The North Korean Economy: Background and Policy Analysis

Publication Date: February 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Government

Type:

Coverage: Korea (North)

Abstract:

This report provides an overview of the economy of the Democratic People's Republic of Korea (DPRK) or North Korea, its external economic relations, attempts at reform, and U.S. policy options. Along with the United States, North Korea's major trading partners -- China, Japan, South Korea, and Russia -- form the socalled Six Parties, which are currently engaged in talks to resolve issues raised by the DPRK's development of a nuclear weapons program.

The economy of North Korea is of interest to Congress because the it provides the financial and industrial resources for Pyongyang to develop its military, constitutes an important "push factor" for potential refugees seeking to flee the country, creates pressures for the country to trade in arms and illegal drugs, is a rationale for humanitarian assistance, is tied to Pyongyang's program to develop nuclear energy and bombs, and creates instability that ultimately affects the economy of South Korea. The North Korean threat to sell nuclear weapons material could be driven in part by its need to generate export earnings. The dismal economic conditions also foster forces of discontent that potentially could turn against the Kim regime -- especially if knowledge of luxurious lifestyle of communist party leaders becomes better known or as the poor economic performance hurts even Pyongyang's elite. The North Korean economy also is a target of economic sanctions.

Economic conditions in North Korea have been dismal for those out of the center of power. Mass starvation -- eased only by international food aid and other humanitarian assistance -- has stalked the countryside. With the termination of aid from Russia in the form of fuel and other raw materials at concessional prices, industrial production in North Korea has shrunk, from 60% of the economy in 1987 to 27% in 2002. The country has embarked on a program of economic reforms that include raising wages, allowing prices to better reflect market values, reducing dependence on rationing of essential commodities, less centralized control over factory operations, and opening foreign trade zones for international investment.

North Korea has extensive trade relationships with China, South Korea, Japan, and Russia. Because of U.S. economic sanctions and lack of normal trade relations status, U.S. imports from North Korea are virtually nil while U.S. exports in 2003 were $8 million. The DPRK runs a $1 billion deficit per year in its international trade that it funds primarily through receipts of foreign assistance and various illicit or questionable activities, such as weapons sales, illegal drugs, and counterfeiting.

In the current Six-Party Talks, economic assistance (including fuel oil) is a major bargaining chip in seeking the complete dismantling of the DPRK's nuclear program. Economic policy options include normalizing relations with Pyongyang, negotiating a trade agreement, lifting economic sanctions, allowing the DPRK to join international financial institutions, and removing the country from the terrorism list.

This report will be updated as conditions warrant.