Asia Pacific | ANALYSIS

Worst North Korea economy in two decades pushing Kim to lash out

Analysts warn of more provocative behavior over the next year

by Sam Kim

BLOOMBERG

Blowing up a building meant to symbolize friendship may have been North Korea’s forceful way of demanding help for an economy straining under international sanctions and borders shut by the coronavirus.

The destruction of the $15 million facility paid for by South Korea in the North Korean border city of Kaesong was one of the biggest provocations Kim Jong Un’s regime has made against its neighbor in years.

South Korean President Moon Jae-in’s government has warned Kim against reckless provocations, but the destroying of the building so far hasn’t derailed plans in parliament to revive inter-Korean cooperation or attempts to persuade the Trump administration to loosen its stance on Pyongyang.

As analysts struggle to reach a consensus on the logic behind the explosive move, the immediate result has been to inject urgency into talks between the U.S. and South Korea over Pyongyang.

Moon sent his nuclear envoy to Washington after the building came crashing down to speak with U.S. officials about ways to deal with the current situation on the Korean Peninsula, the Foreign Ministry said last week. Lee Do-hoon returned home over the weekend but shared few details about the discussions with reporters at the airport, the Yonhap news agency reported.

The U.S. and U.N. sanctions are aimed at getting North Korea to give up its nuclear weapons program.

Any loosening of the restrictions on trade and transactions would bode well for North Korea because its economy now risks shrinking 6 percent this year, according to Fitch Solutions. That would be its worst contraction since 1997, when the country was stricken by famine.

The heightened economic malaise compounds troubles faced by Kim after his nearly three-week absence from public events in April led to speculation about his health and questions about his grip on power.

Trade with China, North Korea’s biggest economic partner, had already slowed to a trickle under the sanctions as President Xi Jinping also sought to rein in Kim’s nuclear ambitions.

But the flow of goods hit a wall after Pyongyang sealed the country’s borders earlier this year to halt COVID-19. In both March and April, North Korea’s exports to China fell more than 90 percent from a year ago, China’s Customs General Administration reported.

“The larger economic context certainly shows Pyongyang getting backed into a corner,” said Kyle Ferrier, director of academic affairs at the Korea Economic Institute of America. “Sanctions were clearly impacting the North Korean economy prior to COVID-19, but the closure of the border with China to curb the spread of the coronavirus has done much more to stymie the North Korean economy.”

While the contraction may not seem large in a world where the virus has sent economies plummeting, North Korea is one of the planet’s poorest countries and can ill afford a turn for the worse.

Money from South Korea would help. Due to the sanctions, trade between the neighbors has slowed to just $3.5 million through May of this year from $2.7 billion in 2015.

Humanitarian assistance has also dried up under Trump’s maximum pressure sanctions campaign. South Korea has sent about $3 billion of aid since 1995, but only a total of $30 million came between 2017 and 2019, according to the latest government data.

The liaison office was located near a joint factory park where South Korean firms once used cheap North Korean labor to manufacture goods. The intended model of economic cooperation earned North Korea an estimated $100 million a year.

North Korea sent in troops to occupy the facility in 2016, during a previous snarling of tensions, and it remains shut under the sanctions.

Before the pandemic, North Korea had been getting better at poking holes in the sanctions regime through trading of contraband and restricted commodities on the high seas, U.N. Security Council reports have shown.

It had also turned to cybercrime, taking in about $2 billion in 2019 through the worldwide theft of resources from the financial sector, according to testimony to a U.S. House committee in June.

But it also participated in negotiations aimed at easing sanctions through talks with longtime friends China and Russia and foes, including the U.S. and South Korea.

Following three summits with Trump since 2018 that produced no sanctions relief, North Korea earlier this month accused the U.S. of breaking promises and said it saw no benefit in engaging with Washington.

“The rapprochement efforts over the past years have not yielded much in terms of economic relief for North Korea,” said Anwita Basu, a Fitch analyst. “They have chosen an adversarial route arguably in hopes that South Korea might get bullied into helping them, but as always, such tactics could backfire.”

Kim’s frustration shows in a recent series of threats against Moon, with the leader of North Korea’s sister, Kim Yo Jong, personally launching verbal attacks against a man she once hobnobbed with during her visit to Seoul in 2018.

“Because North Korea’s economic downturn is fueling its aggression, and is worsened by sanctions, there are no near-term off-ramps here,” said Van Jackson, a former Pentagon official now teaching at Victoria University of Wellington in New Zealand.

“The reasoning that led North Korea to destroy the liaison office will lead them to engage in even more provocative behavior over the next year.”

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