South Korean President Lee Myung-bak may seek to cut off trade with North Korea after uncovering evidence that Kim Jong-il's submarines were responsible for sinking the South Korean warship Cheonan on March 26. It seems like North Korea is in a perpetual state of economic hardship. What are the North Koreans capable of exporting?
Small quantities of metals, dried fish, and labor. In the middle of the 20th century, North Korea was the peninsula's industrial powerhouse, while the South was populated with poor farmers. Following a long period of economic mismanagement and the North's disastrous loss of Soviet subsidies, the Korean peninsula has turned upside down. The Democratic People's Republic of Korea now lacks the machinery and railroads to get its ample supply of gold, coal, and copper out of the ground and onto ships for export. The North Koreans face chronic power shortages, as years of Russian subsidies encouraged them to build an energy-intensive economy. (Their irrigation systems, for example, rely heavily on electricity-gobbling pumps.) They have virtually no modern manufacturing facilities, and capital is scarce, as foreign investors fear the corruption and unpredictability of Kim Jong-il's regime. The only countries now willing to risk money on the dilapidated economy are China and South Korea, which together buy 80 percent of the North Korean exports in hopes of preventing a large-scale collapse in the hermit kingdom.
Losing South Korean investment, which has been increasing over the last decade, would be devastating to the DPRK. In the late 1990s, Hyundai Corp. launched the Kaesong Industrial Complex, where South Korean companies can access cheap labor only 70 kilometers across the border. More than 50 South Korean firms employ 20,000 workers in North Korea who make clothes, kitchenware, semiconductors, and auto parts. These employees earn about $60 per month, which gets passed through a government intermediary. (No one really knows if the government passes the full $60 wage to the workers, as it claims.)
The North Korean government handles most trade through state agencies, which take a piece of the action. If an American business wants to buy North Korean goods, it has to contact a government-owned trading agency office in Hong Kong or Macau. The agency accepts payment in euros, dollars, or yuan, takes a sizable cut, then passes the remainder to the North Korean business in won, the national currency.
North Korea really has two separate economies. Kim Jong-il's Cabinet controls the state economy, which produces the majority of North Korean goods. The so-called second economy, owned and operated by the country's military, runs in parallel. Much like Iran's Revolutionary Guard, the North Korean army is involved in a wide variety of businesses, many of which are unrelated to military affairs. When a company buys goods through a North Korean trading office, it doesn't know whether the government's share is going to the civilian or military leaders.
If a foreign company can't—or won't—bring its business to North Korea, the DPRK will sometimes send its workers abroad. Kim Jong-il has shipped laborers to Russia to work in logging camps and to Senegal to build statues. The government usually sends guards with the workers, but defections are fairly common. North Korea also employs young women abroad as waitresses for its Pyongyang chain of restaurants, but many have fallen on hard economic times recently.
There is at least one bright spot in the North Korean economy: The country has become a source of cheap, skilled labor for South Korean animation companies.
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Explainer thanks Bradley Babson of the DPRK Economic Forum at the U.S. Korea-Institute, Rüdiger Frank of the University of Vienna, Curtis Melvin of George Mason University, and Marcus Noland of the Peterson Institute for International Economics.