North Korea: Economic Leverage and Policy
Analysis
Dick K. Nanto
Specialist in Industry and Trade
Emma Chanlett-Avery
Specialist in Asian Affairs
August 14, 2009
Congressional Research Service
7-5700
www.crs.gov
RL32493
CRS Report for Congress
P
repared for Members and Committees of Congress
North Korea: Economic Leverage and Policy Analysis
Summary
In 2009, the Democratic Peoples Republic of Korea (DPRK or North Korea) embarked on a
course that includes a series of extremely provocative military actions, a shift in power toward the
military, emphasis on ideological purity, rising criticism of the United States, and going forward
with its nuclear and missile program in spite of sanctions and objections from much of the rest of
the world. Two factors seem to be operating to compel this more “aggressive” behavior by
Pyongyang. The first is the apparent stroke by North Korea’s leader, Kim Jong-il, in August 2008.
The country appears to be preparing for succession, and in jockeying for position, the military
seems to be gaining in policy precedence over the civilian side of government, and the military-
first doctrine is prevailing over economic reform. The second factor has been the preparations for
the 100th anniversary of the birth of Kim Il-sung, the founder of the DPRK, in 2012. By then the
country wants to join the club of nuclear and space powers and to be an Asian tiger economy.
North Korea’s dire economic straits provide one of the few levers to move the country 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 to resolve issues raised by the DPRK’s development of a nuclear
weapon. The Six-Party Talks are now stalled. Western leverage over the DPRK remains limited,
but China, and to some extent Russia, are in a position to exert pressure on Pyongyang.
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.
North Korea has extensive trading relationships with China and Russia and, until recently, with
South Korea. U.S. and Japanese trade with North Korea since 2006 has been virtually nil except
for U.S. aid deliveries. The DPRK has been running an estimated $1 billion deficit per year in its
international trade accounts, which it funds primarily through receipts of foreign assistance and
foreign investment as well as through various questionable activities.
Following the DPRK’s second nuclear test and subsequent actions, the focus in mid-2009 has
been on negative incentives and increasing sanctions. The larger question, however, is how to
move beyond tit-for-tat actions to a three-fold transformation of the DPRK: a transformation in its
international relations, in the Stalinist methods by which the Communist regime maintains its
support, and in a moribund economy that cannot feed its own population. This report will be
updated as conditions warrant.
Congressional Research Service
North Korea: Economic Leverage and Policy Analysis
Contents
Major Points and Recent Developments ...................................................................................... 1
The Issue, Interests, and Policy ................................................................................................... 4
Goals and Means................................................................................................................... 6
Conventional Wisdom and Considerations............................................................................. 9
Strategy and Tools............................................................................................................... 10
The Six-Party Talks............................................................................................................. 11
Policy Options .................................................................................................................... 12
Legislation .......................................................................................................................... 13
The Development of U.S. Policy ............................................................................................... 15
Overview of the DPRK Economy.............................................................................................. 18
Juche Philosophy and the Military............................................................................................. 23
Economic Reforms and Free Trade Zones ................................................................................. 25
Foreign Investment ............................................................................................................. 27
Kaesong Industrial Complex ............................................................................................... 29
Investment From China ....................................................................................................... 31
International Trade .................................................................................................................... 32
Other Sources of Foreign Exchange .......................................................................................... 38
Legal Sources of Funds ....................................................................................................... 38
Illegal or Questionable Sources of Funds............................................................................. 44
U.S.-DPRK Trade Relations...................................................................................................... 47
North-South Korean Economic Relations .................................................................................. 49
China-DPRK Economic Relations............................................................................................. 52
Japan-DPRK Economic Relations ............................................................................................. 55
Russia-DPRK Economic Relations............................................................................................ 57
Possible Economic Incentives ................................................................................................... 59
Normalizing Diplomatic Relations ...................................................................................... 59
Negotiating a Trade Agreement ........................................................................................... 59
Easing U.S. Sanctions ......................................................................................................... 60
Allowing the DPRK to Join International Financial Institutions (IFIs) ................................. 60
Fuel and Food Aid............................................................................................................... 60
Products from the Kaesong Industrial Complex ................................................................... 60
Figures
Figure 1.Kyoryo Hotel in Pyongyang ........................................................................................ 19
Figure 1. Estimated Real Annual Growth in North Korea’s GDP,1986-2011 .............................. 21
Figure 2. Foreign Direct Investment Flows and Stocks in the DPRK, 1987-2007 ....................... 28
Figure 3. North Korean Imports of Merchandise by Major Country of Source, 1996-2008......... 35
Figure 4. North Korean Exports of Merchandise by Major Country of Destination, 1994-
2008 ...................................................................................................................................... 36
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North Korea: Economic Leverage and Policy Analysis
Tables
Table 1. Major Priorities and Bargaining Chips by Country in the Six-Party Talks with
North Korea ........................................................................................................................... 12
Table 2. Estimated North Korean Trade by Selected Trading Partner, Selected Years,
2000-2008.............................................................................................................................. 34
Table 3. Imports by Country of Small Arms and Ammunition from North Korea ....................... 37
Table 4. North Korea: Total Net Receipts by Major Source/Donor (Excluding Russia,
South Korea, and China), 2001-2007...................................................................................... 40
Table 5. North Korea: Net Official Development Assistance by Major Source/Donor
(Excluding Russia, South Korea, and China), 2001-2007........................................................ 41
Table 6. South Korean Total and Humanitarian Assistance to the DPRK .................................... 42
Table 7. South Korean Economic and Other Assistance to the DPRK ........................................ 43
Table 8. U.S. Merchandise Exports, Imports, and Trade Balances with North Korea,
1990-2008.............................................................................................................................. 48
Table 9. South Korean Merchandise Trade with North Korea, 1990-2008 .................................. 51
Table 10. China’s Merchandise Trade with the DPRK, 1995-2008 ............................................. 53
Table 11. Japan’s Merchandise Trade with the DPRK, 1994-2007.............................................. 55
Table 12. Russia’s Merchandise Trade with the DPRK, 1994-2006 .......................................... 58
Contacts
Author Contact Information ...................................................................................................... 61
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North Korea: Economic Leverage and Policy Analysis
Major Points and Recent Developments
• The DPRK or North Korea has embarked on a course that includes a major
tightening of policies, a shift in power toward the military, emphasis on
ideological purity, rising criticism of the United States, and going forward with
its nuclear and missile program in spite of sanctions and objections from much of
the rest of the world. On May 25, 2009, North Korea conducted its second test of
a nuclear bomb and continues to test its arsenal of missiles. This holds significant
implications for U.S. interests and goals in Asia. There are two factors that seem
to be operating to compel this more “aggressive” behavior by Pyongyang. The
first is the apparent stroke by North Korea’s leader, Kim Jong-il, in August 2008.
The country appears to be preparing for succession, and in jockeying for position,
the military seems to be gaining in policy precedence over the civilian side of
government, and the military-first doctrine is prevailing over economic reform.
Leaders are leaning more toward nationalism, purity of thought, and loyalty both
to the Communist party and to the party’s ideals. South Korean intelligence
reports that Kim Jong-il has designated his youngest son, Kim Jong-un, as his
heir apparent (South Korea’s Unification Ministry and the U.S. State Department,
however, consider this report as “speculative.”). Kim Jong-il may be allowing the
provocative moves by the military to ensure their support of one of his young
sons to succeed him, or the military may be preparing to install a new leader of
their choice.
• The second factor in the aggressive military actions has been the preparations for
the 100th anniversary of the birth of Kim Il-sung, the founder of the DPRK, in
2012. By then the country intends to become a recognized military and economic
power. Pyongyang apparently feels it has already attained the status of a
politically, ideologically, and militarily powerful state, but it is not recognized by
the world as a nuclear weapon state, and its missile delivery system is still under
development. The military recognizes, however, that it needs the backing of an
“economically powerful state” both to supply the army and to fulfill a lifelong
“cherished desire” of Kim Il-sung. As a step in this process, in May 2009, the
DPRK embarked on a 150-day campaign, a new “all-out assault for opening a
great turnabout phase in the construction of an economically powerful state.” The
campaign calls for the people to rise up in unity, for socialist ideological purity,
and to work harder to accomplish an upsurge in production.1 The result of these
two factors has been a series of policy pronouncements and military actions that
have tightened the domestic orientation of the country and are increasingly
isolating it from the rest of the world. North Korea also is threatening military
action should its ships be searched under the Proliferation Security Initiative.
1 “Magnificent Gunshots of 150-Day Battle Have Sounded—All Forward in an All-Out Assault,” Minju Joson, May 5,
2009, Electronic edition (in Korean). Translated by Open Source Digest, Document KPP20090505051002. DPRK
Cabinet Paper Editorializes on Commencement of ‘150-Day Battle.’
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• It is clear that the resurgence of the
Recent Developments
DPRK military in policy making has
Aug. 6. After 140 days in custody, journalists Laura Ling
nullified progress made under the Six-
and Euna Lee were released to former President Clinton.
Party Talks and diminished the
July 30. Treasury designated Korea Hyoksin Trading
effectiveness of economic and
Corp. as being owned or controlled by a North Korean
diplomatic incentives and sanctions.
entity involved in the development of weapons of mass
These have been one of the few policy
destruction. This follows a similar designation for the
levers that countries could use to
Namchongang Trading Corp. and Hong Kong Electronics
induce Pyongyang to abandon its
based in Iran, announced previously.
nuclear program. The basic
July 29. China confiscated 70 kg of vanadium that North
contradiction in North Korea’s current
Korea attempted to smuggle through its customs at
policy seems to be that it is unlikely to
Dandong city. On July 23, Italy blocked the sale of two
luxury yachts to North Korea because it suspected they
build a strong economy without
were being purchased for Kim Jong-Il.
access to capital, expertise, and
imports of technology and certain raw
July 22. S.Amdt. 1761 (John Kerry) to S. 1390 to express
the sense of the Senate that the United States should
materials from abroad, yet its military
fully enforce existing sanctions, explore additional
actions elicit condemnations and
sanctions, and require a review to determine whether
economic sanctions by other nations
North Korea should be re-listed as a state sponsor of
that only work to thwart its economic
terrorism was agreed to in the Senate. S.Amdt. 1597
(Brownback) to redesignate North Korea as a state
goals. Two keys in this process are
sponsor of terrorism was not agreed to.
actions by China and Russia, countries
friendly to North Korea who joined in
July 16. The State Department designated five North
Korean entities, two goods, and five individuals as being
condemning the DPRK’s May 25
subject to the sanctions in UN Resolution 1874.
nuclear test. Other than financial
sanctions, economic sanctions appear
June 26. The White House formed an interagency team
led by Philip S. Goldberg to coordinate sanctions efforts
to have had little effect on the
against North Korea with other nations. The team
Pyongyang regime because China,
consists of representatives from the State Department,
Russia, and other nations have traded
the White House, the National Security Agency, the
with and provided assistance to the
Treasury Department, and others.
DPRK, and the Kim Jong-il regime
June 18. The Financial Crimes Enforcement Network
seems willing to allow starvation
(FinCEN) of the U.S. Treasury Department issued an
rather than open the country to
advisory for all U.S. financial institutions to take risk
mitigation measures against the possibility that the DPRK
outsiders.
would use deceptive financial practices to hide illicit
• The immediate response to North
conduct.
Korea’s second nuclear test has been
June 12. The UN Security Council unanimously passed
centered on the United Nations and
Res. 1874 in response to North Korea’s second nuclear
the additional sanctions it imposed
test. The resolution put in place a series of sanctions on
North Korea’s arms sales, luxury goods, and financial
under Resolution 1874. These
transactions related to its weapons programs, and called
sanctions were supported by China
upon states to inspect North Korean vessels suspected
and Russia, who arguably are viewing
of carrying such shipments.
Pyongyang’s actions as being inimical
June 4. Two American reporters, Laura Ling and Euna
to certain Chinese and Russian
Lee, who were accused of “illegally” entering the DPRK,
interests. In 2008, China exported
were put on trial and on June 9 were sentenced to 12
from $100 billion to $160 billion in
years in a labor camp.
“luxury goods” that arguably now fall
under the UN sanctions.
• The U.S. strategy has been to tighten sanctions on the DPRK (particularly
financial sanctions), not provide economic or diplomatic incentives for the
DPRK to agree to commitments it has already made, but leaving open the
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North Korea: Economic Leverage and Policy Analysis
possibility of resuming dialogue under the umbrella of the Six Party Talks. What
is clear is that the continuing circle of negotiations, agreements, concessions,
breaking agreements, and more negotiations has not worked. It also seems clear
that the DPRK is not willing to give up its nuclear weapons. The major options
now include (1) containment with a continual ratcheting up of sanctions and an
emphasis on nonproliferation as well as no recognition of the DPRK as a nuclear
power; (2) a comprehensive deal—rather than one that requires gradual steps—in
which North Korea would immediately abandon its nuclear program and the
United States would offer full diplomatic recognition and ties in return; or (3) a
major increase in negative diplomatic, economic, financial, and security pressure
on North Korea.
• A re-estimation of North Korea’s international trade in this report found that the
DPRK exported approximately $2.8 billion in goods in 2008 with 60% going to
China and South Korea. This is more than twice the $1.1 billion in exports
estimated by the South Korean government (Korea Trade-Investment Promotion
Agency, KOTRA). This report also estimated that DPRK imports in 2008 totaled
$4.1 billion with 71% coming from China and South Korea. This too was
considerably more than the $2.7 billion estimated by the South Korean
government. The trade deficit in this report of $1.3 billion, however, is less than
the $1.6 billion estimated by South Korea.
• 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 placed more emphasis on feeding its people. It did so without food
aid and fertilizer from South Korea because Pyongyang would not request it, and
South Korea placed conditions on providing the assistance.2
• Chinese 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 has been financed primarily through foreign aid, investments, and
remittances from overseas workers, as well as through various illicit activities.
• Economic reforms (“adjustments”) in the DPRK were gradually being
implemented but in 2009 were being reversed where possible. Without markets,
however, there would be no means for North Koreans not receiving government
food distributions to survive.
• A February 2007 Six-Party Agreement called for providing fuel and eventual
normalizing of relations with the DPRK in response to specific actions by
Pyongyang in regard to its nuclear program.3
2 The extent that Pyongyang has reversed policies of allowing economic interaction with the South was indicated by the
reported execution in late 2008 of Choe Sung-chol, a party official who played a key role in North-South relations.
When South Korea cut off deliveries of food and fertilizer to the North, Pyongyang held him accountable for the
unwanted impact from the country’s dependence on the capitalist South. He was punished for “planting fantasies about
South Korea in North Korean society.”
3 For details on the Six-Party 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 A. Niksch.
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North Korea’s “Plan A” and “Plan B”
A source with close ties to the North Korean government has written that in 2009 Pyongyang has abandoned Plan A
and turned to Plan B. Plan A called for the DPRK to consider exploring a shortcut to enhanced independence, peace
and prosperity through rapprochement with the United States. This strategy obliged the Kim Jong-il administration to
negotiate away its nuclear weapons program as part of a verified denuclearization of the Korean Peninsula in return
for Washington's strategic decision to coexist peacefully with Pyongyang. Plan A assumed the United States would
cease its hostility toward the DPRK, conclude a peace treaty, and pledge in a verifiable way that it would not attack
the DPRK with nuclear and conventional arms. It also assumed the United States would establish full relations with
the DPRK, uphold its sovereignty and independence, lift sanctions, and provide it with fuel oil and light-water
reactors.
Pyongyang apparently now has shifted to Plan B. This envisages the DPRK going it alone as a fully fledged nuclear
weapon-armed state, with a military-first policy, and then growing into a mighty and prosperous country. It puts the
policy of seeking reconciliation with the United States on the back burner and involves quitting the six-party talks,
restarting nuclear facilities, and conducting additional nuclear and intercontinental ballistic missile tests. Under Plan B,
the DPRK hopes to join al three elite clubs of the world by 2012 (centenary of the birth of Kim Il-sung, the nation's
founder)—nuclear, space, and that of economic tigers—without seeking improved ties or a peace treaty with the
United States.
Source: Kim Myong Chol, “Kim Jong-il shifts to plan B,” Asia Tiimes, May 21, 2009, Online edition.
The Issue, Interests, and Policy
This report examines the economic side of U.S. leverage with North Korea. The security side is
addressed in other CRS reports.4 Here we examine the economy of North Korea5 in the context of
U.S. confrontation with that country over its nuclear weapon and missile programs. This report
provides an overview of the North Korean economy, surveys its economic relationships with
major trading partners, and examines various U.S. policy options.
The issue with respect to the economy of the Democratic People’s Republic of Korea and its
economic relations deals with what actions the United States could take that would lead to a
verifiable halt to the DPRK’s nuclear weapons program; the lessening of tensions between the
DPRK and South Korea, Japan, and the United States; the prevention of proliferation of nuclear
weapons and missile material by North Korea; and the betterment of human rights and the
standard of living of North Korean non-elites.
2009 may turn out to be the tipping point in the quest by the DPRK to become a de facto nuclear-
armed state, although its ability to deliver a nuclear weapon remains problematic. The DPRK has
embarked on a course that includes a major shift in power toward the military, emphasis on
ideological purity, rising criticism of the United States, a restart of its nuclear plant at Yongbyon,
the test of a potential long-range ballistic missile in spite of sanctions and objections from much
of the rest of the world, the sentencing of two American news reporters, the capture of a South
Korean worker from the joint Kaesong Industrial Complex,6 and the test of its second nuclear
4 See CRS Report RL34256, North Korea’s Nuclear Weapons: Technical Issues, by Mary Beth Nikitin, CRS Report
RL33590, North Korea’s Nuclear Weapons Development and Diplomacy, by Larry A. Niksch, and .CRS Report
RS21473, North Korean Ballistic Missile Threat to the United States, by Steven A. Hildreth.
5 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 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.
6 Choe, Sang-hun, “North Korea says it will try 2 Americans,” International Herald Tribune, May 15, 2009. Note: The
(continued...)
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weapon as well as short-range missiles. North Korea also has indicated that it would not return to
the Six-Party Talks on denuclearization.7
Following an apparent stroke by North Korea’s leader, Kim Jong-il (and possible cancer), in
August 2008, the country appears to be preparing for succession and also for the 100th
anniversary in 2012 of the birth of Kim Il-sung, the nation’s founder. In jockeying for position,
the military and its activities related to national security have taken policy priority over the
civilian side of government and issues related to economics, international trade, and society at
large. In addition, Pyongyang’s leaders seem to be leaning more toward nationalism, purity of
thought, and loyalty both to the Communist party and to the party’s ideals. The result has been a
policy shift that implies that North Korea’s domestic issues are taking priority over foreign
considerations, leading to increased isolation from the rest of the world. Kim Jong-il reportedly
has designated his youngest son, Kim Jong-un, as his heir apparent.8 Both South Korea’s
Unification Ministry and the U.S. State Department, however, consider the reported designation
as “speculative.”9 As Kim Jong-il faces possible death, one prominent theory is that he is
indulging hard-line elements in the armed forces in order to secure military backing for his
chosen successor.10 Another possibility is that the military is preparing to name its own leader to
succeed Kim Jong-il.
(...continued)
United States is working through the Swedish embassy in Pyongyang for release of the two reporters. Sweden ,
represents U.S. interest in North Korea.
7 Evan Ramstad, “North Korea Plans to Boycott Six-Party Talks ,” The Wall Street Journal, April 14, 2009, Online
version.
8 Kim Hyun, “Spy Agency Confirms N.K. Leader’s Third Son as Successor: Lawmakers,” Yonhap (Seoul), June 2,
2009, p. Reprinted in Open Source Center #FEA20090603861068.
9 Kim Hyun, “Kim’s failing health prompting N. Korean power transfer to son,” Yonhap, June 4, 2009.
10 Economist Intelligence Unit ViewsWire, North Korea politics: Nuclear threat, May 27, 2009.
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Since Kim Jong-un is in his mid-20s11, if he
North Korea at a Glance
becomes the successor to Kim Jong-il, he
Land Area: 120,540 sq km, slightly smal er than
likely will undergo a period of grooming
Mississippi
before actually assuming power. According to
news reports, Kim Jong-il’s brother-in-law,
Population: 22.7 million (2009 est.)
Jang Seong-taek, is running many of the day-
Head of State: Kim Jong-il
to-day affairs of the DPRK on behalf of the
Capital: Pyongyang
ailing Kim Jong-il.12 He may continue to do so
Life expectancy: 63.8 years
through his membership on the National
Defense Commission until Kim Jong-un is
GDP: CIA estimated $40 billion at purchasing power
properly trained to take over leadership. The
parity in 2008 or $26.2 billion at official exchange rate.
Global Insight estimated $54.2 billion and $28.5 billion,
Commission currently is headed by Kim Jong-
respectively
il, and Kim Jong-un reportedly has been
appointed to a position with this Commission.
GDP Per Capita: $1,700 (CIA) to $2,248 (Global
Insight) at PPP in 2008
It is not clear whether the DPRK military and
society will accept this “three generation
GDP Composition: agriculture: 30% industry: 39%,
services: 31%
succession” once the Dear Leader is out of the
picture. For now, North Korean diplomats
Exports: $1.9 billion (2007)
reportedly have been told to “pay homage to
Export Commodities: minerals, metallurgical
Kim Jong-un;” some schoolchildren have been
products, manufactures (including armaments), textiles,
including his name in their songs; and the
and fishery products
military reportedly is referring to him as
Imports: $3.2 billion c.i.f. (2007)
“Brilliant Comrade.”13 Little is know about
Import Commodities: petroleum, coking coal,
Kim Jong-un except that he might have
machinery and equipment; textiles, grain
attended the International School of Berne
Sources: CIA, World Factbook; Global Insight. CRS
(Switzerland) under an alias or a German-
calculations for trade.
speaking school in Koniz. He graduated from
Pyongyang’s Kim Il-sung Military
University.14
Goals and Means
These developments in the DPRK hold significant implications for U.S. interests and goals in
Asia. U.S. goals with respect to the DPRK have included (1) verifiable elimination of North
Korea’s nuclear weapons program; (2) the halt to DPRK nuclear or ballistic missile proliferation
activities (particularly with Syria and Iran); (3) the reduction of tensions on the Korean Peninsula
and between the DPRK and Japan, (4) the halt to DPRK-sponsored illicit activities (including
counterfeiting of dollars and of products such as American cigarettes), and (5) better human rights
and treatment of returned refugees in North Korea.
11 Some in the North Korean military have begun to refer to Kim Jong-un as the “36 year-old young General,” an
apparent attempt to add 10 years to his age. Moon Sung Hwee, “Kim Jong Woon Mentioned By Name,” Daily NK,
June 4, 2009.
12 David E. Sanger, Mark Mazzetti and Choe Sang-hun , “North Korean Leader Is Said to Pick a Son as Heir,” New
York Times, June 2, 2009, Internet edition.
13 Kim Hyun, “Spy Agency Confirms N.K. Leader’s Third Son as Successor: Lawmakers,” Yonhap (Seoul), June 2,
2009.
14 Evan thomas and Suzanne Smalley, “My Three Sons, North Korea’s First Family Isn't Like You and Me (Or
anyone, really),” Newsweek, July 27, 2009, p. Internet edition.
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The Six-Party Agreement (United States, China, Russia, Japan, South Korea, and the DPRK) 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. By early 2009, the Yongbyon plutonium nuclear
installation was about 80% dismantled. On June 26, 2008, President Bush had lifted the
application of the Trading with the Enemy Act with respect to the DPRK15 and in October 2008
had removed North Korea from its list of state sponsors of terrorism.16 The progress being made
under the Six Party Talks 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 above actions. These activities, as negotiated
under the Six-Party Talks, have been halted since December 2008.
For the DPRK economy, the worst of the 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 December 2008 report, the U.N. World
Food Program (WFP) estimated total food production to be 4.21 million tons for the 2008/2009
marketing year (November 2008-October 2009), leaving the DPRK to face a cereal deficit of
836,000 tons, even with commercial imports (around 500,000 tons). This would leave insufficient
food to feed almost 9 million people until the harvest in October 2009.17 The potential starvation
of a sizable part of North Korea’s population provides some, but limited, leverage for the United
States.
The only countries considered to have major influence in North Korea are China and Russia. Both
issued strong statements condemning Pyongyang’s second nuclear test. China arguably has the
most influence, but even though China has not approved of many of North Korea’s actions, it
fears that instability in the DPRK will create a flood of refugees into its northern provinces.
China’s fear of a collapse of the regime is an incentive for it to ensure that the DPRK has
sufficient energy and food for some minimal level of existence. Beijing is the host for the Six-
Party Talks but faces conflicting goals. China needs stability in East Asia to continue its economic
development and views the DPRK as a fellow communist state. Strategically, China would like to
avoid an arms race in Northeast Asia and is leery of a reunified North and South Korea. The last
thing China needs is for the alliance relationship between the United States and South Korea to be
extended to the Yalu River bordering China. Beijing seems to be more comfortable with an
economically poor state with nuclear aspirations as a neighbor than a more independent, unified
Korean state (possibly with nuclear weapons) that could go the way of the unified Germany and
support the Western alliance. The North Korean nuclear problem, however, works against a major
Chinese interest. It ensures that the United States will remain committed to its alliance
relationships with Japan and South Korea and provides a rationale for a stronger U.S.-led anti-
ballistic missile effort in East Asia. China’s strategy also could backfire if a nuclear-armed DPRK
15 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 11) for delisting North Korea as a state sponsor of terrorism.
16 Merle D. Kellerhals Jr., U.S. Removes North Korea from State Sponsors of Terrorism List; North Korea agrees to
comply with nuclear verification requirements, America.gov, October 14, 2008.
17 U.N. World Food Program. 8.7 Million North Koreans Need Food Assistance, December 10, 2008.
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compelled Japan18 or South Korea to develop nuclear weapons of their own. The Economist
Intelligence Unit sums up the situation as follows:
North Korea’s behavior is deeply embarrassing to the Chinese government. That China
continues to extend vital diplomatic and material support to its unhinged neighbor—
including by repatriating those refugees who manage to escape across the border—is hardly
consonant with China’s ambitions to be seen as a responsible global power. Moreover, North
Korea’s belligerence is having ripple effects that are profoundly contrary to China’s strategic
interests. The threat from North Korea could strengthen conservative governments in both
Japan and South Korea, as well as reinforce both countries’ alliances with the US. Lastly, if
the threat from North Korea spurs Japan to abandon aspects of its pacifist constitution—or
even to develop nuclear weapons—this would be a steep price to pay for preserving Chinese
influence over half of the Korean peninsula.19
Pyongyang perceives its nuclear weapon and potential ballistic missile programs as a means to
achieve two national goals: to gain stature in the world and to develop a credible deterrent against
hostile military action. The DPRK sees itself as surrounded by nuclear powers—either by
countries that are nuclear powers themselves (China and Russia) or countries that are under the
U.S. nuclear umbrella (South Korea and Japan). Without the DPRK nuclear program, North
Korea would be a humanitarian aid “basket case” and a reclusive society that would be hard
pressed to draw more world notice than countries such as Laos or Mongolia. Instead, North Korea
is high on the world’s security agenda, Pyongyang has become adept at using this attention to
extract economic assistance and has used actions by other countries (such as sanctions or U.S.
military exercises in the region) as propaganda tools to fuel nationalism and strengthen its regime.
North Korea’s leaders seem to be in a policy dilemma. 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. 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’s food problem and eating
problem.”20 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). Apparently Pyongyang feels it can accomplish
both goals, since it has designated 2012 to both become a nuclear and space power and to join the
club of economic tigers of Asia.
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 war.21 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 was exacerbated by its inclusion in the “axis of evil,” the Bush doctrine of
18 CRS Report RL34487, Japan’s Nuclear Future: Policy Debate, Prospects, and U.S. Interests, by Emma Chanlett-
Avery and Mary Beth Nikitin.
19 Economist Intelligence Unit ViewsWire, North Korea politics: Nuclear threat, May 27, 2009.
20 Full text of North Korea’s 2008 New Year’s joint editorial, BBC Monitoring Asia Pacific. London. January 2, 2008.
p. 1.
21 Jane’s Information Group. Armed Forces, Korea, North. Jane’s Sentinel Security Assessment, March 4, 2003.
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preemptive strikes, the U.S.-led invasion of Iraq,22 and the death of Saddam Hussein. They
apparently see nuclear weapons as an insurance policy against attempts at regime change by the
West. Also, Pyongyang apparently has observed that once a country becomes a recognized
nuclear power, the United States becomes more friendly with it. Pakistan, India, and China are
cases in point.
As the DPRK goes through preparations for succession and the centennial year of 2012, the
confluence of several forces is complicating matters. These include (1) the global financial crisis
having reduced the ability of other nations to respond favorably to “extortion” by Pyongyang; (2)
the grim economic situation faced by the North Korean people, although food prices are down
from 2008, agricultural production has recovered somewhat, and scarcity does not impose
hardship on the elites and Kim Jong-il’s inner circle; (3) the deterioration in relations between
South and North Korea and the hardening of policies by both sides has put the brakes on
economic cooperation and raised the possibility of some limited military action by North Korea
against the South (with retaliatory actions by the South); (4) an increase in China’s exports to
North Korea in 200823 despite the shrinkage in trade elsewhere in the world; and (5) the effect of
actions in response to the DPRK’s nuclear and missile tests on Iran in its nuclear program. (Will
such actions encourage or discourage Iran?)
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 muted.
Conventional Wisdom and Considerations
Conventional wisdom with respect to North Korea includes the following considerations: (1)
without stringent monitoring mechanisms, Pyongyang probably will cheat on any agreement; (2)
the DPRK will renege on agreements for what seem to be superficial reasons, (3) Pyongyang’s
first priority seems to be regime survival; (4) North Korea regularly engages in illicit activity and
may take actions opposed to normally accepted international law or standards of national
behavior; (5) the DPRK likely will sell nuclear technology and missiles to countries not able to
obtain them through other channels; (6) economic privation in North Korea mainly affects the
population outside of the political and military elite, particularly in the countryside; (7) popular
sentiment opposing the current regime, although reportedly on the rise, appears weak or
suppressed sufficiently for Kim Jong-il or his successor to remain in power for an indefinite
22 Laney, James T. and Jason T. Shaplen. “How to Deal With North Korea,” Foreign Affairs, March/April 2003. p. 20-
21.
23 In 2008, China’s exports to the DPRK increased by 46% from $1,392 million to $2,033 million.
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period of time; and (8) Pyongyang feels justified in its actions given what it perceives as
“hostility” by the United States and South Korea and “broken promises” to build a light-water
nuclear plant for the DPRK and to deliver energy and food aid.
Other factors to be considered include the following: (1) Japan would likely provide a large
monetary settlement to Pyongyang in return for its years of occupation should a peace settlement
be reached; (2) 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; (3) 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; (4) 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 (5) the level of distrust
between the United States and the DPRK is deep and long-standing.
Strategy and Tools
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. U.S. strategy may take both
short- and long-term paths. A short-term strategy includes some tit-tor-tat—an immediate
response to provocations by the DPRK—in order to affect the cost-benefit calculations by leaders
in Pyongyang. Such responses would either increase the costs or decrease the benefits to the
ruling regime stemming from the action in question, and arguably deter Pyongyang from similar
actions in the future. Such sanctions have targeted the North Korean elite (as was done in freezing
their bank accounts in Macao’s Banco Delta Asia and restricting exports to North Korea of luxury
goods) or North Korean companies (those involved in weapons sales, including small arms), and
they have attempted to deprive the central government of revenues from illicit activities
(particularly the sales of nuclear or missile-related items and from counterfeiting currency, drugs,
and cigarettes). This strategy has been manifest in UN Resolution 1874.
A long-term strategy would be aimed at accomplishing a three-fold transformation in the DPRK:
(1) a transformation in its relations with Western nations (to include the DPRK’s perceived need
for nuclear weapons to protect itself from hostile action by the United States), (2) a
transformation in the basis of legitimacy of the ruling regime (to reduce the need to garner
support through Stalinist tactics and by grandiose goals such as becoming a nuclear and space
power), and (3) a transformation in the DPRK economy so that it no longer has to “extort” food
and energy assistance in order to reduce starvation among its people.
In formulating U.S. policy,24 what is not clear is whether current adverse North Korean policies
will moderate after the succession crisis has passed. Will a new North Korean leader allow a
return to the Six-Party Talks and release more market forces in the DPRK economy, or will the
military-first campaign continue with even greater intensity under a new leader who likely will be
24 In June 2009, Deputy Secretary of State Steinberg led a delegation visiting Japan, South Korea, and China to consult
with governments there on the challenges faced in dealing with North Korea’s missile and nuclear program. The
delegation included Special Envoy for North Korea Stephen Bosworth, Under Secretary of the Treasury for Terrorism
and Financial Intelligence Stuart Levey, Assistant Secretary of Defense for Asia and Pacific Security Affairs Wallace
Gregson, and Senior director for Asian Affairs on the National Security Council Jeffrey Bader.
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under heavy influence by the military? Given the weaker power base of a young Kim successor to
Kim Jong-il, it is possible that it will be easier for negotiators to deal with the father, Kim Jong-il,
than with his son.25 The 150-day campaign that began in May 2009 seems to be a somewhat
desperate policy to increase production in view of the expected economic sanctions following the
second nuclear test. The campaign is not likely to have a lasting impact on North Korean output,
since the campaign relies primarily on more human effort. More work does not solve problems of
antiquated machinery, insufficient supplies of electricity and raw materials, the lack of market
incentives and market-based decision making, hunger among workers, and general inefficiencies
caused by centralized planning. Still, the DPRK is likely to continue pushing toward its stated
goal of becoming a newly industrialized country by 2012.
A problem in relations with the DPRK is that the arsenal of diplomatic weapons and incentives
has diminished considerably. The United States and Japan have virtually no trade with North
Korea, and Pyongyang is threatening to cut off more of South Korea’s economic investments in
the North. Humanitarian and economic assistance often do not reach the people most in need and
reportedly are diverted to the military and party elites. The United States, however, does have
financial clout in the world, and no country, financial institution, or exporter would like to have to
choose between its ties with the United States and those with the DPRK.
The tools that can be implemented to influence decision making in Pyongyang include positive
and negative inducements, neither of which seem to work very well. Positive inducements consist
primarily of economic and humanitarian assistance, diplomatic recognition, and increased
economic and trade ties. North Korea also has been pressing for direct bilateral negotiations with
the United States. Negative inducements toward North Korea include general economic
sanctions, sanctions on particular companies, financial sanctions,26 diplomatic isolation, actions to
prevent sales of nuclear and missile technology and materials abroad, and the threat of military
action.
The Six-Party Talks
Engagement with North Korea has been conducted under the Six-Party Talks plus bilateral
discussions between Pyongyang and other nations. The talks (now suspended) 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. The talks,
however, rely heavily on China, and China has conflicting interests in the actual resolution of
DPRK nuclear issue. (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.)
25 Kang Hyun-kyung, “N. Korea’s Next Leader Is Eager English Learner,” Korea Times, June 3, 2009.
26 U.S. sanctions are designed to negatively affect the Pyongyang leadership and not cause additional hardship for the
common people. For a review of sanctions, see Karin Lee and Julia Choi, North Korea: Unilateral and Multilateral
Economic Sanctions and U.S. Department of Treasury Actions, 1955-April 2009, National Committee on North Korea,
Updated April 28, 2009. 89 pp.
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Table 1 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.
Table 1. Major Priorities and Bargaining Chips by Country in the Six-Party Talks with
North Korea
Country Priority
Bargaining
Chips
United
Complete, verifiable, and irrevocable scrapping of
Guarantee security and regime, economic
States
nuclear weapons; non-proliferation; human rights; peace aid, normalized diplomatic and trade
treaty
relations, membership in International
Financial Organizations
North
Guarantee security and regime survival; be recognized
Scrap nuclear weapons and missiles, reduce
Korea
as a nuclear power; economic development; obtain food tensions along DMZ, allow economic
and fuel aid; establish diplomatic relations with the U.S.
cooperation
and Japan; reunification with South Korea on own
terms; peace treaty
South
Set framework for peaceful resolution and prosperity
Economic support, energy, business
Korea
on the peninsula; reunification; access to North Korean
investment and technology
labor and markets, non-nuclear Korean peninsula;
human rights; peace treaty
Japan
Scrap nuclear weapons and ballistic missile programs;
Normalized diplomatic relations, economic
resolve abductions of Japanese citizens
support
China
Non-nuclear Korean peninsula, non-proliferation;
Economic support, alliance support
continued influence on peninsula, weakening U.S.
alliance with Japan and with South Korea; peace treaty
Russia
Scrap N. Korean nuclear weapons; non-proliferation;
Buffer diplomacy, energy assistance, business
promote stability in N.E. Asia
investment
Source: Adapted by CRS 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.
Policy Options
Major U.S. policy options, given the above interests, goals, assumptions, and strategies with
respect to the DPRK, include the following.
• Continue current policies with respect to the DPRK. These include (1)
enforcement of UN Resolutions 1874 and 1718, (2) additional targeted economic
and financial sanctions and diplomatic non-recognition by the United States, (3)
offer of diplomatic engagement with Pyongyang through bilateral and plurilateral
meetings under the aegis of the Six-Party Talks and related meetings; (4) keeping
North Korea from joining international financial institutions; (5) international
efforts to counter trafficking by North Korea in illegal drugs, counterfeit
currency, or other contraband; (6) non-proliferation efforts, including the
Proliferation Security Initiative; and (7) maintenance of U.S. military forces in
South Korea and Japan and continued development of a missile defense system
for East Asia.
• Intensify negative pressures on the DPRK: tighten and provide for closer
monitoring of U.N. and U.S. sanctions; (e.g., freeze assets of and sanction certain
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North Korean companies and individuals; ban certain North Koreans from
traveling abroad; tighten a ban on imports of luxury goods into the DPRK,
designate the DPRK or additional entities as “primary money laundering
concerns”); impose sanctions on the DPRK for counterfeiting U.S. currency;
return the DPRK to the list of sponsors of terrorism (although certain legal
conditions would need to be met)27 induce China to use its extensive influence
with and exports to North Korea to punish it for its nuclear test and to bring
Pyongyang back to the Six-Party Talks; or stop providing protection for North
Korean ships from Somali pirates.
• Negative pressures also may include 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. Negative pressure may include a major
campaign of soft power to include admittance of more North Korean refugees
into the United States, funding exchanges and visits by North Korean cultural
shows and dance groups to the United States, and having the World Food
Program provide North Koreans with food that is more identifiable as originating
abroad. (South Korea has found a secret weapon that has been a hit with North
Koreans: South Korean “Choco Pies,” a snack consisting of two large round
cookies covered with chocolate with a filling of marshmallow in between (much
like an Oreo cookie). They were so popular in the lunches provided to Kaesong
Industrial Complex workers in North Korea that they were making their way into
black markets in the surrounding area and causing alarm among North Korean
authorities.28)
• Wait and see if Pyongyang is serious about not participating in the Six-Party
Talks and trying to join the nuclear, space, and economic tiger clubs by 2012, but
continue to monitor the situation and quietly take prudent countermeasures
through the United Nations and with China until the DPRK’s succession question
is settled. Not give Pyongyang one thing that it desires—world attention and
over-reacting by governments thereby providing propaganda material and
support for the ruling regime. Coordinate policy thrusts with South Korea and
Japan (who are pressing for stronger sanctions), then with China, Russia, and
others. Under specific conditions, offer to hold bilateral talks in the context of the
Six-Party Talks and reaffirm the position that the United States is willing to
normalize relations; sign a peace treaty; give some energy, food, and technical
assistance for complete abandonment of nuclear weapons, and eventually to
allow the DPRK to join the International Monetary Fund and Asian Development
Bank.
Legislation
In the 111th Congress, legislation related to the DPRK economy includes:29
27 Jon Herskovitz, “U.S. Might Impose Counterfeiting Sanctions on North Korea,” Reuters, June 4, 2009.
28 “N.Koreans Love Choco Pie,” Chosen Ilbo, May 23, 2009, English Internet edition.
29 Major congressional actions with respect to security and human rights aspects of U.S.-DPRK relations are included
in CRS Report RL33567, Korea-U.S. Relations: Issues for Congress, by Larry A. Niksch; CRS Report RL34256, North
(continued...)
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• S.Amdt. 1761 (John Kerry) to S. 1390 agreed to on July 22, 2009. To express the
sense of the Senate that the United States should fully enforce existing sanctions,
explore additional sanctions, and require a review to determine whether North
Korea should be re-listed as a state sponsor of terrorism was agreed to in the
Senate. S.Amdt. 1597 (Brownback) to redesignate North Korea as a state sponsor
of terrorism was not agreed to.
• S. 6 (Reid). Restoring America’s Power Act of 2009. Sense of Congress that
Congress should enact, and the President should sign, legislation to restore and
enhance the national security of the United States by (among others) reducing the
threat posed by unsecured nuclear materials and other weapons of mass
destruction and effectively addressing the security challenges posed by Iran and
North Korea.
• S. 837 (Brownback). North Korea Sanctions Act of 2009. A bill to require that
North Korea be listed as a state sponsor of terrorism, to ensure that human rights
is a prominent issue in negotiations between the United States and North Korea,
and for other purposes.
• S. 1416 (Brownback). North Korea Accountability Act of 2009. A bill to require
the redesignation of North Korea as a state sponsor of terrorism, to impose
sanctions with respect to North Korea , to require reports on the status of North
Korea’s nuclear weapons program and counterproliferation efforts, and for other
purposes.
• S. 1434 (Leahy)/H.R. 3081(Lowey). Making appropriations for the Department
of State, foreign operations, and related programs for the fiscal year ending
September 30, 2010, and for other purposes. July 7, 2009. H.R. 3081a greed to
by the House.
• H.Res. 309 (Peter King). Expressing the sense of the House of Representatives
that North Korea should immediately stop any hostile rhetoric and activity
towards the Republic of Korea and engage in mutual dialogue.
• H.R. 485 (Ros-Lehtinen). Security through Termination of Proliferation Act of
2009. States that specified U.S. sanctions with respect to Iran, North Korea, or
Syria shall remain in effect until the President certifies to the appropriate
congressional committees that such country has verifiably dismantled its
weapons of mass destruction programs.
• H.R. 1105 (Obey). Omnibus Appropriations Act, 2009. Includes a prohibition
against funds for assistance or reparations for the government of, North Korea to
include direct loans, credits, insurance and guarantees of the Export-Import Bank
or its agents. (1) Funds made available under the heading `Migration and
Refugee Assistance’ in this act shall be made available for assistance for refugees
from North Korea .Provided for not less than $8,000,000 for broadcasts into
North Korea, and prohibited Economic Support Funds in FY2009 to be made
available for energy-related assistance for North Korea unless the Secretary of
(...continued)
Korea’s Nuclear Weapons: Technical Issues, by Mary Beth Nikitin; and CRS Report RL30613, North Korea:
Terrorism List Removal, by Larry A. Niksch.
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State determines that North Korea is continuing to fulfill its commitments under
the Six Party Talks agreements.
• H.R. 1980 (Ros-Lehtinen). North Korea Sanctions and Diplomatic
Nonrecognition Act of 2009. To continue restrictions against and prohibit
diplomatic recognition of the Government of North Korea, and for other
purposes.
• H.R. 2290 (Sherman). International Uranium Extraction and Milling Control Act
of 2009. To provide for the application of measures to foreign persons who
transfer to Iran, Syria, or North Korea certain goods, services, or technology that
could assist Iran, Syria, or North Korea to extract or mill their domestic sources
of uranium ore.
• H.R. 2346 (Obey). Supplemental Appropriations Act, 2009.30 Among its
provisions, it rejects a request for $34.5 million in Department of Energy non-
proliferation funds to dismantle nuclear facilities in North Korea and rejects $95
million requested for energy assistance to North Korea in the foreign assistance
accounts. House bill provides $18 million for development assistance to North
Korea in the Economic Support Fund. On June 24, 2009 became Public Law No:
111-32.
• H.R. 3423 (McMahon ).To impose certain sanctions on North Korea as a result of
the detonation by that country of a nuclear explosive device on May 25, 2009,
and for other purposes.
The Development of U.S. Policy
The White House, State Department, Defense Department, Treasury, the Special Envoy for North
Korea, and others have been formulating the Obama Administration’s policy toward the DPRK. It
is clear that, in 2009, relations with the DPRK have deteriorated, primarily because of North
Korea’s succession crisis and second nuclear test, but also because the push has ended for some
success in dealing with North Korea at the end of the Bush Administration. Pyongyang also
seems to have escalated its negative actions because it perceived that neither the Obama
Administration nor the new South Korean President seemed to be “taking the bait” and reacting
to the increasingly confrontational actions by Pyongyang.
In mid-2009, the policy of the Obama Administration with respect to the economic side of the
DPRK seems to be to use the provisions of UN resolutions 1874 and 1718 as well as U.S.
financial and military power to isolate and penalize North Korea and to consult with China,
Japan, South Korea, Russia and other countries to create a more united front in ensuring
compliance with the UN resolutions and in attempting to induce Pyongyang to return to the Six
Party Talks. The Administration has recognized that if “strong action” is not taken, there exists a
risk of an arms race (possibly nuclear) in Northeast Asia. The Administration also apparently has
decided not to “buy the same horse twice”—not to provide economic incentives for Pyongyang to
take actions already promised and already “paid for” once and not to reward provocations by the
30 For information on North Korea in the FY2009 Spring Supplemental Appropriations for Overseas Contingency
Operations (H.R. 2346), see CRS Report R40531, FY2009 Spring Supplemental Appropriations for Overseas
Contingency Operations, coordinated by Stephen Daggett and Susan B. Epstein.
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DPRK.31 This appears to be an implicit recognition that there appears to be no practical scenario
that will induce Pyongyang to abandon its nuclear program, so the focus is turning instead to
causing the North Korean leadership to suffer the consequences of its provocative behavior,
preventing the North Korean military from developing a means to deliver a nuclear bomb,
preventing proliferation of nuclear materials32 and sales of ballistic missiles, and attempting to
prevent military cooperation by the DPRK with countries such as Syria, Iran, and Burma or with
terrorist organizations. One implication of this strategy is that, although humanitarian aid is
allowed, very little assistance will arguably be coming from the United States, South Korea, and
possibly China. Therefore, it will up to North Korea, itself, to provide food and fuel for its
foundering economy.
As the George W. Bush Administration drew to a close, it showed a new willingness to negotiate
directly with the DPRK, although it maintained the umbrella of the Six-Party Talks. The February
13, 2007, Six-Party Agreement included a provision that North Korea freeze its nuclear
installations at Yongbyon and invite back the International Atomic Energy Agency to monitor the
freeze. North Korea also was 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 was to provide financing for 50,000 tons of heavy oil to be shipped to the
North. The DPRK and the United States also were 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.33 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 citizens).
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 began to provide fuel
and food aid and held out the prospect of eventual normalization of relations with the DPRK in
31 David E. Sanger, “U.S. Weighs Intercepting North Korean Shipments,” The New York Times, June 7, 2009, Internet
edition.
32 Office of the Press Secretary, The White House, Remarks by the President on North Korea, May 25, 2009.
33 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.... ” 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.
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response to specific disclosure and other actions by Pyongyang in regard to its nuclear program.34
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.35
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 develop nuclear bombs.36 Pyongyang’s tactics seem
to have been to continue to escalate its nuclear program and then to pause and let the world grow
accustomed to this new level before moving to a new level. Currently, however, it appears that the
Pyongyang has given the military the green light to attain recognized nuclear power status by the
year 2012 even in the face of economic and diplomatic sanctions and the possibility of triggering
military action by other countries.
After North Korea’s 2006 nuclear test, 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 U.N. 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. In tightening sanctions following the April 5, 2009, long-range missile test, China
also cooperated to a certain extent.
It appears, however, that despite deep privation and negative growth during the mid-1990s,
economic sanctions have 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 a separate world of relative luxury.37 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 a domestic
coup to occur,38 although if Kim Jong-il were to die, the subsequent regime change could result in
a power struggle that could go in a direction not planned by the “Dear Leader.” Pyongyang has
taken halting steps toward opening its economy to international investment and has allowed more
private markets, but these are similar to policies nearly all centrally planned economies are
34 For details on the Six-Party 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 A. Niksch.
35 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 11) for delisting North Korea as a state sponsor of terrorism.
36 For details, see CRS Report RL34256, North Korea’s Nuclear Weapons: Technical Issues, by Mary Beth Nikitin.
37 BBC Monitoring, Asia Pacific. Former Bodyguard of North Korean Leader Interviewed, October 13, 2003, p. 1.
38 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 Sentinel
Security Assessment. June 10, 2003.
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taking, and China and Russia have been recommending that North Korea adopt them also. As part
of the tightening of policy in 2009, Pyongyang is clamping down on many of the private markets,
although the “cat has already been let out of the bag.” As long as the central government is unable
to provide food and necessities through its ration system, non-elites in North Korea have no
choice but to engage in private market activity. The alternative is starvation.
Irrespective of whether the U.S. economic sanctions worsened North Korea’s economy, the poor
state of 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 South Korea.
Overview of the DPRK Economy
The North Korean economy is one of the world’s most isolated and bleak, even though it has
pockets of modernity (particularly in Pyongyang) and several grandiose, Soviet-style
monuments.39 It was completely bypassed by the Asian “economic miracles” of the past three
decades, which 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 “Stalinist40” North Korean economy can be characterized
by state ownership of means of production; centralized economic planning; the lack of basic
freedoms necessary for a market economy (such as freedom of movement and of commerce);
political repression; and an emphasis on military development (military-first policy). 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, as many as 2 million people starved to death. 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 still exist, and the country
depends on staples from China, and, when allowed, from the U.N. World Food Program,41 as well
as fertilizer from South Korea (when it was being delivered).
39 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.
40 The terms “Stalinist” refers primarily to the repressive, socialist, and militarily oriented nature of the DPRK
economy and does not imply similarity to all aspects of the Soviet Union under Stalin. See, for example, Aidan Foster-
Carter, “Pyongyang Watch, Is North Korea Stalinist?,” Asia Times, September 5, 2001, Online version.
41 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.
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During the 1990s, the inefficiencies of North
Korea’s centrally planned economy,
Figure 1.Kyoryo Hotel in Pyongyang
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.42 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
only $230 million (mostly petroleum) by
2005.43 This added to disastrous domestic
economic conditions in North Korea.44 By the
end of the 1990s, the command economy
aspects of the DPRK had virtually ended.45
Food in North Korea has been so scarce that
youth there are shorter than those in other
East Asian nations.46 Since 1998, the military
reportedly has had to lower its minimum
height requirement in order to garner
sufficient new recruits. Life expectancy has
Source: Photo by Kreis Borken in Das Koryo ist das
been contracting. With the help of the WFP,
Top Hotel in Nordkorea, Tripadvisor, August 2006.
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 were considered to be both
malnourished and anemic.47 The Food and Agriculture Organization of the United Nations
estimated that 7.6 million North Koreans were undernourished in the 2002-2004 period.48 North
Korea refers to this period of hardship as the “arduous march,” 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 2006.49 Over the winter of 2007-2008, the abnormally dry
42 Officially, in 2009, 15.8% of the DPRK’s $3.7 billion budget was allocated for national defense. Some South Korean
analysts argue that the actual figure is higher. U.S. Embassy, Seoul, Economic Section, “DPRK Finance Minister Kim
Announces National Budget to Increase 7 Percent in 2009,” North Korea Economic Briefing, May 21, 2009.
43 Data from Global Insight. Subscription database.
44 Global Insight. Korea, North: Economic Trends: Economic Growth: Background. March 4, 2003.
45 William Brown, “North Korea: How to Reform a Broken Economy,” in North Korea: 2005 and
Beyond, ed. by Philip Yun and Gi-Wook Shin (Stanford: Walter H. Shorenstein Asia-Pacific Research Center;
Washington, D.C.: [distributed by] Brookings Institution Press, 2005), p. 64.
46 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. P. A17.
47 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.
48 Food and Agriculture Organization. Food Security Statistics. Online at http://www.fao.org/statistics/faostat/
foodsecurity/Files/NumberUndernourishment_en.xls.
49 U.N. World Food Programme. WFP Set to Resume Operations in North Korea, Press Release, May 10, 2006.
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and cold weather, reportedly combined with severe flooding during the summer of 2007,
seriously affected the crop growth.50 In a December 2008 report, the WFP estimated total food
production to be 4.21 million tons for the 2008/2009 marketing year (November 2008-October
2009), leaving the DPRK to face a cereal deficit of 836,000 tons, even with commercial imports
(around 500,000 tons). Food assistance requirements to feed almost 9 million people were
estimated at 800,000 tons until the next harvest in October 2009.51
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.”52 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 collapse of the centrally planned economy.53 The Kim regime refuses to
call the economic measures “reforms,” but prefers to characterize them 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 their country.
The DPRK’s gross national product in 2008 in purchasing power parity prices (PPP)—prices
adjusted to international levels—has been estimated at $40 billion (CIA estimate) to $54 billion
(Global Insight estimate). This amounts to national income of about $1,700 to $2,248 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 ($6,000),54 Indonesia ($3,900), or Japan
($38,455). It is also dramatically lower than South Korea’s $26,000 in PPP values or $18,933 at
market prices.55 According to the Bank of Korea, in market prices, North Korea’s GDP in 2008
was an estimated $26.7 billion compared with $971.3 billion for South Korea. Global Insight, an
econometric consulting firm, estimated North Korea’s GDP in 2008 in market prices at $28.5
billion and $1,223 on a per capita basis.56 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 2, 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 by 2.3% in 2007. In 2008, the economy
weathered the global recession and grew by a surprisingly large 3.7%. According to Global
Insight (an economic consulting firm), North Korea’s economic growth rates is expected to
continue at about 2% per year to 2011.
50 Kim, Hyung-jin. North Korea Winter Threatens Food Supply, Associated Press, Seoul, March 3, 2008.
51 U.N. World Food Program. 8.7 Million North Koreans Need Food Assistance, December 10, 2008.
52 Stephan Haggard and Marcus Noland. Famine in North Korea, Markets, Aid, and Reform (New York: Columbia
University Press, 2007). P. 3.
53 Georgy Toloraya. The Economic Future of North Korea: Will the Market Rule? Korea Economic Institute, Academic
Paper Series, Volume 2. No 10, December 2007.
54 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.
55 PPI figures are from the World Bank. World Development Indicators.
56 Global Insight (subscription service), “North Korea, Detailed Forecast,” updated May 2009.
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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 since the 1990s, 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 there is no systematic method of collecting data, and even if there were, households
in different sectors of the economy often 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.
Figure 2. Estimated Real Annual Growth in North Korea’s GDP,1986-2011
Percent
8
Actual
Forecast
6.2
6
3.7
3.8
3.7
4
3.3
3
2.9
2.4
2.2
1.8
1.9 2.1 2.3
2
1.3
1.2
0
-1.1
-1.1
-2
-2.1
-2.3
-4
-3.7 -3.5
-3.6
-4.2
-4.1
-6
-6
-6.3
-8
1986 88
90
92
94
96
98 2000
2
4
6
8
10
Year
Source: Congressional Research Service with data from Global Insight (based on Bank of Korea data).
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. Tourists
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can exchange dollars to won at about 140 won per dollar, but the black market rate is about 4,300
won per dollar.57
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 in children 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 also used to reward party
loyalists. Under Pyongyang’s economic reforms, this system appears to be phasing out, but
beginning in the fall of 2005, North Korea has backtracked on many 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. The reality in much of the DPRK is that the official food
distribution system does not have sufficient supplies to feed the population. The food markets,
therefore, are essential for the non-elite in society.
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 51 categories based on their
ideological orientation. However, in actuality, the economy has created five classes of people.
The official categories are used to allocate rations for daily necessities, jobs, and housing.58 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 buy
imported food, medicines, and toiletries at special hard currency stores.59 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.60
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
57 Global Insight (subscription econometric forecasting service), “North Korea.” (Updated February 2009).
58 South Korea. Ministry of Unification. North Korea Today, August 14, 2001 (Internet edition).
59 UN World Food Programme. World Hunger—Korea (DPR). Available at http://www.wfp.org/country_brief/
indexcountry.asp?country=408.
60 Desperate Straits, Special Report (1). The Economist, May 3, 2003 (U.S. Edition).
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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.61
Despite hushed grumbling about economic deprivation, forced food deliveries to the central
government, and new prohibitions on markets, dissent in North Korea remains stifled. Support for
the ruling regime appears sufficiently 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.
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 10 years. The plan,
however, does not provide an alternative if North Korea does not denuclearize62 and has been
shelved for now.
Juche Philosophy and the Military
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 the philosophy has
been used since the 1950s to perpetuate power by the central government and to build an aura of
the supernatural around their supreme leaders Kim—both father and son.63 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 military-first policy places the army ahead of the working class for the first
time in the history of North Korea’s so-called revolutionary movement.64 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 strong in ideology and economy” only when its military is strong.65 The
61 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, 2007.
62 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.
63 See, for example: Natural Wonders Prove Kim Jong-il’s Divinity: North Korean Media, Agence France Presse. May
3, 2003.
64 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 (Pyongyang).
65 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.
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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 virtually indistinguishable
from those supplying civilians.66
In 1998 at the 10th Supreme People’s Assembly, the military’s National Defense Commission
arguably eclipsed the Politburo as the supreme national 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 the Korean Workers’ Party, the traditional center of the DPRK’s decision making.67 Of
course, the ultimate decision maker in Pyongyang is the Dear Leader, Kim Jong-il, who is
Chairman of the National Defense Commission.
North Korea claims to spend about 15% of its GDP on national defense. In 2006, Pyongyang’s
defense budget was an estimated $2.3 billion to maintain its 1.17 million member military.68
South Korea estimated the North’s military expenditures at $5 billion in 2003. In 2005, North
Korea stated that the defense budget was 15.9% of its total annual budget,69 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.70 It also may help explain North Korea’s carrying out its nuclear tests despite
being warned not to do so by the United States, China, and other nations. 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 represented a defeat for the military, but the
restart of Yongbyon and nuclear tests in 2009 indicate a strong resurgence by military interests.71
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
66 Nam, Woon-Suk. Guidelines of Economic Policies. KOTRA, January 9, 2001.
67 Gause, Ken E. North Korean Civil-military Trends: Military-first Politics to a Point. Army War College, September
2006. P.
68 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 available.”
69 “DPRK Allocates 15.9 Percent of State Spending for Military.” People’s Daily Online, April 12, 2005.
70 Asia: The deal that wasn’t; North Korea. The Economist. London: September 24, 2005. p. 81.
71 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)
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non-economic 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, for example, may
be viewed as too risky.72 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.
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. Much of the reforms, however, have been from the “bottom up” by necessity as
the central government faltered on its ability to deliver food and basic necessities through its
distribution system. These difficulties, together with advice from China and Russia, have
compelled the Pyongyang regime to allow some economic reforms.73 To the extent possible, they
are allowing reforms in the Chinese sequence with economic reforms preceding political reforms
while eschewing the Russian model of political reform preceding and concurrent with economic
reforms.74 The DPRK also has been examining the Vietnamese model of development and do moi
(reform). Kim Jong-il reportedly prefers the Vietnamese style of gradual economic reform rather
than the abrupt Chinese style.75
The reforms began in July 2002 when Pyongyang announced a series of measures that some had
hoped would 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
adjustment policy,”76 in the manufacturing sector, in particular, 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 has suffered.77 This, in turn, has raised pressures on Pyongyang to increase the
productivity of its economic system.
72 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.
73 Mika Marumoto, “North Korea and the China Model: The Switch from Hostility to Acquiescence,” Academic Paper
Series, On Korea, Korea Economic Institute, vol. 1 (2008), pp. 98-117.
74 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.
75 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.
76 Hong, Ihk-pyo. A Shift Toward Capitalism? Recent Economic Reforms in North Korea. East Asia Review, vol. 14,
Winter 2002. Pp. 93-106.
77 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.
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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 initial reforms, overall prices 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.78 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
oriented operations with farmers allowed to retain more of any production exceeding official
targets.
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.79 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.80 Visitors to Pyongyang in
late 2006 indicated that the market was thriving with all types of products and shoppers driving
European cars.81
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
78 Hong, Ihk-pyo, A Shift Toward Capitalism?, East Asia Review, Winter 2002. Pp. 96.
79 Jeong, Chang-hyun. Capitalist Experiments Seen Expanding into DPRK. Joong Ang Ilbo, October 19, 2003.
Translated in CanKor #160 by Canada-DPR Korea e-clipping Service, April 13, 2004.
80 Lintner, Bertil. North Korea, Shop Till You Drop, Far Eastern Economic Review, May 13, 2004. P. 14-19.
81 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.
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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, and other so-called non-socialist elements are also banned from
central markets.82
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 that normally deal with issues such as intelligence gathering and
sedition.83 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. 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 and nimble traders).84
Foreign Investment
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 Sales Agency Corporation.85 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.86 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. As relations with
South Korea soured and a tourist there was shot operations at Mt. Kumkang have ceased.
According to data compiled by the United Nations Conference on Trade and Development
(UNCTAD) since 1987, the DPRK had a cumulative $1.38 billion in foreign direct investment
(FDI) as of the end of 2007. Annual FDI flows have been sporadic, even negative in some years,
but since 2003 (except for 2006), they have been rising. (See Figure 3.)
82 Institute for Far Eastern Studies. State of the Market in the DPRK, North Korea Brief No. 07-12-5-1. Posted
December 11, 2007.
83 Han Young Jin. Even the National Security Agency Participates in the Control of the Jangmadang. The Daily NK
(electronic version). December 26, 2007.
84 Good Friends: Centre for Peace, Human Rights and Refugees, North Korea Today, No. 103, December 2007.
85 KOTRA, North Korea, Status of Induced Foreign Capital.
86 K. Park. A Report on Visit to Rajin-Seonbong Region, January 4, 2001. KOTRA,
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Figure 3. Foreign Direct Investment Flows and Stocks in the DPRK, 1987-2007
$million
.4
1600
.1
9
9
2
8
7
4
.7
7
3
1
4
2
3
1
1400
.2
1
3
2
1
8
.7
.8
.2
.4
1
1
1200
5
5
0
4
0
4
Stocks
2
5
4
4
4
2
0
0
0
0
0
0
1
1
1
1
1
1
1000
.1
.5
.8
.8
.7
6
8
6
5
5
7
800
.1
0
0
1
1
1
1
93
7
7
7
7
7
23
.3
7
6
2
75
600
.4
7
400
Flows
0
3
.9
.8
.2
6
3
8
9
3
5
1
200
1
1
.7
.2
.3
0
3
.1
.1
.9
.5
.8
0
.4
5
5
3
14
1
8
0
1
3
3
0
.7
.9
.8
.4
.8
-0
4
-3
6
0
-1
-1
.6
-200
-6
4
0
-1
87 88 89 90 91 92 93 94 95 96 97 98 99 0
1
2
3
4
5
6
7
Year
Source: United Nation Conference on Trade and Development, FDI database.
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 in Cairo, Egypt,87 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
year.88
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
87 Orascom also reportedly is investing $115 million in a North Korean cement manufacturer for a 50% stake in the
firm.
88 Arab Firm Earns First Mobile License In DPRK. Yonhap, January 30, 2008.
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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.89
Kaesong Industrial Complex90
The most significant effort at creating free-trade zones has been the Kaesong Industrial Complex
(KIC), although North Korea in 2009 has threatened to shut it down. One South Korean
companies already announced it is moving out of the complex.91 Until 2009, this joint effort
between the North and South was 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. As of
December 2008, 93 companies had begun operations in Kaesong. They were employing 38,931
North Korean personnel and 1,055 South Korean personnel.92 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 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), JCCOM (communication components), and Yongin Electronics (transformers,
coils).93
In 2006, the KIC produced some $7.5 million worth of goods each month.94 In September 2007,
monthly production had reached $17.1 million. In 2008 yearly production reached about $250
89 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.
90 For details, see CRS Report RL34093, The Kaesong North-South Korean Industrial Complex, by Dick K. Nanto and
Mark E. Manyin
91 “Tenant Companies Are Moving Out of Kaesong,” Hankyoreh , June 3, 2009, Open Source Document ID:
KPP20090604049004.
92 Republic of Korea. Ministry of Unification. Inter-Korean Relations in 2008. February 2009.
93 Republic of Korea. Ministry of Unification. Gaeseong Industrial Complex Project—Status and Tasks, June 2005.
94 South Korea to Continue “Utmost Efforts” for Inter-Korean complex—Minister. Yonhap News Agency. Reported by
BBC Monitoring Asia Pacific. London, December 8, 2006.
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million or about $20.8 million per month. The major products include textiles, chemical products,
metals and machinery, and electric and electronic products.95
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 rapprochement 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. Although KIC operations continued
even after the North Korean nuclear test in 2006, its status in 2009 is in doubt.
A controversial issue has arisen with respect to the KIC and the proposed South Korea-U.S. Free-
trade Agreement (FTA). 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 Korean workers, whether they
are being exploited,96 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 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, the workers receive about $37 per
month. Workers also receive overtime pay.97
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. 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, therefore, would amount to approximately
95 Republic of Korea. Ministry of Unification. Key Statistics for Gaeseong Industrial Complex. September 30, 2007.
96 Rights Body Criticizes South Korea Over Refugee Protection, Inter-Korean Complex. Yonhap News Agency, Seoul.
Reported by BBC Monitoring Asia Pacific. London, January 12, 2007.
97 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/
EUP0201R.jsp.
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$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.98
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.99 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 of $135 million.100 These figures seem understated. Since
2006, Chinese investments 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 include the following:101
• 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 billion tons.
• 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
98 CRS Report RL33435, The Proposed South Korea-U.S. Free Trade Agreement (KORUS FTA), by William H.
Cooper and Mark E. Manyin.
99 See Eberstadt, Nicholas. The North Korean Economy, Between Crisis and Catastrophe (New Brunswick, NJ,
Transaction Publishers, 2007). p. 227.
100 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 at http://kp.china-embassy.org/eng/zcgx/jmwl/
t306852.htm.
101 Shanghai Northeast Asia Investment & Consultancy Company. A Study Report on the DPRK Mineral Resources.
Shanghai Northeast Asian Forum website, in Chinese, December 7, 2007. Reported by Open Source Center, document
#KPP20080123032002.
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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 10,000 tons of
molybdenum concentrate per year.
• 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 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 smelting.
International Trade
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.102 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
102 International Monetary Fund. Direction of Trade Statistics. It should be noted that countries occasionally misreport
trade with South Korea as trade with the DPRK.
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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.103
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 2, in 2008 North Korea exported an estimated $2,801 in merchandise (up from $2,535
million in 2007) while importing $4,127 million (up from $3,437 million in 2007).104 This created
an apparent merchandise trade deficit of $1,326 million (up from $901 million in 2007). Imports
from China, in particular, rose 46% from $1,393 million in 2007 to $2,033 million in 2008. In
recent years, North Korea’s exports to and imports from China and South Korea have risen. South
103 For a report on DPRK statistics, see Mika Marumoto, Project Report: DPRK Economic Statistics Project , March
2009, http://uskoreainstitute.org/research/projects/index#dprkSTATS.
104 Indian imports from North Korea as reported seem in error. (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 $41 million. Likewise for Indian exports of petroleum products and organic chemicals reported as
going to North Korea likely went to South Korea. (S. Korea’s reported imports of such products from India are
considerably less than the reported India exports to South Korea.) Indian export data for 2004-2008, therefore, exclude
HS categories 27 and 29.
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Korea and China account for 60% of North Korean exports and 71% of North Korean imports.
Economic sanctions imposed by Japan have reduced that bilateral trade to almost nothing.
Table 2. Estimated North Korean Trade by Selected Trading Partner, Selected Years,
2000-2008
($ in millions)
North Korean Exports
2000
2001
2002
2003
2004
2005
2006
2007
2008
World 1,319 1,171 1,291 1,266 1,561 1,568 1,909 2,535 2,801
China
37 167 271 395 586 499 468 584
754
Japan
257 226 235 174 164 132 78
0
0
S.
Korea 152 176 272 289 258 340 520 765
930
Russia
8 15 10 3 5 7 20 34 14
India
20 3 5 1 4 8 9 41 116
Thailand 20 24 44 51 91 133 168 36
29
Germany 25 23 29 24 22 45 17 16
21
North Korean Imports
2000
2001
2002
2003
2004
2005
2006
2007
2008
World 1,859 3,086 1,973 2,051 2,616 3,388 2,908 3,437 4,127
China
451 573 468 628 799
1,081 1,232 1,393 2,033
Japan 207
1,066 133 92 89 62 44 9
8
S.
Korea 273 227 370 435 439 715 830 1,032 888
Russia
38 62 69 111 205 206 190 126
97
India
158 170 145 105 167 38 33 41
40
Thailand 189 106 172 204 239 207 216 184
48
Germany 53 80 139 71 68 63 63 34 31
Balance
-540
-1,915
-682
-785
-1,055
-1,820
-999
-901
-1,326
of Trade
Table 1 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 UN 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. Entries missing from the UN COMTRADE Database for 2007 and 2008 were taken
from Global Trade Atlas.
Note: n.a. = not available. Figures are nominal and not adjusted for inflation. Data from previous versions of this
table have been revised to reflect more country submissions to the UN database and to include DPRK trade
with Taiwan. The South Korea Trade-Investment Promotion Agency (KOTRA) has estimated that in 2008,
North Korea exported $1,130 million while importing $2,685 million for a trade deficit of $1,555 million. See
Institute for Far Eastern Studies (IFES), North Korea exports total USD $1.13 billion in 2008, NK Brief No. 09-7-22-
1, North Korea Economy Watch, Archive for the ‘Korea Trade-Investment Promotion Agency (KOTRA)’
Category, July 22, 2009. In 2009, data for 2004-7 were revised using Global Trade Atlas and UN Comtrade
statistics with adjustments for India.
The South Korea Trade-Investment Promotion Agency (KOTRA) has estimated that in 2008,
North Korea exported $1,130 million while importing $2,685 million for a trade deficit of $1,555
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million. The KOTRA data, however, exclude data for about 60 developing countries (including
most countries of the Middle East)105 and do not include South Korean trade with the DPRK.
What can be said is that the DPRK’s trade deficit has been running in the range of $1 billion to
$1.5 billion per year.
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 2, 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, plant products, and chemical products.106 In particular, imports of energy
materials and foods reflect Pyongyang’s attempts to remedy these fundamental shortages.
Figure 4. North Korean Imports of Merchandise by Major Country of Source,
1996-2008
$Billions
5
4
Other
3
Thailand
Russia
South Korea
2
Japan
1
China
0
96
97
98
99 2000
1
2
3
4
5
6
7
8
Year
Source: CRS with data from UN 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
(mainly rice valued at high Japanese prices) 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. Imports from the
105 Mika Marumoto, Project Report: DPRK Economic Statistics Project , March 2009, p. 62. http://uskoreainstitute.org/
research/projects/index#dprkSTATS.
106 (South) Korea Trade-Investment Promotion Agency.
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United States and Japan have been virtually nonexistent. China and South Korea have become the
largest sources of imports for the DPRK, but other sources recently also have become significant.
Major export markets for the DPRK have been China, Thailand, and South Korea (primarily
because of production from South Korean factories in the Kaesong Industrial Complex). (See
Figure 5 and Table 2.) 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 Destination,
1994-2008
$million
3000
2500
Other
2000
Thailand
1500
South
Korea
1000
Japan
500
China
0
96
97
98
99 2000
1
2
3
4
5
6
7
8
Year
Source: Data from U.N. COMTRADE Database, Global Trade Atlas, and (South) 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.
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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.
UN Resolution 1874 includes a ban on all arms transfers from the DPRK, including small arms.
Data on small arms trade are available to a certain extent, but such exports are likely to be under-
reported in official statistics.
Table 3 shows imports of small arms and ammunition by trading partner countries from North
Korea from 2001 to 2008. The total reported transactions has been about $5.3 million over the
eight years. The importers have included countries from Latin America, Europe, Southeast Asia,
and the Middle East.
Table 3. Imports by Country of Small Arms and Ammunition from North Korea
(In Dol ars)
Importer
2001-2 2003 2004 2005 2006 2007 2008 Total
9302—REVOLVERS & PISTOLS, DESIGNED TO FIRE LIVE AMMO
Guatemala
104,169 0 0 0 0 0 0
104,169
9303—SPORT SHOTGUNS & RIFLES ETC, VERY PISTOLS, ETC.
Indonesia
17,600 0 0 0 0 0 0
17,600
Luxembourg
0
1,562 0 0 0 0 0
1,562
Slovenia
0 0 0 0 0 0
14,903
14,903
9304—ARMS NESOI, OTHER THAN SIDE ARMS AND SIMILAR ARMS
Bolivia
0 0
910 0 0 0 0
910
Denmark
5,557 0 0 0 0 0 0
5,557
Ethiopia
0 0 0
364,414 0 0 0
364,414
Germany
6,000 0 0 0 0 0 0
6,000
Madagascar
447 0 0 0 0 0 0
447
Mexico
0
2,397 0
121,383 0 0 0
123,780
9305—PARTS & ACCESSORIES OF ARMS OF HEADINGS 9301 TO 9304
Guatemala
10,419 0 0 0 0 0 0
10,419
9306—BOMBS, GRENADES, ETC.; CARTRIDGES, ETC. AND PARTS
Australia
0 0 0 0
3,910 0 0
3,910
Brazil
0 0 0 0 0
45,500 0
45,500
Czech
Republic
0 0 0 0 0 0 0
1,380
Germany
2,000 0 0 0 0 0 0
2,000
Indonesia
675,882 0 0 0 0 0 0
675,882
Wallis and Futuna
2,231 0 0 0 0 0 0
2,231
Slovenia
0 0 0 0 0 0
740
740
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Thailand
0 0 0 0 0 0
14,372
14,372
9307—SWORDS, CUTLASSES, BAYONETS, & SIMILAR ARMS & PARTS
Ghana
0 0 0
23,127 0 0 0
23,127
United
Arab
Emirates 0 0 0
802,975
3,059,141 0 0
3,862,116
Total
824,305 3,959
910
1,311,899
3,063,051 45,500 30,015
5,295,922
Source: Congressional Research with Data from United Nations COMTRADE Database.
Note: The categories are by four-digit Harmonized System codes and description. A “Very pistol” is a flare gun.
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.107
Legal Sources of Funds
North Korea is able to borrow on international capital markets. As of the first quarter of 2009, the
country had loans from foreign located banks that report to the Bank of International Settlements
(BIS) of $98 million, down from $141 million at the end of 2007. The amount of loans is a
relatively small amount, only about $4 per capita. Total liabilities in the first quarter 2009 to BIS
banks (including those located in North Korea) came to $996 million (of which $718 million was
short term), down considerably from $1,532 million for the fourth quarter of 2007. Most of these
liabilities appear to be export credits. North Korea also had deposits of $96 million with BIS
banks, down from $398 million at the end of 2007.108
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 was not voluntary.109 North Korea does not pay interest on the bonds. Rather the
107 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.
108 Data are from Joint BIS-IMF-OECD-WB External Debt Hub at http://www.jedh.org/jedh_creditor.html.
109 Gittings, Danny. Kim Can’t Kill the Free Market. The Wall Street Journal (Brussels), May 30, 2003. p. A11.
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government holds a lottery in which the winners receive monetary prizes greater than the
foregone interest on the bonds.110
Although North Korea is not a major recipient of foreign direct investment (FDI), in 2007, the
stock of foreign direct investment in the DPRK was $1,378 million. The inflow that year was $53
million, up from the outflow of $105 million in 2006, and the inflow of $50 million in 2005, but
less than the $197 million in 2004, and $158 million in 2003.111 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, although the future of Kaesong
is now in question.
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 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 4, 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, fell further to $59.6 million in 2006 as North Korea
made significant repayments of previously received funds, and rose to $178.1 million in 2007. Of
this amount, $102 million came from the Netherlands.
110 DPRK Holds Annual Lottery for Government Bond Repayments. Institute for Far Eastern Studies, NK Brief No. 08-
1-3-2, January 3, 2008.
111 United Nations Conference on Trade and Development. World Investment Report, 2007. New York, United Nations,
FDISTAT database showing Major FDI Indicators.
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Table 4. North Korea: Total Net Receipts by Major Source/Donor (Excluding Russia,
South Korea, and China), 2001-2007
($millions)
2001 2002 2003 2004 2005 2006 2007
U.S.
0.3
131.2 42.9 56.5 6.9 0.4 32.5
Germany
34.1 35.0 11.8 54.2 6.5 3.2 1.2
France 12.8
-656.4
447.7
1,151.1
6.2
-16.9
0.3
Netherlands 0.1 0.6 0.8 0.5 0.65
101.8
102.0
Australia
4.8 5.4 2.1 3.9 5.3 4.5 6.6
Norway
7.9 5.5 9.5 5.6 5.3 3.8 4.4
Sweden
3.4 4.3 4.9 46.2 59.4
-74.8 8.6
Switzerland 6.1 2.1 4.0 3.9 4.2 7.0 5.9
UK 1.1
-15.9
44.8
142.3
0.2
.
1.2
Canada
1.5 0.2 2.1 -1.4 1.6 -1.6 14.8
Multilateral 65.0 40.1 51.7 47.5 41.5 23.3 27.0
—of which
EC
40.3 61.2 30.9 31.4 19.4 12.1 16.6
WFP
0.6 0.1 3.2 7.5 8.4 1.8 1.0
UNTA
2.6 2.5 1.8 2.5 3.03 2.01 3.4
UNICEF 2.6 2.5 1.8 2.5 3.03 2.01 3.4
Arab
14.5 2.2 7.9 1.3 -0.4 -1.7 -0.2
Agencies
Total
218.6 -440.2 593.4
1,529.6 148.7 59.6 178.1
Source: Organisation for Economic Cooperation and Development. Source OECD, International Development
Statistics, online database. http://stats.oecd.org.
Note: Data are from OECD members, multilateral agencies, and 12 other reporting nations excluding South
Korea, China, and Russia. UNTA = U.N. Transitional Authority. WFP = U.N. World Food Program. EC =
European Community. Total Receipts include Official Development Assistance + Other Official Flows + Private
Flows.
As shown in Table 5, much of the total receipts by North Korea came in the form of official
development assistance. In recent years, the country has received between $55 and $265 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
$160.8 million, in 2005 was $86.8 million, in 2006 was $54.5 million, and in 2007 was $97.6
million. The major donors have been the multilateral agencies, European Community, the United
States, Sweden, Norway, and Australia. In 2008, the United States provided the DPRK with
$$93.7 million in food aid and $106.0 million in fuel oil for a total of $199.7 million.112
112 CRS Report R40095, Assistance to North Korea, by Mark E. Manyin and Mary Beth Nikitin.
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Table 5. North Korea: Net Official Development Assistance by Major Source/Donor
(Excluding Russia, South Korea, and China), 2001-2007
($ in millions)
2001 2002 2003 2004 2005 2006 2007
U.S.
0.3
131.2 42.9 56.0 7.9 0.4 32.5
Germany 27.0 33.2 7.2 7.5 5.2 2.9 1.4
France
0.3 0.5 -0.4 -0.5 -0.4 0.6 0.3
Australia
4.6 2.0 2.1 3.3 4.6 2.7 6.6
Norway
2.5 3.6 4.4 5.6 5.3 3.8 4.7
Sweden
3.4 4.3 4.9 5.4 5.5 5.1 7.8
Switzerland 4.5 3.4 4.0 3.9 4.2 6.0 5.9
European
40.3 61.2 30.9 31.4 19.4 12.1 16.6
Community
Multilateral
1.8 3.1 4.0 1.1 2.7 1.7 10.4
Agencies
(not EC)
Non-DAC 0.4 1.87 1.4 11.1 5.9 2.3 -0.5
Total
117.6 265.2 131.0 160.8 86.8 54.5 97.6
Source: Organisation for Economic Cooperation and Development, Development Statistics database.
Note: 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 four searches.113
As indicated in Table 6, since 1991, the South Korean government has provided a total of
$3,337.0 million in assistance to the DPRK. Of this, $2,221.99 million was humanitarian
assistance (food aid, fertilizer, or assistance provided through non-governmental organizations).
Total assistance reached a high of $635.43 million in 2007 but dropped to $159.36 million in
2008 as deliveries of food and fertilizer were halted. South Korean civilian organizations also
have provided assistance to North Korea ($71 million in 2003).114
113 U.S. to Pay N. Korea for MIA Search. Associated Press. July 15, 2003. For details on U.S. assistance to North
Korea, see CRS Report RS21834, U.S. Assistance to North Korea: Fact Sheet, by Mark E. Manyin.
114 Republic of Korea, Ministry of Unification. Inter-Korean Relations on the Occasion of the 4th Anniversary of the
June 15 Joint Declaration. June 18, 2004. p. 9.
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Table 6. South Korean Total and Humanitarian Assistance to the DPRK
($millions)
Total
Assistance
Year Total
Assistance
Humanitarian
Food Aid
Fertilizer
through NGOs
1991
3.02
- - -
1992
0.71
- - -
1995 236.60
236.60
-
-
1996 9.82
3.76 -
3.07
1997 0.00
-
- 20.05
1998 0.03
-
- 14.26
1999 28.88
-
28.53 -
2000 178.00
163.10
76.69 83.42 2.99
2001 170.72
90.29
14.68 49.47 26.14
2002 254.57
175.37
84.63 66.60 24.14
2003 343.25
256.93 159.21 70.13 27.59
2004 326.75
196.31
98.25 84.46 13.60
2005 596.35
357.26
193.79 123.44 40.03
2006 393.49
226.65
10.65 125.66 90.34
2007 635.43
395.71
157.34 103.49 134.88
2008 159.36
54.11
3.91 0.00 50.20
Total
3,337.00
2,221.99 1,039.51 735.19 447.29
Source: Republic of Korea (South Korea) government and Korean EX-IM Bank, via South Korea Ministry of
Unification.
Note: NGO=Non-governmental Organization. Total Assistance = Humanitarian + Economic + Other
Assistance
As shown in Table 7, in addition to humanitarian assistance, South Korea has provided $1,115.01
million in economic and other assistance to the DPRK since 1991. This has taken the form of
road and rail construction, business subsidies, development of the Kaesong Industrial Complex,
tours of Kumgang Mountain, family reunions, and other. The road and rail assistance was mainly
for connecting the Kaesong Industrial Complex located across the demilitarized zone in North
Korea to South Korea. Also related to Kaesong was much of the aid to ROK businesses as well as
direct expenditures to develop the industrial complex. Not included in South Korean assistance to
the DPRK are the wages of North Korean workers in Kaesong or other internal business
transactions.
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Table 7. South Korean Economic and Other Assistance to the DPRK
($millions)
Aid to
Kaesong
Road
Mt. Kumgang
ROK
Industrial
Family
Year
and Rail
Tours
Business
Complex
Reunions Other
1991
1992
- - - - 0.71
-
1995
- - - - - -
1996
- - - - - 6.06
1997
- - - - - -
1998
- - - - 0.01
0.02
1999
- - - - 0.35
-
2000 12.89 -
0.44 - 2.75 1.81
2001 69.6 34.86 0.83 -
1.20 0.08
2002 53.5 26.71 2.20 - 20.56 0.37
2003 94.09 5.03 10.66 -
3.47 0.66
2004 96.55 6.20 27.78 6.00 3.68 3.83
2005 193.17 0.01 28.62 25.65 16.67 15.00
2006 93.06 1.28 50.16 80.75 15.91 16.02
2007 68.33 0.50 60.95 82.89 30.8 131.13
2008 14.38 1.52
9.79 52.22 19.00 58.54
Total 695.57 76.11 191.45 247.5 115.12 236.55
Source: Republic of Korea (South Korea) government and Korean EX-IM Bank, via South Korea Ministry of
Unification.
Another major source of income for certain North Korean families has been in remittances from
overseas Koreans, particularly those who live in Japan.115 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
115 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.
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Korea. 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 Kim Jong-il as gifts.116
Given the decade of stagnation (1992-2002) 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.117 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 reports to the Japanese government.118 Recent Japanese sanctions include a
lowering of the amount on remittances to North Korea that require reporting from 30 million to
10 million yen (. from reported to April, following North Korea’s rocket launch, Japan imposed
fresh sanctions including reducing the amount of remittance to North Korea subject to reporting
to the Japanese government from more than 30 million yen ($300,000) to more than 10 million
yen ($100,000). Anecdotal evidence indicates that considerable amounts of currency from Japan
are simply carried by individuals on ships or sent through China and not reported. Japan,
however, has tightened inspections of North Korean ships and curtailed operations of ferry boats
traveling between the two countries.119 Remittances by North Koreans living in South Korea and
China also are reportedly growing. These could amount to around $6 million per year from 6,000
(of 10,000) refugees in South Korea and some more from the 100,000 refugees living in China.120
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 has received each
year over and above its export earnings. These have amounted to perhaps $700 million on net per
year. North Korea must finance the remainder of its trade deficit—about $300 to $500 million—
by other means. It appears that these other means have included exports of military equipment
and illicit activity.
Illegal or Questionable Sources of Funds121
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, Iraq, Syria, Pakistan, and
other nations in the past decade to earn foreign currency.122 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 North Korea is one example of such arms sales.123 In
testimony in 2003 before the House Committee on International Relations, the Undersecretary of
116 Melons Used to Smuggle Cash to N Korea. Japan Today News (Online), January 1, 2003.
117 Remittance Law Reinterpreted Cash Transfers to Pyongyang May Be Suspended as Deterrent. The Daily Yomiuri
(Tokyo), May 19, 2003. p. 1.
118 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, 2003.
119 See, for example, Masaki, Hisane. N Korea’s Missiles Met by Japanese Sanctions, Asia Times Online, July 6, 2006.
120 “Refugees’ Remittances to N.Korea ‘Growing’,” Chosun Ilbo, February 10, 2009, english.chosun.com.
121 For details, see CRS Report RL33885, North Korean Crime-for-Profit Activities, by Liana Sun Wyler and Dick K.
Nanto.
122 Asano, Yoshiharu. N. Korea Missile Exports Earned 580 Mil. Dollars in ‘01. Daily Yomiuri, May 13, 2003.
123 Solomon, Jay. U.S. Debates North Korean Exports, Asian Wall Street Journal, May 5, 2003. p. A1.
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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 countries of concern.
These sales are one of the North’s major sources of hard currency.124 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 2001.125 Between 1998 and 2001, North Korea is estimated to have
exported some $1 billion in conventional arms to developing nations.126 In a 2009 article, the Wall
Street Journal quotes analysts as saying that North Korean sales of short- and medium-range
missile systems remain among North Korea’s largest export earners, part of an arms trade that
generates $1.5 billion annually.127 This is likely to be an overstatement, since it exceeds the total
deficit in North Korea’s annual deficit in trade of about $1 billion.
With respect to illegal drug trade, the State Department has indicated that “drug trafficking with a
connection to the Democratic People’s Republic of Korea (DPRK, or North Korea) appears to be
down sharply. There have been no instances of drug trafficking suggestive of state-directed
trafficking for six years, but there still is insufficient evidence to say for certain that state-
sponsored trafficking has stopped at this time. Small-scale trafficking along the DPRK-China
border continues. In March 2007 the DPRK acceded to the three drug conventions.”128 In the past,
North Korea apparently was engaged in illegal drug trade. Officials from the U.S. military
command in Seoul reportedly said that North Korea had earned between $500 million and $1
billion annually from the narcotics trade.129 North Korea is thought to have produced more than
40 tons of opium per year which would have made it the world’s third-largest opium exporter and
sixth-largest heroin exporter. The regime also is accused of trafficking in methamphetamine
stimulants. In 2003, U.S. counter-narcotics officials are reported to have said that since 1976,
there had been at least 50 arrests or drug seizures involving North Koreans in more than 20
countries. Japanese authorities have said that nearly 50% of illegal drug imports into Japan come
from North Korea.130 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.
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 illegally” and that “organizations,
factories and groups should not illegally produce or export drugs.” Punishment is severe, up to
124 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 4, 2003.
125 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.
126 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.
127 Jay Solomon, “Tests Point to Spread of Weapons Trade,” The Wall Street Journal, May 28, 2009, p. A6.
128 U.S. Department of State, Bureau of International Narcotics and Law Enforcement Affairs, 2009 International
Narcotics Control Strategy Report (INCSR), Washington, DC, February 27, 2009.
129 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.
130 Kim, Ah-young, Halt North Korea’s Drug Habit; a Narcotic State, International Herald Tribune, June 18, 2003. p.
8.
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death, and the family members and shop mates of offenders face collective responsibility and
punishment with the perpetrator.131
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 route to Australia.132
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,133 but it is not clear that North Korea currently engages in
counterfeit currency production, although such notes still reportedly circulate. North Korean
General O Kuk-ryol, who recently was promoted to the country’s National Defense Commission
and who reportedly is in charge of arranging the succession of Kim Jong-il’s third son, Kim Jong-
un, was identified by U.S. and foreign intelligence sources as a key figure in the covert
production and distribution of high-quality counterfeit $100 bills.134
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 thanks to international aid and the
country’s trading in weapons and illicit goods.”135
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 Destruction Proliferators and Their Supporters).136 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.137
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.... ”138 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.
131 U.S. Department of State. International Narcotics Control Strategy Report, 2007. March 2007.
132 Struck, Doug. Heroin Trail Leads to North Korea. Washington Post Foreign Service, May 12, 2003. p. A01.
133 For details, see CRS Report RL33324, North Korean Counterfeiting of U.S. Currency, by Dick K. Nanto.
134 Bill Gertz, “Exclusive: N. Korea general tied to forged $100 bills,” June 2, 2009, On-line edition.
135 Choe, Sang-Hun. N. Korea Sees Sanctions Amid Tough Times. Associated Press Online, June 12, 2003.
136 Available at http://www.whitehouse.gov/news/releases/2005/06/20050629.html.
137 U.S. Department of the Treasury. Treasury Targets North Korean Entities for Supporting WMD Proliferation. Press
Release JS-2984, October 21, 2005.
138 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 15, 2005.
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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 developing countries under
the generalized system of preferences program.139
The United States, moreover, maintains various economic sanctions on North Korea because the
country is considered a threat to national security, is a communist state, and it proliferates
weapons of mass destruction.140 In 2008, however, the Bush Administration lifted restrictions on
the DPRK under the Trading with the Enemy Act and removed the DPRK from the list of State
Sponsors of Terrorism. Some bills in the 111th Congress would relist the DPRK. 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
but subsequently halted them. 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 that are 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-controlled items, items on the Commerce Control List,141 and service or repair
of such items. Except for the UN sanctions, economic sanctions on North Korea 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 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 exchanges to the extent that the aid doesn’t damage its
national interest.142 In February 2008, the New York Philharmonic Orchestra performed in
Pyongyang.143
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 removed it from the terrorism list,144 and has indicated its willingness to negotiate a
139 See CRS Report RL33663, Generalized System of Preferences: Background and Renewal Debate, by Vivian C.
Jones, Generalized System of Preferences, by William H. Cooper.
140 See CRS Report RL31696, North Korea: Economic Sanctions, by Dianne E. Rennack.
141 http://w3.access.gpo.gov/bis/ear/ear_data.html
142 Yoon, Won-sup. US Eased Sanctions on North Korea in 2007, Korea Times, February 12, 2008.
143 Daniel J. Wakin. North Koreans Welcome Symphonic Diplomacy. New York Times, February 27, 2008. p. 1.
144 The North Korean Counterterrorism and Nonproliferation Act (H.R. 3650, Ros-Lehtinen, Ileana ) provides for the
(continued...)
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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 8 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 and to $52 million in 2008. However, much of this has been food and energy
assistance provided as part of North Korea’s process of denuclearization. The small annual
surplus in U.S. trade with North Korea arises primarily from food and energy assistance that has
been provided to the DPRK.
Table 8. U.S. Merchandise Exports, Imports, and Trade Balances with North Korea,
1990-2008
($ in thousands)
Year
U.S. Exports
U.S. Imports
Balance
1990 32
0 32
1991 484
10 474
1992 83
0 83
1993 1,979
0 1,979
1994 180
0 180
1995 11,607
0 11,607
1996 541
0 541
1997 2,409
0 2,409
1998 4,454
0 4,454
1999 11,265
29 11,236
2000 2,737
154 2,583
2001 650
26 624
2002 25,012
15 24,997
2003 7,977
0 7,977
2004 23,750
1,495 22,255
(...continued)
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.
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Year
U.S. Exports
U.S. Imports
Balance
2005 5,757
3 5,754
2006 3
0 3
2007 1,728
0 1,728
2008 52
0 52
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.145 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 for business purposes,146 and some U.S. enterprises reportedly are working
as subcontractors in the development of North Korea’s Kaesong industrial complex.147
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 the outcome of the current Six-
Party Talks.148 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.
145 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.
146 Meeting with President of the American Chamber of Commerce and CRS analysts, April 7, 2003, Washington, DC.
147 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.
148 The Six-Party Talks are made up of representatives from the United States, Japan, North Korea, South Korea,
Russia, and China.
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In 2008, total merchandise trade between North and South Korea was $1,820 million, up from
$1,797.9 million in 2007, $1,349.7 million in 2006, and more than triple the $403.0 million just
seven years earlier. South Korean exports, which had reached $1,032.6 million in 2007, fell to
$888 million in 2008. South Korean imports from North Korea rose to $930 million, up from
$765.3 million in 2007. 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 shipments.
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.
As indicated in Table 6 and Table 7 above, South Korea also provides the DPRK with
humanitarian and economic assistance. Since 1991, this has amounted to a total of $3,337.00
million with $2,221.99 million in humanitarian assistance and $1,115.01 million in economic and
other assistance. Since 2008, this assistance has largely come to a stop.
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 processing done under contract) by North Koreans.149 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.150 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 highways.
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 the South. In 2008, the KIC produced some $20 million worth of goods each month.151
149 Speech by Minister Jeong Se-hyun on the 34th Anniversary of the Ministry of Unification. Korean Unification
Bulletin, No. 53, March 2003.
150 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 A. Niksch. For the approval list, see KOTRA, Companies Approved for South-North Korean
Economic Cooperation.
151 South Korea to Continue “Utmost Efforts” for Inter-Korean complex—Minister. Yonhap News Agency. Reported
by BBC Monitoring Asia Pacific. London, December 8, 2006.
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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
exports.
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 raise the per capita income of North Korea to $3,000
within ten years if Pyongyang denuclearizes.152
Table 9. South Korean Merchandise Trade with North Korea, 1990-2008
($ in thousands)
South Korean
South Korean
Year
Imports
Exports
Total Trade
Balance
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
2008 930,000
888,000
1,818,000
-42,000
152 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.
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Sources: South Korea Ministry of Unification, KOTRA.
China-DPRK Economic Relations
China remains the DPRK’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.
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 North Korean military” and that the DPRK
“does not listen to what China has to say.”153 (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, and usually sends
them back to North Korea.154
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 Taipei;
• The North Korean refugee problem on the China-DPRK border;
153 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.
154 CRS Report RS22973, Congress and U.S. Policy on North Korean Human Rights and Refugees: Recent Legislation
and Implementation, by Emma Chanlett-Avery. 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.
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• 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 rolling stock.)155
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 DPRK156 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 States.”157 After North Korea’s long-range
missile test in April 2009, China agreed to stronger U.N. sanctions on three North Korean
companies. After North Korea’s second nuclear test in May 2009, China issued a strong statement
of condemnation and in June 2009 backed UN Security Council resolution 1874 that provided for
additional sanctions on the DPRK. In 2008, China exported and estimated $100 million to $160
million in luxury goods that now appear to be under sanction by UN Security Council
resolutions.158
Since the collapse of the Soviet Union, China has been the DPRK’s largest trading partner and
supplier of concessional assistance (through subsidized trade and direct transfers). As an export
market and source of imports, however, North Korea plays a relatively minor role for China. In
2007, the DPRK ranked 64th among China’s export markets—smaller than Peru, Egypt, or
Hungary. As a source of imports, North Korea ranked 70th—below Gabon, Yemen, or Belgium.
Table 10 shows China’s merchandise trade with the DPRK.
Table 10. China’s Merchandise Trade with the DPRK, 1995-2008
($ in millions)
Year China’s Imports China’s Exports
Total Trade
China’s Balance
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
155 Jane’s Information Group, op. cit.
156 See UN Security Council Resolution 1718, October 14, 2006.
157 Kahn, Joseph. China May Press North Koreans. The New York Times, October 20, 2006. p. A1.
158 CRS Report R40684, North Korea’s Second Nuclear Test: Implications of U.N. Security Council Resolution 1874,
coordinated by Mary Beth Nikitin and Mark E. Manyin, p. 6, Appendix.
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Year China’s Imports China’s Exports
Total Trade
China’s Balance
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
2008
754.045 2,033.233 2,787.278 1,279.188
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 $414 million and shipments of oil (not crude) totaled
$120 million. Total exports of mineral fuel oil of $585 million accounted for 29% of all Chinese
exports to the DPRK. China, however, does not appear to be selling this oil to North Korea at
concessionary prices. In 2008, the average price for Chinese exports of crude oil to North Korea
was $0.78 per kilogram, while it was $0.71 for such exports to the United States, $0.66 for South
Korea, $0.81 for Japan, and $0.50 for Thailand.159
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 or regime stability would be undermined by foreign aid policies of other countries.160
In November 2003, China reportedly transferred responsibility for securing its border with North
Korea from the police to its army.161 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 dividing the two countries is narrow and the river banks low.162 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 through Dandong.163
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
159 Average price calculated by World Trade Atlas using Chinese trade statistics.
160 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.
161 Foley, James. China Steps Up Security on North Korean Border. Jane’s Intelligence Review, November 1, 2003.
162 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).
163 Lee, Chang-hak. China’s Trade with N.K. Via Dandong Exceeds US $200 million. KOTRA, February 21, 2003.
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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.)
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, and there has been no resolution of the Japanese
abducted by North Korea’s intelligence agency. North Korea’s May 2009 test of a nuclear device
reinforced existing trends in DPRK-Japan economic relations. Although the Japanese government
was reportedly considering a complete economic embargo on North Korea in the wake of the
most recent test, the impact is considered largely symbolic because of the already drastically
reduced trade.
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 11. Japan’s Merchandise Trade with the DPRK, 1994-2007
($ in millions)
Year Japan’s Imports
Japan’s Exports
Total Trade
Japan’s Balance
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
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Year Japan’s Imports
Japan’s Exports
Total Trade
Japan’s Balance
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
2008 0.000 7.663 7.663 7.663
Source: Japanese data as supplied by World Trade Atlas.
As indicated in Table 11, by 2008, total trade between Japan and the DPRK had fallen to $8
million from $1,290 million in 2001. In 2007, Japan had no imports from the DPRK and reported
exports of $8 million.
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 1995 and 2004, Japan provided 1.2 million metric tons of humanitarian
food aid to North Korea, mostly through the United Nations World Food Program.164
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.
164 CRS Report RL31785, Foreign Assistance to North Korea, by Mark E. Manyin.
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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 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.165
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 the
leadership of the two states at the highest political levels.166
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 the unification process.167
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. Russia also condemned the May 2009 nuclear test.
165 Lunev, Stanislav. New Era in Russian-North Korean Relations. Newsmax.com, August 23, 2000.
166 Vorontsov, Alexander. Current Russia—North Korea Relations: Challenges and Achievements. The Brookings
Institution Center for Northeast Asian Policy Studies, February 2007, 24 p.
167 Ibid.
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The DPRK’s trade with Russian lags behind what it has been in the past. In 2008, North Korea
ranked 107th among Russia’s sources of imports (below Jamaica and Ghana) and 92nd in terms of
markets for Russian exports (below the Virgin Islands and Gibraltar). The increasing volume of
Russian mineral fuel exports to the 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, wood pulp, machinery, non-rail
vehicles, iron and steel, and wood. Russian exports of mineral fuels have been declining from a
peak of $224.4 million in 2005 to $73.5 million in 2007 and $41.6 million in 2008. Major
Russian imports from North Korea include machinery, electrical machinery, glass, and plastics.
Table 12. Russia’s Merchandise Trade with the DPRK,
1994-2006
($ in millions)
Year
Russia’s Imports
Russia’s Exports
Total Trade
Balance
1994 44.00a 52.00a 96.00a 8.00a
1995 15.00a 70.00a 85.00a 55.00a
1996 347.00a 525.00a 872.00a 178.00a
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
2008 13.519
97.005
110.524 83.486
Sources: Russian data as supplied by World Trade Atlas.
a. 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 1960s to build power plants. This
opened the way for Russia to engage in more economic cooperation with the DPRK.168
168 Russia to Forgive Most of N. Korea’s Debt. The Chosun Ilbo (digital version), January 5, 2007.
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Possible Economic Incentives
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 $10 billion to North Korea in compensation for its occupation.169
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
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
2008.
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.170 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.
Although 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
169 See CRS Report RL32161, Japan-North Korea Relations: Selected Issues, by Mark E. Manyin.
170 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 1, 2001.
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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, Europe, Southeast Asia, 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.171 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 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.
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
171 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.
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Kaesong Industrial Complex) to receive preferential treatment under the FTA. Such a designation
apparently would require legislative approval by both countries.
Author Contact Information
Dick K. Nanto
Emma Chanlett-Avery
Specialist in Industry and Trade
Specialist in Asian Affairs
dnanto@crs.loc.gov, 7-7754
echanlettavery@crs.loc.gov, 7-7748
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