‘Severe test’: As North Korean economy tanks, Kim needs solutions

North Korea’s economy likely shrank by 8.5 percent this year due to COVID-19 restrictions, Fitch Solutions says.

North Korean leader Kim Jong Un could hint at changes in economic policy during an upcoming New Year speech [Jung Yeon-Je/AFP/Getty via Bloomberg]

North Korea’s Kim Jong Un will likely seek fresh impetus for driving growth at a ruling party congress in January after the pandemic added to the pain of sanctions that leave him with a smaller economy than the one he took over nine years ago.

After closing its borders in response to Covid-19, North Korea’s gross domestic product likely shrank 8.5% in 2020, according to a projection by Fitch Solutions. That would be the biggest contraction in data back to 1990 and would leave the economy around 9% smaller than when Kim took power with a pledge to improve people’s living standards.

The figures point to an accelerated need for Kim to come up with a new five year economic plan to survive the crisis and ensure he maintains a firm grip on power. On Tuesday, Kim examined preparations for the congress to be held in early January, state media said.

North Korea GDP chart [Bloomberg]

Kim could hint at changes in the pipeline during an upcoming New Year speech or in a report on Tuesday’s meeting that will be closely scrutinized for clues to his stance over the Biden administration and steps he might take to shore up the economy.

“Kim Jong Un faces his most severe test of how to improve economic performance and management,” said Bradley Babson, a former World Bank economist who now serves on the advisory council of the Korea Economic Institute of America. “It’s too early for North Korea to take a reading on how the Biden administration will relate to this situation, but the party congress at the end of January will be a critical moment that will set the stage for at least the next couple of years.”

Kim has already made a rare admission that economic policy was falling short when he replaced his point man in charge of the economy in the summer. A drive to complete a showcase hospital in the center of Pyongyang in time for a 75th ruling party anniversary in October also came up short, pointing to strains in the centrally planned economy.

Among measures Kim might consider at the congress for regaining momentum are a phased re-opening of borders, a return to some small-scale market liberalization reforms and further resort development, though much will depend on the pandemic’s trajectory.

North Korea says it has no cases of the coronavirus — a claim doubted by U.S. and Japanese officials — but has nonetheless taken drastic quarantine steps that have worsened the regime’s economic woes.

Its border remains closed with China, which is by far North Korea’s largest economic partner. Trade between the neighbors likely plummeted an additional 80% this year, according to the Seoul-based Korea International Trade Association.

China's imports from North Korea chart [Bloomberg]

Popular exports like wigs, shoes and watches have fallen the most, while the focus of trade has shifted to natural resources such as graphite, which poses less chance of spreading the virus, according to KITA.

How Kim might pursue the search for renewed sources of aid or a relaxing of sanctions also remains unclear.

Should Kim extend an offer for talks, it could begin with South Korea. Trade between the two neighbors had already hit rock-bottom before the pandemic, following the closing of a joint industrial zone in Kaesong that contributed to $2.7 billion in trade at its height in 2015.

The shuttering of Kaesong in 2016 took place in a turning-point year that saw Pyongyang conduct two nuclear tests and the start of a slide in the economy after total growth of 6.9% in Kim’s first five years.

North Korea GDP chart [Bloomberg]

North-South relations hit a new low in June when Kim had a liaison office blown up after criticizing Seoul for standing with the Trump administration on sanctions. Still, a call by Seoul’s unification minister Lee In-young to share Covid vaccines suggests the South is willing to keep listening.

Measures announced at the congress will only be partly effective without progress in reviving trade with China and easing nuclear tensions with the U.S., according to Anwita Basu, a Fitch analyst.

With President-elect Joe Biden seen less willing to adopt the kind of high-level, face-to-face diplomacy of President Donald Trump, North Korea is likely to set the bar high for any concessions on its nuclear arms while leaving the door open to talks.

“North Korea isn’t going to totally abandon its nuclear arms, but it could offer a freeze to seek a long-term solution,” said Hong Soon-jick, a North Korea researcher at Seoul National University Asia Center. “And as long as it keeps away from something provocative to draw attention, its chance of getting some economic help from outside might just improve.”

Source: Bloomberg