The effect of sanctions
Pyongyang may have begun moderating its course in November when it declared it had successfully launched its most advanced type of intercontinental ballistic missile (ICBM), the Hwasong-15, allegedly capable of striking any part of the U.S. mainland. In his New Year’s address, Kim announced the regime has mastered nuclear weaponization. Military experts remain doubtful of North Korea having perfected a nuclear-tipped missile that can strike the U.S. mainland. They strongly doubt Pyongyang’s mastery of long-range missile technology that the United States achieved after hundreds of test launches. Then why was Pyongyang touting perfection of its incomplete nuclear armaments and turning eager for inter-Korean dialogue?
We cannot expect to hear an explanation straight from Kim’s mouth. But we can attempt to read what is going on by looking at the data. The biggest change from the fourth nuclear test two years ago is heavier international sanctions. The sanctions before the fourth test mostly banned North Korea’s exports and imports of commodities that can go into nuclear and weapons development. Since then, sanctions broadened to block hard-currency-earning sources. We must evaluate the effects of sanctions in order to get at Kim’s real intentions.
If the sanctions had not worked, Kim might have proposed talks on the PyeongChang Olympics out of military or diplomatic tactics or a sudden impulse to jointly celebrate an international sports event on the other side of the border. If sanctions have had a true effect on the economy, Pyongyang may have come to the negotiating table with the option of completely shifting its direction. If they had mild effects, Pyongyang may be aiming to lighten the sanctions through conciliatory gestures.
There are some who claim trade sanctions have little effect on a state-controlled and closed economy like North Korea’s. But they are blind to certain changes in the North Korean economy. Data suggests that North Korea’s trade reliance — its trade with other countries and South Korea divided by its gross domestic product — has increased from 2010. In 2014, the ratio hit 52 percent, close to the global average of 60 percent in the same year. North Korea can no longer be deemed a closed economy as half of its income has come from trading with others. It suffers as much as an open economy when exports decrease. In 2017, the North’s exports to China — the only remaining market it officially trades with — plunged by 37 percent on-year. This year, they could plummet more than 90 percent if China fully complies with the sanctions.
If exports cannot bring in revenue, North Korea’s elite will suffer. They have earned a lot through trade. Minerals, which make up more than half of North Korea’s outbound shipments, yield profits of 80 percent. A survey showed that North Korean officials usually got 7 percent of revenue in kickbacks when doing business with a Chinese trader. The money mostly goes to the state regulator that supervises the exporting company, or to be exact, high-level military and party officials. When bilateral trade between North Korea and China reached $6 billion, up to $400 million would have gone into their pockets.
The effect of sanctions also stretches to the grass roots as they affect marketplaces that generate the primary incomes for ordinary citizens. The markets have flourished because exports kept up the supplies. Markets are now responsible for more than 70 percent of the income of North Korean citizens. North Koreans on average earn 3,000 won in the value of their currency — worth just 40 cents on black markets — from their workplaces a month. To feed a family of four, however, at least $30 to $50 of monthly income is needed. This is why most North Koreans get their incomes through market activities.
Most officials who cannot be engaged in market trade themselves live off bribes from citizens. Bribes paid to officials in return for allowing them to keep up illicit market activity takes up about 10 percent of people’s monthly household expenditures. If market activities are subdued, bribes also would be reduced to make lives for officials tougher. Trade sanctions, therefore, serve as a “bunker buster” on the entire North Korean system by delivering an upset to the regime, the elite, bureaucrats and ordinary people.
Let’s turn to data to see what effect the sanctions have had. The table shows the monthly impact on trade (anthracite shipment volumes, mineral exports share, total trade between North Korea and China), foreign currency income (the difference of exports and imports) and market (the foreign exchange rate and rice price in the market). The effectiveness of trade sanctions, which hovered below 10 in January and February of 2017, shot up to 40 to 50 after China stopped importing North Korean anthracite from March. By December, the effectiveness index neared 60. Despite a sharp fall in exports, imports remained unchanged, suggesting a thinning of foreign exchange reserves.
Pyongyang is estimated to have about $3 billion in foreign exchange reserves. The unregistered sum could be higher when including foreign currency hoarded away by the elite. The coffers will fall further this year. By the second half, North Korea could be short on foreign exchange.
Trade sanctions have dealt a heavy blow to North Korean exports. Repatriation of North Korean overseas workers and a ban on enterprises jointly set up with North Koreans added to North Korea’s troubles in earning hard currency. The country could run into a foreign liquidity crisis and witness devastation in the market after another year of heavy sanctions, stoking public disgruntlement with Kim, who promised to deliver better living standards. Pyongyang’s two-track policy to advance the military and the economy would be shaken. If the sanctions’ effectiveness index goes above 80, Kim’s hold on power could be threatened.
Kim has been championing economic sovereignty to fight sanctions. He mentioned “self-reliance” nine times during his New Year’s addresses from 2012 to 2017 and eight times in this year’s. But it is not easy to transform an economy reliant on trade to a self-sufficient one. The trade levels suggest raw materials, parts, machinery and wage payments came from offshore. The supply chain cannot be localized suddenly. Kim’s call for tougher moral discipline and his warning against anti-socialist phenomena underscored his growing anxiety.
Kim may have turned fearful of sanctions. Sending a North Korean delegation, performers and a cheerleading squad to the PyeongChang Olympics may have been a reasonable move. He could paint himself and North Koreans as normal, peace-loving people. He also could try to cause fissures between Seoul and Washington and among South Koreans in hopes of weakening the sanctions. His talk of the joint celebration of “our people” in the New Year’s address would be masking his real intentions.
The sanctions effect suggests that Kim could be pretending to change his course for the time being. The effectiveness level would have to shoot up to 80 to make North Koreans serious about negotiating their nuclear weapons away. The rate will go up this year and unsettle North Korea’s economy, society and regime. It is most likely that Pyongyang is trying to buy time through a charm offensive to get the necessary raw material and parts for nuclear and missile weapons.
Our government must carefully read the data to discern North Korea’s real intentions instead of blindly trusting its words. The data suggests the ultimate effects of the sanctions. To change the North’s course permanently, the government must tighten sanctions together with the rest of the world. If our government takes the opposite direction, it could bring a disaster to the Korean people. The government must not pollute its North Korea policy as part of an ideological battle. It must understand the North through an objective analysis of its struggle for survival.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Jan. 22, Page 27
*The author is a professor of economics at Seoul National University and head of unification at JoongAng Ilbo-led Reset Korea campaign.