mineral wealth offer hope if managed properly.
What is in Kim Jong-un's balance books is a matter of speculation for those of us outside of Pyongyang. However, it is possible to indirectly built the rough outlines of North Korea’s fiscal picture based on existing statistics, even if their accuracy and dated nature make them dubious source material.
During the Cold War, much of North Korea's support came via the USSR and China in the shape of goods and services, supplied for very low prices. However, at the end of the Cold War, much of this aid stopped, most notably that from the USSR. Ever since then, China has remained North Korea's sole political and economic strategic partner, without whom it is doubtful the Kim dynasty would stand very long.
In the 1990s, the loss of Soviet support dealt a detrimental blow to the economic viability of the North, and the worst of the consequences came in the mid-1990s with a massive famine that is thought to have killed around one million people. In the new millennium, better agricultural management and fundamentally important food aid from the United Nations has helped prevent recurrences on the same scale, but the overall situation still remains precarious.
The already low capacity of the North Korean state is heavily favoured towards the military, where the priority of the annual budget goes, but accurate hard numbers are difficult to find. While some statistics are reported through the Korean Central News Agency’s website, its limited functionality makes searching and confirming data equally very hard. The dated nature of the linked data suggests that 15.8% of the national budget were spent on national defence. If we take the percent figure to correspond, couple with a Jane’s estimate from 2011 that the 2009 military budget for the DPRK stood at $9 billion. Reversing the calculation reveals a total annual budget of approximately $55 billion, but that is hardly believable, considering that the GDP (GNI) estimate for the entire North Korean economy stands at around $22 billion. If we contrast 9:22, then we can say that approximately 40% of the gross national product is dedicated to the military. The previous linked source also indicated a $5.73 billion figure for the annual government budget, but that can be logically explained on the dependence whether the military budget is counted separately, or as a part of the overall budget. That information, unfortunately, cannot be confirmed.
There is no tax system in North Korea, as the economy is de facto the state's and the entire scope of its (legitimate) activity is under the ownership of the state. This makes a traditional approach of calculating receipts practically impossible, and we have to rely on indirect methods of observation, such as trade flows, incomplete official statistics, and South Korean data (via the Ministry of Unification).
North Korea does have one very promising source of economic stability and revenue, tied directly with its nuclear program: atomic power. With an ailing economy, plagued by an inability to provide or even improve stable living standards for average North Koreans, atomic power holds both promise for kick-starting industry, itself plagued by inadequate power generation. It would also turn North Korea into an exporter of energy with the ability to sell power to China and potentially the wider East Asian market. With the announced restart of the Yongbyon nuclear facility, it could do as much with nuclear weapons as with improving the civilian electricity capacity. The ability to produce and manage reactors would be a strategic advantage to North Korea not just militarily, but economically and commercially — despite high start-up costs for nuclear power, it is a profitable initiative in the long run, especially if the power or technology is exported to foreign clients. What makes this entire scenario plausible is the fact that North Korea possesses large deposits of mineral wealth, including uranium and graphite, core ingredients for a nuclear industry.
North Korea's illicit economy presents yet further challenges to our ability in forming an accurate picture of the country's fiscal situation. That underground economy varies from Pyongyang's involvement in the drug and arms trades to average people engaging in illegal private activity. While getting caught is a punishable offence, there is no good way to put a value on the amount of this sub-state economic activity neither.
China remains a critical ally to North Korea, politically and economically and bilateral trade, as exports and imports are also fundamentally important for the viability of the North Korean economy.
The previous article in this series explored North Korea’s monetary policy, and the next piece will look at Pyongyang’s trade relations and their role in North Korea’s economy.