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North Korea Appears To Be Running A Trade Surplus, And That's Troubling News

Mar 19, 2013, 02:10 IST

Marcus Noland and Stephen Haggard of the Peterson Institute for International Economics have been studying North Korea's economy for a book tentatively titled "Hard Target: Sanctions, Inducements, and the North Korea Problem".

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Their research appears to have revealed something unusual — North Korea, despite being an economic basket-case, may be running a trade surplus. If that's true, sanctions may well a losing tactic for the international community.

The chart below, posted by Noland to the Institute's blog earlier today, shows some of their findings on the rogue state's balance of payments:

Peterson Institute For International Economics

As you can see, this data (which includes estimates of illicit activity) shows that for much the last 20 years North Korea has likely run current account deficits — consuming more than it was producing, and using foreign finance to make up the shortfall. However, in the last couple of years this appears to have changed, and the country seems to be running a trade surplus.

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Crucially, a lot of the trade from the past few years appears to be above board, despite North Korea reputation for illicit industries (we've heard reports of fraudulent money abroad, which are believed to include widespread counterfeiting of US dollars and even reports of gold smuggling and drug trafficking).

Another chart from the Institute's research appears to show North Korea's illicit trade is less important to the country in recent years.

Peterson Institute For International Economics

Instead, it appears that commercial trade estimates have dramatically increased. A lot of this legitimate trade appears to be with China, despite signs of political tension between the two countries. Other sources seem to confirm this — China's Ministry of Commerce reported that trade between the two countries reached an all-time high of $1.37 billion in the first quarter of last year.

As Noland argues in his blog post today, this is a bad sign for pretty much everyone involved.

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"It is bad news for North Korea because as a relatively poor country, they should be running a current account deficit," Noland writes, "importing capital, and expanding productive capacity for future growth. Instead, our calculation suggests that they are exporting capital."

So where is the money going? Unfortunately, rather than being spent internally on North Korean citizens, it appears to be going overseas to be spent by elites. Last week some reports in the South Korean press suggested Kim Jong-un could have as much as $5 billion stashed in overseas accounts. This money is believed to be used to buy luxury goods for Kim himself or others in the Pyongyang elite.

This is a problem for the international community, as it means that punishing North Korea economically — such as through sanctions — will be less effective. The country has excess money, and it's economic links with China are only strengthening.

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