The North Korean Economy: Leverage and Policy Analysis
The North Korean Economy:
Leverage and Policy Analysis
Updated August 26, 2008
Dick K. Nanto
Specialist in Industry and Trade
Foreign Affairs, Defense, and Trade Division
Analyst in Asian Affairs
Foreign Affairs, Defense, and Trade Division
The North Korean Economy:
Leverage and Policy Analysis
North Korea’s dire economic straits provides one of the few levers to move the
Democratic Peoples Republic of Korea (DPRK) or North Korea to cooperate in
attempts by the United States, China, South Korea, Japan, and Russia to halt and
dismantle its nuclear program. These five countries plus North Korea comprise the
“six parties” who are engaged in talks, currently restarted, to resolve issues raised by
the DPRK’s development of a nuclear weapon. This report provides an overview of
the North Korean economy, its external economic relations, reforms, and U.S. policy
In June 2008, the Bush Administration announced that it was lifting restrictions
under the Trading with the Enemy Act and was starting the process to remove the
DPRK from the list of State Sponsors of Terrorism. Other sanctions, including U.N.
sanctions imposed following North Korea’s nuclear test, still remain in place.
The economy of North Korea is of interest to Congress because it provides the
financial and industrial resources for the Kim Jong-il regime to develop its military
and to remain in power, constitutes an important “push factor” for potential refugees
seeking to flee the country, creates pressures for the country to trade in arms or
engage in illicit economic activity, is a rationale for humanitarian assistance, and
creates instability that affects South Korea and China in particular. The dismal
economic conditions also foster forces of discontent that potentially could turn
against the Kim regime — especially if knowledge of the luxurious lifestyle of
communist party leaders becomes better known or as poor economic performance
hurts even the elite.
Economic conditions in North Korea have been improving since the disastrous
conditions in the mid-1990s but still are dismal for those out of the center of power.
Crop failures and flooding have reportedly increased the potential for mass starvation
in 2008, although progress in the Six Party Talks have open the way for deliveries
of humanitarian assistance from the United States and South Korea. The DPRK has
embarked on a program of limited economic reforms that include allowing open
markets, allowing prices to better reflect market values, reducing dependence on
rationing of essential commodities, trimming centralized control over factory
operations, and opening areas for international investment.
North Korea has extensive trading relationships with China and South Korea
and more limited trade with Russia. Because of economic sanctions U.S. and
Japanese trade with North Korea in 2006 and 2007 was virtually nil. The DPRK has
been running an estimated $1.5 billion deficit per year in its international trade
accounts that it funds primarily through receipts of foreign assistance and foreign
investment as well as through various questionable activities.
This report will be updated as conditions warrant.
Major Points and Recent Developments................................1
In troduction ......................................................2
Overview of the DPRK Economy.....................................6
Economic Reforms and Free Trade Zones..............................15
Kaesong Industrial Complex....................................20
Investment From China........................................22
Other Sources of Foreign Exchange..................................29
Legal Sources of Funds........................................29
Illegal or Questionable Sources of Funds..........................34
U.S.-DPRK Trade Relations........................................37
North-South Korean Economic Relations..............................41
China-DPRK Economic Relations....................................43
Japan-DPRK Economic Relations....................................47
Russia-DPRK Economic Relations...................................48
U.S. Interests, Strategy, and Policy...................................51
U.S. Interests, Goals, and Strategy................................51
Current U.S. Policy...........................................53
The Six-Party Talks...........................................56
Possible Economic Incentives ...................................58
Normalizing Diplomatic Relations...........................58
Negotiating a Trade Agreement..............................59
Easing U.S. Sanctions.....................................59
Allowing the DPRK to Join International Financial Institutions
Removing the DPRK from the Terrorism List...................60
Fuel and Food Aid........................................60
Products from the Kaesong Industrial Complex.................60
Figure 1. Estimated Real Annual Growth in North Korea’s GDP
Figure 2. North Korea’s Industrial Structure...........................14
Figure 3. Foreign Direct Investment Flows and Stocks in the DPRK,
Figure 4. North Korean Imports of Merchandise by Major Country of Source,
Figure 5. North Korean Exports of Merchandise by Major Country of
List of Tables
Table 1. Estimated North Korean Trade by Selected Trading Partner,
Selected Years, 1994-2007.....................................25
Table 2. North Korea: Total Net Receipts by Major Source/Donor,
Table 3. North Korea: Net Official Development Assistance by Major
Source/Donor (Excluding Russia, South Korea, and China), 1999-2006..32
Table 4. Economic Aid and Other Official Flows From South Korea to
North Korea, 2000-2004 and Total 1995 to 2004....................33
Table 5. U.S. Trade by Commodity With the Democratic People’s
Republic of Korea (North Korea) in 2004-2006.....................39
Table 6. U.S. Merchandise Exports, Imports, and Trade Balances with
North Korea, 1990-2007 .......................................40
Table 7. South Korean Merchandise Trade with North Korea, 1990-2007....43
Table 8. China’s Merchandise Trade with the DPRK, 1995-2007...........45
Table 9. Japan’s Merchandise Trade with the DPRK, 1994-2007...........47
Table 10. Russia’s Merchandise Trade with the DPRK, 1994-2006.........50
Table 11. Major Priorities and Bargaining Chips by Country in the
Six-Party Talks with North Korea................................57
The North Korean Economy:
Leverage and Policy Analysis
Major Points and Recent Developments
!The economy of the DPRK (North Korea) is one of the few policy
levers that countries can use to induce Pyongyang to abandon its
!The economy of the DPRK is in dire straits with a considerable
share of its population on the edge of starvation and in need of
outside food aid. In 2008, Pyongyang is placing more emphasis on
feeding its people. This likely is one reason that North Korea has
been more cooperative in disclosing and ending its nuclear weapons
!China and South Korean investments and trade with the DPRK are
helping the country to secure needed imports of energy, food, and
machinery for factories. North Korea’s trade deficit is being
financed primarily through foreign aid, investments, and remittances
from overseas workers, as well as through various illicit activities.
!Other than recent financial sanctions, economic sanctions appear to
have had little effect on the Pyongyang regime because China,
Russia, South Korea, and other nations have traded and provided
assistance to the DPRK, and the Kim Jong-il regime seems willing
to allow starvation rather than open the country to outsiders. A fall
of the Kim Jong-il regime seems unlikely at this time, although
pressures apparently are building in some quarters in North Korea
to look beyond the aging leader Kim.
!Economic reforms (“adjustments”) in the DPRK are gradually being
implemented, but the pace is slow and reversals of reform measures
!A February 2007 Six-Party Agreement calls for providing fuel and
eventual normalizing of relations with the DPRK in response to1
specific actions by Pyongyang in regard to its nuclear program.
1 For details on the Six-Party Talks, see CRS Report RL33590, North Korea’s Nuclear
Weapons Program, and CRS Report RL33567, Korea-U.S. Relations: Issues for Congress,
both by Larry A. Niksch.
!H.R. 2764 (P.L. 110-161) appropriated $53 million for energy
assistance for North Korea. In May 2008, the Bush Administration
announced it would resume food assistance to North Korea by2
providing 500,000 metric tons.
!Options for Congress include increasing its role in the Six-Party
Talks through oversight, hearings, legislation, and policy
discussions with the Executive Branch; continuing with the status
quo (primarily a State Department effort) including an emphasis on
human rights, non-proliferation, and actions to counter illicit
activities; or to take a more rigid stance toward Pyongyang until it
fulfills its commitments under the 2007 Six-Party Agreement.
!On July 11, 2008, Park Wang-ja, a 53-year-old housewife, was shot
dead by a North Korean soldier while taking a pre-dawn stroll near
a South Korea-managed resort on Mount Kumkang in North Korea.
South Korea halted further tourist visits to the mountain resort
(worth about $10 million per year to North Korea). (There is some
speculation that this could be the DPRK military’s attempt to derail
denuclearization under the Six-Party process.)
!On July 12, 2008, North Korea agreed to disable its nuclear facilities
by the end of October and, in return, the other parties pledged to
provide promised energy aid to the North by that time.
!In June 2008, the DPRK disclosed additional detail on its nuclear
program. The Bush Administration announced that it was lifting
restrictions under the Trading with the Enemy Act and was starting
the process to remove (August 11, 2008, at the earliest) the DPRK
from the list of State Sponsors of Terrorism. Other sanctions,
including U.N. sanctions imposed following North Korea’s nuclear
test, remain in place.
On June 26, 2008, President Bush announced the lifting of the application of the
Trading with the Enemy Act (TWEA) with respect to the Democratic People’s
Republic of Korea (DPRK, or North Korea), and notified Congress of his intent to
rescind North Korea’s designation as a State Sponsor of Terrorism.3 According to
2 For information on U.S. aid to the DPRK, see CRS Report RS21834, U.S. Assistance to
North Korea, by Mark E. Manyin and Mary Beth Nikitin.
3 U.S. Department of State. “North Korea: Presidential Action on State Sponsor of
Terrorism (SST) and the Trading with the Enemy Act (TWEA).” Fact Sheet, June 26, 2008.
This began the clock on a 45-day period of prior notification of Congress (ending August
the State Department, these actions were taken following the DPRK’s submission of
a declaration of its nuclear programs as agreed to under the Six Party Talks. The
Secretary of State is able to (but has not yet) rescind North Korea’s designation as
a State Sponsor of terrorism (as of August 11, 2008, following the 45 day period in
which Congress could have passed a joint resolution blocking the proposed
rescission). The United States reportedly is waiting for more complete verification
of the DPRK nuclear program.4
Recent progress being made under the Six Party Talks on the denuclearization
of the Korean Peninsula also enabled the United States to resume shipments of
humanitarian aid to North Korea. A shipload of food and another of heavy fuel oil
arrived in North Korea shortly after the announcement by President Bush of the
North Korea at a GlanceIn 2008, the confluence of several
Land Area: 120,540 sq km, slightlyforces is complicating the economic
smaller than Mississippisituation faced by Pyongyang. The
Population: 23.3 million (2007 est.)first is the global food shortage and
Head of State: Kim Jong-ilconcomitant high prices combined with
Capital: Pyongyanga poor crop outlook for farms and
Life expectancy: 72 yearshalting recovery in industries within
GDP: estimated $40-$71 billion atNorth Korea. The second is the
purchasing power parity in 2007
GDP Per Capita: $1,900 (CIA) tohardening of attitudes by the new
$3,094 (Global Insight) at PPP in 2007 South Korean President Lee Myung
GDP Composition: agriculture: 30%Bak who has declared an end to
industry: 39%, services: 31%unrequited South Korean economic
Exports: $1.9 billion (2007) assistance to the North and reciprocal
Export Commodities: minerals,criticism of the South by Pyongyang.
metallurgical products, manufacturesThese negative factors are offset
(including armaments), textiles, andsomewhat by progress being made in
fishery productsNorth Korea’s relations with Japan
Imports: $3.2 billion c.i.f. (2007) over the problem of abductees
Import Commodities: petroleum, coking(Japanese citizens kidnapped by the
coal, machinery and equipment; textiles,
grain DPRK) that may lead to a
normalization of relations and a large
Sources: CIA, World Factbook; Global Insight.payment by Japan of reparations to the
CRS calculations for trade.DPRK for Japan’s occupation of the
Korean peninsula and also by
investments in North Korean industrial
production by China in the northern region and by South Korea primarily in the
Kaesong Industrial Complex. These investments have created new exports for the
DPRK. The progress under the Six-Party Talks and the apparent willingness on the
part of both the United States and the DPRK to compromise in order to move the Six
Party Agreement on denuclearization forward has opened the way for deliveries of
U.S. humanitarian aid, and if sanctions are lifted, for possible Western investment
4 Kellerhals, Merle D., Jr. “North Korea Must Provide a Verification Plan, U.S. Officials
Say.” U.S. Department of State. Available at [http://www.america.gov].
in North Korea. The outlook for growth in 2008 is for an increase in real gross
domestic product of about 2.1%, down slightly from the 2.4% in 2007.5
The Stalinist state of North Korea (Democratic People’s Republic of Korea or
DPRK) faces a dilemma as its economy stagnates, goods are unequally distributed,
and much of the population undergoes severe privation. In the ongoing Six-Party
Talks on the DPRK’s nuclear weapons, economic assistance has been the primary
incentive for Pyongyang’s leaders to proceed with commitments relating to the
closure of its nuclear weapon’s program despite resistance from domestic interests
(particularly the military).
North Korea’s leaders seem to perceive themselves as being in a policy
dilemma. They see the United States as a hostile power and perceive themselves as
a possible target of U.S. military action. They have pushed to become a nuclear
power despite warnings not to do so even from China, their major ally. Yet North
Korea’s nuclear weapon development has become a rallying point for national pride
and what they see as a deterrent against hostile action. Yet a January 2008 joint
newspaper editorial by the Communist Party, military, and youth militia stated that
“at present, no other task is more urgent or more important than solving the people’s6
food problem and eating problem.” In January 2008, Kim Jong-il reportedly stated,
“The most important and urgent issue for us now is to bring about a turnabout in the
building of the economy and in the lives of the people.”7 Pyongyang currently faces
the archetypical economic trade-off between “guns and butter,” but in their case the
question is whether to retain the “guns” (nuclear weapons) or give them up in order
to obtain “butter” (food imports).
In negotiating with the DPRK, the United States has five major policy levers:
international political pressure, economic assistance, economic sanctions, diplomatic
isolation, and the threat of preemptive military action. This report examines the
economic side of U.S. leverage with North Korea. The security side is addressed in8
other CRS reports. Here we provide an overview of the North Korean economy,
survey its economic relationships with major trading partners, and conclude with a
discussion of U.S. policy options.
Information on the DPRK’s economy is scanty and suspect. The closed nature
of the country and the lack both of a comprehensive data-gathering structure using
modern economic concepts and a systematic reporting mechanism make quantitative
assessments difficult. Still, sufficient information is available to provide a sketch of
the North Korean economy that has enough details to address different policy paths.
5 Global Insight (subscription econometric forecasting service). “North Korea” (updated July
6 Full text of North Korea’s 2008 New Year’s joint editorial, BBC Monitoring Asia Pacific.
London. January 2, 2008. p. 1.
7 Kim Ung-ho. Main Attack Front in Building a Powerful State. Rodong Sinmun, January
8 See CRS Report RL33590, North Korea’s Nuclear Weapons Program, and CRS Report
RL33567, Korea-U.S. Relations: Issues for Congress, both by Larry A. Niksch.
U.S. interest in the moribund North Korea economy goes beyond the leverage
that economic assistance provides in negotiations over Pyongyang’s nuclear
weapons. The economy provides the financial and industrial resources for
Pyongyang to support its military and nuclear weapons program. It constitutes an
important “push factor” for refugees seeking to flee the country. It creates pressure
for the country to engage in illicit trade. When the economy is performing poorly,
it diverts international food aid that could be used elsewhere and creates instability
that raises the risk of desperate action by Pyongyang. Dismal economic conditions
may foster forces of discontent in the DPRK that potentially could turn against the
ruling regime of Kim Jong-il — especially if knowledge of the luxurious lifestyle of
regime leaders and the higher standard of living in South Korea spreads or if the poor
economic performance hurts even Pyongyang’s elite. Despite over a decade of
hardship, however, most dissatisfaction or opposition to the regime seems to be
This CRS report notes that the worst of North Korea’s economic crisis reached
in the mid-1990s seems to have passed, but the economy is still struggling and
heavily dependent on foreign assistance to stave off starvation among a sizable
proportion of its people. In a 2008 survey, the U.N. World Food Programme (WFP)
found that food availability, accessibility, and utilization have deteriorated sharply
since 2007; close to three quarters of the households have reduced their food intake;
and that more malnourished and ill children are being admitted to hospitals and
institutions. The conclusion was that millions of people in the DPRK are9
experiencing hunger not seen in almost a decade. Severe floods in 2007 worsened
a situation that had been improving. So far, deliveries of food aid, Pyongyang’s
reforms, and increasing trade with South Korea and China have enabled the country
to bridge to some extent its shortfall between food production and basic human
needs. U.N. trade sanctions along with U.S. financial sanctions may have had some
effect, judging by the complaints coming out of Pyongyang and progress in the Six-
Party Talks. U.S. trade sanctions alone, however, tend to have little impact because
the United States already has virtually no trade with the DPRK. The country can
turn to other nations for needed imports, and sanctions do not halt humanitarian aid
The Six-Party Agreement of February 13, 2007, included an economic incentive
of heavy fuel oil and humanitarian food aid, as well as the prospect of the
normalization of diplomatic relations between the DPRK and the United States and
Japan in exchange for North Korea’s freezing and allowing inspections of the
activity at its Yongbyon nuclear reactor. The Agreement is being implemented on
the basis of action-for-action.
9 U.N. World Food Program. DPRK Survey Confirms Deepening Hunger for Millions.
New-Press Release, July 30, 2008.
Overview of the DPRK Economy
The North Korean economy is one of the world’s most isolated and bleak.10 It
was completely bypassed by the Asian “economic miracles” of the past three decades
that brought modern economic growth and industrialization to South Korea, Taiwan,
Singapore, and Hong Kong, as well as rapid growth and trade liberalization to China,
Thailand, Malaysia and other Asian nations. The “Stalinist” North Korean economy
can be characterized by state ownership of means of production; centralized
economic planning, command, and monitoring of political attitudes; and an emphasis
on military development. The economic system is designed to be self-reliant and
closed. The irony of the situation is that the longer the economy tries to remain self-
sufficient, the poorer its performance and the more dependent the country becomes
on the outside world just to survive.
During the 1990s, major portions of the North Korean population survived
primarily through transfers of food and other economic assistance from abroad. The
worst of the food crisis has passed, but shortages are still there, and the country
depends on staples from China, South Korea, and, when allowed, from the U.N.
World Food Program to stave off mass starvation.11
During the 1990s, the inefficiencies of North Korea’s centrally planned
economy, especially its promotion of state-owned heavy industries, along with high
military spending — about 15-25% of GDP — joined with drought and floods to
push the economy into crisis. In addition, the collapse of the Soviet bloc meant the
loss of Russian aid, export markets, and cheap oil. Trade with the former Soviet
Union dropped from as much as $3.58 billion in 1999 and has recovered to only12
$230 million (mostly petroleum) by 2005. This added to disastrous domestic13
economic conditions in North Korea. Food has been so scarce that North Korean14
youth are shorter than those in other East Asian nations. Since 1998, the military
reportedly has had to lower its minimum height requirement in order to garner
sufficient new recruits. Life expectancy has been contracting. With the help of the
WFP, which had been feeding more than a quarter of North Korea’s 23 million
people, chronic malnourishment among children reportedly fell from 62% in 1998
to about 37% in 2004. About one-third of mothers are considered to be both
10 For an in-depth study of the North Korean economy, see Marcus C. Noland, Avoiding the
Apocalypse: The Future of the Two Koreas, Institute for International Economics, 2000.
11 In January 2008, a program for recovery assistance for vulnerable groups in the DPRK
lasting from April 2006 to May 2008 had appealed for $102,234,076 and had received 56%
of the income against that appeal. The largest donors were South Korea, Russia,
Switzerland, Germany, and Australia. World Food Program. Resourcing Update, Project
No. 10488.0, January 15, 2008.
12 Data from Global Insight. Subscription database.
13 Global Insight. Korea, North: Economic Trends: Economic Growth: Background. March
14 Chao, Julie. Economic Devastation Visible in Pyongyang. Korea Is like a Land Time
Forgot, and Crisis with U.S. Isn’t Helping. The Austin American Statesman, May 3, 2003.
malnourished and anemic.15 The Food and Agriculture Organization of the United
Nations estimated that 7.6 million North Koreans were undernourished in the 2002-16
an apparent comparison to the “long march” in Chinese revolutionary history. In
January 2006, Pyongyang ordered the WFP to stop food deliveries to the DPRK, but
limited food assistance (about 75,000 tons annually) was resumed after an agreement
in May 2006.17 Over the winter of 2007-2008, the abnormally dry and cold weather
reportedly has seriously affected the growth of autumn wheat and barley. When
combined with severe flooding during the summer of 2007, the WFP predicted the18
DPRK will be short about 1.4 million tons of food in 2008.
An extensive analysis of the famine in the 1990s concludes that the “ultimate
and deepest roots of North Korea’s food problems must be found in the very nature
of the North Korean economic and political system.”19 Since 2002, Pyongyang has
allowed some reforms that may ease the economic pressures over the long term. In
a sense, these reforms legitimized what was already occurring following the collapse20
of the centrally planned economy. The Kim regime refuses to call the economic
measures “reforms,” but as will be discussed later in this report, that in essence is
what they are. North Korea prefers to characterize the reforms as “utilitarian
socialism.” This includes the introduction domestically of market economy elements
(called the July 1, 2001 measures) and in the international arena, the pursuit of
normalization of relations with countries that have traditionally been hostile toward
The DPRK’s gross national product in 2007 in purchasing power parity prices
(PPP) — prices adjusted to international levels — has been estimated at $40 billion
(CIA estimate). This amounts to national income of about $1,800 to $2,964 per
capita in PPP values or roughly in the range of that of Zimbabwe, Uzbekistan,
Bangladesh, or the Sudan. This is considerably lower than that of China ($6,572),21
Indonesia ($3,842), or Japan ($30,821). It is also dramatically lower than South
15 Watts, Jonathan. Where Are You, Beloved General? In a Land Where Paranoia,
Propaganda, and Poverty Are the Norm, an Albino Raccoon Reassures North Koreans That
Good Times Are Ahead. Mother Jones, Vol. 28, No. 3, May 1, 2003. p. 52.
16 Food and Agriculture Organization. Food Security Statistics. Online at
[h ttp ://www. fao. o r g / s t a t i s t i c s / f a o s t a t/food secu rity/F iles/N u mb erU n d ern ou rish men t_ en . x ls].
17 U.N. World Food Programme. WFP Set to Resume Operations in North Korea, Press
Release, May 10, 2006.
18 Kim, Hyung-jin. North Korea Winter Threatens Food Supply, Associated Press, Seoul,
March 3, 2008.
19 Stephan Haggard and Marcus Noland. Famine in North Korea, Markets, Aid, and Reform
(New York: Columbia University Press, 2007). P. 3.
20 Georgy Toloraya. The Economic Future of North Korea: Will the Market Rule? Korea
Economic Institute, Academic Paper Series, Volume 2. No 10, December 2007.
21 A recent World Bank Study indicates that China’s PPP values should be reduced by about
40% for 2005 and subsequent years. World Bank. 2005 International Comparison
Program, Preliminary Results, December 17, 2007.
Korea’s $21,868 in PPP values or $16,200 at market prices.22 According to the Bank
of Korea, in market prices, North Korea’s GDP in 2006 was an estimated $25.6
billion compared with $888 billion for South Korea. Global Insight, an econometric
consulting firm, estimated North Korea’s GDP in 2006 at $22.9 billion ($23.9 billion23
in 2007). A remarkable fact is that in the post-Korean War and into the mid-1970s,
living standards were higher in North Korea than in either South Korea or China.
Now, North Korea is far behind its rapidly growing neighbors.
As shown in Figure 1, growth in estimated real gross domestic product (GDP)
in the DPRK was dropped into the negative for most of the 1990s before beginning
to recover in 1999. In 2004 to 2006, growth has been continuing at about 2%, up
slightly from earlier years. In 2006, the economy shrank by 1.1% and continued to
decline in 2007 by an estimated 2.3%. In essence, the economy appears to have
recovered moderately after the 1990s but has contracted again over 2006-2007.
It should be noted that various scholars and government officials produce a
variety of estimates of North Korean growth rates and GDP. Some estimates show
gradual recovery, but others argue that real per capita GDP has been stagnant or even
declining over the past decade. One problem is that estimates of inflation are
difficult to obtain and are inherently unreliable. The reason is that households in
different sectors of the economy may pay different prices for the same commodities
— particularly staples that have been distributed through official channels to some
but must be purchased in markets by others. Rice, for example, may be sold in an
official market for one price, sold in an irregular market for another, or distributed
as a ration to certain households basically for free. Another problem is that officials
who report data often are under pressure to meet certain targets. Unlike in the West
where data may be “sugar coated” to make them more palatable, in the DPRK, the
underlying statistics often are “rubberized.” They may be stretched or compressed
according to official expectations.
22 PPI figures are from the World Bank. World Development Indicators.
23 Global Insight (subscription service), “North Korea, Economic Growth: Outlook,” updated
July 23, 2008.
Figure 1. Estimated Real Annual Growth in North Korea’s GDP
3 3.3 2.9 2.4
1.3 1.2 1.82
-1 . 1 -1 . 1-2
-2 . 1 -2 . 3
-3 . 7-3 . 5 -4 . 2 -4 . 1-3 . 6-4
-6 -6 . 3
1986 88 90 92 94 96 98 2000 2 4 6 7
Source: Data from Bank of Korea
Another problem with North Korean data is that there is a huge difference
between the official exchange rate and the free market rate. This problem is avoided
in PPP estimates that compare purchasing power and adjust for exchange rate
differences. In estimates of GDP expressed in dollars, however, the exchange rate
is used to convert North Korean won to U.S. dollars. According to Global Insight,
the official exchange rate in North Korea has been 2 per dollar while the free market24
rate has ranged between 200 to3,000 won per dollar.
What can be said for certain is that a sizable part of the DPRK population lives
on the edge of existence. In few countries today does a small decline in GDP or
summer flooding cause massive starvation and growth stunting as it does in the
DPRK. Also, despite the threat of imprisonment for crossing the border into China
and being repatriated to North Korea, a large number of refugees still attempt to flee
the economic and political conditions in the country.
In this land of scarcity, consumer necessities have been rationed and used to
reward party loyalists. Under Pyongyang’s economic reforms, this system appears
to be phasing out, but in the fall of 2005, North Korea backtracked on some of its
economic reforms by forbidding private sales of grains and reinstituting a centralized
food rationing system. Pyongyang also reportedly closed its food markets but then
opened consolidated markets that carried food and other items.
24 Global Insight (subscription econometric forecasting service), “North Korea.” (Updated
July 23, 2008).
The combination of a weak economy unable to provide basic food and
necessities and a ruling regime intent on maintaining its power has created economic
divisions within society. North Korea reportedly officially classifies its citizens into
three ranks and fifty-one categories based on their ideological orientation. However,
in actuality, the economy has created five classes of people. The official categories25
are used to allocate rations for daily necessities, jobs, and housing. The de facto
categories have resulted from the intrusion of market forces and trading on the
official class divisions.
The top class consists of the elite who claim the first rewards from society.
They are the party cadres who are leaders in the military and bureaucracy and who
enjoy privileges far above the reach of the average household. While starvation
haunts the provinces, many of the privileged class live in Pyongyang (where
provincial North Koreans cannot enter without special permission); some drive
foreign cars, acquire imported home appliances, reside in apartments on a lower floor
(so they do not have to climb too many stairs when the electricity is out), and buy26
imported food, medicines, and toiletries at special hard currency stores. The elite
have a strong vested interest in maintaining the current economic system, despite its
problems. Their incomes originate from the treasury, from foreign investors (mostly
South Korean), remittances from ethnic Koreans in Japan (although these have been
curtailed), and the country’s shadowy trade in everything from missile technology
to fake banknotes and narcotics.27
After the elites surrounding Kim Jong-il, the second group comprises business
traders with access to foreign capital and international transactions; the third consists
of “organized thugs” who make their money through public trading and markets.
The fourth class is composed of urbanites and others who scrape by on government
rations, while the fifth class is farmers who support their way of life through farming
private plots and selling goods in markets.28
Despite hushed grumbling about economic deprivation, forced food deliveries
to the central government, a rationing system with insufficient stocks to deliver, and
new prohibitions on markets that are difficult to understand and rationalize, dissent
in North Korea remains stifled. Support for the ruling regime appears strong — even
among the lower classes of people — although this support is often enforced by
severe squashing of even the slightest hint of dissent. Even suspicious comments in
casual conversations may be reported to the authorities. The country is far from
developing a middle class with independent economic means, personal sources of
information, and a thirst for more democratic institutions.
25 South Korea. Ministry of Unification. North Korea Today, August 14, 2001 (Internet
26 UN World Food Programme. World Hunger — Korea (DPR). Available at
[h ttp ://www. wfp . org/cou n try_ b rief/in d ex cou n try. asp ? cou n try=408].
27 Desperate Straits, Special Report (1). The Economist, May 3, 2003 (U.S. Edition).
28 Class Divergence on the Rise as Market Economics Spread in DPRK, Institute for Far
Eastern Studies, North Korea Brief. September 21, 2007. Cited in NAPSNet, September 21,
In 2007, South Korea’s new President Lee Myung-bak stated in his plan,
“Vision 3000: Denuclearization and Openness,” that if North Korea denuclearizes
and opens, his administration will help to make North Korea’s national income
$3,000 per person within ten years. The plan, however, does not provide an29
alternative if North Korea does not denuclearize.
The Pyongyang regime has pursued a policy of self-sufficiency and isolation
from the world economy that they call juche or self-reliance. Juche goes beyond
economics as it has been used since the 1950s to perpetuate power by the central
government and to build an aura of the supernatural around their supreme leaders30
Kim — both father and son. Although the regime does not emphasize the
connection, the current system of dynastic succession with a paramount father figure
also harkens back to Confucianism and the powerful dynastic tradition that united
the Korean peninsula for hundreds of years.
The economic practice of juche has minimized international trade relations,
discouraged foreign direct investment, and fostered what it considers to be core
industries — mostly heavy manufacturing. While promoting such heavy industry,
for most of the post-Korean War period, Pyongyang has emphasized the parallel
development of military strength.
Current head of state, Kim Jong-il (often referred to as “Dear Leader”), has
given highest priority to the military. This places the army ahead of the working
class for the first time in the history of North Korea’s so-called revolutionary31
movement. Under Kim Il-sung (Kim Jong-il’s father), the juche ideology placed
equal emphasis on political independence, self-defense, and economic self-support
capabilities. Kim Jong-il, however, insists that North Korea can be a “country strong32
in ideology and economy” only when its military is strong. The country, therefore,
has been developing its industries within the context of a military-industrial complex
with strong links between heavy industry and munitions production. Some of North
Korea’s munitions industries (manufacturing dual use products) are virtually33
indistinguishable from those supplying civilians.
In 1998 at the 10th Supreme People’s Assembly, the military’s National
Defense Commission arguably eclipsed the Politburo as the supreme national
29 Analysis team of the Daily NK. Lee Myung-Bak’s Administration: A Breakthrough in
North Korea’s Opening, The Daily NK (Internet edition), December 12, 2007.
30 See, for example: Natural Wonders Prove Kim Jong-il’s Divinity: North Korean Media,
Agence France Presse. May 3, 2003.
31 British Broadcasting Corporation. N. Korea: Paper Supports Leader Kim Jong-il’s
Military-first Ideology, April 26, 2003. Reported by BBC from KNCA News Agency
32 Toyama, Shigeki. Expert on Kim Chong-il’s “Military-First Politics,” South-North Issues,
Tokyo Gunji Kenkyu (in Japanese, translated by FBIS), August 1, 2002. P. 108-117.
33 Nam, Woon-Suk. Guidelines of Economic Policies. KOTRA, January 9, 2001.
decision making body in North Korea. In the years since, the term “military-first
politics” has been used to signify the privileged status the Korean People’s Army
holds and to stress the ascendant position of the military relative to the power of the34
Korean Workers’ Party, the traditional center of the DPRK’s decision making. Of
course, the ultimate decision maker in Pyongyang is the Dear Leader, Kim Jong-il.
In 2006, Pyongyang’s defense budget was an estimated $2.3 billion to maintain
its 1.1 million member military.35 South Korea estimated the North’s military
expenditures at $5 billion in 2003. In 2005, North Korea stated that the defense36
budget was 15.9% of its total annual budget, but others had put the figure at 27.2%
in 2003. Even a defense budget of $2.3 billion, however, implies an expenditure of
$2,090 per member of the military, a woefully small amount. This implies that the
tug of war between “guns and butter” within the North Korean regime must be quite
intense given the scarcity of resources throughout the country even though the
military does operate businesses that bring in additional revenues.
The heavy weight of the military in Pyongyang’s decision making may help
explain what to outsiders seem to be inexplicable actions by the North Korean
government. For example, almost immediately after negotiators had issued the
September 19, 2005, Six-party Statement in which North Korea ostensibly
committed itself to abandoning all nuclear weapons and existing nuclear programs,
Pyongyang began backtracking and within two months announced a boycott of future
Six-Party Talks.37 It also may help explain North Korea’s carrying out its first
nuclear test on October 9, 2006, despite being warned not to do so by the United
States, China, and other nations. Recent progress in the six-party talks under which
North Korea shut down its Yongbyon nuclear reactor as required in phase I of the
February 13, 2007 agreement arguably represents a defeat for the military, but the
slow progress in phase II to date could indicate strong resistance by military interests
to cutting more deeply into North Korea’s nuclear program.38
When juche is combined with central planning, a command economy, and
government ownership of the means of production, economic decisions that in a
market economy would be made by private business and farmers have to go through
a few elite in Pyongyang. These decisionmakers may or may not understand
advances in agronomy or manufacturing and tend to be motivated by non-economic
34 Gause, Ken E. North Korean Civil-military Trends: Military-first Politics to a Point.
Army War College, September 2006. P.
35 The International Institute for Strategic Studies. The Military Balance, 2006. London,
Routledge, 2006. P. 276. Also, The Military Balance, 2007, p. 357. Note: in the 2008,
edition of the Military Balance, the DPRK’s defense budget is listed as “definitive data not
availab l e. ”
36 “DPRK Allocates 15.9 Percent of State Spending for Military.” People’s Daily Online,
April 12, 2005.
37 Asia: The deal that wasn’t; North Korea. The Economist. London: September 24, 2005.
38 For a description of decisionmaking in the DPRK, see Former DPRK Diplomat’s Book
on DPRK National Strategy, Inner Circle Politics (2). Open Source Center document
KPP20070918037001. August 20, 2007. (Translated by Open Source Center from Korean)
factors, such as maintaining political power or avoiding blame for initiatives gone
awry. Farming methods based partly on crop rotation or new varieties of rice, for39
example, may be viewed as too risky. Foreign investment also is hindered partly
because the regime abhors being “exploited” by capitalists who seek to make profits
on their business ventures in North Korea and partly because of their deep-seated
mistrust of Westerners, Japanese, and South Koreans.
North Korea’s industrial sectors are shifting rapidly. At the end of World War
II, the DPRK represented the industrialized part of the Korean peninsula. Under
Japanese colonialism, heavy industry, water power, and manufacturing were
concentrated in the North, while agriculture flourished in the less mountainous
South. Even in 1990, 49% of the North Korean economy was in mining,
manufacturing, and construction, while 23% was in services (including government
and utilities) and 27% in agriculture. In recent years, however, the DPRK’s non-
military industries have almost collapsed. By 1997, mining, manufacturing, and
construction had dropped from 49% to 32% of the economy but in 2003 had risen
somewhat to 36%. In 2003, services had risen to 37% of the economy, while
agriculture has remained fairly constant at 27%. In 2007, mining, manufacturing,
and construction were making a slow recovery to 40% of the economy. Services had
gained slightly to 39%, and agriculture had declined to 21% of GDP. (See Figure 2.)
Some of the most advanced industries in North Korea are associated with its military,
and in 2006, $73.7 million worth of goods was produced in the Kaesong Industrial
Complex by South Korean firms using North Korean labor.40
39 Current experiments in agriculture are directed from Pyongyang with seven major tasks
that include replacing chemical fertilizers with organic and microbial ones. See Yonhap
News. N. Korea Eyes China as a Model for Development. May 11, 2004.
40 See CRS Report RL34093, The Kaesong North-South Korean Industrial Complex, by Dick
K. Nanto and Mark E. Manyin.
Figure 2. North Korea’s Industrial Structure
Percent of Total Economy
80% Ser v ices/ Ut ilit ies
Manuf act u ring/ Mining/ Const r uct ion
Agriculture, Forestry, & Fisheries
Source: The Bank of Korea.
The drop in the share of manufacturing in GDP has come about largely because
of the rapid decline in production from factories, not because of large absolute
increases in services or agricultural production. One report indicated that in 2003
factories were running at about 30% of their capacity. The economy lacks food for
workers, raw materials, energy, and foreign currency to buy new equipment and41
imported inputs into the manufacturing process. Much industrial capital stock is
nearly beyond repair as a result of years of underinvestment and shortages of spare
parts. Recently, the government has emphasized earning hard currency, developing
information technology, addressing power shortages, and attracting foreign aid, but
it appears unwilling to do so in any way that jeopardizes its control.
North Korea’s mining sector is recovering somewhat. In 2007, 57% of China’s
imports from North Korea were in mineral fuels ($170 million, mostly coal) and ores42
($164 million, mostly iron, zinc, precious metal, lead, and molybdenum). North43
Korea is rich in minerals and ores. The regime looks askance, however, at
exporting ores or commodities that were typical of “economic imperialism” during
41 Former North Korean Professor Interviewed on Pyongyang’s Economic Reform. Choson
Ilbo, April 14, 2003. Translated and reported by BBC Worldwide Monitoring, April 18,
42 Global Trade Atlas using Chinese data.
43 Shanghai Northeast Asia Investment & Consultancy Company. A Study Report on the
DPRK Mineral Resources. Shanghai Northeast Asian Forum website, in Chinese, December
the colonial era when the foreign companies “exploited” the resources of less
The DPRK leadership, in their joint editorial at the beginning of 2008, however,
emphasized the need for rebuilding the national economy, particularly mining and
the metal, chemical, and light industries. They noted the construction of a
large-scale hydroelectric power plant completed in 2007 and set out the goal of
constructing an economically powerful state by 2012.44
The agricultural sector also is in dire straits. The economy depends heavily on
collective farms that have been devastated by drought or floods, lack of fertilizers
and other inputs, antiquated farming methods, and a lack of incentives for private
production. A report in 2003 from North Korea indicated that the situation along the
border with China had deteriorated to the point that rates of starvation, disease, and
even suicides were reaching a crisis point.45 In recent years, there has been a new
emphasis on fishing — using both traditional methods and new aquaculture
technology. According to the U.N. Food and Agriculture Association, in 2007,
North Korea’s harvesting of winter crops and potatoes (accounting for about 10% of
total production) had risen by 18% to 523,000 tons due primarily to increased potato46
production. However, severe flooding had damaged grain crops in the southern
“cereal bowl” provinces. This resulted a 7% decline to some 3.8 million tons in
overall 2007 food crop production.47
Economic Reforms and Free Trade Zones
As with other isolationist economies in the contemporary world of globalization
and interlinked societies, North Korea has been plagued with the negative effects of
its attempts at self sufficiency: technological obsolescence, uncompetitive exports,
economic privation, and lack of foreign exchange. These difficulties, together with
advice from China and Russia, have compelled the Pyongyang regime to introduce
some economic reforms. To a large extent, they are adopting the sequence of
Chinese reforms with economic reforms preceding political reforms while eschewing
the Russian model of political reform preceding and concurrent with economic48
reforms. The DPRK also has been examining the Vietnamese model of
44 Pak, Yo’n. Basic Spirit That Runs Consistently in This Year’s Joint Editorial, Rodong
Sinmun, in Korean, January 4, 2008. Translated by Open Source Center, document
45 Gifford, Rob. North Korea (audio report), NPR Morning Edition, April 30, 2003.
46 UN Food and Agriculture Organization. Democratic People’s Republic of Korea text.
October 1, 2007. Available under country profiles on UN FAO website.
[h ttp ://www. fao. org].
47 N. Korea more and more open to U.N. aid: rapporteur. Yonhap, (in English), January 18,
48 For a history of DPRK reforms in light of interaction with China, see Mika Marumoto.
North Korea and the China Model: The Switch from Hostility to Acquiescence . Korea
Economic Institute. Academic Paper Series, Vol. 2, No. 5, May 2007.
development and do moi (reform). Kim Jong-il reportedly prefers the Vietnamese
style of gradual economic reform rather than the abrupt Chinese style.49
The reforms began in July 2002 when Pyongyang announced a series of
measures that some surmise may mark the beginning of the end of the Stalinist
controls over the economy and the onset of more use of the market mechanism to
make economic decisions, particularly production and consumer purchases.
Although the government has dubbed the reforms an “economic adjustment50
policy,” the actions appear to be a desperate attempt to revive the moribund
economy. The reforms also dovetail with North Korea’s “military first” policy. As
Kim Jong-il has given first priority to the military, the rest of the population has51
suffered. This, in turn, has raised pressures on Pyongyang to reform its economic
The adjustments (reforms) featured an end to the rationing system for daily
commodities (except for food), a huge increase in prices of essentials and in wages,
a major devaluation of the currency (official exchange rate), abolishment of the
foreign exchange coupon system, increased autonomy of enterprises, authorization
of the establishment of markets and other trading centers, and a limited opening of
the economy to foreign investment. Prices still remain under centralized control but
at levels closer to those existing in peasant (free) markets. North Korea has not
abandoned the socialist planned economy, but it has been compelled to “adjust”
certain aspects of it.
Under the reforms, overall prices were increased by 10 to 20 times.
Government prices for many essential items, however, rose by much more. The
price for rice rose by 550 times, for corn 471 times, for diesel oil 38 times, and for
electricity 60 times. Wages also were raised but not enough to keep pace with
skyrocketing consumer prices. Wages rose by 18 times for laborers and 20 times for
managers.52 Even though not all workers received the promised wage increases, the
price and wage reforms caused households to face rampant consumer inflation, and
many people ended up worse off financially than before the reforms.
In North Korean factories, reforms include greater control over prices,
procurement, wages, and some incentives to increase profits in order to distribute
them based on individual performance. The regime also is looking to implement
reforms in agriculture similar to those implemented in China (along the lines of the
rural household contract system). In the mid-1990s, North Korea’s agricultural work
squads had already been reduced in size. Now they are moving toward family
49 The DPRK Learns Vietnam, Kookmin Ilbo, Seoul, October 25, 2007. CanKor Report
#296. DPRK-Vietnamese Relations, November 1, 2007. Jung Sung-ki.. Kim Jong-il
Interested in Vietnamese-style Reform Policy, Korea Times. October 28, 2007.
50 Hong, Ihk-pyo. A Shift Toward Capitalism? Recent Economic Reforms in North Korea.
East Asia Review, vol. 14, Winter 2002. Pp. 93-106.
51 In January 2007, the communist party’s central committee reportedly asked families to
“voluntarily” offer food to the army, since the food shortage in the people’s army was
severe. Yang, Jung A. Citizens Exploited as the Nation Cannot Produce its Own Income.
The Daily NK (Internet edition), January 24, 2007.
52 Hong, Ihk-pyo, A Shift Toward Capitalism?, East Asia Review, Winter 2002. Pp. 96.
oriented operations with farmers allowed to retain more of any production exceeding
Although small farmers’ markets have long existed in North Korea, Pyongyang
did not legalize such farmers’ markets until June 2003. This followed the formal
recognition of commercial transactions between individuals and the 1998 revision
to the constitution that allowed individuals to keep profits earned through legitimate
economic activities.53 Now free markets and shopping centers that use currency, not
ration coupons, are spreading. The Pyongyang Central Market, for example, became
so crowded that a new, three-story supermarket had to be built. Pyongyang’s Tongil
market with its lines of covered stalls stocked with items such as fruit, watches,
foreign liquor, clothes, Chinese-made television sets, and beer from Singapore also
is bustling with sellers and consumers reminiscent of those in other Asian
countries.54 Visitors to Pyongyang in late 2006 indicated that the market was
thriving with all types of products and shoppers driving European cars.55
The North Korean population is gradually becoming re-accustomed to operating
in open markets. This has raised fears by the DPRK regime of encroachment by
capitalism into their socialist economic system. On August 26, 2007, Kim Jong-il
announced that “markets have become anti-socialist, Western-style markets.” This
has led to a steady stream of government edicts restricting market activity across the
country. At first, authorities prohibited women under the age of 40 from selling
goods in Pyongyang markets. Then on December 1 the authorities banned women
under the age of 49 from running businesses in Pyongyang. (Since males are
officially required to be at their assigned workplaces, women generally run the
businesses.) Certain products, such as videos of South Korean dramas, movies, and56
other so-called non-socialist elements are also banned from central markets.
Enforcement of the new regulations at first was spotty, but in late 2007, it
appears to have become more strict. According to news reports, policing is also
being conducted by central government security agencies, organizations that57
normally deal with issues such as intelligence gathering and sedition. The extent
of the Kim regime’s attempts to control the development of a market economy can
be illustrated by the increased difficulty of acquiring travel permits for persons
suspected of being wholesale merchants intending to carry goods from one place to
another. This crackdown on travel also is affecting normal tourist and family trips.
53 Jeong, Chang-hyun. Capitalist Experiments Seen Expanding into DPRK. Joong Ang Ilbo,
October 19, 2003. Translated in CanKor #160 by Cananda-DPR Korea e-clipping Service,
April 13, 2004.
54 Lintner, Bertil. North Korea, Shop Till You Drop, Far Eastern Economic Review, May
55 Pritchard, Charles L. Siegfried S. Hecker, and Robert Carlin. News Conference: Update
from Pyongyang, sponsored by the Korea Economic Institute, held at the National Press
Club, Washington, DC, November 15, 2006.
56 Institute for Far Eastern Studies. State of the Market in the DPRK, North Korea Brief No.
57 Han Young Jin. Even the National Security Agency Participates in the Control of the
Jangmadang. The Daily NK (electronic version). December 26, 2007.
Corruption, however, allows some businesses to continue, as certain officials
reportedly are receptive to bribes. Secret peddling on streets and other banned
activity also continues out of sight of the authorities (particularly by young and58
North Korean economic reforms also include opening certain areas to foreign
investment. Under the Joint-Operation Act of 1984 to 1994, there were 148 cases
of foreign investment worth about $200 million into North Korea. Of these 148
cases, 131 were from pro-North Korean residents of Japan. In 1991, Pyongyang
opened the Rajin-Sonbong free trade zone and established the Foreigner Investment
Act. To 1997, some 80 investments totaled $1.4 million. Other areas receiving
foreign investment include Nampo, Pyongyang, Kosung-gun, Shimpo, Wonsan, and
Mt. Kumkang. Foreign companies in North Korea include 50 South Korean
companies (e.g., Hyundai, daewoo, Taechang, LG, Haeju, and G-Hanshin), DHL,
ING Bearing Bank; Japan’s Hohwa, Saga, and New Future Ltd. companies;
Taiwan’s JIAGE Ltd., and the China Shimyang National Machinery Facility Sales59
Agency Corporation. The U.N. Development Programme is promoting the Tumen
River Valley Development Project which aims to develop business based on transit
transportation, tourism, and commissioned processing trade.60 Mt. Kumkang has
been developed with the cooperation of South Korea’s Hyundai corporation into a
tourist destination for South Koreans and a venue for reunions of families separated
by the DMZ.
According to data compiled by the United Nations Conference on Trade and
Development (UNCTAD) since 1987, the DPRK had a cumulative $1.56 billion in
foreign direct investment (FDI) as of the end of 2006. Annual FDI flows have been
sporadic, even negative in some years, but since 2003, they have been rising. (See
Figure 3.) In 2007, both South Korea and China increased their investments in
58 Good Friends: Centre for Peace, Human Rights and Refugees, North Korea Today, No.
59 KOTRA, North Korea, Status of Induced Foreign Capital.
60 K. Park. A Report on Visit to Rajin-Seonbong Region, January 4, 2001. KOTRA,
Figure 3. Foreign Direct Investment Flows and Stocks in the DPRK,
$ m illio n
& &.7 .8 .2 . 4 182.2 1
&1025 1055 1040 1 044 1040 1024 1Sto cks
& & & & & &1 .5 .8 .8 .71000
. 08 16 15 15 1 7
3.1 2.3 706 7 7 7 7 7
62 9& & & &&&&63 57 Flow s
07. .2 6.9 .2
3.8 3 7 158 19 .4 135
4 .95 13 .9 .5 .8 30. .4 50.1
3.1 0 1 8 7 1 1 3& & 40
.8 -0. -0.0 -14.9 -3.8 -16.4
87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 2006
Source: United Nations Conference on Trade and Development. Foreign Direct Investment
The industrial sector is receiving some help from Chinese investments and from
South Korean firms operating in the Kaesong Industrial Complex. It also is able to
attract a limited amount of foreign investment from other nations. For example, in
January 2008, Orascom Telecom, the fourth-largest Arab phone operator based in61
Cairo, Egypt, announced that its subsidiary in North Korea (CHEO Technology —
25% owned by the state-owned Korea Post and Telecommunications) had received
a license to be the first provider of mobile telephone services throughout the country.
The company is to invest up to $400 million in network infrastructure over the first
thee years and to provide service to Pyongyang and other major cities within one
North Korea’s mining sector is recovering somewhat. In 2007, 57% of China’s
imports from North Korea were in mineral fuels ($170 million, mostly coal) and ores63
($164 million, mostly iron, zinc, precious metal, lead, and molybdenum). North64
Korea is rich in minerals and ores. The regime looks askance, however, at
61 Orascom also reportedly is investing $115 million in a North Korean cement manufacturer
for a 50% stake in the firm.
62 Arab Firm Earns First Mobile License In DPRK. Yonhap, January 30, 2008.
63 Global Trade Atlas using Chinese data.
64 Shanghai Northeast Asia Investment & Consultancy Company. A Study Report on the
DPRK Mineral Resources. Shanghai Northeast Asian Forum website, in Chinese, December
exporting ores or commodities that were typical of “economic imperialism” during
the colonial era when the foreign companies “exploited” the resources of less
Since 2000, the DPRK has attempted to emulate China’s highly successful free
trade zones (FTZ) by establishing the Sinuiju Special Administrative Region (SAR)
on the northwestern border with China and Kaesong (Gaesong) Industrial Complex
along the border with South Korea. Since being established in 2002, the
development of the Sinuiju SAR has been stymied partly because of the arrest by
Beijing of Chinese businessman Yang Bin, a Chinese-Dutch entrepreneur who was
named as its governor, on charges of illegal land use, bribery and fraud. After Kim
Jong-il’s visit to China in 2006, Sinuiju appears to be receiving new attention.
Foreign currency management groups reportedly are moving in, and ordinary
citizens are being replaced by residents of Pyongyang and other areas.65
Kaesong Industrial Complex66
Currently, the most significant effort at creating free-trade zones is the Kaesong
Industrial Complex (KIC). This joint effort between the North and South is
developing rapidly, despite tensions over North Korea’s testing of ballistic missiles
and a nuclear weapon. The KIC is managed by South Korea’s Hyundai Asan and
Korea Land Corporation. Located just over the border 43 miles north of Seoul on
the route to Pyongyang, this 810-acre complex aims to attract South Korean
companies, particularly small and medium sized enterprises, seeking lower labor and
other costs for their manufactured products and who may not be able to establish
subsidiaries in China or other countries. By September 30, 2007, 52 companies had
begun operations in Kaesong. They were employing 15,158 North Korean personnel
(another 2,025 North Koreans were working in construction in the complex and 59967
in administrative offices). To be completed in three stages, the first stage (2002-
2007) had 3.3 million square meters of a total of 66 million square meters being
constructed or under construction in 2006. Hyundai Asan and the Korea Land
Corporation plan to eventually attract 300 businesses in the first stage, 700 in the
second, and 1,000 businesses in the third stage with an estimated total of 300,000
workers. Of the $374 million initial cost for the first stage, $223 million was to be
provided by the South Korean government. In December 2006, the Korea Electric
Power Corporation connected North and South Korea by a 100,000 kilowatt
power-transmission line for use by the companies in the KIC.
The initial 15 companies operating in Kaesong and their products included
Living Art (kitchenware), Shinwon (apparel), SJ Tech (semiconductor component
65 Institute For Far Eastern Studies. Interest Revived in the Sinuiju Special Administrative
Region. Reported by Nautilus Institute, Policy Forum Online 06-25A, March 30, 2006.
66 For details, see CRS Report RL34093, The Kaesong North-South Korean Industrial
Complex, by Dick K. Nanto and Mark E. Manyin.
67 Republic of Korea. Ministry of Unification. Key Statistics for Gaeseong Industrial
Complex. September 30, 2007.
containers), Samduk Trading (footwear), Hosan Ace (fan coils), Magic Micro (lamp
assemblies for LCD monitors), Daewha Fuel Pump (automobile parts), Taesung
Industrial (cosmetics containers), Bucheon Industrial (wire harness), Munchang Co.
(apparel), Romanson (watches, jewelry), JY Solutec (automobile components and
molds), TS Precision Machinery (semiconductor mold components), JCCOM68
(communication components), and Yongin Electronics (transformers, coils).
In 2006, the KIC produced some $7.5 million worth of goods each month.69 In
September 2007, monthly production had reached $17.1 million. Over the January
2005 to September 2007 period, production in Kaesong totaled $213.8 million with
$92.3 million in textiles, $26.6 million in chemical products, $54.0 million in metals70
and machinery, and $41.0 million in electric and electronic products.
Kaesong developed partly from South Korea’s sunshine policy of economic
engagement with the North. The KIC serves both geopolitical and economic
purposes. Geopolitically, it provides a channel for rapproachment between North
and South Korea, a bridge for communication, a method of defusing tensions, and
a way to expose North Koreans to outside ideas and ways of doing business.
Economically, the KIC provides small- and medium-sized South Korean firms with
a low-cost supply of labor for manufacturing products, provides jobs for North
Korean workers, and provides needed hard currency for Pyongyang. Even after the
North Korean nuclear test in 2006, KIC operations continued.
A controversial issue has arisen with respect to the KIC and the proposed South
Korea-U.S. Free-trade Agreement. South Korea had requested that products
exported from the complex be considered to have originated in South Korea in order
to qualify for duty free status under the proposed FTA. Such a provision had been
included in other South Korean FTAs.
The language of the proposed Korea-United States FTA (signed but not yet
approved by Congress) does not provide for duty-free entry into the United States
for products made in Kaesong. Annex 22-B to the proposed FTA, however, provides
for a Committee on Outward Processing Zones (OPZ) to be formed and in the future
to designate zones, such as the KIC, to receive preferential treatment under the FTA.
Such a designation apparently would require legislative approval by both countries.
Other issues raised by the KIC have been the conditions for North Korean71
workers, whether they are being exploited, as well as the hard currency funds the
industrial complex provides for the ruling regime in Pyongyang. South Korean
officials, as well as other analysts, point out that average wages and working
68 Republic of Korea. Ministry of Unification. Gaeseong Industrial Complex Project —
Status and Tasks, June 2005.
69 South Korea to Continue “Utmost Efforts” for Inter-Korean complex — Minister. Yonhap
News Agency. Reported by BBC Monitoring Asia Pacific. London, December 8, 2006.
70 Republic of Korea. Ministry of Unification. Key Statistics for Gaeseong Industrial
Complex. September 30, 2007.
71 Rights Body Criticizes South Korea Over Refugee Protection, Inter-Korean Complex.
Yonhap News Agency, Seoul. Reported by BBC Monitoring Asia Pacific. London, January
conditions at Kaesong are far better than those in the rest of North Korea. The
monthly minimum wage is $50 ($57.50 including the cost of social insurance).
General workers receive $50, team leaders receive $52-$55, and heads of companies
receive $75 per month. After the government, takes its share of the wages, the72
workers receive about $37 per month. Workers also receive overtime pay.
The North Korean government derives hard currency from several sources in
the KIC project, including leasing fees and its taxes and fees deducted from the
wages of North Korean workers. The wages are first paid in hard currency to a
North Korean government agency that takes a certain percentage before paying the
North Korean workers in won. If the government collects about $20 per month (in
social insurance taxes plus its cut of wages) for each of the 10,000 workers now at
Kaesong, its monthly take from wages would amount to approximately $200,000 per
month or $2,440,000 over a year. One estimate is that Pyongyang has earned a total
of about $20 million from the Kaesong Industrial Complex.73
Investment From China
China has a direct interest in economic reform and recovery in the DPRK.
Chinese business interests with support from Beijing are beginning to invest widely
in the North Korean economy. Unlike, South Korean investors, Chinese are allowed
to invest in enterprises fully integrated into the DPRK economy. They also have
provided machinery and equipment to existing North Korean factories.
Chinese investment in mineral extraction in the DPRK seems to represent an
easing the DPRK constitutional ban against “cultural infiltration (Article 41). This
has been interpreted to include international economic integration and
globalization.74 However, Pyongyang seems to be treating investment from China as
being “not contaminated” relative to those from South Korea or other nations. South
Korean investments are carefully walled off from the average North Korean citizen,
whereas China has been able to invest in production facilities in various locations.
According to Chinese sources, from January to October 2006, the Chinese side
approved 19 new investments in the DPRK, with negotiated investment of $66.67
million. Cumulative investment up to the end of October 2006 included Chinese
government approval of 49 investments in the DPRK with negotiated investment of75
$135 million. These figures seem understated. Since 2006, Chinese investments
72 South Korea Considers Expanding Joint Industrial Complex in North. Yonhap News
Agency, Seoul. Reported by BBC Monitoring Asia Pacific. London, July 26, 2006. Ministry
of Unification (South Korea). The Gaesong Industrial Complex. Status of North Korean
Workers. November 14, 2006. Online at [http://www.unikorea.go.kr/english/EUP/
73 CRS Report RL33435, The Proposed South Korea-U.S. Free Trade Agreement (KORUS
FTA), by William H. Cooper and Mark E. Manyin.
74 See Eberstadt, Nicholas. The North Korean Economy, Between Crisis and Catastrophe
(New Brunswick, NJ, Transaction Publishers, 2007). p. 227.
75 Embassy of the People’s Republic of China in the Democratic People’s Republic of Korea.
A brief account of the economic and trade relations between China and the DPRK. Online
have increased significantly. The projects of the investment covered such fields as
food products, medicine, light industry, electronics, chemical industry and minerals.
Major Chinese investments involving mining and minerals in the DPRK include76
!China Tonghua Iron and Steel Group has invested 7 billion yuan
(approximately $875 million) in developing the DPRK’s Musan Iron
Mine. Two billion yuan (approximately $250 million) is to be used
for the preliminary construction of communication facilities and
cables from Tonghua, China, to the DPRK’s Musan area; 5 billion
yuan (approximately $625 million) is to be used mainly on
technology and equipment in developing the mine as well as in
Musan’s overall planning.) This mine is the largest open-cut iron
mine in Asia with verified iron-rich ore reserves reaching seven
!On October 20, 2007, China’s Tangshan Iron and Steel Company
(China’s third largest steel company) and the DPRK’s Department
of Foreign Economic Cooperation and Taep’ung International
Investment Group signed a letter of cooperation intent. The two
sides are to cooperate on the DPRK Kimch’aek Metallurgy Park
Project, and the DPRK So’ngjin Iron, Steel, Coal, and Electricity
Project. Tangshan is to build a steel smelting plant in the DPRK
with an annual steel output of 1.5 million tons. It is to be jointly
funded by the DPRK side and is to involve joint development and
utilization of nearby iron ore.
!The China Iron and Steel Group reportedly is ready to develop a
molybdenum mine in the DPRK with a goal of producing more than
!China and the DPRK have signed a “PRC-DPRK
Inter-Governmental Agreement on Joint Development of Offshore
Oil” to pursue joint energy projects.
!China’s Jilin Province also has cooperated with the Hyesan Youth
Copper Mine (containing the largest copper deposit in Asia),
Manp’o Zinc and Lead Mine, and the Hoeryo’ng Gold Mine in the
DPRK. One project is to transmit electricity from Jilin’s Changbai
County to the DPRK in exchange for the gold, copper, and other
ores. The joint project is to install power transmission facilities with
an estimated total investment of 220 million yuan ($27.5 million).
!China’s Heshi Industry and Trade Company along with the
International Mining Company have set up a joint venture with the
DPRK’s So’gyo’ng 4 Trade Company called the “DPRK-China
International Mining Company.” The Chinese side is to provide
76 Shanghai Northeast Asia Investment & Consultancy Company. A Study Report on the
DPRK Mineral Resources. Shanghai Northeast Asian Forum website, in Chinese, December
equipment and capital, while the DPRK side is to contribute mineral
resources and the existing facilities.
!In October 2005 China Minmetals also signed with the DPRK side
an “Agreement on Establishing A Joint Venture in Coal Industry in
the DPRK,” which called for establishing a joint venture with the
DPRK at the Ryongdu’ng Coal Mine.
!On August 23, 2004, China’s Zhaoyuan Shandong Guoda Gold
Stockholding Company and the DPRK Committee for the
Promotion of External Economic Cooperation agreed to establish a
joint venture mining company to mine the gold in the DPRK’s Mt.
Sangnong and to ship all the mined gold concentrate to Zhaoyuan
for smelting. The DPRK’s Sangnong Gold Mine is estimated to have
at least 150 tons of mineable gold. However, due to a shortage of
capital and backward technology, it has been in a state of
semi-stoppage of production. Guoda is to provide equipment and
technology and is to ship the mineral ores by sea to Zhaoyuan for
Despite North Korea’s isolation and emphasis on juche, it does trade with other
countries. According to trade statistics compiled by the International Monetary
Fund, the DPRK had at least some trade with 80 of the 182 countries or customs
territories that report their trade data to the Fund.77 For Pyongyang, the foreign
economic sector plays an important role in that it allows the country to import food,
technology, and other merchandise that it is unable to produce in sufficient quantities
at home. Since North Korea does not export enough to pay for its imports, it
generates a deficit in reported merchandise trade that must be financed by other
means. Pyongyang has to find sources of foreign exchange — other than from its
overtly traded exports — to pay for the imports. Experts point out that the DPRK
has used its military threat to “extort” aid and other transfers from the United States,
Japan, South Korea, and the humanitarian agencies. This, along with various illicit
activities, has helped Pyongyang to finance a surfeit of imports.
Detailed data on the country’s external economic relations suffer from
reliability problems similar to those associated with the domestic economy. The
foreign economic data on actual commercial transactions, however, tend to be more
accurate since they also are reported by trading partner countries and are compiled
by the International Monetary Fund and United Nations. Individual countries, for
example, report on their imports from and exports to North Korea. These mirror
statistics, however, differ from North Korea’s actual annual numbers because of
differences in data gathering methods, coverage, timing, and reporting. Countries
also may misreport trade with the Republic of Korea as trade with the Democratic
People’s Republic of Korea. Detailed and reliable data on trade in military
equipment and illegal drugs also are notoriously difficult to obtain and to verify.
77 International Monetary Fund. Direction of Trade Statistics. It should be noted that
countries occasionally misreport trade with South Korea as trade with the DPRK.
South Korea also compiles statistics on trade with North Korea that differ from
its data reported to the United Nations. South Korea considers trade with the North
as inter-Korean trade, not foreign trade. The trade figures that South Korea reports
to the IMF for its commercial transactions with the North are considerably lower
than the figures that it reports as inter-Korean trade [usually available from the Korea
Trade-Investment Promotion Agency (KOTRA)]. The inter-Korean trade data
reported by South Korea also include more detail on non-transactional trade (mostly
foreign aid) with North Korea. IMF data also differ somewhat from those reported
by data vending companies (such as Global Trade Atlas and Global Insight). This
report uses a combination of trade totals (mirror statistics) from the IMF, partner
country data from the Global Trade Atlas, intra-Korean trade from South Korea’s
KOTRA, and references some estimates of total trade from Global Insight.
The DPRK’s policy of juche, its suspicion of foreign countries, and the collapse
of its industrial production, has resulted in a minimal level of commercial relations
with other nations in the world. This trade has been rising in recent years, although
much of this increase can be attributed to investments by South Korea and China in
DPRK mining and manufacturing. As shown in Table 1, in 2007 North Korea
exported an estimated $1,854 million in merchandise (down from $2,048 million in
2006) while importing $3,242 million (up from $2,962 million in 2006) for a
merchandise trade deficit of $1,388 million. In recent years, North Korea’s exports
to and imports from China and South Korea have risen. South Korea and China
account for 73% of North Korean exports and 75% of North Korean imports.
Economic sanctions imposed by Japan have reduced that bilateral trade to almost
Table 1. Estimated North Korean Trade by Selected Trading
Partner, Selected Years, 1994-2007
($ in millions)
North Korean Exports to:
1994 1999 2000 2001 2002 2003 2004 2005 2006 2007
World1,0391,030 1,307 1,148 1,278 1,251 1,524 1,683 2,048 1,854
S. Korea176122152176272289 258340520765
India* 13 17 20 3 5 1 4 8 9 * 41*
Th ailand 9 3 19 24 45 57 91 133 148 34
Germany 572425232924224517 16
North Korean Imports from:
1994 1999 2000 2001 2002 2003 2004 2005 2006 2007
World1,2861,353 1,859 3,083 1,970 2,049 2,615 3,093 2,962 3,242
S. Korea18212273227370435 4397158301,032
India 4 1 3 5 173 162 182 157 121 55 105 660
Th ailand 13 38 189 106 172 204 239 207 216 184
Balance-247-323 -552 -1,935 -692 -799 -1,090 -1,410 -914 -1,388
Source: S. Korean data from S. Korea, Unification Ministry. World trade data from U.N. COMTRADE
Database, accessed via U.S. Department of Commerce, Trade Policy Information System, August 2008. Country
data from Global Trade Atlas and U.N. COMTRADE Database. World trade totals mirror data derived from
U.N. reporter country trade with North Korea plus inter-Korean trade reported by South Korea and adjusted
Indian data for 2006 and 2007.
*Data for Indian imports from North Korea seem in error for 2006 and 2007. (Items such as electrical machinery
and parts, in particular, likely actually were imported from South Korea.) After comparing reported Indian data
with that for China, 2006 imports by India from North Korea of $475 million were reduced to $9 million, and
2007 imports of $173 million were reduced to $41 million.
North Korea’s major trading partners have been China, South Korea, Japan,
Russia, Germany, Thailand and India (as well as Brazil, Singapore, and Hong Kong).
As shown in Figure 4 and Table 1, North Korea’s major import sources have been
China, South Korea, Russia, Japan, and Thailand. Germany and India also are major
suppliers. Major imports by North Korea include machinery, minerals, plant78
products, and chemical products. In particular, imports of energy materials and
foods reflect Pyongyang’s attempts to remedy these fundamental shortages.
78 (South) Korea Trade-Investment Promotion Agency.
Figure 4. North Korean Imports of Merchandise by Major Country of
3000 O t her
2000 Sout h
1994 95 96 97 98 99 2000 1 2 3 4 5 6 7
Source: Data from U.N. COMTRADE Database, Global Trade Atlas, and (South) Korea Unification Ministry.
Despite current tensions over Pyongyang’s nuclear program, imports appear to
be growing and are estimated to have exceeded their peak in 2001 when a large
shipment of food aid from Japan artificially increased the import total. Fuel imports
from China, food imports from various countries, and supplies of material and
components for assembly in the Kaesong Industrial Complex account for most of
the increases. In 2007, imports from the United States and Japan were virtually
nonexistent. It is apparent that China and South Korea increasingly are becoming
the largest sources of imports for the DPRK.
Major export markets for the DPRK have been China, Japan, and Thailand with
South Korea developing as a major market following the easing of relations. (See
Figure 5 and Table 1.) In Europe, Germany has been North Korea’s major trading
partner, and in Latin America, Brazil is developing as a market for North Korea’s
exports. Since 2003, exports to Japan have declined — due to trade sanctions and
friction over the DPRK’s admitted kidnappings of Japanese citizens. North Korea’s
major exports include ores, coal, animal products, textiles, machinery, electronic
products, and base metals.
Figure 5. North Korean Exports of Merchandise by Major Country of
O t her
1000 Sout hKorea
1994 95 96 97 98 99 2000 1234567
Sources: United Nations, COMTRADE Database and Global Trade Atlas using partner trade data.South Korean data from Korea Unification Ministry
A recent remarkable development has been North Korea’s increase in exports
of primary products (such as fish, shellfish and agro-forest products) as well as
mineral products (such as base metallic minerals). Pyongyang reportedly has
imported aquaculture technology to increase production of cultivated fish and
agricultural equipment to increase output of grains and livestock. It also has
imported equipment for its coal and mineral mines. Much of the coal and mineral
exports have resulted from partnering with Chinese firms through which the Chinese
side provides modern equipment in exchange for a supply of the product being
mined or manufactured. The production from the Kaesong Industrial Complex also
has become significant. North Korean imports from South Korea and China both
exceeded $1 billion in 2006, and North Korean exports to South Korea reached $765
million and to China $582 million.
Meanwhile, traditional exports of textiles and electrical appliances have been
declining. This reflects North Korea’s unstable power supply, lack of raw materials
and components imported from abroad, and the need to ship finished goods to China
or another third country for final inspection. This diminishing ability of North Korea
to provide a reliable manufacturing platform for the least complicated assembly
operations without help from foreign investors does not bode well for the country’s
future ability to generate the exports necessary to balance its trade accounts.
Other Sources of Foreign Exchange
North Korea’s annual merchandise trade deficit of about $1 billion implies that
Pyongyang must either be receiving imports without immediate payment required
(aid and capital flows) or be generating foreign exchange through some means —
either legal or illegal. Legal means include borrowing, foreign investments, foreign
aid, remittances from overseas North Korean workers, selling military equipment not
reflected in trade data, and by selling services abroad. Illegal methods include the
counterfeiting of hard currency, illegal sales of military equipment or technology,
sales of illegal drugs, or by shipping illegal cargo between third countries. The
country also can dip into its foreign exchange reserves.79
Legal Sources of Funds
North Korea is able to borrow on international capital markets. As of the fourth
quarter of 2007, the country had loans from foreign located banks that report to the
Bank of International Settlements (BIS) of $50 million (down from $116 million at
the end of 2006 and $121 million at the end of 2005, $81 million in 2004, and $190
million in 2003). The amount of loans for 2007 is a relatively small amount, only
about $2 per capita. Total liabilities to BIS banks (including those located in North
Korea) came to $1,532 million for the fourth quarter of 2007 (up considerably from
$489 million in first quarter 2007). Most of these liabilities appear to be export
credits. North Korea also had deposits of $388 million in BIS banks at the end of
International bond issues are not a major source of funds for North Korea. In
May 2003, the country issued ten-year bonds — the first since 1950 — but since its
sovereign securities are not rated by major Western credit rating agencies, the issue
has generated little interest on international financial markets and is aimed at
domestic investors. Pyongyang claims that a million people had signed up to receive
the bonds, but many speculate that the deductions from the salaries of North Korean
purchasers in amounts equivalent to four months’ wages to buy the bonds is not81
voluntary. North Korea does not pay interest on the bonds. Rather the government
holds a lottery in which the winners receive monetary prizes greater than the82
foregone interest on the bonds.
Although North Korea is not a major recipient of foreign direct investment
(FDI), in 2006, the stock of foreign direct investment in the DPRK was $1,565
million. The inflow that year was $135 million, up from the inflow of $50 million
79 For an examination of North Koreas external relations, see Stephan Haggard and Marcus
Noland, North Korea’s External Economic Relations, Peterson Institute for International
Economics Working Paper No. WP07-7, August 2007.
80 Data are from Joint BIS-IMF-OECD-WB External Debt Hub at
[http://devdata.worldbank.org/sdmx/j edh/j edh_home.html].
81 Gittings, Danny. Kim Can’t Kill the Free Market. The Wall Street Journal (Brussels),
May 30, 2003. P. A11.
82 DPRK Holds Annual Lottery for Government Bond Repayments. Institute for Far Eastern
Studies, NK Brief No. 08-1-3-2, January 3, 2008.
in 2005, but less than the $197 million in 2004, and $158 million in 2003.83 The FDI
comes mainly from South Korea and China. North Korea’s free trade zones,
particularly the Kaesong Industrial Complex, however, are attracting more foreign
direct investment. In addition, South Korea’s Hyundai Corporation secretly paid
North Korea nearly $500 million, partly in money borrowed from the South Korean
government just a week before the two nations held a historic summit in June 2000.
This was part of an estimated billion dollars or more Hyundai was to pay for
exclusive rights to engage in seven major economic projects there.84
Table 2. North Korea: Total Net Receipts by Major
Total Receipts Net
2000 2001 2002 2003 2004 2005 2006
German y -2.4 34.1 35.0 11.8 54.2 6 .5 3.2
Fran ce 28.4 12.8 -656.4 447.7 1 ,151.1 6 .2 -16.9
Australia 7.9 4 .8 5.4 2 .1 3.9 5 .3 4.5
Norway 4.6 7 .9 5.5 9 .5 5.6 5 .3 3.8
Swed en 3.5 3 .4 4.3 4 .9 46.2 59.4 -74.8
Switz. 1 .0 6.1 2 .1 4.0 3 .9 4.2 7 .0
UK -7 .4 1.1 -15.9 44.8 142.3 0 .2 ..
EC 25.0 40.3 61.2 30.9 31.4 19.4 12.1
Mu ltilateral 4 6 . 4 6 5 . 0 4 0 . 1 5 1 . 7 4 7 . 5 4 1 . 5 2 3 . 3
World Food 0.60.60.13.22.214.171.124
Tota l 76.07 188.6 -440.2 593.4 1 ,529.6 148.7 59.6
Source: Organisation for Economic Cooperation and Development. Source OECD,
International Development Statistics, on-line database. [http://stats.oecd.org]
Note: Data are from OECD members, multilateral agencies, and 12 other reporting nations
excluding South Korea, China, and Russia. Multilateral Agencies include the UN,
International Fund for Agricultural Development, Arab Agencies, and European Community.
EC = European Community. Total Receipts include Official Development Assistance +
Other Official Flows + Private Flows. In 2006, the DPRK received $101.8 million from the
N eth erlan d s.
83 United Nations Conference on Trade and Development. World Investment Report, 2007.
New York, United Nations, FDISTAT database showing Major FDI Indicatiors.
84 Seo, Soo-min. Questions Linger Despite President’s Statement. Korea Times, February
14, 2003. Dorgan, Michael. Secret Payment to North Korea Disclosed, Knight Ridder
Newspapers, January 30, 2003.
A major source of funding for imports into the DPRK has been foreign aid or
direct government transfers. Both developmental and humanitarian aid and past
assistance under KEDO (Korean Peninsula Energy Development Organization,
created under the 1994 Agreed Framework, but construction was terminated in 2003)
to build two light water nuclear reactors and provide heavy fuel oil have enabled
imports into North Korea without financing from Pyongyang.
North Korea also receives funds in the form of official development assistance
(ODA) from aid donor nations, multilateral development banks, and other
organizations; other official flows; and private flows. The Organisation for
Economic Co-operation and Development (OECD) compiles these data from its
member nations plus 12 others and from multilateral agencies. The OECD data,
however, do not include reporting from South Korea (Seoul considers transactions
with the North as intra-country, not as foreign), China, or Russia (not members of
the OECD). As shown in Table 2, in 2004, net total receipts for North Korea came
to $1,529.6 million from donors, primarily because of a $1.151.1 million receipt
from France, $142.3 million from the United Kingdom, and $56.5 million from the
United States. In 2005, however, the net total dropped to $148.7 million as the
dispute over North Korea’s nuclear program escalated, and fell further to $59.6
million in 2006 as North Korea made significant repayments of previously received
As shown in Table 3, much of the total receipts by North Korea came in the
form of official development assistance. In recent years, the country has received
between $46 and $286 million in net official development assistance (ODA) from
the countries and agencies that report such data to the OECD (does not include
Russia, China, and South Korea). In 2004, total net ODA was $120.8 million, in
2005 was $64.7 million, and in 2006 was 45.7 million. The major donors have been
the multilateral agencies, European Community, the United States, Sweden, Norway,
Table 3. North Korea: Net Official Development Assistance by
Major Source/Donor (Excluding Russia, South Korea, and
($ in millions)
Total Net Official Development Assistance
2000 2001 2002 2003 2004 2005 2006
German y 1 .5 27.0 33.2 7 .2 7.5 5 .2 2.9
Fran ce 1.7 0 .3 0.5 -0.4 -0.5 -0.4 0 .6
Australia 7.1 4 .6 2.0 2 .1 3.3 4 .6 2.7
Norway 3.3 2 .5 3.6 4 .4 5.6 5 .3 3.8
Swed en 3.5 3 .4 4.3 4 .9 5.4 5 .5 5.1
Switzerland 2.6 4 .5 3.4 4 .0 3.9 4 .2 6.0
E u rop ean 25.0 40.3 61.2 30.9 31.4 19.4 12.1
Mu ltilateral 1.6 1 .8 3.1 4 .0 1.1 2 .7 1.7
Non DAC* — 0.41.871.4126.96.36.199
Tota l 73.3 117.6 265.2 131.0 160.8 86.8 54.5
Source: Organisation for Economic Cooperation and Development, Development Statistics database.
*Non DAC=Non-OECD Development Assistance Committee, such as Thailand and Poland.
The United States also has paid North Korea to search for remains of American
servicemen missing from the Korean War. In 2003, it paid $2.1 million to conduct
As indicated in Table 4, between 2000 and 2004, South Korean government
assistance to North Korea ran at around $500 million per year. South Korean
civilian organizations also provided assistance to North Korea ($71 million in86
2003). The KEDO item is for energy and funds provided to the Korean Peninsula
Energy Development Organization in exchange for North Korea’s pledge to
dismantle its existing nuclear program. This program has been halted.87
85 U.S. to Pay N. Korea for MIA Search. Associated Press. July 15, 2003. For details on
U.S. assistance to North Korea, see CRS Report RS21834, U.S. Assistance to North Korea:
Fact Sheet, by Mark E. Manyin.
86 Republic of Korea, Ministry of Unification. Inter-Korean Relations on the Occasion of
the 4th Anniversary of the June 15 Joint Declaration. June 18, 2004. p. 9.
87 CRS Report RS21834, U.S. Assistance to North Korea: Fact Sheet, by Mark E. Manyin.
Table 4. Economic Aid and Other Official Flows From South
Korea to North Korea, 2000-2004 and Total 1995 to 2004
($ in millions)
KEDOa 308.9 271.1 288.7 333.0 137.1 1 ,365.2
Food Aid Pledges 93.417.3120.4122.2164.6794.9
Road & Rail Links12.969.653.594.192.6322.7
Payment for 2000200.0
Mt. Kumgang Toursb — 34.8188.8.131.520.6
Aid to ROK Business0.40.82.210.711.926.1
Otherc 5.0 9 .1 7.9 12.8 15.9 50.7
Source: CRS Report RL31785, Foreign Assistance to North Korea, by Mark E. Manyin,
Appendix A. See report for data sources and analysis.
a. Korean Peninsula Energy Development Organization
b. Republic of Korea Export-Import Bank’s “DPRK Support Fund”
c. Includes Cultural Exchanges and Aid to non-governmental organizations
Another major source of income for certain North Korean families has been in88
remittances from overseas Koreans, particularly those who live in Japan. Most of
the North Koreans in Japan either remained there after World War II or are
descendants of those people. Some had been forcibly brought there to work in coal
mines or factories during the 50-year Japanese occupation of Korea. Currently, of
the approximately 650,000 ethnic Koreans who live in Japan, an estimated 56,000
to 90,000 are from the North Korean area, and many are reported to be actively
involved in supporting the Pyongyang regime. Ethnic Koreans in Japan work in a
variety of businesses and occupations, but they face discrimination in Japanese
society and are known for operating pachinko (pinball) parlors and other enterprises
providing entertainment and night life as well as being involved with Japan’s yakuza
or gangsters. Many of these, as well as managers of North Korean-related credit
unions, regularly have sent remittances to relatives or associates in North Korea.
88 For details, see CRS Report RL32137, North Korean Supporters in Japan: Issues for U.S.
Policy, by Emma Chanlett-Avery. DPRK workers also are countries such as those in the
Middle East, China, and Russia.
One unusual method of smuggling money to North Korea has been to hide 10,000
yen bills (worth roughly $90 each) under expensive melons being shipped to Kim89
Jong-il as gifts.
Given the decade of stagnation of the Japanese economy and rising tensions
between Japan and North Korea, these remittances have reportedly been declining.
A 2003 Japanese newspaper report placed the amount at between $200 million and
$600 million per year, but that figure could be exaggerated.90 In testimony before
parliament, Japan’s Finance Minister stated that in Japan’s FY2002, $34 million had
been sent from Japan to North Korea through financial channels that required reports91
to the Japanese government. A working estimate would be approximately $100
million per year in such remittances. Anecdotal evidence indicates that considerable
amounts of currency from Japan are simply carried by individuals on ships and not
reported. More than 1,000 North Korean freight vessels had been traveling between
North Korea and Japan each year. Japan, however, has tightened inspections of
North Korean ships and curtailed operations of ferry boats traveling between the two92
In summary, the DPRK’s net total receipts plus remittances, aid and
investments from South Korea, and special food and fuel assistance in connection
with negotiations over Pyongyang’s nuclear program, constitute most of the overt
resource inflows that North Korea receives each year over and above its export
earnings. These amount to perhaps $700 million on net per year. North Korea must
finance the remainder of its trade deficit — about $800 million — by other means.
It appears that these other means include exports of military equipment and illicit
Illegal or Questionable Sources of Funds93
Data on North Korean sales of military equipment abroad is understandably
murky, but the country is thought to have sold hundreds of ballistic missiles to Iran,94
Iraq, Syria, Pakistan, and other nations in the past decade to earn foreign currency.
The interdiction by Spain of an unmarked vessel in December 2002 containing parts
for 12 to 15 Scud missiles (valued at about $4 million each) bound for Yemen from
89 Melons Used to Smuggle Cash to N Korea. Japan Today News (Online), January 1, 2003.
90 Remittance Law Reinterpreted Cash Transfers to Pyongyang May Be Suspended as
Deterrent. The Daily Yomiuri (Tokyo), May 19, 2003. p. 1.
91 Japanese Finance Minister Says “At Least” 34m US Dollars Sent to North Korea.
Financial Times Information, Global News Wire — Asia Africa Intelligence Wire. June 6,
92 See, for example, Masaki, Hisane. N Korea’s Missiles Met by Japanese Sanctions, Asia
Times Online, July 6, 2006.
93 For details, see CRS Report RL33885, North Korean Crime-for-Profit Activities, by Liana
Sun Wyler and Dick K. Nanto.
94 Asano, Yoshiharu. N. Korea Missile Exports Earned 580 Mil. Dollars in ‘01. Daily
Yomiuri, May 13, 2003.
North Korea is one example of such arms sales.95 In testimony before the House
Committee on International Relations, the Undersecretary of State for Arms Control
and International Security pointed out that North Korea possesses Scud and No-
Dong missiles and is developing the Taepo-Dong 2. He stated that the country is by
far the most aggressive proliferator of missiles and related technologies to countries96
of concern. These sales are one of the North’s major sources of hard currency.
According to a U.S. military officer quoted in the Japanese press, North Korea
exported $580 million worth of ballistic missiles to the Middle East in 2001.97
Between 1998 and 2001, North Korea is estimated to have exported some $1 billion98
in conventional arms to developing nations.
With respect to illegal drug trade, officials from the U.S. military command in
Seoul reportedly said that North Korea is earning between $500 million and $1
billion annually from the narcotics trade.99 North Korea is thought to produce more
than 40 tons of opium per year which would make it the world’s third-largest opium
exporter and sixth-largest heroin exporter. The regime also is accused of trafficking
in methamphetamine stimulants. U.S. counter-narcotics officials are reported to have
said that since 1976, there have been at least 50 arrests or drug seizures involving
North Koreans in more than 20 countries. Japanese authorities say that nearly 50%100
of illegal drug imports into Japan come from North Korea. According to the U.S.
State Department, although such reports have not been conclusively verified by
independent sources, defector statements have been consistent over years and occur
in the context of regular narcotics seizures linked to North Korea. The State
Department’s International Narcotics Control Strategy Report for 2007 stated its
view is “that it is likely, but not certain, that the North Korean government has
sponsored criminal activities in the past, including narcotics production and
trafficking, but notes that there is no evidence for several years that it continues to
traffic in narcotics.” During 2006, the Japanese media reported that drug trafficking
occurred along the DPRK-PRC border with Japanese criminal figures traveling to
the border area to purchase methamphetamine for smuggling back to Japan.
According to the State Department, in March 2006, a new decree warned
citizens, state factories and groups in the DPRK to “…not sell, buy, or use drugs
95 Solomon, Jay. U.S. Debates North Korean Exports, Asian Wall Street Journal, May 5,
96 Testimony of John R. Bolton, Under Secretary for Arms Control and International
Security, U.S. Department of State. U.S. House Committee on International Relations, June
97 Asano, Yoshiharu. N. Korea Missile Exports Earned 580 Mil. Dollars in ‘01. Daily
Yomiuri, May 13, 2003. Pearson, Brendan. Illicit Boost for N Korea Economy. Australian
Financial Review, May 14, 2003. p. 12.
98 CRS Report RL33696, Conventional Arms Transfers to Developing Nations, 1998-2005,
by Richard F. Grimmett. p. 53. This figure is rounded to the nearest $100 million.
99 Paddock, Richard C. and Barbara Demick. N. Korea’s Growing Drug Trade Seen in
Botched Heroin Delivery, Washington Post, May 21, 2003. Also see CRS Report RL33885,
North Korean Crime-for-Profit Activities, by Liana Sun Wyler and Dick K. Nanto.
100 Kim, Ah-young, Halt North Korea’s Drug Habit; a Narcotic State, International Herald
Tribune, June 18, 2003. p. 8.
illegally” and that “organizations, factories and groups should not illegally produce
or export drugs.” Punishment is severe, up to death, and the family members and
shop mates of offenders face collective responsibility and punishment with the101
In a blatant incident in May 2003, the Australian navy and special forces
commandeered a North Korean ship (Pong Su) off the country’s southern coast that
allegedly was moving 110 pounds of almost pure heroin valued at $50 million. The
ship apparently picked up the heroin elsewhere in Asia and took a circuitous route102
Allegations also have been made that North Korea engages in counterfeiting
operations, particularly of U.S. $100 notes. It is believed that the country has earned
$15 million to $20 million per year in counterfeiting,103 but it is not clear that North
Korea currently engages in counterfeit currency production, although such notes still
In the opinion of a North Korean expert at Seoul’s Sejong Institute, “North
Korea’s economy had received a death sentence long ago, but it keeps afloat thanks104
to international aid and the country’s trading in weapons and illicit goods.”
Since late 2005, the United States has taken several measures to reduce illicit
financial activities by North Korea. On June 28, 2006, President Bush issued
Executive Order 13382 (Blocking Property of Weapons of Mass Destruction105
Proliferators and Their Supporters). On October 21, 2005, pursuant to Executive
Order 13382, the U.S. Treasury designated eight North Korean entities as
proliferators of weapons of mass destruction and their delivery vehicles. The action
prohibited all transactions between the designated entities and any U.S. person and
froze any assets the entities may have had under U.S. jurisdiction.106
On September 15, 2005, the U.S. Treasury designated Banco Delta Asia SARL
as a “primary money laundering concern” under Section 311 of the Patriot Act
because it represented an unacceptable risk of money laundering and other financial
crimes. Treasury stated that “Banco Delta Asia has been a willing pawn for the
North Korean government to engage in corrupt financial activities through Macau
101 U.S. Department of State. International Narcotics Control Strategy Report, 2007. March
102 Struck, Doug. Heroin Trail Leads to North Korea. Washington Post Foreign Service,
May 12, 2003. p. A01.
103 For details, see CRS Report RL33324, North Korean Counterfeiting of U.S. Currency,
by Raphael F. Perl and Dick K. Nanto.
104 Choe, Sang-Hun. N. Korea Sees Sanctions Amid Tough Times. Associated Press Online,
June 12, 2003.
105 Available at [http://www.whitehouse.gov/news/releases/2005/06/20050629.html].
106 U.S. Department of the Treasury. Treasury Targets North Korean Entities for Supporting
WMD Proliferation. Press Release JS-2984, October 21, 2005.
....”107 On March 14, 2007, the Treasury finalized its rule against Banco Delta Asia,
barring the bank from accessing the U.S. financial system, but allowing the $25
million in North Korean funds held to be released.
U.S.-DPRK Trade Relations
U.S. trade with the DPRK is quite limited. The United States does not maintain
any diplomatic, consular, or trade relations with North Korea, and the country does
not have normal trade relations (most favored nation) status. This means that North
Korean exports are subject to the relatively high tariffs existing before World War
II in the United States. For example, women’s blouses of wool or cotton carry a 90%
import duty if from North Korea but are duty free if from free-trade agreement
countries, such as Canada, Israel, or Mexico, or are subject to 9 to 10% duty if from
most other nations. As a communist nation, North Korea also does not qualify for
duty-free treatment of certain products that are imported from designated developing108
countries under the generalized system of preferences program.
The United States, moreover, maintains various economic sanctions on North
Korea because the country is on the U.S. State Department list of state supporters of
international terrorism, is considered a threat to national security, is a communist109
state, and it proliferates weapons of mass destruction. In June 2008, however, the
Bush Administration announced that it was lifting restrictions under the Trading with
the Enemy Act and was starting the process to remove the DPRK from the list of
State Sponsors of Terrorism. Other sanctions, including U.N. sanctions imposed
following North Korea’s nuclear test, still remain in place. The United States
resumed shipments of food and heavy fuel oil to North Korea as humanitarian aid.
Travel to and trade with North Korea in other than dual-use goods are allowed if
overarching requirements are met, and there are no restrictions on the amount of
money Americans may spend in the DPRK. The sanctions related to the
proliferation of weapons of mass destruction generally target the offending entities.
North Korean assets in the United States frozen prior to June 19, 2000, remain
frozen. North Korea is on the most restricted list of countries for U.S. exports
(Country Group E list) of items such as computers, software, national security-110
controlled items, items on the Commerce Control List, and service or repair of
such items. Economic sanctions on North Korea, however, are essentially unilateral
by the United States. Most other nations (except Japan) allow relatively free trade
in non-sensitive goods with the DPRK.
In October 2007, President Bush reportedly approved the lifting of some
sanctions imposed on the DPRK under an act governing human trafficking. This
easing allowed the United States to provide assistance in educational and cultural
107 U.S. Department of the Treasury. Treasury Designates Banco Delta Asia as Primary
Money Laundering Concern under USA PATRIOT Act. Press Release JS-2720, September
108 See CRS Report 97-389, Generalized System of Preferences, by William H. Cooper.
109 See CRS Report RL31696, North Korea: Economic Sanctions, by Dianne E. Rennack.
exchanges to the extent that the aid doesn’t damage its national interest.111 In
February 2008, the New York Philharmonic Orchestra performed in Pyongyang.112
In October 2007, the White House requested $106 million “to provide Heavy
Fuel Oil or an equivalent value of other assistance to North Korea on an
“action-for-action” basis in support of the Six-Party Talks in return for actions taken
by North Korea on denuclearization.113 The Consolidated Appropriations Act, 2008
(H.R. 2764, PL 110-161, Signed December 26, 2007) provided for up to $53 million
for energy-related assistance for North Korea.
The United States uses trade with North Korea as leverage and to send a
message of disapproval for various activities by Pyongyang. As the six-party nuclear
talks have progressed, however, the United States has expressed its willingness begin
discussions to normalize relations with the DPRK, has taken steps to remove it from
the terrorism list,114 and has indicated its willingness to negotiate a peace treaty to
formally end the Korean Conflict. The way also could be opened for North Korea’s
admission to membership in international financial institutions (such as the World
Bank, International Monetary Fund, and Asian Development Bank). This would
allow the DPRK to receive development assistance that would help finance
additional imports from countries such as the United States.
Table 5 shows U.S. trade with North Korea for 2004-2007. In 2004, U.S.
exports to the DPRK of $23.8 million were mostly for food provided as humanitarian
aid. In 2005, food aid was down to $5.8 million, and in 2006 had ceased. In 2006,
the only U.S. exports were books and newspapers worth $3,000. With some progress
in the Six-Party Talks, in 2007, U.S. exports of white wheat to North Korea rose to
$1.728 million. As for imports, in 2004, the United States imported $1.5 million in
organic chemicals plus $77,000 in woven apparel from North Korea. In 2005,
imports had dropped to $3,000 worth of tools and cutlery, and were nil in 2006 and
111 Yoon, Won-sup. US Eased Sanctions on North Korea in 2007, Korea Times, February
112 Daniel J. Wakin. North Koreans Welcome Symphonic Diplomacy. New York Times,
February 27, 2008. p. 1.
113 White House. Office of the Press Secretary. Fact Sheet: 2008 War Funding Request,
October 22, 2007.
[h ttp ://www. wh iteh ou se. gov/n e ws/releases/ 2007/10/prin t/20071022-7.html]
114 The North Korean Counterterrorism and Nonproliferation Act (H.R. 3650, Ros-Lehtinen,
Ileana ) provides for the continuation of restrictions against the government of North Korea
(imposed as a result of the DPRK being deemed a supporter of international terrorism) unless
the President certifies to Congress that North Korea has met certain benchmarks respecting:
(1) missile or nuclear technology transfers; (2) support of terrorist groups and terrorist
activities, (3) counterfeiting of U.S. currency, (4) release of South Korean POWs, Japanese
journalists, and Kim Donk-Shik; and (5) Bureau 39’s closure.
Table 5. U.S. Trade by Commodity With the Democratic
People’s Republic of Korea (North Korea) in 2004-2006
($ in thousands)
SITC CategoryU.S. ExportsU.S. Imports
Year 2004 2005 2006 2007 2004 05 06 07
Cereals and Cereal10,28
Fixed Vegetable Fats
Vegetables 3,461 1,806 0 0 0 0 0 0
Cereal, Flour, starch
or Milk; Bakers
Wares 2 ,459 0 0 0 0 0 0 0
Misc. Grain, Seed,
Dairy Products and
A rticles 1 9 1 0 0 0 0 0 0 0
Woven Apparel 000077000
0 5 ,757 3 1 ,728 1,495 3 0 0
Source: U.S. Department of Commerce accessed through World Trade Atlas.
Table 6 shows U.S. merchandise exports, imports, and trade balances with
North Korea since 1990. Imports have been zero or relatively low with a peak of
$1,495,000 in 2004. Almost all of these imports from North Korea were organic
chemicals and woven apparel. A possible concern is that imports of books,
newspapers, and manuscripts have dropped to zero. For a country with great
strategic importance to the United States, information on North Korea is not flowing
directly into the U.S. market. U.S. exports at $23,750,000 in 2004 rose from $32,000
in 1990 to $25,012,000 in 2002. Another peak occurred in 1995 when U.S. exports
totaled $11,607,000. Of this amount, $10,810,000 was in cereals. The small annual
deficit in U.S. trade with North Korea arises primarily from food aid that has been
provided to the DPRK.
Table 6. U.S. Merchandise Exports, Imports, and Trade
Balances with North Korea, 1990-2007
($ in thousands)
YearU.S. ExportsU.S. ImportsBalance
1995 11,607 0 11,607
1999 11,265 29 11,236
2000 2,737 154 2,583
2002 25,012 15 24,997
2004 23,750 1,495 22,255
Source: U.S. Department of Commerce through World Trade Atlas.
According to the U.S. Department of Commerce, the United States has no direct
investment in North Korea.115 An American company interested in doing business
in North Korea, particularly establishing a company, likely would work through an
overseas subsidiary. Some American business executives with the U.S. Chamber of
Commerce in South Korea, for example, reportedly travel to North Korea for116
business purposes, and some U.S. enterprises reportedly are working as117
subcontractors in the development of North Korea’s Kaesong industrial complex.
115 U.S. Bureau of Economic Analysis. U.S. Direct Investment Abroad Detail for Historical-
Cost Position and Related Capital and Income Flows, 2001. Survey of Current Business,
September 2002, p. 94.
116 Meeting with President of the American Chamber of Commerce and CRS analysts, April
117 Koo, Kyung-hee. U.S. Enterprises Participate in Developing the Gaeseong Industrial
Complex. KOTRA-North Korea Team. January 30, 2004. Reprinted in KOTRA Bulletin,
February 11, 2004.
North-South Korean Economic Relations
Economic relations have been a major route for opening relations between
North and South Korea. Seoul has a major stake in relations with the DPRK and the118
outcome of the current Six-Party Talks. It seeks a “soft landing” for the current
standoff over the North’s nuclear program — one that will lead to a lessening of
tensions and steady integration of North Korea’s economy into the global economic
and financial system. As with other countries divided by ideology and a history of
hostilities as “pawns” on the chess board of the Cold War, the two halves of the
peninsula face numerous issues to be resolved before they can normalize relations
— let alone contemplate reunification.
South Korea has much to gain from rapprochement with the North. Its strategy
has been to use its economic leverage and family reunions (families separated by the
division of the Korean Peninsula) to open channels with the North Korean people
while maintaining a credible military deterrent to overt hostile action by Pyongyang.
South Korea recognizes that essentially it has won the Cold War on the Korean
peninsula, but it recoils at the prospect of funding economic rehabilitation in the
DPRK as West Germany did with East Germany. Seoul also recognizes that its
economic ties are gradually shifting from reliance on the American market to greater
integration with China, Japan, and other countries of Asia. Its labor costs are rising,
and many of its companies are remaining competitive only by manufacturing in
China and other low-wage markets. For them, the prospect of abundant cheap labor
just a short distance to the north is appealing and perhaps an alternative to cheap
labor in China.
In 2007, total merchandise trade between the two Koreas increased to $1,797.9
million, up from $1,349.7 million in 2006 and more than triple the $403.0 million
just six years earlier. The largest increases have been in South Korean exports which
reached $1,032.6 million, up 24% from $830.2 million in 2006. Imports from North
Korea also rose to $765.3 million, up 47% from $519.6 million in 2006. Much of
the increase in exports has been in the form of food and industrial goods. In 2006,
$419.3 million in South Korean exports to the North were actually South Korean aid
The major items purchased by South Korea from the North include
food/aquatic/forestry products, textiles, steel/metal products, and electronics. The
major South Korean exports to North Korea include chemicals, textiles, machinery,
steel/metal products, and food/forestry products.
Since 1992, particularly under the Sunshine Policy of former South Korean
President Kim Dae Jung and under the Policy for Peace and Prosperity of former
President Roh Moo-hyun, Seoul has permitted its corporations to pursue business
interests in North Korea. In 2003, the government allowed activities by 89
companies including 35 involved in contract processing (assembly, sewing, or other
118 The Six-Party Talks are made up of representatives from the United States, Japan, North
Korea, South Korea, Russia, and China.
processing done under contract) by North Koreans.119 The companies included
Daewoo (jackets, bags), Samsung Electronics (communications center, switchboard),
Samcholi Bicycle, Green Cross (medicine), International Corn Foundation (corn
seeds), Hyundai (Mt. Kumkang tourism, development), and Hanshin Co. (glass).
The Korea Electronic Power Corporation’s work on the construction of a light water
nuclear power plant under the U.S.-North Korean 1994 Agreed Framework has been
halted.120 One global strategy of South Korean businesses is to develop processing
sites in North Korea to take advantage of low labor costs there; in some cases, labor
costs are competitive with those in China. The two countries also have taken some
halting steps toward linking their economic systems. In addition to the business
relationships, since September 2002, the two countries have been reconnecting the
Gyeongui (Seoul-Sinuiju) and Donghae (East Sea) railway lines and adjacent
As discussed in the section above on Economic Reforms and Free Trade Zones,
the focus of North-South economic cooperation now is the Kaesong Industrial
Complex (KIC). Managed by South Korea’s Hyundai Asan and Korea Land
Corporation and located just over the border in North Korea, this 810 acre complex
already has attracted small and medium sized enterprises from South Korea. The
KIC accounts for much of the increased commercial trade between the North and the121
South. In 2006, the KIC produced some $7.5 million worth of goods each month.
It provides small- and medium-sized South Korean firms with a low-cost supply of
labor for manufacturing products, provides jobs for North Korean workers, and
provides needed hard currency for Pyongyang.
North Korea depends more on South Korea in international trade than South
Korea does on the North. North Korea accounts for less than 1% of total South
Korean exports, while North Korean exports to South Korea account for more than
a third of total North Korean exports. South Korea has access to global markets for
many of its world class industries (automobiles, semiconductors, consumer
electronics, etc.), while North Korea faces restricted markets for its limited array of
In his inaugural speech on February 25, 2008, President Lee Myung-bak
indicated that South Korea attitude toward inter-Korean relations should be
pragmatic, not ideological. He reiterated his plan to provide assistance in order to
119 Speech by Minister Jeong Se-hyun on the 34th Anniversary of the Ministry of Unification.
Korean Unification Bulletin, No. 53, March 2003.
120 In March 1996, KEPCO was designated the prime contractor for the construction of two
1,000MW light water nuclear reactors in North Korea for KEDO (Korean Peninsula Energy
Development Organization). It broke ground near Sinpo in August 1997. By the end of
2001, the project was 16% completed with some 1,200 workers employed. For details on
the Agreed Framework, see CRS Report RL33590, North Korea’s Nuclear Weapons
Development and Diplomacy, by Larry Niksch. For the approval list, see KOTRA,
Companies Approved for South-North Korean Economic Cooperation.
121 South Korea to Continue “Utmost Efforts” for Inter-Korean complex — Minister.
Yonhap News Agency. Reported by BBC Monitoring Asia Pacific. London, December 8,
raise the per capita income of North Korea to $3,000 within ten years if Pyongyang
Table 7. South Korean Merchandise Trade with North Korea,
($ in thousands)
Year South Korean ImportsSouth KoreanExportsTotal TradeBalance
1990 12,278 1,188 13,466 -11,090
1991 105,719 5,547 111,266 -100,172
1992 162,863 10,563 173,426 -152,3
1993 178,167 8,425 186,592 -169,742
1994 176,298 18,249 194,547 -158,049
1995 222,855 64,436 287,291 -158,419
1996 182,400 69,639 252,039 -112,761
1997 193,069 115,270 308,339 -77,799
1998 92,264 129,679 221,943 37,415
1999 121,604 211,832 333,436 90,228
2000 152,373 272,775 425,148 120,402
2001 176,170 226,787 402,957 50,617
2002 271,575 370,155 641,730 98,580
2003 289,252 434,965 724,217 145,713
2004 258,000 439,000 697,000 181,000
2005 340,300 715,500 1,055,800 375,200
2006 519,563 830,198 1,349,761 310,635
2007 765,346 1,032,550 1,797,896 267,204
Sources: South Korea Ministry of Unification, KOTRA.
China-DPRK Economic Relations
China remains North Korea’s chief ally. In addition to sharing its status as one
of the last communist regimes in the world, China views the Korean peninsula as
vital to its strategic interests. Beijing values North Korea as a buffer between the
democratic South Korea and the U.S. forces stationed there, as a rationale to divert
U.S. and Japanese resources in the Asia Pacific toward dealing with Pyongyang and
less focused on the growing military might of China, and as a destination for Chinese
foreign investment and trade. Beijing arguably has more influence in Pyongyang
than any other nation.
122 Inauguration Speech of President Lee Myung-bak, February 25, 2008. On website of the
South Korean Ministry of Foreign Affairs and Trade. [http://www.mofat.go.kr/index.jsp].
Cooperation between the two countries is extensive but often strained. In 1961,
China and the DPRK signed a mutual defense pact, but recently a Chinese official
reportedly said that they are not “well informed of the internal situation of the North123
Korean military” and that the DPRK “does not listen to what China has to say.”
(This presumably referred to Pyongyang’s missile and nuclear tests.) Also with
respect to North Korean refugees, their first destination is usually northeastern
China. According to Human Rights Watch, China labels North Korean
border-crossers as illegal economic migrants, rather than refugees or asylum seekers,124
and usually sends them back to North Korea.
China also is hosting and facilitating the ongoing Six-Party Talks that seek a
resolution to the North Korean nuclear problem.
In August 2001, Chinese President Jiang Zemin visited Pyongyang and
promised increased humanitarian and economic assistance. In April 2004, Kim
Jong-il visited Beijing to discuss food aid and nuclear issues.
According to Jane’s Information Group, several issues have arisen to cause
friction in the Sino-North Korean relationship. These include
!Chinese exasperation at the DPRK’s failure to reform its economy;
!Pyongyang’s prevarication over the nuclear and peace treaty issues
and the consequent dangerous stimulus this provides to proliferation
in the region;
!The nuclear standoff with the United States and Pyongyang’s
possession of nuclear weapons;
!Growing economic and political rapport between Pyongyang and
!The North Korean refugee problem on the China-DPRK border;
!Pyongyang’s missile testing, prompting Japan to acquire a Theater
Missile Defense system, with Taiwan wishing to be included;
!North Korea’s construction of underground missile sites close to the
Chinese border; and
!North Korea’s cavalier attitude towards business. (China
occasionally suspends shipments of humanitarian aid to the DPRK
because Pyongyang regularly ‘forgets’ to return Chinese railroad
In 2006, Pyongyang’s missile and nuclear tests severely strained relations
between China and the DPRK. Beijing had warned the DPRK not to conduct either
of the tests and “lost face” when Pyongyang went ahead with them anyway. As a
result, for the first time China agreed to UN resolutions imposing sanctions on the
123 Chu, Wan-chung. These Days, North Korea Does not Even Listen to China. Chosun
Ilbo, August 7, 2006. Reprinted by BBC Monitoring Asia Pacific, August 10, 2006.
124 Human Rights Watch. China: Protect North Korean Refugees, March 9, 2004. James
D. Seymour. China: Background Paper on the Situation of North Koreans in China, A
Writenet Report by commissioned by United Nations High Commissioner for Refugees,
Protection Information Section, January 2005.
125 Jane’s Information Group, op. cit.
DPRK126 and also took measures to halt banking transactions with North Korean
entities and to curtail shipments of petroleum. China, however, did not agree to
conduct inspections of shipments along its borders with North Korea. Some analysts
indicate that Pyongyang may be growing weary of its lop-sided relations with
Beijing and may be attempting to become more independent. Pyongyang may view
nuclear weapons as a “trump card to intimidate China as much as the United
S t at es.”127
Since the collapse of the Soviet Union, China has been the DPRK’s largest
trading partner and supplier of concessional assistance (through subsidized trade and
direct transfers). As an export market and source of imports, however, North Koreath
plays a relatively minor role for China. In 2007, the DPRK ranked 68 among
China’s export markets — smaller than Peru, Egypt, or Hungary. As a source of
imports, North Korea also ranked 68th — below Gabon, Yemen, or Belgium. Table
Table 8. China’s Merchandise Trade with the DPRK, 1995-2007
($ in millions)
Year China’s ImportsChina’s ExportsTotal TradeChina’sBalance
1995 63.609 486.037 549.646 422.428
1996 68.638 497.014 565.652 428.376
1997 121.610 534.411 656.021 412.801
1998 51.089 356.661 407.750 305.572
1999 41.722 328.634 370.356 286.912
2000 37.214 450.839 488.053 413.625
2001 166.797 570.660 737.457 403.863
2002 270.863 467.309 738.172 196.446
2003 395.546 627.995 1,023.541 232.449
2004 582.193 794.525 1,376.718 212.332
2005 496.511 1,084.723 1,581.234 588.212
2006 467.718 1,231.886 1,699.604 764.168
2007 581.521 1,392.453 1,973.974 810.932
Sources: Chinese (PRC excluding Hong Kong) data as supplied by World Trade Atlas.
China is a major source for North Korea of imports of petroleum. According
to Chinese data, exports to the DPRK of crude oil reached $282.0 million and
shipments of oil (not crude) totaled $95.4 million. These two categories accounted
for 27% of all Chinese exports to the DPRK. China, however, does not appear to be
126 See UN Security Council Resolution 1718, October 14, 2006.
127 Kahn, Joseph. China May Press North Koreans. The New York Times, October 20, 2006.
selling this oil to North Korea at concessionary prices. In 2007, the average price for
Chinese exports of crude oil to North Korea was $0.54 per kilogram, while it was
$0.49 for such exports to the United States, $0.43 for South Korea, $0.48 for Japan,128
and $0.29 for Singapore.
China also provides aid directly to Pyongyang. By bypassing the United
Nations, China is able to use its assistance to pursue its own political goals
independently of the goals of other countries. It is widely believed that Chinese food
aid is channeled to the military. This allows the World Food Program’s food aid to
be targeted at the general population without risk that the military-first policy or129
regime stability would be undermined by foreign aid policies of other countries.
In November 2003, China reportedly transferred responsibility for securing its
border with North Korea from the police to its army.130 Many of China’s two million
ethnic Koreans live along this border, and it is a favorite crossing point for refugees
from North Korea. In 2006, China built a 20-kilometer long fence along its border
with North Korea. It is located primarily along areas where the Yalu River dividing131
the two countries is narrow and the river banks low. Much of China’s trade with
the DPRK goes through the port of Dandong on the Yalu River. In 2002, 40% of
Chinese exports to and 11% of its imports from North Korea passed through132
China’s major imports from North Korea include mineral ores, mineral fuels
(coal), woven apparel, fish and seafood, iron and steel, and wood. China’s major
exports to North Korea include mineral fuels and oil, meat, electrical machinery,
machinery, plastic, man-made filament, vehicles, and iron and steel. (See section of
this report on foreign investments for activity by Chinese firms in the DPRK.)
128 Average price calculated by World Trade Atlas using Chinese trade statistics.
129 Babson, Bradley O. Towards a Peaceful Resolution with North Korea: Crafting a New
International Engagement Framework Paper presented at a conference sponsored by the
American Enterprise Institute, Korea Economic Institute, and Korea Institute for
International Economic Policy, Washington, DC, February 12-13, 2004.
130 Foley, James. China Steps Up Security on North Korean Border. Jane’s Intelligence
Review, November 1, 2003.
131 China Erects Massive Fence on N. Korean Border After Test. World Tribune.com,
October 25, 2006. Schafer, Sarah. Threatening the Whole World, on China’s Border with
North Korea, Local Villagers Fear the Fallout from Pyongyang’s Nuclear Aspirations,
Newsweek, October 12, 2006. (Internet edition).
132 Lee, Chang-hak. China’s Trade with N.K. Via Dandong Exceeds US $200 million.
KOTRA, February 21, 2003.
Japan-DPRK Economic Relations
Japan’s economic relations with North Korea have declined sharply as tension
over Pyongyang’s nuclear and missile programs has spiked. After North Korea test
launched several missiles in July 2006 and then detonated a nuclear device in
October 2006, Japan imposed strict unilateral sanctions, causing bilateral trade to
plummet. Japan banned imports and most North Korean nationals from entering
Japan, prohibited all North Korean ships from entering Japanese ports, and outlawed
the export of “luxury goods” to North Korea, including caviar, jewelry, liquor, and
any food known to be favored by North Korean leader Kim Jong-il. Tokyo has also
ceased sending any humanitarian aid to North Korea, and has refused to provide
economic or energy assistance until their concerns with Pyongyang are resolved.
This pattern is a reversal of earlier economic relations. Although Japan and
North Korea have never established official diplomatic relations, the two nations
maintained significant economic ties for well over a decade. From the end of the
Cold War, Japan was second only to China among North Korea’s top trading
partners. Bilateral trade declined considerably in the 1980s, but the drop was
attributed primarily to the steep overall downturn of the North Korean economy as
much as the state of bilateral relations. Before relations deteriorated, Japanese
leaders made several efforts to normalize relations with North Korea, promising
considerable economic assistance to the country. Since 2002, however, North
Korea’s provocative missile and nuclear device tests, along with the issue of
Japanese citizens kidnapped by North Korean agents in the 1970s and 1980s, has
stalled any further diplomatic progress and retarded economic relations. From
2001-2005, Japan’s share of North Korean trade declined as China, South Korea, and
Russia expanded trade with Pyongyang.
Table 9. Japan’s Merchandise Trade with the DPRK, 1994-2007
($ in millions)
Year Japan’s ImportsJapan’s ExportsTotal TradeJapan’sBalance
1994 328.313 171.092 499.405 -157.221
1995 338.073 253.798 591.871 -84.275
1996 290.745 226.480 517.225 -64.265
1997 301.796 178.942 480.738 -122.854
1998 219.489 175.137 394.626 -44.352
1999 202.564 147.839 350.403 -54.725
2000 256.891 206.760 463.651 -50.131
2001 225.618 1,064.519 1,290.14 838.901
2002 235.840 132.645 368.485 -103.195
2003 174.390 91.445 265.835 -82.945
2004 164.299 88.743 253.042 -75.556
2005 132.277 62.505 194.782 -69.772
2006 77.776 43.816 121.592 -33.96
2007 0.000 9.331 9.331 9.331
Source: Japanese data as supplied by World Trade Atlas.
As indicated in Table 9, by 2007, total trade between Japan and the DPRK had
fallen to $9 million from $1,290 million in 2001. In 2007, Japan had no imports
from the DPRK and reported exports of $3 million in bicycles, $2 million in trucks,th
and $0.3 million in public transport vehicles. North Korea is Japan’s 168 largest
export market, below Namibia, Bhutan, and Botswana.
Before Japan stopped importing from North Korea, seafood made up almost
half of the North’s exports to Japan, followed by electrical machinery, aluminum and
articles thereof, mineral fuels, and apparel. North Korean clams and matsutake
mushrooms are particularly prized in the Japanese market. Japan sent items such as
vehicles, electrical machinery, boilers/reactors, manmade filaments, wool, and
articles of iron or steel to North Korea. Some Japanese lawmakers have argued that
Japan should expand the ban on imports from North Korea to cover exports as well.
Japan’s food aid to North Korea has also dwindled as relations soured. The
pattern of Japanese aid reflects developments in the political relationship between
Tokyo and Pyongyang: shipments began in 1995 and 1996 when relations warmed,
were temporarily suspended periodically as tensions mounted, and eventually ceased
altogether in late 2004 because of disagreement over the abduction issue. Between
North Korea, mostly through the United Nations World Food Program.
A group of pro-Pyongyang ethnic Koreans living in Japan known as the Chosen
Soren (Chongryun in Korean) in the past provided North Korea with additional funds
in the form of cash remittances and, possibly, facilitated illicit trade such as drug
trafficking and counterfeiting. Although the exact amount of remittances is
unknown, the total appeared to be in the neighborhood of $100 million per year but
declined sharply since the early 1990s. A series of scandals involving ethnic Korean
banks in Japan revealed that money was illegally channeled to North Korea through
the network of Chosen Soren-affiliated credit unions. Following the missile tests in
2006, Japan froze fund transfers and overseas remittances by 15 groups and one
individual suspected of links to North Korean weapons programs, and established
rules that require financial institutions to report to the Japanese government
remittances overseas of more than 300 million yen.
Russia-DPRK Economic Relations
Russian reforms and the end of the Cold War greatly reduced the priority of the
DPRK in the strategy of Russian foreign policy. Following Soviet support of North
Korea in the Korean War, the USSR provided assistance to Pyongyang that helped
equip its military and create its heavy industrial sector. In 1998, at the peak of the
bilateral relationship, about 60% of North Korea’s trade was with the Soviet Union.
Much of the trade was in raw materials and petroleum that Moscow provided to
Pyongyang at concessional prices. Relations between the two cooled in the 1990s
133 CRS Report RL31785, Foreign Assistance to North Korea, by Mark Manyin.
as Russia recognized South Korea, announced that trade with North Korea was to be
conducted in hard currencies, and opted out of its bilateral defense agreement.134
Recently, overall relations between Russia and North Korea have been
improving. Russia is upgrading its railway connections with the DPRK and has been
participating in an ambitious plan to build a trans-Korean railway. As is the case
with China and South Korea, Russia is critical to North Korean security, since Russia
shares a border with the DPRK, and Russian cooperation would be necessary to
enforce any security guarantee. As fuel aid from abroad has decreased, moreover,
North Korea has turned again toward Russia as a source of supply.
An observer of Russia-DPRK relations views Russian policy toward North
Korea as an important component of Moscow’s general strategy toward what it
considers the critically important Asia-Pacific region. Russia’s strategic course
includes a calculating and pragmatic approach toward North Korea and the Korean
Peninsula in general. Moscow has gained unique and exclusive communications
capabilities with Pyongyang based on the development of trust between the135
leadership of the two states at the highest political levels.
This observer also points out that the perspective of Russia on the North Korea
nuclear issue does not fully coincide with that of the United States. While Moscow
has insisted on a denuclearized Korean peninsula and the irreversible dismantlement
of North Korea’s nuclear weapons and nuclear development programs, it also firmly
supports the peaceful resolution of the issue. Russia is a participant in the Six-Party
Talks. Moscow apparently has concluded that the Kim Jong-il regime does not face
impending collapse, and therefore, outside pressure and economic sanctions intended
to bring about regime change work only to increase tensions and the probability of
a military confrontation. Russia also does not favor a Korean Peninsula unified by
military force with American help. This would put U.S. forces on the Russia-Korean
border. Rather, Russia supports a unified Korea that would maintain friendly
relations with all countries, including Russia, and opposes foreign interference in the136
As is the case with China, Russia also is concerned that economic hardships in
the DPRK push refugees across the border into Russian territory. Moscow also
supported U.N. Security Council Resolutions in 2006 that condemned North Korea’s
missile and nuclear tests. This has cooled the relationship to some extent.
The DPRK’s trade with Russian lags behind what it has been in the past. Inth
and Ghana) and 81 in terms of markets for Russian exports (below the Virgin
Islands and Gibraltar). The increasing volume of Russian mineral fuel exports to the
134 Lunev, Stanislav. New Era in Russian-North Korean Relations. Newsmax.com, August
135 Vorontsov, Alexander. Current Russia — North Korea Relations: Challenges and
Achievements. The Brookings Institution Center for Northeast Asian Policy Studies,
February 2007, 24 p.
DPRK has moved Russia past Japan, Germany, and Thailand to become North
Korea’s third largest trading partner.
Major Russian exports to the DPRK include mineral fuels, aircraft, iron/steel,
wood and pulp, paper, and non-rail vehicles. The large increase in Russian exports
have come mostly in mineral fuels which increased from $20 million in 2002 to a
peak of $224.4 million in 2005 before declining to $190.6 million in 2006 and $73.5
million in 2007. Of these, solid fuels from coal and oil accounted for the majority
of the exports. Pyongyang has had to turn to Russia as a source for energy as
supplies of fuel oil from the United States, Japan, and South Korea were curtailed as
the Six-Party Talks bogged down. Major Russian imports from North Korea include
machinery, electrical machinery, and manmade staple fibers.
Table 10. Russia’s Merchandise Trade with the DPRK,
($ in millions)
1997 16.790 72.449 89.239 55.659
1998 8.463 56.497 64.960 48.034
1999 7.208 48.507 55.715 41.299
2000 7.633 35.631 43.264 27.998
2001 14.664 56.099 70.763 41.435
2002 10.317 47.404 57.721 37.087
2003 2.903 112.343 115.246 109.440
2004 4.575 204.665 209.240 200.090
2005 6.862 224.402 231.264 217.540
2006 20.076 190.563 210.639 170.487
2007 33.539 126.068 159.607 92.529
Sources: Russian data as supplied by World Trade Atlas.
*1994-96 data from International Monetary Fund. Direction of Trade Statistics.
In December 2006, Russia reportedly agreed to write off some 80% of the $8
billion in debt owed it by the DPRK. North Korea had borrowed the funds in the
economic cooperation with the DPRK and to facilitate progress in the Six-Party
U.S. Interests, Strategy, and Policy
The three legs of any grand strategy toward the DPRK include economic,
diplomatic, and military means to accomplish U.S. goals and protect U.S. national
interests. This report examines the economic side of this triad of strategic policy
instruments but also reviews the diplomatic and military aspects of U.S. policy in
order to provide a policy context.
U.S. Interests, Goals, and Strategy
The DPRK threatens several U.S. national interests. It threatens U.S. security
through its development and potential proliferation of nuclear weapons as well as
other weapons of mass destruction. North Korea’s missile delivery systems currently
can reach South Korea and Japan, and it is reportedly developing a missile (Taep’o-138
dong 2) that can reach the continental United States. Its conventional forces are
concentrated along the demilitarized zone within striking distance of South Korean
population centers and U.S. forces. North Korea’s dictatorial, communist, and
oppressive regime headed by Kim Jong-il runs counter to U.S. values of freedom,
liberty, human rights, democracy, and economic choice.
The national security strategy of the United States touches on North Korea
mainly through the following broadly stated goals: (1) to prevent enemies from
threatening the United States, allies, and friends with weapons of mass destruction;
(2) to strengthen alliances to defeat global terrorism and to work to prevent attacks
against the United States or friendly countries; (3) to work with others to defuse
regional conflicts; (4) to ignite a new era of global economic growth through free
markets and trade; and (5) to champion aspirations for human dignity.139
As applied to the DPRK, the immediate U.S. goals include (1) to halt or
eliminate North Korea’s development of nuclear or other weapons of mass
destruction; (2) to prevent/halt proliferation of weapons of mass destruction,
particularly to terrorist groups; (3) to curtail illegal and questionable activities by
North Korea to include illicit sales of missiles,140 dealing in illegal drugs, and
counterfeiting of currency; (3) to reduce the threat of war on the Korean peninsula;
(4) to ensure that North Korea does not participate in international terrorist activity;
(5) to induce economic, political, and societal change in the country that could bring
137 Russia to Forgive Most of N. Korea’s Debt. The Chosun Ilbo (digital version), January
138 See CRS Report RS21473, North Korean Ballistic Missile Threat to the United States,
by Andrew Feickert.
139 The White House. The National Security Strategy of the United States of America.
140 See CRS Report RS21473, North Korean Ballistic Missile Threat to the United States,
by Steven A. Hildreth.
about favorable changes in the Kim regime, in governance, in the standard of living
of its people, and in attitudes toward the United States; and (6) to enhance the
security of South Korea and Japan with respect to the DPRK.
Conventional wisdom with respect to North Korea includes the following
assumptions: (1) without stringent monitoring mechanisms, Pyongyang probably
will cheat on any agreement; (2) North Korea regularly engages in illicit activity and
may take actions opposed to normally accepted international law or standards of
national behavior; (3) economic privation in North Korea mainly affects the
population outside of the political and military elite, particularly in the countryside;
(4) popular sentiment opposing the current regime, although reportedly on the rise,
appears weak or suppressed sufficiently for Kim Jong-il to remain in power for an
indefinite period of time; (5) a U.S. military attack on North Korea would result in
an immediate counter-attack on Seoul and other targets in South Korea using existing
conventional weaponry that would cause extensive damage; and (6) any North
Korean use of nuclear bombs on the United States or its allies would trigger
retaliation that likely would destroy Pyongyang, its military installations, and other
Other factors to be considered include the following: (1) South Korea has been
pursuing a policy of rapproachment and eventual normalization of relations with
North Korea, although it maintains considerable distrust and hostility toward the
country; (2) among the countries with interest in North Korea, China appears to have
the most influence and economic and political interaction, although ties with Russia
still are strong, and South Korea has been a major source of economic assistance and
trade; (3) Japan would likely provide a large monetary settlement to Pyongyang in
return for its years of occupation should a peace settlement be reached; (4) the border
between China and North Korea is porous, particularly in the winter when the rivers
are frozen and electricity so scarce that few lights operate at night; (5) centrally
planned, communist economies, that have been operating for several decades create
distortions and consumer dissatisfaction that enable rapid transition to a market
economy once those economies are liberalized; (6) economic reform and the opening
of trade and investment in North Korea would likely induce large increases in
production and economic well-being, but most DPRK production facilities are so
lacking in new machinery and equipment that major investments would be needed
to raise them to world standards; and (7) the level of distrust between the United
States and the DPRK is deep and long-standing.
Given U.S. interests and goals, it appears that U.S. strategy may include the
following: (1) convincing the Pyongyang regime that developing nuclear weapons
decreases, not increases, its security; (2) creating tension within the regime over the
allocation of resources between nuclear and conventional weapons and between the
military and civilian economies; (3) weakening the hold by Pyongyang on the daily
lives of its citizens and support of Kim Jong-il by fostering alternative centers of
power, facilitating the transition to a market economy, and increasing information
flows into the country; (4) depriving the central government of revenues derived
from illicit activities; and (5) eliciting greater cooperation from China and Russia
to induce them to apply more pressure on Pyongyang to make suitable concessions
and carry through on commitments deriving from the Six-Party Talks.
An economic strategy would be to generate interests in and dependency on
international trade, investment, and greater interaction with the outside world that
could weaken the hold by Pyongyang on the daily lives of citizens and bring the
country more into the globalized world. Such economic liberalization also could
reduce pressures on North Korea to engage in illicit trade in order to cover its trade
deficit and diminish the need for Pyongyang to saber rattle in order to divert
attention from its domestic problems.
Major U.S. policy options, given the above interests, goals, assumptions, and
strategies with respect to the DPRK, include the following.
!Continue current policies of negotiations with the promise of lifting
sanctions as DPRK denuclearization progresses under the Six-Party
!Intensify negative pressures on the DPRK (tighten economic and
financial sanctions, restrict trade between North Korea and countries
such as China, Japan, South Korea, and Europe, and discourage
foreign investment in the DPRK).
!Increase engagement to include positive incentives for reform over
the long term (loosen sanctions, encourage reforms, facilitate
foreign investment, promote trade, and allow North Korea to join
the International Monetary Fund and Asian Development Bank).
!Combine policy options into a package of incentives.
Current U.S. Policy
Current U.S. policy with respect to the DPRK includes (1) diplomatic
engagement through the Six-Party Talks and related bilateral meetings; (2) non-
proliferation efforts, including the Proliferation Security Initiative; (3) international
efforts to counter trafficking by North Korea in illegal drugs, counterfeit currency,
or other contraband; (4) maintenance of U.S. military forces in South Korea, Japan,
and elsewhere in the Pacific as a credible deterrent against North Korean aggression;
(5) economic sanctions and diplomatic isolation; and (6) keeping North Korea from
joining international financial institutions.
As the Bush Administration nears a close, it has shown a new willingness to
negotiate directly with the DPRK, although it maintains the umbrella of the Six-Party
Talks. The February 13, 2007, Six-Party Agreement includes a provision that North
Korea is to freeze its nuclear installations at Yongbyon and invite back the
International Atomic Energy Agency to monitor the freeze. North Korea also is to
discuss with the other six parties “a list of all its nuclear programs, including
plutonium extracted from used fuel rods” from the five megawatt reactor (which
North Korea claims to have reprocessed into nuclear weapons-grade plutonium). In
exchange, South Korea is to provide financing for 50,000 tons of heavy oil to be
shipped to the North. The DPRK and the United States also are to start talks “aimed
at resolving bilateral issues and moving toward full diplomatic relations” and the
United States was to settle the Banco Delta Asia issue. Under the Agreement, North
Korea and Japan also were to “start bilateral talks” toward normalization of relations
on the basis of settlement of “outstanding issues of concern” (which Japan interprets
as requiring a settlement of the issue of North Korea’s kidnapping of Japanese
The February 2007 Agreement represented a clear change in strategy by the
United States and other parties to the talks. For the first time, the Banco Delta Asia
action was linked by the United States to the Six-Party Talks and nuclear issues. In
essence, the United States agreed to see that the Banco Delta issue was settled before
Pyongyang would have to take action to invite International Atomic Energy Agency
inspectors back into the country and to shut down its nuclear plant. For the DPRK,
this meant that the $25 million in frozen funds from Banco Delta accounts would be
released first. This was done. The Agreement also implied that a strategy of regime
change appeared to be off the table. The question now is whether the DPRK will live
up to its commitments under the Agreement and what leverage the United States,
China, and other participants have to ensure Pyongyang’s compliance.
As a result of the February 2007 Six-Party Agreement, the United States has
begun providing fuel and food aid and has held out the prospect of eventual
normalization of relations with the DPRK in response to specific disclosure and other141
actions by Pyongyang in regard to its nuclear program. On June 26, 2008,
President Bush announced the lifting of the application of the Trading with the
Enemy Act (TWEA) with respect to the DPRK and notified Congress of his intent
to rescind North Korea’s designation as a State Sponsor of Terrorism.142 According
to the State Department, these actions were taken following the DPRK’s submission
of a declaration of its nuclear programs as agreed to under the Six Party Talks. The
earliest date (August 11, 2008) for the State Sponsor of Terrorism recision has
passed. The Secretary of State reportedly is waiting for more complete verification
on the part of the DPRK before proceeding.
What is evident from the experience of the past seven years is that Pyongyang’s
stalling and the United States’ refusal to negotiate bilaterally (even under the
umbrella of the Six-Party Talks) provided time for Pyongyang to continue to pursue
its nuclear program. Given North Korea’s nuclear test in 2006, it is now obvious that
the DPRK actually had created a nuclear device and may still have as many as five143
or six still in its arsenal.
North Korea claims that the reasons for its nuclear program are to deter an
attack by the United States and to use the bombs if South Korea starts a war or to
devastate Japan in order to prevent the United States from participating in such a
141 For details on the Six-Party Talks, see CRS Report RL33590, North Korea’s Nuclear
Weapons Program, and CRS Report RL33567, Korea-U.S. Relations: Issues for Congress,
both by Larry A. Niksch.
142 U.S. Department of State. “North Korea: Presidential Action on State Sponsor of
Terrorism (SST) and the Trading with the Enemy Act (TWEA).” Fact Sheet, June 26, 2008.
This began the clock on a 45-day period of prior notification of Congress (ending August
143 For details, see CRS Report RL34256, North Korea’s Nuclear Weapons: Latest
Developments by Mary Beth Nikitin.
war.144 The nuclear program also enables it to gain international prestige, to exercise
a degree of hegemony over South Korea, and to extract economic assistance from
other countries. Pyongyang is unlikely to abandon this nuclear program without
significant changes to the underlying reasons for the program’s existence. Its fear
of being attacked had been exacerbated by its inclusion in the “axis of evil,” the Bush145
doctrine of preemptive strikes, and the U.S.-led invasion of Iraq. Some also
consider Pyongyang’s nuclear program to be a bargaining chip to be traded for
economic assistance and to gain international recognition.
What also can be said about U.S. policy is the renewed willingness to negotiate
bilaterally under the Six-Party process, the Banco Delta Asia action, poor economic
conditions and crop harvests in the DPRK, and pressures by China, South Korea, and
Japan have brought some apparent progress in situation with North Korea. Precisely
what Pyongyang’s intentions are is still murky, but it is clear that the DPRK is now
placing a higher priority on food supply and economics in policymaking.
After North Korea’s 2006 nuclear test, moreover, it became evident that even
China opposed the path Pyongyang was taking. Following the nuclear test, the
United States took the issue to the United Nations. The resulting UN Security
Council Resolution 1718 (October 14, 2006), called on North Korea to abandon its
nuclear and missile programs and imposed several sanctions. The resolution
imposed an arms embargo on North Korea, banned trade in materials related to
ballistic missiles or weapons of mass destruction, and barred exports of luxury goods
to the DPRK. It also froze funds and other financial assets owned by people
connected with North Korea’s unconventional weapons program and banned travel
by such people. China and Russia supported this resolution. Japan responded by
curtailing imports from and travel to North Korea, banned North Korean ships from
entering its ports, and prohibited exports of 24 luxury products to the DPRK.
It appears, however, that despite deep privation and negative growth during the
mid-1990s, economic sanctions had little effect on Pyongyang’s behavior in ways
that would achieve U.S. ends. The ruling elite and military have first priority on
scarce food and other supplies. The Kim regime allots economic privileges to its
insiders. Peasants may starve, but ranking communist party members live in a146
separate world of relative luxury. The poor economic conditions also do not
appear to have materially undermined the Kim regime. Experts consider internal
dissident forces too weak and Kim’s control over his military too strong for a147
domestic coup to occur. Pyongyang has taken halting steps toward opening its
144 Jane’s Information Group. Armed Forces, Korea, North. Jane’s Sentinel Security
Assessment, March 4, 2003.
145 Laney, James T. and Jason T. Shaplen. “How to Deal With North Korea,” Foreign
Affairs, March/April 2003. p. 20-21.
146 BBC Monitoring, Asia Pacific. Former Bodyguard of North Korean Leader Interviewed,
October 13, 2003, p. 1.
147 The only significant power base that might challenge the regime is the military. Since
Kim Jong-il became Chairman of the National Defence Commission, however, he has
promoted 230 generals. Most of the army’s 1,200-strong general officer corps owe their
allegiance to him. Jane’s Information Group, “Internal Affairs, Korea, North,” Jane’s
economy to international investment and has allowed more private markets, but these
are similar to policies nearly all centrally planned economies are taking, and China
and Russia have been recommending that North Korea adopt them also.
Irrespective of whether the U.S. economic sanctions worsened North Korea’s
economy, the poor state of the North Korea’s agriculture and industries has indirectly
affected U.S. national interests. It has necessitated humanitarian aid and has
generated a deficit in trade that Pyongyang has attempted to fill by dealing in illegal
drugs and missiles. Food scarcity also has pushed numerous refugees into China and
In terms of non-proliferation, the Proliferation Security Initiative now has more
than 60 governments participating (including Russia). Although aimed at stopping
trade in weapons of mass destruction and their components, the prospect of ships
being inspected complicates North Korean efforts to smuggle illicit weapons, drugs,
and counterfeit currency.148
The Six-Party Talks
Current engagement with North Korea is being conducted under the Six-Party
Talks plus bilateral discussions between Pyongyang and other nations. The Talks
include the United States, DPRK, China, Japan, South Korea, and Russia. This
brings all major players to the table, exposes China and Russia to North Korean
obstinacy, enables China and Russia to exert pressure on Pyongyang, and includes
Japan and South Korea who have direct interests in a peaceful resolution of the
problem and are likely to be the major providers of aid to the DPRK. (For discussion
of the talks, see CRS Report RL33590, North Korea’s Nuclear Weapons
Development and Diplomacy, and CRS Report RL33567, Korea-U.S. Relations:
Issues for Congress, both by Larry Niksch.)
Table 11 summarizes the major negotiating priorities and bargaining chips for
each side in the Six-Party Talks. Any policy package would have to address at least
some of the priorities of each nation.
The highest priority for the United States, Japan, and Russia reportedly is for
North Korea to scrap its nuclear weapons program in a manner that is verifiable.
Japan also is concerned about North Korean missiles (which have been fired over
Japan) and a full accounting for the abduction of its citizens. In addition, the United
States, China, Russia, and Japan seek a stop to weapons proliferation, while Japan
also seeks normalization of relations with the DPRK, and South Korea seeks a
framework for rapprochement, possible reunification with the North, less military
tension along the demilitarized zone (DMZ), and access to cheap labor and markets
in the North.
Sentinel Security Assessment. June 10, 2003.
148 The White House. Proliferation Security Initiative, Fact Sheet. September 4, 2003. U.S.
Department of State. U.S. Notes First Anniversary of Proliferation Security Initiative. Press
Release, June 1, 2004.
Table 11. Major Priorities and Bargaining Chips by Country in
the Six-Party Talks with North Korea
UnitedComplete, verifiable, and irrevocableGuarantee security and
Statesscrapping of nuclear weapons; non-regime, economic aid,
proliferation; human rights; peace treatynormalized diplomatic and
NorthGuarantee security and regime; establishScrap nuclear weapons and
Koreadiplomatic relations with the U.S. andmissiles, reduce tensions
Japan; reunification with South Korea onalong DMZ
own terms; peace treaty
SouthSet framework for peaceful resolution andEconomic support, energy,
Koreaprosperity on the peninsula; reunification;business investment
access to North Korean labor and markets,
non-nuclear Korean peninsula; human
rights; peace treaty
JapanScrap nuclear weapons program andNormalized diplomatic
missiles; resolve abductions of Japaneserelations, economic support
ChinaNon-nuclear Korean peninsula, non-Economic support, alliance
proliferation; continued influence onsupport
peninsula, weakening U.S. alliance with
Japan and with South Korea; peace treaty
RussiaScrap N. Korean nuclear weapons; non-Buffer diplomacy, energy
proliferation; promote stability in N.E.assistance, business
Source: Adapted from: The Seoul Economic Daily, 22 August 2003, cited in Hong Soon-Jick, “North
Korean Nuclear Crisis: Prospects and Policy Directions,” East Asian Review, Vol. 15, No. 3, Autumn
2003, p. 31.
Pyongyang’s primary goals appear to include (1) preservation of communist
rule under Kim Jong-il, (2) obtaining a security guarantee that would preclude a
possible preemptive attack by the United States or its allies, (4) maintaining key
elements of its nuclear weapons programs, (3) establishing diplomatic relations with
the United States and Japan, (4) reunification with the South on its own terms, and
(5) obtaining economic assistance for its ailing economy while maintaining its juche
A risk of any policy package, such as the February 13, 2007 Agreement, is that
North Korea might not scrap its nuclear program once energy and other aid starts to
flow again, or the economy recovers sufficiently to become more self sustaining.
Some surmise that the DPRK military is still resisting a complete shut-down and
dismantling of the DPRK’s nuclear program. If Pyongyang does not follow through
on the Agreement, tensions could escalate, and punitive measures could be
considered.149 Absent a settlement of the nuclear issue, the world may have to learn
149 See OPLAN 5026 - Air Strikes. [http://www.globalsecurity.org/military/ops/
to live with a nuclear-armed North Korea much as it has learned to live with a
nuclear-armed Pakistan and India. Japan and South Korea would have to consider
whether to develop nuclear capability themselves. Another risk of providing a policy
package that includes real incentives could be that the United States would be
perceived as being blackmailed and giving away too much to a dictator who
regularly violates the human rights of his people.
The costs of a diplomatic solution to tensions with North Korea, however, seem
relatively small compared with a nuclear arms race in Northeast Asia, the possibility
of nuclear proliferation, or a preemptive military action. Opening trade and
diplomatic relations would be of relatively low cost for the United States, but this
would require resolution of certain issues. It also appears that in the final year of its
second term, the Bush Administration is seeking a diplomatic success story with the
DPRK. Negotiations with Pyongyang bilaterally and under the Six-Party Talks have
proceeded in earnest. Humanitarian aid has been resumed. It is now up to
Pyongyang to follow through on its commitments under the Six-Party Agreement,
particularly to disclose all of its nuclear programs.
Possible Economic Incentives
The February 2007 Six-Party Agreement includes various economic incentives
for the DPRK. The short-term incentives included providing fuel and releasing the
Banco Delta funds, removing the DPRK from the U.S. terrorist list and recinding its
designation as a State Sponsor of Terrorism, while long-term incentives include
normalization of economic relations, and allowing North Korea to join multilateral
financial institutions, such as the Asian Development Bank and International
Monetary Fund. The list of potential economic incentives, include the following:
Normalizing Diplomatic Relations. Normalization of diplomatic relations
with the DPRK would apply to the United States, Japan, and South Korea. North
Korea already has diplomatic relations with China, Russia, and the European Union
(including an embassy in London). Associated with normalizing relations would be
a peace treaty formally ending the Korean War. For Japan, the DPRK would have
to resolve certain issues, including a full accounting of the status of kidnapped
Japanese citizens, North Korea’s missile firings over Japan, and incursions by
suspected DPRK espionage and drug-running ships into Japanese waters. Upon
conclusion of these normalization talks, Japan is likely to offer $5 billion to $10150
billion to North Korea in compensation for its occupation.
Normalizing diplomatic relations allows countries to communicate with each
other in a more direct fashion, enables diplomats to gather information directly, and
provides more interaction on a personal level. Normalized relations can help to
overcome the Pyongyang propaganda machine both within the DPRK and on the
world stage. Normalization, however, can imply that the United States is willing to
tolerate conditions in North Korea. This may be unacceptable to some. Absent
150 See CRS Report RL32161, Japan-North Korea Relations: Selected Issues, by Mark
normalized relations, Washington could seek a relationship similar to that with Cuba.
Even without diplomatic ties, the U.S. mission in Havana is attached to that of
Switzerland and maintains a staff similar in size to a regular embassy. (North Korea
has been a member of the United Nations since 1991 and has representatives in New
York.) Japan has initiated talks with Pyongyang that could lead to normalized
relations, and South Korea has been seeking diplomatic ties and possibly some form
of reunification in the future. In 2007, bilateral talks between Japan and the DPRK
on normalization were stymied by the abduction issue, but they have resumed in
Negotiating a Trade Agreement. After normalization, the United States
could negotiate a trade agreement with the DPRK that would cover goods, services,
and investments and could be modeled after the 2001 bilateral trade agreement
concluded between the United States and the Socialist Republic of Vietnam.151 Upon
implementation of the trade agreement, each country would accord the other normal
trade relations (most favored nation) status. The immediate effect would be to allow
North Korean exports to the United States to enter at the lower rates of duty accorded
to nearly all other nations of the world. The trade agreement also could cover
investment and other U.S. interests.
While the DPRK’s market currently is small, eventually it could re-industrialize
and become a larger economic player in the region. Liberalization of North Korean
trade and investment relations, moreover, can work through the economy in the same
way that it did in China and Russia by exposing the public to the benefits of
increased wealth. The major negative to establishing trade with North Korea is that,
unless it is part of a larger package that includes other concessions, the United States
could be viewed as exchanging an important bargaining chip for minimal gain.
Easing U.S. Sanctions. The United States could ease economic sanctions
on North Korea if the country resolves the issues that caused the sanctions to be
imposed initially. Since North Korea’s other trading partners have more liberal trade
with North Korea, it is mainly American companies and traders that are impacted by
the sanctions. Pyongyang can spend its available foreign exchange in any of a
number of world markets — in China, Russia, South Korea, Europe, or elsewhere.
Moreover, as North Korea opens its economy, U.S. businesses would be able to
decide whether or not to invest there based on their own economic interests and not
because they are hindered from doing so by U.S. law.
Allowing the DPRK to Join International Financial Institutions (IFIs).
The United States could stop blocking the DPRK from joining the major IFIs,
particularly the Asian Development Bank, World Bank, and International Monetary
Fund.152 Pyongyang is particularly interested in joining the Asian Development
Bank, but IFI procedures require membership first in the International Monetary
Fund. The IMF requires certain economic data which the World Bank or Asian
151 The White House, George W. Bush. “Presidential Proclamation: To Implement the
Agreement Between the U.S. and Socialist Republic of Vietnam on Trade Relations,” June
152 For information on requirements to join the International Monetary Fund, see Primorac,
Marina. How Does a Country Join the IMF? Finance & Development, June 1991, vol. 28,
Issue. 2; pp 34-5.
Development Bank needs to evaluate projects and loan requests. Membership in IFIs
requires that a country establish data gathering and reporting mechanisms as well as
open their country to visits, surveys, or assessments by the IFI. As an incentive, a
special fund could be set up in the World Bank or Asian Development Bank to assist
North Korea in its economic transition. This fund could be financed by Japan or
South Korea in conjunction with their normalization of relations with the DPRK.
Removing the DPRK from the Terrorism List. The 45-day period for
notification to Congress of the U.S. intent to rescind the listing of the DPRK as a
State Sponsor of Terrorism passed on August 11, 2008. If the President rescinds this
listing, North Korea would become eligible for U.S. foreign aid, loans from the U.S.
Export-Import Bank, loans from any international financial organizations in which153
it has membership, and an easing of U.S. export control requirements.
Fuel and Food Aid. The Bush administration resumed shipping fuel and
food aid on a humanitarian basis to the DPRK. South Korea also has resumed
shipments of fuel, but it has insisted that food and fertilizer aid be sent only if
requested by North Korea.
Products from the Kaesong Industrial Complex. When South Korea
was negotiating the proposed Korea-U.S. Free Trade Agreement (signed but not yet
approved by Congress), they asked that products from the Kaesong Industrial
Complex in North Korea be included under the FTA and be accorded duty-free entry
into the United States. The resulting FTA language, however, does not provide for
duty-free entry into the United States for products made in Kaesong. Annex 22-B
to the proposed FTA, however, does provide for a Committee on Outward
Processing Zones (OPZ) to be formed and to designate zones (such as the Kaesong
Industrial Complex) to receive preferential treatment under the FTA. Such a
designation apparently would require legislative approval by both countries.
Major congressional action with respect to security and human rights aspects
of U.S.-DPRK relations is included in CRS Report RL33567, Korea-U.S. Relations:
Issues for Congress, by Larry A. Niksch; North Korea’s Nuclear Weapons: Latest
Developments, by Mary Beth Nikitin; and North Korea: Terrorism List Removal?
by Larry A. Niksch.
153 See CRS Report RL33567, Korea-U.S. Relations: Issues for Congress, by Larry A.