The Coronavirus Has Pushed North Korea’s Economy to the Edge

Despite the crisis, there’s no signs of reform from Pyongyang.

Customers look at makeup products in a store attached to a cosmetics factory in Pyongyang on July 28, 2018.
Customers look at makeup products in a store attached to a cosmetics factory in Pyongyang on July 28, 2018. Ed Jones/AFP via Getty Images

As in much of the world, the coronavirus pandemic has shut down North Korea’s economy. The country’s fiscal resources are overwhelmed, forcing Pyongyang to issue domestic bonds for the first time in 17 years. The crisis highlights the country’s financial weakness, which stems from its decades-long self-imposed isolation and more recent international sanctions.

Before turning to debt, North Korea attempted to wring money from state factories and the country’s budding donju entrepreneur class of merchants—and, increasingly, financiers—who best exemplify North Korea’s “reform from below” dynamic. They rose from the collapse of the central plan and have a symbiotic relationship with a state officially hostile to capitalism, existing in a limbo with little political or legal protections, as contract law and property rights remain rudimentary. The Minju Chosun, a powerful government-run newspaper in North Korea, called on factories and businesses to fulfill their tax obligations so that the state could meet its plans to grow the budget 4.2 percent this year. That seems an impossibility at this point.

But recognizing the limits of squeezing revenue from a failing economy, the government now plans to issue domestic bonds for the first time since the small issuance of “People’s Livelihood” bonds in 2003. (North Korea has never issued international bonds.) The debt issuance is notable because the governments of Kim Jong Un and his father, Kim Jong Il, ran tight fiscal ships, spending within their means and not resorting to inflationary financing. For all its failings, North Korea did not fall into the hyperinflation trap as other isolated and badly run states like Zimbabwe and Venezuela did.

The aim of the debt issuance is to collect as much foreign currency circulating in the country as possible. The issuance will be massive, reportedly covering 60 percent of the budget. (In comparison, South Korea’s deficit financing will rise to only 16 percent of its expenditure in 2020.) The majority of the bonds will be issued to state-run firms, but 40 percent will be sold to the donju. The latter will be required to purchase the bonds to obtain business permits. Without the coercion of withholding business licenses, the donju would be unwilling to swap hard-earned savings for government debt, knowing that the government has a very poor record of honoring its liabilities. The donju hold bad memories of the currency redenomination in 2009, which wiped out personal savings.

International efforts are probably not in the cards, although there is a prior example. North Korea is no stranger to economic stress and has shunned engagement with the international community. But in 1997, in the midst of a devastating famine, it approached the International Monetary Fund (IMF) in search of external financing. At the time, the economy had still not recovered from the 1991 collapse of the Soviet Union, and there were no domestic savings to tap. IMF staff conducted a fact-finding mission to Pyongyang led by the senior advisor of its Asia and Pacific Department in September of that year. They concluded that “a fundamental change in policies, along with large amounts of investment to restructure the economy,” was necessary. The finance ministry balked at the level of transparency required to engage with the IMF and cut off discussions.

But now, after North Korea’s nuclear tests beginning in 2006 and the sanctions that followed, the country’s membership in the IMF is blocked by more than its unwillingness to open its books for inspection. Membership will essentially require a diplomatic opening from Pyongyang to Washington, which has effective veto power in the IMF. This could be done, and the Russian case is instructive. Soviet leader Mikhail Gorbachev sought entry to the IMF in the late 1980s as part of his perestroika (restructuring) and glasnost (opening) policy, although he faced skepticism from the West as well as intense internal opposition.

However, Soviet nonintervention in the fall of the Berlin Wall on Nov. 9, 1989, provided the diplomatic opening to the United States. Subsequently, then-U.S. President George H.W. Bush unilaterally announced that the IMF should establish a “special association” for the USSR as a preliminary step toward membership, recognizing Western European doubts on whether the Soviet Union was ready to accept the responsibilities of international financial community membership. The IMF’s Executive Board approved a provisional special association in September 1991 and immediately staffed up to provide technical assistance. In June 1992, six months after the collapse of the Soviet Union, the new president, Boris Yeltsin, took the Russian Federation into the IMF.

There was a faint glimmer of possibility that North Korea would embark on a similar path when Kim Jong Un pivoted away from missile-rattling in early 2018 to sports diplomacy at the February Pyeongchang Olympics and to summit diplomacy with South Korean President Moon Jae-in and U.S. President Donald Trump later that year and into 2019. However, the failure of the U.S.-North Korea summit in Hanoi in February 2019 dashed hope that Kim was ready to provide a diplomatic opening to the United States. Moreover, North Korea has demonstrated no previous intention toward systemic reform, even during the Sunshine Policy era of South Korean Presidents Kim Dae-jung and Roh Moo-hyun in the early 2000s, when South Korea invested significantly in the Kaesong Industrial Zone and Mount Kumgang tourist zone on the northern side of the 38th parallel border. North Korea had sealed off both enclaves from its domestic economy, other than for manual labor.

Nuclear tests since 2006 have brought international sanctions that further isolate the country, banning 90 percent of North Korea’s exports in value terms by 2018. North Korea evaded sanctions with some effect but did not fully offset the loss. But when North Korea closed its border with China early this year to stop the spread of the coronavirus, it effectively shut down all external trade and tourism.

So now North Korea is left to its own devices, facing the coronavirus pandemic without access to credit or emergency financing from the IMF, World Bank, Asian Development Bank, or other governments—let alone access to global capital markets. Nevertheless, there are no indications from Pyongyang that it is ready to throw in the towel on Juche, its policy of self-reliance, and embark on reform and opening. The same obstacles that prevented progress in 1997 prevail today, and nothing has changed institutionally in more than two decades—except the addition of international sanctions. North Korea admitted to its economic hardship in another recent Minju Chosun article, saying that Western imperialists are seeking to “subjugate” countries through aid. North Korea does not want any scrutiny of or limits on its conduct, let alone the policy conditions that come with IMF or World Bank financial assistance.

Both communist China in 1978 and communist Vietnam in 1986 recognized that opening and reform were essential to lift their economies out of destitution and to improve prospects for political stability. China tried to open the mind of Kim Jong Il, taking him on a tour to Shenzhen and Guangzhou in January 2006 that was reminiscent of Deng Xiaoping’s galvanizing 1992 tour of southern China, yet reform in North Korea did not follow. If there is a silver lining in this cloud, it is that perhaps the pandemic will force Pyongyang to realize its untenable position, accept opening and reform, and reconsider engaging the international community.

International financial institutions are stepping up to provide substantial concessional financing for coronavirus pandemic relief for countries with urgent needs. The IMF has its Rapid Credit Facility with limited policy conditionality. And the World Bank is setting up a new health emergency multidonor fund that will complement $160 billion of existing financing to help countries respond to the pandemic and bolster economic recovery. But it is too late for North Korea this time. In its international isolation, such aid is beyond Pyongyang’s reach.

Thomas Byrne is the president of the Korea Society in New York City and was Moody's Asia-Pacific and Middle-East Sovereign Risk Group manager.