KOREA FOCUS
Estimation of North Korea’s Nominal Per Capita GDP in 2012
Kim Cheon-koo

Research Fellow
Hyundai Research Institute


I. Overview

 

Understanding North Korea’s current economic situation and its changes helps the government set up reasonable and appropriate North Korea policies and prepare for a unified economy. If North Korea achieves sustainable economic growth, improves its standard of living and narrows the gap with South Korean economy, it will also have positive effects on the South. For example, unification costs will be lower. On the other hand, if a major setback in North Korean economy leads to political turbulence it could pose a serious threat to South Korea.

 

In order to evaluate North Korea’s economic development level and compare it to those of other countries, Hyundai Research Institute has calculated the country’s nominal per capita GDP every year. The institute’s method of calculation uses correlations between the country’s economic growth and its various welfare indexes, its yearly grain production and infant mortality rate. The latter is believed to be the most reliable indicator to measure North Koreans’ income level, as it responds sensitively to aggravated individual hygiene, insufficient nutritional intakes, reduced medical care benefits, and exacerbated health environment resulting from economic fluctuations.

 

II. North Korean Economy in 2012

 

1. Domestic Situation

 

In 2012, North Korea’s food production increased and state construction work expanded. The food production benefited from favorable weather conditions and support from the Food and Agriculture Organization (FAO). According to the FAO, North Korea’s grain production in 2012 totaled 5.03 million tons, an increase of 5.9 percent from 4.75 million tons in 2011. Rice production increased 8.2 percent to 2.68 million tons compared with 2.48 million tons in 2011, and corn production also grew 9.9 percent, from 1.86 million tons in 2011 to 2.04 million tons in 2012.

 

State construction of power plants, housing and other infrastructure facilities expanded under the North’s push to become a “strong, prosperous country” and Kim Jong-un’s “people-first” politics in his first year in office. In the utility sector, North Korea completed the construction of Hwachon Power Plant, and expanded its investment into building and repairing power stations. The North also started the construction of skyscraper apartment buildings in Mansudae district, a core housing project in Pyongyang. In addition, it erected homes in Pyongyang and border cities and built and repaired roads and parks in these regions.

2. External Situation

 

North Korea’s trade with China and South Korea increased and the support from the international community rose to the highest level in eight years. North Korea-China trade totaled $5.93 billion in 2012, up 5.4 percent from $5.63 billion in 2011. In 2012, North Korea’s export to China rose 0.9 percent to $2.49 billion from $2.46 billion in 2011, while its import from China grew 8.9 percent, from $3.17 billion in 2011 to $3.45 billion last year. North Korea’s trade deficit against China widened from $700 million to $960 million over the cited period.

 

Trade between the two Koreas amounted to $1.98 billion in 2012, up 15.3 percent from $1.71 billion in 2011. North Korea’s export to South Korea totaled $1.07 billion, up 17.6 percent from $900 million in 2011, while the North’s import from the South totaled $900 million in 2012, recording an increase of 12.7 percent from $800 million in 2011. North Korea’s trade surplus with South Korea widened, from $110 million in 2011 to $170 million in 2012.

The international community’s support for North Korea sharply increased in 2012 to record the highest level since 2004. It reached $120 million in 2012, an increase of 32 percent from $89.23 million in 2011 and a hefty four-time jump from 2010. A total of 20 countries, including South Korea, Norway, Switzerland, Canada, Russia and Brazil, provided humanitarian support for North Korea in 2012, marking an increase from six nations in 2010 and 17 in 2011.


 

III. Estimation of Nominal Per Capita GDP in 2012

 

This report analyzed correlations between infant mortality rates and per capita GDP on the basis of data in 198 countries, and estimated North Korea’s GDP by taking into account the peculiar situation of the communist country.

 

This report employed the regression analysis method by adopting a fixed-effect model. It used per capita GDP as a subordinating variable, and infant mortality rate as an independent variable. The logarithm-applied value of infant mortality rate was used as an independent variable, based on child mortality and U.N. data. It also used the logarithm-applied value of per capita GDP as a subordinating variable, with data supplied by the International Monetary Fund (IMF).

 

North Korea’s grain output was taken into account in addition to its infant mortality rate released by the United Nations. The yearly infant mortality rate was calculated by using grain output as weights on the country’s infant mortality rate released every five years.

 

North Korea’s grain production has shown modest increases in recent years, ending the type of steep declines seen in the 1990s. To determine the grain output, this report relied on a survey of North Korean crops conducted by the Food and Agriculture Organization at the end of each year. North Korea’s grain production showed continuous growth between 1970 and the early 1990s, but plummeted during the “March of Tribulation” period in the mid-1990s. The lowest point was in the late 1990s. Production has slowly recovered since 2000.

 

North Korea’s infant mortality rate also has recovered from the depths of the 1990s and is beginning to improve little by little. The infant mortality rate, which sharply rose during the “March of Tribulation,” has since shown a slow decline.

Hyundai Research Institute’s regression analysis estimated North Korea’s nominal per capita GDP in 2012 at $783, up $63 from $720 in 2011. North Korea’s per capita GDP reached its peak at $986 in 1987, but turned toward a steady negative growth to fall to the mid-$600 range in the early 2000s. The North Korean economy has improved a little upon the turn of the 2000s but has yet to recover the late-1980s’ level when its economic power reached its peak. Recently, its economic power has continued to improve from $688 in 2010 to $720 in 2011 and to $783 in 2012.

 

North Korea’s nominal per capita GDP was lower than those of other communist countries, and accounted for a mere 3 percent of South Korea’s. It stood at a lower level than those of China ($6,076), Vietnam ($1,528) and Laos ($1,446). It was also far lower than those of countries with similar population sizes, such as Malaysia ($10,304) and Romania ($7,935). Among Asian countries, Bangladesh ($850) and Myanmar ($835) have similar income levels to North Korea.

 

Although North Korea’s nominal per capita GDP was up in 2012, it still remained at South Korea’s mid-1970s level, and accounted for only 3.4 percent of the South’s nominal per capita GDP, which amounted to $23,113 in 2012.

 

IV. Policy Implications

 

North Korea still suffers from food shortages with its economic development nearly 40 years behind South Korea. Therefore, it is necessary to help the North develop a self-reliant economy by reinvigorating inter-Korean economic cooperation, continue to provide humanitarian aid to the North, and narrow the wide gulf in economic power between the two Koreas.

 

North Korea’s current economic level makes self-sufficiency unattainable. It is necessary for South Korea to help the North develop self-reliant economy by revitalizing economic cooperation in proportion to improvements in the overall inter-Korean relations. Investment is needed in social infrastructure, energy, resources development and logistics network, which will provide the industrial foundation prerequisite for jumpstarting the North Korean economy. For example, South Korea will need to invest in the basic industries of steelmaking and oil refining, the construction of infrastructure, including power plants, roads and ports, and the creation of industrial complexes for small- and medium-sized enterprises.

 

South Korea will need to continue to provide humanitarian aid through the United Nations and other international organizations, to help the North’s most vulnerable people, including children, who suffer from low income levels and food shortages. Although increased crop production in 2012 has improved the overall food situation in North Korea, the stunted growth and malnutrition of North Korean children is still evident. South Korea should act in purely humanitarian concern and continue to provide grain, food and medicine regardless of political and military conditions between the two Koreas.

 

The widening income gap between the two Koreas is swelling the cost of future unification to an increasingly burdensome level. Therefore, South Korea needs to mount efforts to bridge the gulf. It should help the North resuscitate its economy and establish an economic system capable of delivering stable, sustainable growth. To maximize the return of unification expenditures, the South should also make pre-unification investments in North Korea’s industries and regions that produce bigger synergic effects than others.

[Issues and Tasks 13-29, July 11, 2013, Hyundai Research Institute]