North Korea: Are Sanctions Working?

Yves here. Even though the Harvey-Irma hurricane duo moved North Korea coverage to the back burner, the Hermit Kingdom has not gone away as a problem for the US and its allies. This Bruegel article recaps the thinking of various economists on whether sanctions against North Korea have had a real impact on its economy.

By Silvia Merler, an Affiliate Fellow at Bruegel and previously, an Economic Analyst in DG Economic and Financial Affairs of the European Commission. Originally published at Bruegel

The Economist argues that Western sanctions have not had much effect on North Korean economy, which is probably growing at between 1% and 5% a year. The UN has attempted to block the country’s access to hard currency by capping the amount of coal it can export, and China, the buyer in 99% of North Korea’s reported coal sales, said that it would suspend all imports. Yet North Korean vessels have continued to dock at Chinese coal ports. Moreover, countries or individuals that help North Korea do business have not been subject to “secondary sanctions” that would further isolate the country and appear to have been instrumental in persuading Iran to seek a deal over its nuclear plans in 2015. But one additional reason why the country may be proving so resilient is that its economy has also been changing. Though still officially illegal, private enterprise has grown since limited reforms made it possible for individuals to generate profit. Satellite imagery shows markets growing both in size and number across cities. These limited reforms have allowed the regime to plug part of its dollar deficit, as North Korea’s new class of traders and businessmen buy themselves protection by making hard-currency “donations” to the government.

A recent report by the DailyNK investigates the state of North Korea’s market economy and the implications of proliferating marketization. In the absence of official data, the report relies on research efforts undertaken between 2014-2016 in collaboration with 32 specially-trained sources from North Korea, who reported from inside the country on conditions within their local General Markets. Daily NK was able to verify the existence of 387 officially-sanctioned markets, with residents selling from over 600,000 stalls. In population terms, over 5 million people (20% of the population) are either directly or indirectly reliant on the General Markets, solidifying their place in North Korean society.

The authorities seem to have largely embraced the ability of markets to provide for people, but the report details efforts to bring the markets under control. The newly affluent middle class (donju) has become deeply involved in real estate transactions and other financial activities, leading to widening income inequality and to the emergence of a new poorer class. DailyNK points out that policy options to deal with the North Korean nuclear program have been debated at length, but little if any time has been devoted to debating options that pursue change via the power of the markets. Targeting the market economy in North Korea as a key path towards improved quality of life for its citizens may represent the most realistic strategy for tangible progress.

Stephan Haggard – who wrote the preface to the abovementioned DailyNK report – thinks that the heightened aggressivity of North Korea is more a sign of weakness than of strength and it may signal that economic sanctions are actually biting. Since the nuclear crisis broke in 2002, North Korea’s trade with Japan, South Korea and most other countries in the world has fallen to virtually zero and he country has become increasingly dependent on China, at exactly the moment when the economy was becoming more open and dependent on trade. In August 2017, the US managed to get China to sign on to US Security Council sanctions that will dramatically cut North Korea’s access to foreign exchange. Kim Jong Un came to power promising a more forward-looking regime, with a great focus on the economy and material benefits, but to realize this dream requires that North Korea integrates into global markets. This is impossible under a heightened sanctions regime. Therefore, Kim Jong Un’s only hope is to drive political wedges between the tacit coalition that is forming among China, the United States, Japan and Korea, by heightened military aggression.

Henry Féron disagrees. Writing on the 38 North blog of the US-Korean Institute at Johns Hopkins SAIS, he argues that the recent Pyongyang’s construction boom along with other indicators of improved economic performance such as food production and foreign trade, provide further evidence of the ineffectiveness of current economic sanctions. Kim Jong Un has inaugurated a grand, new apartment complex nearly every year since he assumed power. North Korea observers have been perplexed by how the state can bear such construction costs given the breadth of economic sanctions imposed against the state. One way to explain North Korea’s construction frenzy is that it is overspending and exhausting its foreign reserves to import building materials, or it may be that North Korea’s special trade relations with China make it less dependent on such reserves than is often assumed. Because the trade has not been balanced for years, some commentators believe that by accepting the situation, China is hiding a de facto subsidization of the North Korean state. Féron however thinks that the single most important factor in Pyongyang’s ability to afford major refurbishment is the improvement in the North Korean economy.

Kent Boydston of the Peterson Institute for International Economics stresses that the story with North Korean sanctions is primarily about China and how tightly China agrees to tie its hands. China’s share of North Korea’s trade in 2016 increased from 64 percent to 88 percent after Park Geun-hye shuttered the Kaesong Industrial Complex in February 2016, cutting South Korea’s share from 30 to 5 percent. Assuming North Korea does not cease provocations, the question is where will sanctions go next? Much of the top five categories of North Korea’s exports to China are now banned. In terms of the top 5 product classifications—which comprise 88 percent of total China-North Korea licit trade—this leaves the two textile categories as the only remaining ones left completely untouched by the UN. The negative growth rate of the textile categories may suggest there is decreased demand on the Chinese side for North Korean products. This could be because in an increasingly sanctioned environment, investors may be reluctant to put more into the North Korean textile industry. Given the North Korean economy’s ability to adjust to sanctions, however, Boydston argues that a more effective response could be to require China cutting back its exports too.


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14 comments

  1. Quanka

    This is fascinating how wildly the opinions of ‘expert class’ vary on this question. From an economics standpoint, I don’t find any of the arguments all that persuasive – not than an argument based on economic analysis would be!

    The biggest factor – IMO – is the unknown. We have no data on NK and very limited data on China. Do we really know that China is restricting imports? Would we even be able to determine that, if it were the case? Also, the neoliberal class in the western world poo-poos the idea of endogenous, organic and internally fueled growth (Its all about those Int’l export markets!) Given the lack of data out of NK – we dont know from what baseline NK would be able to grow, nor at what rate internal growth was occurring. 20% of the population engaged in the markets … that’s not insignificant!

    Reply
  2. Norb

    Using markets as a weapon seems like a bad idea in the long term. If you believe at all in the power of human compassion and love, then market as weapon ideology seems the best way to bring about tyranny.

    So the question of working sanctions needs to have a clearly stated and focused goal which is never forthcoming because it does not exist. In the case of North Korea, North Koreans wish to live and survive in prosperity, and those outside forces wish to colonize the land in whatever form possible.

    The neoliberal world is a world of conflict- in perpetuity.

    Markets, while being sold as the savior of humanity is shaping up to be its downfall. Thinking outside of the box- anyone?

    Reply
  3. The Insider

    I don’t think the sanctions will have much effect, simply because the Chinese so pointedly ignore them.

    What will have an effect is what the U.S. is already doing: making it clear that they won’t respond to North Korea’s obvious attempts at extortion. A previous administration was foolish enough to try to pay off the North Koreans, and it should be no surprise that they are back for another round of protection money.

    North Korea has been scraping by through a combination of coal exports as well as renting out sweatshop labor to China, but if they’re advertising their nuclear program, it seems likely that they aren’t quite getting ends to meet and are turning to the protection racket to get more cash. If that’s the case, the best thing the U.S. can do is not respond.

    One random thought: the bottomless well of credit to the west of North Korea may be significantly benefiting the country. Even if they can’t borrow unlimited amounts of funds, their CCP insider friends certainly can, and may be making big investments in North Korea. China seems determined to prove Hyman Minsky wrong, but if the credit cycle actually turns out to be a thing and North Korea has been on the receiving end of it, things could get very interesting should that credit cycle ever turn.

    Reply
    1. Bill Smith

      My view is that the Chinese are no longer ignoring most of the sanctions but that they have not been going out of the way to enforce them.

      I agree the best US response is to mostly ignoring the North Korean provocations.

      But the US could step up some defensive measures that might move things along. For example, the US could deploy a THAAD battery or two in Japan to protect US bases there. That might actually get the Chinese and Russians to be more aggressive in enforcing sections with the understanding the US THAAD batteries would be removed if the reasons for their deployment where removed. Alas, by then the Japanese will have likely deployed the AN/SPY-6 (combined S and X band radars) with SM-3 Block IIA which have strategic missile defense implications.

      Reply
  4. kgw

    The U.S. is primarily responsible for the the current state of affairs…It was the anti-communist fervor of the U.S. elite that drove the whole affair. They worried that their plan to use Japan, as it is used today, as a buffer against the communists was at risk.

    As occupiers, they used the hated Japanese administration ( Japan “annexed” and ruled Korea prior to WW1 until the end of WW2) to “maintain order” among the local population. The CIA to be flew the dictator-to-be Syngman Rhee, educated in the U.S., and installed him as president; his methodology was on the same order as the Japanese: kill the opposition, and call them communist.

    The U.S. dropped more bombs on Korea, indiscriminately, than Japan. It was like Dresden, but everywhere.

    Don’t forget the U.S. actions up to the present day when attempting to parse the actions of the Koreans.

    Sergey Lavrov, from a speech to the students at the Moscow School of International Relations this year:
    Lavrov: “We see that many Western politicians find it difficult to accept the obvious – the post-bipolar era is over. The hopes of replacing it with hegemony were not realised. Today we are witnessing the development of a new, more just and democratic polycentric arrangement…. A multi-polar system reflects the cultural and civilisational diversity of the modern world…. [Western states are] standing in the way of forming a multipolar world order, but no one can stop this objective and relentless process…. All we want is to build our own lives ourselves, without foreign prompting and unwelcome advice…. General trends gravitate towards a multipolar world, but… we still have not reached peak resistance to this trend…. Our Western partners need to realise… that joining this trend, rather than going against it, is a much easier and more efficient way to secure their national interests.”

    Lavrov: “The basic principles of international law… – [namely,] sovereign equality of states and commitments not to interfere in their internal affairs and to resolve all disputes by peaceful means…. It is well-known who violated these basic principles, who bombed Yugoslavia, Iraq and Libya, who allowed the emergence of… ISIS and Jabhat al-Nusra…. The Syrians themselves should determine the future of their country. We are using the same principles in our dealings with all the parties to the crises in Libya, Iraq, and Yemen…. There’s no doubt that the [approaching] Syrian settlement will certainly be a positive factor not only for the Middle East, but international relations in their entirety…. This will be a signal that one can no longer dictate decisions unilaterally, without taking into account the opinion of the country in question.”

    One can only hope that Mr. Lavrov’s remarks are heard elsewhere…

    Reply
    1. The Insider

      Mr. Lavrov should not confuse multi-polar with “democratic”. The pre-modern world order was very much a multi-polar one, but it was not in any meaningful sense democratic.

      One can see why the leadership of Russia and China would be sympathetic toward a world order that reflects that of the Imperialist or Medieval eras, as both have governments which are steadily evolving toward aristocracies in substance (North Korea has already arrived at that destination, of course). But calling it “democracy” is simply dishonest.

      Reply
      1. kgw

        The idea is to not interfere in the internal dynamics of sovereign nations, in order that they may develop in accord with their own peoples lives. There is nothing democratic in military intervention of any sort in order to make it amenable to another culture’s preferences. Democracy on the level of sovereign nations, not on the level of individuals. First things first, if you will.

        Reply
  5. L

    There are as I see it two additional questions that are worth asking about China’s willingness to tie its’ hands which is: “How long will they do so?” And “For how long will they need North Korea?”

    Xi Jinping got himself declared a “Core Leader” just a year ago (putting him on par with Mao and Deng). The 5 year assembly will be happening in October and in the run up to it he has been filling the Chinese airwaves with messages on how he is making the country strong and stable. He has also been purging his opponents left right and center behind the scenes.

    At this point he can ill-afford anything that messes up his narrative of Chinese dominance and stability, especially an ill-tempered neighbor. For now he needs to appear to be the reasonable party who is managing things when Trump can’t and to do that he needs to appear to take the sanctions seriously as a “constructive effort.” But once he has finished whatever power play he plans then, will he still be willing to put in the effort of enforcing the sanctions or will he go back to the default of tut-tutting Kim but quietly benefiting from the captive neighbor?

    The second question though is with respect to the subsidies. China continues to support North Korea in part because they see it as an essential part of their buffer against U.S. allies like Japan and South Korea. That view as I understand it stems back to the 50’s when the focus was on a land invasion and was sustained in part by the old guard of party leaders some of whom “volunteered” for the war. In effect North Korea was part of their own domino theory.

    But, as China has grown more assertive and has sought to get involved in the economies of its neighbors the security calculus has changed. At some point the premise that North Korea is needed as a buffer state may change if they feel that they have other assets which can take its place. Or when the perception that they are enabling the instability harms their soft power enough that the trade is seen as worth it.

    As I see it the true answer to Kim’s longevity lies in the answer to those questions.

    Reply
  6. MarkE

    As the saying goes, insanity is doing the same thing over and over again and expecting the result to change. Sanctions have rarely worked against a dictatorial regime that can easily push the costs onto its population. For proof, look at where we are now with North Korea and consider that we have had multiple previous rounds of sanctions, embargoes, and other economic carrots and sticks. The NK regime is adept at evading sanctions, especially when China’s effort in enforcing them is so half-hearted. Remember too that over the years the NK regime has repeatedly let its population starve to finance its weapons programs. It takes so much out of their lives that they are now on average several inches shorter than their cousins to the south. The idea that some new NK bourgeoisie will pressure the regime to stop its nuclear program is fantasy. Anyone even remotely out of line goes to a prison camp and the regime takes whatever wealth they have built as a bonus. A real Chinese embargo on NK coal imports might make a difference, as could an embargo on exports from China, but they have shown little willingness to take these steps.

    The NK regime is getting everything it wants out of its ballistic nuclear build-up – bargaining power, fear/respect, and, above, all, the continuing raison d’etre of imminent conflict with the U.S/West. They earn vital hard currency through weapons exports and there is no reason to believe they will not sell nuclear technology to non-state terrorists. The PRC is still playing “Emperor of China” tributary buffer state games. Russia is happy to have another way to screw the U.S. and drive a wedge into our alliances. These two were the ultimate sources of NK nuclear and missile technologies in the first place. Dragging China and Russia by their heels into another sanctions round will be politically costly and ultimately unproductive. The NK regime is not going to give up its ballistic missiles and nuclear warheads for anything anywhere near the economic bargaining table.

    What will happen is that South Korea and Japan will get nuclear missiles, or perhaps in the case of SK, artillery. They have to now, as a condition of sovereign integrity and survival. We have to let them, to avoid the excruciating choices that come from guaranteeing their survival with our nuclear umbrella, and perhaps our populations. In fact, our least worst option is to supply them with several dozen tactical nuclear weapons each. Some of these weapons will have to be under control of our ally, so that they will have an independent deterrent.

    These are terrifying and dangerous choices to be sure. Nuclear weapons proliferation is bad per se. Neither SK nor Japan have much strategic depth (populations and productive capacity too concentrated), so they may have itchy trigger fingers and an accidental conflict could develop. But this is less bad than allowing the NK threat to go unchecked. It is also the only real hope of getting China and Russia to stop playing games and force North Korea to give up its ballistic nuclear capacity. The last thing they want is the South and Japan with nuclear weapons, so they should understand that the longer the threat from the North continues, the more the opposing capability will deepen and grow. The North should understand that anything they do will immediately be matched ten times over. This includes missile defense systems and perhaps some new capabilities to deal with their conventional artillery threat to Seoul.

    The good outcome would be a negotiated nuclear-free peninsula and region. The U.S., Japan and South Korea have no particular wish for conflict in Northeast Asia. Indeed, were it not for their weapons threat and periodic outrages against the South, North Korea would probably rank no higher than Paraguay on the list of U.S. foreign policy concerns. Neither South Korea nor Japan (especially Japan) even want nuclear weapons. Both counties have the technology and people needed to make them quite quickly, but they have been content with the non-proliferation regime and U.S. guarantees against the major threats of China and Russia. Things have changed now. Ironically, the best way back to the status quo ante will be the introduction, hopefully temporary, of a local nuclear deterrent.

    Reply
    1. witters

      It must be me. For the great threat I see isn’t NK but the USA. And the way some people miss that elephant in their strategic and tactical theorising is truly astounding.

      Reply
      1. animalogic

        It’s not just you. The US is both directly & indirectly the author of this ridiculous shambles.
        It’s well known the the NK leadership have drawn the obvious conclusion from Iraq & Libya: a leader can end up dead should the US decide such.
        Further, it’s worth remembering that the US has the bulk of the responsibility for the breakdown of the 90’s “Agreed framework”.
        Add the fact that the US & SK routinely wargame near the border & you can imagine somewhat the fears the NK leadership have.
        There is one answer to this mess: diplomacy. Sadly the US now has the reputation (in Russian terminology) of not “being agreement capable”.

        Reply
  7. RBHoughton

    I suspect the effect of sanctions may be getting ameliorated by the decline in the Fed’s global power and the rise of competing currencies in international trade. Its no longer a given that SWIFT will be involved or a western bank.

    The recent Spanish film “The Propaganda Game” about North Korea reveals a relaxed amused attitude amongst residents to sanctions.

    If I recall history correctly it has often been said that sanctions merely put up prices.

    We have seen the use of GPS on international shipping diminish as owners find an increasing variety of cargo to ship in/out of our myriad war zones. All-in-all, I think the media plug sanctions because we do not want to negotiate and that’s the only other choice of action.

    Reply
  8. Roland

    Why on Earth would anyone want NK to be less prosperous? The better their economy is doing, and the more those who govern NK find trade to be a positive thing, the better the chances of continued peace.

    For years the NK gov’t has told people that they’re up against the world. Why validate the regime’s propaganda?

    Why encourage NK to pursue centralized autarky?

    The whole notion of trying to clamp down trade, or oil imports in the wintertime, is simply nuts.

    Reply

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