Statistics don’t lie

Inter-Korean relations are at a crossroad. South Korea is willing to change its policy on North Korea. North Korea too appears to be ready for a change. Its leader Kim Jong-un indicated summit talks were possible in his New Year’s address. The state newspaper Rodong Sinmun on Jan. 24 called for dialogue and negotiations to improve inter-Korean relations. Two days later it said reunions of families separated by the Korean War can resume if Seoul lifts its sanctions on North Korea. The National Defense Commission in a statement on Jan. 25 said North Korea was trying to improve ties with South Korea as a “historical mission” and not for economic purposes. It threatened to retaliate if its endeavors were undermined.

As always, the rhetoric from Pyongyang has been contradictory, but the underlying tone suggests an improvement in relations is possible. Its actions are a bit clearer than its words. North Korea attempted to improve ties with Japan last year by tackling the long-standing issue of Japanese abductees. In October, Pyongyang sent its three most influential figures to the Incheon Asian Games closing ceremony. It sent Vice Marshal Choe Ryong-hae as a special envoy to Russia and meet President Vladimir Putin.

Why has North Korea become suddenly eager to improve relations with South Korea, Japan and Russia? The answer can be found in the price of natural resources, North Korea’s main exports. Natural resources like anthracite coal and iron ore that it mostly ships to China take up around 50 percent of North Korean exports. The country’s shipments of anthracite in 2013 were valued at 1.5 trillion won ($1.37 billion). According to World Bank data, Australian coal prices plunged to $62 per ton in December, nearly half of the peak of $121 in 2011.

Revenue from the anthracite trade would have been halved for North Korea as well. The volume is declining as well as the price. Slowing construction in China has reduced steel demand and coal imports. Softer oil prices do not offer much relief even though North Korea relies on imported oil because it gets it for free or on credit from China.

Trade is the North Korean regime’s lifeline. North Korea earns no more than 100 billion won from the inter-Korean joint venture industrial complex in Kaesong. The earnings from about 70,000 workers dispatched to China, Russia and the Middle East return home about 200 billion won. Illicit drugs and counterfeit banknotes add a few more million for the regime. But they are pitiful compared with what its natural resources used to earn. As North Korea relies more and more on external trade, it has become vulnerable to international prices - and market forces. Because the regime is sustained by foreign currency revenues, fewer earnings could take a toll on its governing ability as well.

As North Korea began to make big money by extracting and selling its underground resources, it carried out deadly attacks on a South Korean naval ship and an island in 2010. Emboldened by its newfound riches from natural resources, it braved international warnings and conducted a third nuclear test in 2013. Swelling coffers bolstered its confidence. Then revenue from natural resources began to dwindle from 2014. The earlier earnings were lavished on white-elephant construction projects like a ski resort that no one uses. The regime, which is still new to things like external trade and market forces, was confounded at the ebb in the national coffers. Pyongyang turned to Tokyo and Moscow and, amid little progress there, reached out to Seoul.

How should we respond? Some say we should keep the sanctions as North Korea could be further pushed into the corner. The financial squeeze could worsen due to the decline in revenues from natural resources, but as long as it has China to turn to, the Pyongyang regime will somehow survive. It will dig up whatever it has to sell to China. North Korea will become more reliant on China and make Korean unification more difficult.

To understand North Korea, we must read the data rather than its rhetoric. We must use this opportunity well. We must come up with a more creative and progressive policy on North Korea by studying its economic structure. The path to North Korea lies in the burgeoning trade the country is increasingly becoming dependent on. To use a familiar phrase, we should follow the money.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Jan. 29, Page 31

The author is an economics professor at Seoul National University.

by Kim Byung-yeon