North Korea's GDP: Features and Issues

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Kim, Byung-Yeon; Lee, Suk

Research Report North Korea's GDP: Features and issues

Dialogue on the North Korea Economy, No. May 2021

Provided in Cooperation with: Korea Development Institute (KDI), Sejong

Suggested Citation: Kim, Byung-Yeon; Lee, Suk (2021) : North Korea's GDP: Features and issues, Dialogue on the North Korea Economy, No. May 2021, Korea Development Institute (KDI), Sejong

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May 2021

North Korea’s GDP: Features and Issues

Byung-Yeon Kim

May 2021

Dialogue on the North Korea Economy

North Korea’s GDP: Features and Issues

The basis for studying the North Korean Dialogue on the North Korea Economy economy is to gain an understanding of the size of the overall economy and the trends within it. However, owing to the fact that North Korea Date and Venue does not release data on its GDP and GNI, the Namhakdang, Friday, June 12, 2020 task has fallen on the shoulders of outside researchers and such institutions as the Bank of Korea (BOK). Still, with such a lack of official data, Interviewer the estimates produced have been subject to much controversy, and the question of accuracy Lee, Suk (Senior Fellow at KDI) and propriety remains unanswered. Interviewee

Kim, Byung-Yeon Against this backdrop, we at the KDI Office (Economics Professor at Seoul National of North Korean Economic Studies invited Dr. University) Kim, Byung-Yeon, an economics professor at Seoul National University and one of the most prominent experts in this area, for an interview.

KDI's Dialogue on the North Korean Economy is a monthly series that features interviews with the foremost experts on North Korea. The first publication was released in March 2021 in connection with the KDI Review of the North Korean Economy. Each edition tackles a different facet of the North Korean economy, and offers valuable insight into prominent issues and aspects. The views and opinions expressed by the contributors are their own, and do not reflect the official views and position of KDI. - KDI Review of the North Korean Economy Board of Editors Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

Estimating North Korea’s GDP Prior to the 1990s Kim, Byung-Yeon You are absolutely right. North Korea has released rough estimates of its NMP a few GDP is the fundamental on which eval- times in the past, but it has hardly been uations of a country’s economic conditions For this issue, we are privileged to have Dr. Kim, Byung-Yeon, economics professor at Seoul regular. In regard to the 25% difference, are based. However, estimates on North National University, with us to talk about an important economic aggregate of North Korea, while we can estimate and understand Korea’s GDP and GDP growth rate have the GDP. Dr. Kim is a leading expert on the North Korean economy and GDP, and as such, I am it as you have explained, there is still a been the subject of endless controversy certain that we will be able to learn a lot from today. lot of confusion. So, are there any other due to the lack of statistical data in par- ways to estimate GDP without official ticular, and also due to the different ap- data from North Korea. That is, in addition Lee, Suk Q. proaches used by researchers. to converting the economic aggregate of In terms of the concepts for econom- Since 1990, the Bank of Korea (BOK) has periodically released its growth rate estimates for socialist economies into GDP, are there ic aggregates, Marx believed that, in prin- the North Korean economy in cooperation with other South Korean government agencies. As ways to measure the GDP of economies ciple, services do not create value-add- an important source of information on the status of the North Korean economy, these figures like North Korea using other indicators? ed. This notion laid the foundation for the are widely used by researchers, and hold considerable sway over estimations on economic use of ‘net material product (NMP)’ in- growth. For the sake of convenience, let us divide the period into pre-1990 and post-1990. stead of GDP in socialist economies. It But first, I would like to ask you about concepts of an economic aggregate in a socialist North Korea released relatively detailed was understood that value-added could country. North Korea adopted the socialist economic system, and as far as we know, the statistics in the 1950s, but stopped publish- only be generated through the input of la- terms used in such an economy differ from those used in an market economy, for example, ing official data from the 1960s. Japanese bor and subsequent production of materi- GDP and GNI. This contrast would have been much more marked before 1990. So, in relation, scholars, Goto and Niwa, tried to estimate als. Hence, buying goods at a low price and could you tell us about the indicators used in socialist economies and the differences with North Korea’s GDP using a method sim- selling it at a higher price as is customary those used in market economies. Also, how would we interpret them? ilar to the NMP-based method applied in distribution was not deemed to be cre- by the CIA to estimate the Soviet’s GDP ation of value. Rather, it was ruled as an (Goto, 1990; Niwa and Goto, 1989). Howev- act to self-profit, and was punishable on er, while this worked until 1960, the lack of the grounds of speculation. data made this endeavor no longer feasible. Thus, NMP can be understood to be In addition, because there was significant- GDP minus the value-added created in ly less data for North Korea than the So- the service industry. According to CIA es- viet Union, various assumptions had been timates, the Soviet Union’s GDP was 25% made in the estimation of GDP, making higher than its NMP. That difference of the accuracy of the estimates somewhat 25% is the value-added generated through suspect. services. The same is true for North Korea Even though we cannot directly assess where education, distribution, and financ- North Korea’s GDP, there are other alter- ing are considered non-value-added sectors. natives. One is to use real indicators which Having said that, we have not even seen are related to GDP. For example, research- data on its NMP for a long time. ers studying the income of periods for which statistical data are mostly unavail- able, such as ancient or medieval times, use people’s height as a proxy for per capita income. Specifically, it is assumed that in-

02 03 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

national income. In the case of the Sovi- et Union, government expenditure was as much as 60-65% of GDP. This high share of government expenditure in GDP is be- If the availability of cause public finance was used to finance most investments in enterprises in social- official data for the ist economies. If we assume that the ratio of government expenditure to GDP Soviet Union is 100, has been stable in North Korea, one could think that the changes in government ex- then, I believe, that penditure could be used to estimate GDP. for North Korea However, data on the budget are a nominal variable that includes changes in pric- was only 10 up to es, and thus, this short-cut method would mismeasure or overestimate GDP by con- come is closely tied to calorie intake, and and GDP of other countries, and subse- the early 1960s, fusing the rate of change in the nominal as such, the higher the calorie intake, the quently use this relationship to make esti- variable with the real economic growth taller a person would be. But, caution is re- mations for GDP of the country under in- and not even 5 rate. Although, in principle, there should quired here. We need to differentiate be- vestigation. Specifically, after the standard thereafter. be no inflation in a socialist economy, even tween flow and stock. For instance, while parameters are obtained using data from the official data from the Soviet Union a person’s height is a stock variable that other countries, estimates for the GDP-a show an inflation rate of 1% per annum. is measured at a particular point in time, dependent variable-are computed by mul- If the informal sector is included in the es- GDP is a flow variable. Therefore, using tiplying these with the amount of indica- timation, overall inflation would be high- height, it would be difficult to estimate per tors (cement and steel output, nutrition, er. Moreover, the Soviet government in- capita income that changes annually. health, etc.) for a data-lacking country.1 cluded its central bank loans in the budget is 100, then, I believe, that for North Ko- Real indicators include production in- Another real indicator that is commonly income. All of this could be the same in rea was only 10 up to the early 1960s, and dicators such as cement and steel output, used is night lights. In this case, we evaluate North Korea. Therefore, we have to bear in not even 5 thereafter. Therefore, the CIA and nutrition indicators such as daily cal- the relationship between the night lights mind that considering the rate of change method does not work for North Korea. orie intake. And while we can also use and per capita income of other countries, in the budget to be the equivalent to GDP Instead, researchers more often use the health indicators, such as infant mortali- and then apply this relationship to a coun- growth could be extremely problematic. short-cut method. Using real indicators ty and life expectancy, to estimate per cap- try that has data for night lights but not Because there is such a shortage of data 2 can be considered as one of the short-cut ita GDP, there are limitations as health infor per capita income to obtain the latter. on the North Korean economy, research- method. dicators which also possess properties of a However, because there is considerably ers sometimes produce implausible figures Although not a real indicator, North stock variable. When there is no available less data for North Korea than for the So- based on some of the assumptions they Korea’s figures on budget and settlement data on the GDP of a certain country, the viet Union and other socialist states, the make. In one case, using the above meth- of accounts is the only official data that real indicator method will first examine problem is much more serious. If the avail- od of equating the rate of change in fiscal is regularly released by the regime. Some the relationship between the real indicators ability of official data for the Soviet Union expenditure with GDP growth, it was re- scholars assume that there is a constant ported that North Korea posted an annu- and stable relationship between budget al economic growth rate of 20-30% until and GDP, and use these data to estimate 1 Kim, Byung-Yeon and Suk Lee (2006), and Chun, Hong-Tack (1992) estimated the GNI of North Korea through the real indicator method. the 1990s. 2 Kim, Kyoochul (2017) analyzed the level of and trends in the well-being of North Korea by using data on night lights.

04 05 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

Recent discussions on the North Ko- rate. This approach applies both the CIA’s nomic growth rate (Maddison, 1995; 1998). rean growth rate also show potential for method and data. That is, the discrepancies This is because, as noted in many studies, such errors. In a recent paper, the author between the Soviet’s official growth rate there is a high level of uncertainty when assessed the economic conditions of North and the CIA’s estimate for GDP growth it comes to the reliability of China’s offi- Korea to be reasonable after believing that were equated to be the differences in infla- cial growth statistics. Maddison subdivid- the 4.2% growth in the 2020 budget plan tion, and such discrepancies were deducted China’s industries, and used the output released in April was the economic growth ed from the output growth rate of North growth rate and weighted value of each in- rate. But, as I pointed out earlier, the bud- Korea’s mining and manufacturing indus- dustry to assess the economic growth rate. get and settlement of accounts is a nomi- try. In addition, the industrial ratio from He found that the official growth rate had nal variable, and in the Soviet’s case, it in- North Korea’s report to the UN in 1992 been overestimated. The method used by cluded its central bank loans in the budget was used to calculate the weighted value Maddison is a form of the short-cut meth- income. There is no guarantee that North of each industry. The structure of each in- od while our’s (Kim, Byung-Yeon, Kim, Korea is any different. And, unless specif- dustry was assumed to be the same in 1989 Suk-Jin, and Lee, Keun) is a combination ic items of the budget account are clearly as in 1992, and a reverse estimation was of the CIA method and Maddison’s. stated, doubt will only escalate. done consecutively until 1954. I would like to elaborate on the CIA Simply put, the authors used data on method.4 Estimating the GDP of a social- output rather than figures including price ist economy requires (1) obtaining output changes in accordance with the CIA meth- data, (2) obtaining price data, and (3) re- Whether it be using budgetary growth or od, and deducted the hidden inflation solving the exchange rate problem to de- other nominal variables, or using other data from the growth rate, which includes price nominate the national income in dollars. to estimate inflation and deducting it from changes, to obtain this data. Maddison also However, in terms of output data, even the budgetary growth rate, it seems to nal of Comparative Economics, and es- used output data to estimate China’s eco- the CIA used the Soviet’s official statistics me that there have been diverse and risky timates North Korea’s economic growth attempts made to measure North Korea’s in 1954-1989. To prevent the growth rates GDP; although not always accurate. Given from being distorted by the aforemen- that, I would like to ask you a more realistic tioned problem of prices, the authors used question. How should we view the actual a methodology that weight averages the trends in North Korea’s GDP and growth output growth rate by industry (agriculture, rate? Could you elaborate on your research mining and manufacturing, and services). and explain how these trends have changed Specifically, the hidden inflation, which was since the 1990s? estimated using the data from the Sovi- et Union, was deducted to obtain the output growth rate for the mining and man- I think one of the most important stud- ufacturing industry. This adjustment was ies on the long-term growth of the North made because, in a socialist economy, the Korean economy is that of Kim Byung- hidden inflation is included in the indus- Yeon, Kim Suk-Jin, and Lee Keun (2007).3 trial growth rate, which could, in turn, lead The study was published in the Jour- to an overestimation of the overall growth

3 Kim, Byung-Yeon (2014) and Kim (2011) discussed the estimation of North Korea’s economic growth rate in more detail. 4 The CIA method is explained in more detail by Kim Byung-Yeon (2008).

06 07 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

3 Kim, Byung-Yeon (2014) and Kim (2011) discussed the estimation of North Korea’s economic growth rate in more detail. 4 The CIA method is explained in more detail by Kim Byung-Yeon (2008).

06 07 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

while making its own estimations for the posted 4.4% while that of per capita GDP Led by Bruce Cumings, numerous stud- turned on the Peninsula at the end of the price data. This is because prices reflect the marked 1.9%. Still, it should be noted that ies believe that South Korea pulled ahead 1960s. Thereafter, North Korea’s growth scarcity value in a market economy while even these figure may have been slight- of North Korea in the mid-1970s. Howev- rate contracted even further. they are arbitrarily set by the government ly overestimated. This is because, although er, UN statistics are usually based on data According to recent BOK data, North in a socialist economy, and as such, it is the hidden inflation was deducted for the from its member states. Therefore, if there Korea’s average annual growth rate in 1956- difficult to accurately estimate the Soviet’s mining and manufacturing industry, it was is fault with North Korea’s statistics, there 1989 was 4.7% (Jo, Se-Hyung and Minjung GDP with the official prices. As for the ex- not adjusted for the agricultural industry is also fault with the UN’s. Kim, 2020). This represents only a 0.3%p change rate, the agency resolved the issue owing to the lack of data. The long-held belief that North Korea difference with our estimates. Although by estimating the GDP value of the Sovi- These findings indicate that South Ko- was affluent until the mid-1970s is a myth, different methodologies were used, similar et Union and the United States using the rea’s per capita GDP already exceeded that and the time has come to discard such fal- patterns and result were drawn, leading me purchasing power parity (PPP) approach, of North Korea in 1968. The common no- lacies. As I said earlier, our (Kim et al.) es- to conclude that this reinforces the reliabil- both in ruble and dollars terms, and by ob- tion, however, is that this reversal took timates show that the tables had already ity of our results. taining the geometric mean of these two place in the 1970s. It also suggests that even estimates. But in North Korea’s case, ob- the UN’s data can be misleading which re- | Table 1 | Comparison of the Estimates for North Korea’s Economic Growth Rate in 1954-1989 by study1) taining the output data in itself represents veals that the overtake happened in 1974. (unit: %) a challenge; which is why the short-cut According to the data, the per capita GDP Kim, Byung- Jo, Se- ROK Minis- Institute of method is so often used. of North and South Korea were $480 and DPRK Offi- Hwang, Eui- Yoon, Seok- Yeon, Suk- Hyung and try of Unifi- North Kore- Jo, Dong Ho cial Data Gak Bum Jin Kim and Minjung $416, respectively, in 1973, and $518 and Year cation an Studies Keun Lee3) Kim $575 in 1974.5 (NMP) (GNP) (GNP) (GNP) (GNP) (GNP) (GNP) (GDP)

From the studies published so far, I see 1953-1956 30.1 ------that the short-cut method is the most 9.34) 1956-1960 21.0 - - 32.3 - - 13.6 favored means for many researchers to obtain North Korea’s economic growth rate 1960-1965 9.9 - 9.4 11. 4 - - 3.3 4.2

for before the 1990s. So, what about the 1965-1970 5.4 7.4 12.8 10.2 3.3 4.0 subsequent economic growth trends? South Korea’s per 1970-1975 14.22) - 6.1 25.0 10.1 8.5 4.6 3.9 1975-1980 4.02) - 5.3 9.2 10.2 -2.0 2.2 2.0 Initially, growth rates were high, but they capita GDP already 1980-1985 8.82) 3.6 - 7.2 8.5 -1.5 4 2.5 have declined gradually. This is a typical exceeded that of pattern of socialist economies such as the 1985-1990 - 1. 4 - 2.4 5.1 - 2.7 2.4 Soviet Union and others in Eastern Eu- North Korea in Avg. growth rate in 1954- 12.0 - - - - - 4.4 4.7 rope. However, there is a difference. For 1989 North Korea, it exhibited a much sharper 1968. Note: 1) The author recited and edited figures from Kim et al.(2007) and Jo, Se-Hyung and Minjung Kim (2020). decline in its growth rate compared to oth- 2) Figures are average annualized growth rates estimated for 1971-1975, 1974-1980, and 1978-1984, respectively. 3) Kim et al. (2007) estimated North Korea’s economic growth rate using the weighted average for the output growth rate of the agricultural er socialist states from the early 1960s, just industry, mining industry, and service industry calculated based on their share of the gross national income and by deducting the hidden inflation. The output growth rate of the mining industry was drawn from the official statistics released by North Korea (1954-1989); as socialism was taking root. In 1954-1989, that of the agricultural industry from the same official statistics (1954-1960) and data from the South Korean government (Ministry of the average annual growth rate of GDP Unification and the Ministry of Agriculture and Forestry, 1961-1989) and; that of the service industry was assumed to be the same as the weighted average of the output growth rate for the two other industries. 4) The figure represents an estimate for 1954-1960. Source: Central Statistical Office of DPRK (1961); Lee (1972; 2000); Ministry of Unification (1996, etc.); Institute of North Korean Studies (1983; 5 https://unstats.un.org/unsd/snaama/ (accessed on August 8, 2020). 1994); Jo, Dong Ho (1992); Yoon, Seok-Bum (1983); Hwang, Eui-Gak (1992); Kim et al.(2007); Jo, Se-Hyung and Minjung Kim (2020).

08 09 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

I have learned a lot from your detailed of economic development, the bigger the explanation of the efforts made to estimate gap is between the market exchange rate North Korea’s GDP before the 1990s. Now and PPP-based exchange rate; we call this let’s move on to the 1990s. Since 1990, the the discount rate. If we ignore the dis- BOK has released a yearly report on North count rate and use the ROK won-US dol- Another issue with Korea’s GNI growth in collaboration with the BOK’s method lar exchange rate, North Korea’s GDP cal- relevant South Korean organizations, and culated based on the market exchange BOK estimates makes estimations on GDP and economic is based on North rate would be overestimated. Hardly any- is that there is aggregates. The BOK’s estimation of North one would believe that North Korea’s dol- Korea’s GDP is not only used in Korea but Korea’s output times lar-denominated per capita income was almost no direct overseas as basic data on the growth rates higher than that of Vietnam. However, and trends of the North Korean economy. South Korea’s prices the BOK had North Korea’s per capita in- consideration of the Could you explain how these estimates are times South Korea’s come pegged at $1,108 in 2006 while Viet- produced, and their objectives, features, nam’s was only $720 in the same year. informal economy. and limitations? value-added. Currently, the BOK only releases its estimates on North Korea’s GDP in South Korean won. However, there are still insti- The main objective of the BOK’s esti- tutions and experts who apply the ROK mates is to compare the GDP of the two won-US dollar exchange rate to obtain and 6 Koreas. For this, BOK uses South Korea’s present North Korea’s GDP in US dollars. er, the impact on the level of national in- national accounts system together with This practice ignores the wide gap in eco- come could be considerable. For example, North Korea’s output data. If I rough- timates in South Korean won. The BOK nomic strength between North and South a significant share of the value-added cre- ly summarize this method, after compiling adds a note in its releases to avoid many Korea, and overestimates the former’s na- ated in the informal sector was omitted output data through a variety of means, it misunderstandings which states that its es- tional income. The difference between the from the CIA’s GDP estimates for the So- is multiplied by South Korea’s prices then timates differ from conventional GDPs market and PPP-based exchange rates is viet Union. According to my own research, South Korea’s value-added. In other words, and using them for direct comparison is approximately 30% for South Korea while CIA estimates would increase 6.8% (Kim, the BOK’s method is based on North Ko- not recommended. it is between 50% and 70% for underdevel- 2003) if the value-added generated by the rea’s output times South Korea’s prices Until the early 2010s, BOK estimates oped economies. informal sector is included. In other words, times South Korea’s value-added. on North Korea’s GDP were denominat- Another issue with BOK estimates is just by excluding the value-added of the Data on North Korea’s output are used, ed in US dollars. However, this is no lon- that there is almost no direct consideration informal sector, the CIA underestimated but they have not been released directly by ger feasible as it is difficult to determine of the informal economy. Some criticize the Soviet’s GDP by 6.8%. The problem is, the North Korean authorities but estimat- an exchange rate appropriate for North that the BOK’s estimates do not reflect the the share of the Soviet Union’s informal ed by relevant South Korean institutions. Korea. It would be easy to think that, be- market segment although it accounts for a sector is smaller than that of North Ko- Generally, a country’s GDP is estimat- cause the BOK’s estimates are represent- growing share of the North Korean econo- rea, and there was no rapid growth trend. ed using data on output, prices, and val- ed in the South Korean won, the ROK my. This criticism is warranted, and efforts Thus, the risk of growth figures becoming ue-added. Meanwhile, the BOK’s estimates won-US dollar rate could be used to make should be made to take the informal sec- structurally distorted through the omit- use South Korea’s prices and value-add- the conversions. However, this has a seri- tor into account. If there are no significant tance of the informal sector is low. How- ed. As such, we get North Korea’s GDP es- ous pitfall. The lower a country is in terms changes in the size of the informal sector, ever, in the case of North Korea, because the impact of excluding it on the estimated drastic changes in the size of the informal annual growth rate will be limited. Howev- 6 For more discussions on the BOK method, refer to Kim (2017) and Kim, Suk-jin (2017). sector are more likely, we need to take the

10 11 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

potential problem of distortion more seri- former to the latter. When North Korea’s o u s l y. GDP is estimated based on this new fig- While attempting to reevaluate the ure, there is a yearly maximum increase of BOK’s GDP estimates for North Korea 1±α%p in BOK estimates. This implies that in relation to the informal sector, a ques- the BOK’s estimates on North Korea’s eco- On the other hand, upon entering 2017, North tion arises over the possibility of distor- nomic growth during the Kim Jong-un era Korea’s informal sector would have been tion in the figures for before and after the have been underestimated by that much mid-1990s when the informal sector be- on a yearly basis. Given this, it seems more adversely affected by the implementation of UN gan to grow sharply. It is also possible that, plausible that North Korea’s economic during the period after the inception of growth rate under Kim Jong-un and be- sanctions. Nevertheless, this was not directly Kim Jong-un until the effectuation of the fore UN sanctions was not in the 1% range UN sanctions, informal activities appear to as estimated by the BOK, but between 2 reflected in the BOK estimates for 2017-2019, have expanded. I have roughly measured to 3% at maximum. The reason why this the contribution of the informal sector to is the maximum bound is because the suggesting that there may have been some North Korea’s national income using the growth rate of informal-sector activities overestimation. results of a survey on North Korean de- was assumed to be that of the overall ser- fectors (Kim, Byung-Yeon, 2019). When we vice industry. The service industry is made compare the participation rate of North up of different sectors that include educa- Korean defectors in the informal sector tion and banking, and the growth rates of during Kim Jong-il’s era and that of Kim each sector were considered to have risen tion rate of informal activities. On the oth- erly researched. But, the estimation meth- Jong-un, we find a 10%p increase from the by as much as the growth in the participa- er hand, upon entering 2017, North Korea’s ods used in the study of Kim Byung-Yeon, informal sector would have been adverse- Kim Suk-Jin and Lee Keun, and my 2017 ly affected by the implementation of UN study, which is updated for the period af- sanctions. Nevertheless, this was not direct- ter 1990, employ output data so has lit- ly reflected in the BOK estimates for 2017- tle relevance to South Korea’s prices and 2019, suggesting that there may have been value-added (Kim, 2017; Kim, Kim, and some overestimation. We must always be Lee, 2007). Comparing the BOK estimates wary of potential estimation errors when from the 1990s and the estimates present- an event of significance to informal eco- ed in my studies will help to verify the ex- nomic activities is not considered in the es- istence of bias when South Korean pric- timations for economic growth. As such, es and value-added are used. Overall, the how changes in activities at markets should trends seen in these two sets of estimates be taken into account in estimating North are similar, but variances in my estimates Korea’s GDP remain an important task tend to be larger. For example, the BOK for the BOK. assessed that North Korea’s GDP contract- The last problem with the BOK’s GDP ed 30% in 1997 from 1989, but I estimated estimates is related to the use of South Ko- 40%. For the subsequent period, my study rea’s prices and value-added. Due to the finds the recovery period to be faster. In re- lack of cases in other countries, the is- gard to this, further analysis will be needed sue of potential bias has yet to be prop- to make a comparison with cases in which

12 13 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

the value-added of a country that has a sector and the formal one differs across Other Estimates on North Korea’s GDP similar economic structure to North Korea countries. For example, the two sectors can and Growth Rate has been used, or to examine biases aris- independently coexist as in South America. ing from using South Korea’s value-add- Alternatively, the informal sector can neg- ed. I understand that Dr. Kim Kyoochul at atively affect the formal sector as is well il- I am curious as to whether there are other KDI has been working on this subject. lustrated by the Soviet Union in the 1980s. types of data besides the BOK’s. Could One of the reasons is that raw materials you tell about the difference between the bound for the formal sector are often si- estimates presented in your study and phoned off to the informal sector. Accord- those officially released by North Koreans? You have made some crucial points. As you ingly, as the former contracts and the lat- What is your opinion on this? Additionally, have stated, there are two issues with BOK ter grows, a negative relationship can form if there are other useful estimates, please estimates. The first is the matter of output, between the growth rates of the two. It is tell us about them also. and the second is prices and value-added. also possible that the formal sector bene- The use of South Korea’s prices and value- fits from the marketization in the informal added has been a source of contention as sector, and a virtuous cycle is created. For Both the UN and BOK release data on doubts continue over just how realistically instance, state-owned enterprises can sell North Korea’s national income. The UN they reflect the conditions in North Korea. their final products in the markets and use reported that, in 2018, North Korea posted Meanwhile, in terms of output, even if it is the profit to buy more raw materials need- a per capita income of $688. But, accord- assumed that the data obtained through ed for production. As it can be seen, the re- prices is accurate, the informal sector the problem of the 1%p you mentioned lationship between the formal and infor- has not been included in the calculations. earlier. mal sectors is not always fixed. As this is a very important point, I would Given that the BOK method only uses like to ask you another question. What if, the formal sector, gaining an accurate owing to the COVID-19 crisis, all market That is a key aspect, but it is difficult to reading of not only GDP size but also activities are suspended in North Korea and explain due to the complicated relation- growth will be difficult in the event of The UN reported the formal sector regains vitality? Will the ship between the different variables. From sudden changes in the size of the informal that, in 2018, North growth of the informal sector still be faster a general point of view, it is extraordinary sector or in its relationship with the formal than that of the formal sector? It would that the growth of the informal sector sur- sector. Also, there is the risk of over- and Korea posted a not be problematic if the growth rates passes that of the formal sector. Typical- underestimating the overall growth rate if of the two sectors were the same, but if ly, the informal sector lacks legal protec- the growth of the two sectors widely differ. per capita income the growth of informal sector is higher, tion, and financial clout. There is also the This is something that we should be con- the BOK method―which excludes the matter of the participants. For example, in tinue to focus on. of $688. But, informal sector―is likely to underestimate South America, low-educated, low-skilled according to my the overall economic growth rate. On the workers constitute the majority of the contrary, what would happen if the growth workforce. This means that the labor input estimation, it stood rate of the informal sector was favored? of the informal sector is weaker than that Would there be an underestimation of the formal sector. As a result, growth at $770 in 2014. or overestimation? I ask this for clarity rates in the informal sector is lower than because, although the BOK’s estimates are that in the formal one. currently superior to all others, there is still The relationship between the informal

14 15 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

ing to my estimation, it stood at $770 in sibly determining that the growth rate in- Macroeconomic Trends Seen Through the overall pace of recovery, my estimate 2014. While my estimates tend to be higher creased in line with the increase in the price North Korea’s GDP would still be around the early 1990s level, than the UN’s, there is no information on of major items such as coal. But, while which would roughly complete a U-shaped how it obtained this other than the belief mineral prices fell in 2013-2014, the regime curve. Some could argue that, not only has that it receives data from member states. nevertheless reported that the North Kore- So, according to all of the aforementioned North Korea already achieved such a lev- North Korea is known to also make di- an economy grew 4.5% during the period. estimates, what have the macroeconomic el of GDP, it has surpassed the 1990 lev- rect announcements through numerous So, I doubt the reliability of these figures. trends been like in North Korea since the el. Serving as the rationale behind this are channels which report that national in- 1990s? the numerous newly-built buildings and come stood at $1,013 in 2013 and $1,053 in more variety of goods in the markets. Of 2014. These figures are similar to the BOK’s course, these changes require further ex- estimates obtained by multiplying North When we value the BOK’s figures for amination. But what is visible to the eye is Korea’s ROK won-denominated per capi- 1989 at 100 and look at the GDP trends, only a small fraction of the overall GDP ta income by the South Korean exchange we find an overall, slightly U-shaped curve. which consists of both tangible and intan- rate.7 The figure for 2013, in particular, co- while mineral The line continued to decline from 1990 gible components. To the layman, tangible incides with the 2015 per capita income es- before bottoming out in 1997-1998, and re- components include consumer goods, ser- 8 prices fell in 2013- timated by Hyundai Research Institute. bounding thereafter. With 1989 set at 100, vices, and buildings, among others are ev- Given these similarities, I suspect-although 2014, the regime North Korea’s GDP in the mid- to late I am not certain-that North Korea refers 1990s would have fallen to roughly 70. My to South Korea’s data. nevertheless study shows that this was 60, and the re- It has also been declared that North Ko- covery pace was faster (than the BOK es- rea has continued to grow even after UN reported that the timate). As I mentioned earlier, the dif- when foreign sanctions were implemented in 2016. One ference derives from whether or not the North Korean economist maintains that North Korean estimates use South Korean prices and val- trade and markets the economy grew 3.7% in 2017, and per economy grew 4.5% ue-added. The informal sector was exclud- expand, the GDP capita income was at $1,214.9 He did not, ed from both estimates, and both agree however, comment on the method he used. during the period. that North Korea has been unable to fully composition tends From what I have heard, while the output return to the 1989 level. data compiled from various firms and or- So, I doubt the Given that the current nutritional status to shift towards ganizations, the international prices were of North Koreans seems to be at a similar multiplied to the output data due to var- reliability of these level to the mid-1980s, concerns have been consumer goods ious problems over prices. Still, it a meth- figures. raised over the fact that the recovery in and services, and od that raises considerable doubt. Another GDP cannot be so slow, because, as some source claims to have seen a change in the have pointed out, the growth of the infor- nutritional status international prices of major goods; pos- mal sector surpassed that of the formal sector; a fact that is missing from BOK improves even with figures. The BOK assesses that North Ko- 7 The BOK estimated the per capita GNI of North Korea at 1.388 million won (in South Korean won). This figure is equivalent to 1.263 million rea’s current per capita GDP is at the 1994- the same per capita won if the South Korean won-US dollar exchange rate for 2014 (1 USD = 1,099 KRW) is applied. 1995 level, and my own estimations pro- 8 Hyundai Research Institute estimated the nominal GNI of North Korea for 2015 at US$1,013 by using the relationship between the infant income. mortality rate and per capita income, and by considering the crop yields (http://hri.co.kr/upload/publication/2016928161319[1].pdf). duced similar results. Even if the informal 9 https://www.japantimes.co.jp/news/2018/10/13/asia-pacific/north-koreas-economy-grew-3-7-2017-pyongyang-professor-estImates/#. sector was considered, thereby accelerating Xjz0_cgzaUk (accessed on August 8, 2020).

16 17 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

erything for GDP. However, when foreign ing, with new buildings rising, and more the volume of trade with former socialist Figuretrade 1 and Trends markets in North Korea’s expand, Exports/Imports the GDP to comChina -(left) and importsTrade Balance(right) and other goods in the markets. states such as the Soviet Union reached $5 position tends to shift towards consum- This illustrates the changes in GDP com- billion. From a long-term perspective, we er goods and services, and nutritional sta- position from heavy to light industry in- are able to see that the high level of trade (unit: $) tus improves even with the same per capita cluding consumer goods. For example, in- compared to the national income declined income.0 This is why there is confusion be- stead of making tanks, investments were sharply in the 1990s before rebounding in There are those who

tween0 an increase in the share of tangible redirected to the light industry, increas- the 2000s. Upon entering the 2010s, the ra- components and overall growth. ing the supply of consumer goods. When tio continued to rise with the level of trade argue that the North 0 Firstly, lets deal with how trade and/ the informal sector is invigorated, GDP openness nearing that of the 1980s until Korean economy or0 marketization can change the share composition leans towards areas that have sanctions were enforced. Thus, it can be of GDP from the heavy industry to the market demand. This could also happen in determined that the size of the North Ko- has continued light0 and consumer goods industry. For North Korea. As a result, people can mis- rean economy nearing the end of the 1980s the0 Soviet Union, GDP continued to fall take a change in GDP composition for was almost the same as the present level. to grow a yearly throughout the early to mid-1990s, and a GDP growth as they can actually see the Lastly, our study, which empirically an- 20 U-shaped recovery was only achieved in changes being made. alyzes the relationship between BOK esti- average of 7% under around10 2006-2007. Barring brief rebounds We also need to a look at the changes in mates and the variables that affect growth, Kim Jong-un, between, the whole cycle took about 16 trade. In the 1970s-1980s, the level of open- found a systematic relationship between 0 years.1990 I 1991lived1992 199in 199Moscow199 199 199 in199 the1999 1990s.2000 2001 I2002 re200- 200 200ness200 200 in200 North2009 2010 2011Korea’s2012 201 201 trade201 201 was201 201 consid2019 - these variables (Kim, 2011). The BOK esti- which is certainly member the overall quality of life improv- erable as was the trade-to-GDP ratio, and mates have a negative (-) relationship with the fiscal burden and imports from Chi- unconvincing. na while they have a positive (+) relation- Figure China’s Aid to North Korea (2008 – Nov. 2019) | Figure 1 | Trends in North Korea’s Economic Growth Rate from the 1990s ship with exports to China, South Korean (unit: %) aid, and inter-Korean integration index. If 1 the BOK’s estimates were indeed seriously flawed, such systematically significant re-

10 sults would not be possible. There are those who argue that the total exports rose. We can assume that the North Korean economy has continued to foreign currency earned during this period grow a yearly average of 7% under Kim had a lagged effect, and as such, was re-

0 Jong-un, which is certainly unconvincing. flected in Kim Jong-un’s era. Accordingly, Although there were growth factors on the the fact that the North Korean economy market side, there were non on the trade grew fast under Kim Jong-un is an optical side. With mineral prices rising until 2013, illusion, and possibly, the result of a time North Korea’s total trade peaked in 2014- lag. 10 2015 but contracted thereafter, offsetting any effects trade growth had on improving 1 1990 1991 1992 199 199 199 199 199 199 1999 2000 2001 2002 200 200 200 200 200 200 2009 2010 2011 2012 201 201 201 201 201 201 2019 economic conditions. North Korea raked NK Market(A) International Market(B) Bank of Korea Kim, Byung-Yeon in a considerable amount of foreign currency f rom mineral exports in 2010-2012; Source: By author based on the Bank of Korea Economic Statistics System, Statistics on North Korea’s GDP (http://ecos.bok.or.kr/, accessed on June 6, during which time both mineral prices and 2020) and Kim (2017), Table 2.6 Estimates of Annual Growth Rates and GDP per Capita of North Korea, 1990-2013.

18 19 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

Figure 1 Trends in North Korea’s Exports/Imports to China (left) and Trade Balance(right) | Figure 2 | North Korea’s Total Trade Since the 1990s will likely tumble during 2020. a yearly 7% without reform and opening

(unit: $100(unit: million) $) As long as the sanctions remain in place, up is highly implausible. it is difficult to believe that North Korea If North Korea reforms and opens up, 0 will grow at a yearly average of over 3%. and economic integration is achieved on 0 If sanctions continue at the current lev- the Peninsula, the capital and technologies el, the maximum that can be achieved in of not just South Korea but the rest of the 0 terms of economic growth is 1-2%, and world will flow into the North. If this hap- 0 this is only if weather conditions are fa- pens, a yearly average growth rate of over vorable enough to produce good crop. Un- 10% is possible. This is the best-case scenar- 0 less these special conditions are met, there io for North Korea. If North Korea choos- 0 is hardly anything that North Korea can es not to open and reform, but denuclear-

20 do. If the sanctions are eased substantially, izes to have sanctions lifted, the markets the economy may be able to grow 4%, al- and trade will expand, and average annual 10 beit temporarily. For an economy to con- growth will likely mark about 3%. But, like 0 tinue growing by more than 4% a year, it I said, under the current conditions, a 1-2% 1990 1991 1992 199 199 199 199 199 199 1999 2000 2001 2002 200 200 200 200 200 200 2009 2010 2011 2012 201 201 201 201 201 201 2019 must launch serious economic reforms and growth is the maximum. Worse still, if the Source: KOSIS North Korea Statistics (https://kosis.kr/bukhan/, accessed on October 6, 2020); KOTRA North Korean Foreign Trade Trends (accessed on opening-up. The argument that the North COVID-19 crisis continues to negatively af- October 6, 2020). Korean economy has continued to grow at fect trade and the markets, North Korea’s Figure China’s Aid to North Korea (2008 – Nov. 2019) economic growth rate for 2020 is projected You have given us new and fascinating markets in North Korea―one of the two to be less than -5%. insight. From your account, we know that major growth factors (the other is trade)― North1 Korea’s GDP and growth rate began have continued to grow, mineral trade to shrink from the early-1990s before is on a downward trend after peaking in reaching10 a trough at around 1997-1998, 2012-2013. Thus, it is unreasonable, as you Before wrapping up, as someone who has and rebounding thereafter. Currently, it is have said, to conclude that North Korea’s As long as the been studying the North Korean economy, almost at previous levels. You also touched economic growth rate has drastically grown could you share a few words for those upon an important point that the currently during Kim Jong-un’s era. That brings us sanctions remain in who want to study this field or use data on seemingly0 better economic conditions to the future. So, how do you see North North Korea’s GDP? are not an indication of higher growth or Korea’s macroeconomic trends changing? place, it is difficult GDP. This was supported by the Soviet Union’s case, which witnessed―during its to believe that North In terms of estimating GDP, the real in- transition―considerable progress being After hitting bottom in 1997-1998, the 10 dicator method-which I have explained in made in some areas of its economy thanks two positive elements that helped North Korea will grow at detai-has many limitations. Firstly, it is dif- to the changes in GDP composition despite Korea achieve a U-shaped growth are for- 1 a yearly average of ficult to find the yearly trends in growth. the continued1990 1991 1992 199 fall199 199in 199GDP.199 There199 1999 2000 were2001 2002 two200 200 200 200eign200 200 trade2009 2010 and2011 2012 the201 201market.201 201 201 Still,201 2019 as you NK Market(A) International Market(B) This can be tackled by using data on night additional key points. One is that,Bank when of Korea know,Kim, Byung-Yeon from 2020, trade has been weak and over 3%. lights. For this, we must identify and utilize we examine the correlation between BOK market activities have been sluggish due to indicators that reflect the trends in night data and the variables related to growth, the COVID-19 crisis. As such, North Ko- lights, and study the regional discrepan- there is a systematic relationship. The rea’s economic growth rate, which has al- cies. More research is also needed to exam- other is that, even if we assume that the ready been constrained by UN sanctions, ine the relationship between GDP and dif-

20 21 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

ferent variables. Some of the question we can ask are: what is behind the fall/rise in GDP?; what are the regional differences?; have the many markets in a certain region References helped it to grow rapidly?; is it owed to an increase in trade?; is the growth based on an increase in the sale of mineral products produced in that region?; or, is it owed Kim, Kyoochul, “Economic Well-being of the North Korean People and New Trends: An to the on-the-ground leadership of the leader supreme (although there is very lit- Approach based on New Types of Data,” KDI Review of the North Korean Econo- tle chance of this)? To make an argument, my, July 2017, pp.3-22. an economist must compile reliable data, Kim, Byung-Yeon, “National Income of North Korea: Estimates and Assessments,” Korea and rigorously assess them. Indeed, mere- EXIM North Korea Economic Review, Fall 2008. ly speculating without any data is not the Kim, Byung-Yeon, “The Determinants of North Korean Economic Growth,” POSRI Busi- hallmark of serious economist, and experts ness and Economic Review Vol.11 No. 1, POSCO Research Institute, pp.63–81, 2011. on the North Korean economy are, by no Kim, Byung-Yeon, “Estimates of Long-term Growth Rates of the North Korean Economy,” means, an exception. Mun, Sung Min, Byung-Yeon Kim, Young-hoon Kim, Ji Young Choi, Suk-Jin Kim, Understanding the North Korean Economy with Statistics, the Bank of Korea, 2014. Kim, Byung-Yeon, “The North Korean Economy under the Kim Jong-un Regime,” North Korea Today , Yoon Young-kwan (ed), Neulpum Plus, 2019. Today, we gained valuable insight into Kim, Byung-Yeon and Suk Lee, “Ways to Improve the Estimation Methodology for the the ways in which we can view North GNI of North Korea,” Ministry of Unification, 2006. Korea’s GDP and growth rate as well as Kim, Suk-jin, “Estimating the GNI of North Korea: Status and Tasks,” presented to the into the new types of available data and seminar on the GNI of North Korea, University of North Korean Studies, 2007. perspectives on them. You have shown us Mun, Sung Min, “Introduction to Statistics on the GNI of North Korea and Comparison the exemplar of how we should approach of Income Levels,” Mun, Sung Min, Byung-Yeon Kim, Young-hoon Kim, Ji Young North Korea as economists, which is both intricate and thoughtful. Thank you again Choi, Suk-Jin Kim, Understanding the North Korean Economy with Statistics, the for your compelling and in-depth accounts, Bank of Korea, 2014. and for taking the time to be with us today. Institute of North Korean Studies, Digest on North Korea, 1983; 1994. Yoon, Seok-Bum, Macroeconometric Analysis of the North Korea Economy, Survey Materials from the Board of National Unification, 1986. Chun, Hong-Tack, “Estimating North Korean GNP by Physical Indicators Method,” KDI Journal of Economic Policy, Vol.14 No.1, 1992. Jo, Dong Ho, “Labor Productivity and Optimal Wage in North Korea,” KDI Journal of Economic Policy Vol.15 No.4, Korea Development Institute, 1993, pp.37-68. Jo, Se-Hyung and Minjung Kim, “Estimating Long-term Economic Growth in North Ko- rea: 1956-1989,” BOK Economic Research, 2020. Statistics Korea, A Socioeconomic Comparison of North and South Korea, 2000. Hwang, Eui-Gak, A Theory of the North Korean Economy: Current Status and Compari-

22 23 Dialogue on the North Korea Economy North Korea’s GDP: Features and Issues

22 23 Dialogue on the North Korea Economy

son of the Economies of North and South Korea, Seoul: Nanam, 1992.

Goto, Hu jio, Estimates of the North Korean Gross Domestic Product: 1956-1959, Kyoto Sangyo University Press, 1990. Kim, Byung-Yeon, “Informal Economy Activities of Soviet Households: Size and Dynam- ics,” Journal of Comparative Economics, Vol. 31, No. 3, 2003, pp.532-551. Kim, Byung-Yeon, Unveiling the North Korean Economy, Cambridge University Press, 2017. Kim, Byung-Yeon, Suk-Jin Kim and Keun Lee, “Assessing the Economic Performance of North Korea, 1954-1989: Estimates and Growth Accounting Analysis,” Journal of Comparative Economics, Vol. 35, No. 3, 2007, pp.564-582. Maddison, Angus, Monitoring the World Economy, 1820-1992, OECD, 1995. Maddison, Angus, Chinese Economic Performance in the Long Run, OECD, 1998. Niwa, Haruki and Goto, Fujio, “Estimates of the North Korean Gross Demestic Product Account,” Asian Economic Journal, March, 1989, pp.133-169.

DPRK Central Planning Commission Central Bureau of Statistics, DPRK Collection of Statistical Data on the Development of the People’s Economy, Pyongyang, 1961.

http://hri.co.kr/upload/publication/2016928161319[1].pdf (accessed on August 8, 2020). https://www.japantimes.co.jp/news/2018/10/13/asia-pacific/north-koreas-economy-grew-3-7- 2017-pyongyang-professor-estimates/#.Xjz0_cgzaUk(accessed on August 8, 2020). Official UN statistics (https://unstats.un.org/unsd/snaama/Downloads, (accessed on September 15, 2020). Bank of Korea Economic Statistics System, Statistics on North Korea’s GDP (http://ecos.bok. or.kr/, accessed on October 6, 2020).