How North Korea keeps its economy humming despite the sanctions

While a total Chinese shutdown of trade would bring the country to its knees, at the moment it’s not doing too badly, writes Justin Hastings

PUBLISHED : Sunday, 24 September, 2017, 12:31pm
UPDATED : Sunday, 24 September, 2017, 12:38pm

While it would be wrong to say the North Korean economy is going like gangbusters, it is surprisingly stable, despite increasingly onerous sanctions.

Pyongyang is experiencing a building boom, food prices appear to have stabilised, North Korea is somehow able to fund an annual current accounts deficit with China, and the overall economy even grew 3.9 per cent in 2016, according to the South Korean central bank.

This raises the obvious questions of where North Korea’s money is coming from, and how it is getting – and paying for – the sanctioned items that are showing up in Pyongyang markets, like luxury cars.

The United States and other countries point to weapons sales, drug trafficking, computer hacking, insurance fraud, and the like, as the source of North Korea’s wealth, such as it is. But the truth is more complicated. The North Korean government, and the North Korean economy in general, have a plethora of ways of getting the money and supplies they want. North Korea is no longer a socialist economy, and it is not clear that the North Korean government is particularly dependent on the traditional targets of sanctions for its revenues.

Based on interviews, partly with Chinese doing business in North Korea, and site visits, partly to North Korean businesses, throughout China, South Korea and Southeast Asia, for my book A Most Enterprising Country: North Korea in the Global Economy, it appears that North Koreans at all levels of society survive by becoming entrepreneurs, evincing a combination of pragmatism, creativity and ruthlessness.

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At the bottom, private citizens have long run small businesses, and mainly women sell household goods, food and imported Chinese and South Korean products in grey markets that have sprung up across the country.

Enterprising businesspeople have also registered their businesses as state companies in light of the ban on private business. Much of the intercity transport in North Korea is privately run but technically publicly owned, for example. The vehicles are imported by private entrepreneurs, who network with state officials to register the vehicles as state assets, make them managers, and give them political protection in exchange for a cut of the profits.

Some North Korean businesses have started or provided waitresses for restaurants, with the majority of restaurants in North Korea apparently privately run but publicly owned in recent years, and at least 16 North Korean restaurants in Shenyang, northeast China were in 2013 operating with a variety of ownership schemes.

State officials for their part have used their positions to go into business for themselves and with the Chinese. One Chinese businessman, for example, recounted how he paid US$100,000 to buy his North Korean partner a high-level rank in the North Korean military, which allowed his partner to protect their mutual business dealings.

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All of this activity is either illegal or occupies a legal grey zone. To look the other way and provide legitimacy to private businesses, state officials collect bribes, fees and some profits. In turn, they have to provide income to their superiors, who deliver money to their bosses, and so on up the line. In this way, the entire country functions like a food chain, with the apex predator, Kim Jong-un, collecting revenue from all sorts of economic activity, both legal and illegal, in the country.

Nor have North Koreans been stymied by attempts to stop them. State companies have become exceptionally good at masking their movements through front companies, shell accounts and complicated business arrangements. Average North Koreans are adept at buying and selling goods in the face of both North Korean and Chinese government hostility. Fed up with delays at the border, poor infrastructure in North Korea, sudden changes in trade policies and who is allowed to export from the country, and trade restrictions, traders on both sides of the border have built up remarkably robust networks that can support cross-border trade in adverse conditions.

Some of the items that have been sanctioned in the past two years – iron ore, seafood and textiles – were already partly being smuggled across the river, sometimes by the boatload, or through border checkpoints from North Korea to China.

Numbers are hard to come by, but smuggling is not insignificant. One trader I talked to estimated that 70 per cent of the trade moving through Dandong, the main Chinese city bordering North Korea, was actually smuggled. Another trader said the majority of seafood exported from North Korea was smuggled even before the ban.

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Sanctioned items – including chemicals, machine parts, and luxury goods – are in turn smuggled from China to North Korea. Smugglers report that they’ve experienced no downturn in business during sanctions enforcement or smuggling crackdowns.

It would be going too far to say the North Korean economy is prospering, rather than allowing North Koreans to survive, and North Koreans are not infinitely adaptable – a complete Chinese shutdown of trade and barricading of the border would probably bring the country to its knees. But it would be a mistake to think North Korea is going to collapse because of economic failure.

Justin Hastings is an international relations specialist at the University of Sydney