The Black Hole of North Korea

What economists can't tell you about the most isolated country on Earth.

The government of North Korea regards economic statistics as state secrets, which makes the country's economy difficult to study. I do careful survey research on the North Korean economy by surveying defectors, Chinese enterprises, and South Korean firms. Still, North Korea is so opaque that when I am asked where I get my data, I normally reply, "I make it up." And I'm only half-joking.

Others seem less than half-serious. Last month, the South Korean news agency Yonhap ran a story about a report from a major South Korean think tank stating that North Korea's GDP grew 4.7 percent in 2011. That think tank, the Hyundai Research Institute, used a combination of United Nations infant mortality data for 198 countries over the 2000-2008 period and North Korean crop data to estimate annual North Korean per capita income. While infant mortality and food availability correlate with income, one cannot meaningfully estimate year-to-year income changes with these two pieces of information alone.

Spurious precision is not unique to the study of North Korea, and this example isn't even the worst -- in the 1990s, two Japanese researchers claimed they had calculated North Korean per capita income down to the dime. But nowhere else is the gap between what we know and what we think we know so wide. I cannot remember the last time the North Koreans published a budget containing levels (i.e., actual numbers) and not percentages (e.g., crop yield grew 5 percent). Nicholas Eberstadt of the American Enterprise Institute once visited the Central Statistics Bureau in Pyongyang; the bureau told him that its statistics were elastic, "like rubber bands."

Whatever your metaphor, North Korean statistics are fragmentary, subject to gross error and even intentional deception. Although one can employ statistical techniques to root out obvious anomalies and impose internal consistency, in the end, analysis of North Korean data is as much about forensic art as science, about acknowledging that some statistics deny precision.

In principle, we should be able to at least get a sense of North Korea's external relations by examining the "mirror statistics" of the country's trading partners -- adding up what other countries say they import from North Korea, for example, to calculate its exports.

But even such an apparently simple exercise is fraught. Every year some country around the world reports an amazing spike in trade or investment with North Korea, consisting mostly of North Korean cell phones and automobiles. Has Apple opened an iPhone factory in Pyongyang? No, someone in the bowels of some national statistical agency has confused North and South Korea. Both Mexico and Austria have done so in the past; Denmark confused the two in its 2009 outward investment data. The disparity in the magnitudes of North and South Korean trade volumes is so vast, with North Korea trading very little and South Korea trading very much, that a single such instance of misidentification can completely distort North Korea's trade statistics. Our best-guess estimate for North Korea's total trade in 2010 is about $7 billion. Mexican trade with South Korea is $15 billion. So if a major trading country confuses the two Koreas, the misreporting can swamp reality.

The most widely cited source on North Korean trade, the South Korean government agency KOTRA, carefully screens the mirror data for such obvious anomalies. But KOTRA excludes the North's trade with South Korea on the constitutional grounds that inter-Korean trade is domestic. Because of budget cuts, or a desire to downplay North Korea's Middle East connections, KOTRA also ignores trade with many Middle Eastern countries like Algeria and Saudi Arabia, both of which report trade with North Korea to the U.N. statistical agencies. As a result, KOTRA greatly exaggerates the prominence of the trade partners that it does record, with important geopolitical implications. The New York Times and the Washington Post, for example, have both reported that China accounts for about 80 percent of North Korea's trade. The actual figure is roughly half as much, which means North Korea is a lot less economically dependent on China than those figures imply.

How about internal data? The most widely cited sources are the South Korean government and the U.N. agencies. The former produces estimates of North Korean national income while the latter produces estimates on things such as agricultural output and food aid requirements. In recent years the U.S. government has downscaled its efforts in these areas and no longer provides much of an alternative to the South Korean and U.N. figures. These analysts face the challenge of analyzing an economy swathed in secrecy, a challenge compounded by the politicization of their efforts. Thus, their estimates come with a wide margin of error.

It is doubtful that anyone, including the people inside the North Korean government, knows the real size of the North Korean economy. Since the centrally planned economy went into decline 20 years ago, a significant share of economic activity has moved into the semi-legal, largely unregulated market economy. North Korea has never been egalitarian, but over the same period, an enormous gulf has opened between lifestyles in the capital, Pyongyang, and conditions in the hinterland. Little hard evidence exists to quantify these developments. The North Korean government restricts aid agencies' access to the population (and even restricts the number of Korean speakers in agencies' resident missions), making conventional assessments impossible. When the U.N. World Food Program began doing household surveys and focus groups, the government quickly shut down the effort, afraid that too much information would leak out.

The South Koreans construct their estimates by making estimates of physical output based on satellite imagery, and possibly spies or informants, and then aggregate the physical output according to a secret input-output table. This estimate is then subject to interagency discussion before the South Korean central bank publicly releases the figures.

This process is not particularly transparent and appears vulnerable to politicization. In 2000, the central bank delayed the announcement of the estimate until one week before the historic summit between South Korean President Kim Dae-jung and North Korean leader Kim Jong Il. The figures implied an extraordinary acceleration of North Korea's growth rate to nearly 7 percent. This had never occurred before and has not been repeated since. Under current South Korean President Lee Myung-bak, a conservative, the central bank's figures imply that the North Korean economy has barely grown at all.

The work of the U.N. agencies appears similarly problematic. Probably the most policy-relevant information released by the United Nations are estimates of North Korea's food aid needs produced by the Food and Agriculture Organization (FAO) and the World Food Program (WFP). On the supply side, the FAO is diplomatically obliged to take seriously the official North Korean production numbers, which appear to exaggerate harvests in good times and understate output when aid is needed. The demand-side calculation of how much food the North Koreans need is open to challenge on a variety of grounds, most notably uncertainty about the centrality of grain in the North Korean diet. The U.N. agencies have become increasingly transparent and open about the possible shortcomings of their calculations; previous reports would include a figure and then merely state that it had not been scientifically observed. Still, the FAO-WFP numbers imply that North Korea has been in continuous famine for a decade, something that no credible observer would claim.

Sadly, we don't even know how many North Koreans there are, how many serve in the armed forces, how many died in the famine, or how many have fled their country. For some purposes this is fine -- we can count their tanks even if we don't know how they pay for them. But for others -- how much aid should we provide, are sanctions likely to work, and ultimately, is time on our side or theirs -- we would be wise to ask the questions "what do we know" and "how do we know it" when formulating policy on North Korea.

Former U.S. Vice President Walter Mondale once counseled me that anyone who claims to be an expert on the North is a liar or a fool. My corollary is: Don't trust any figure on the North Korean economy that comes with a decimal point attached.



Let North Korea Keep Its Nukes

It's the only solution that has any hope of success.

On Feb. 29, the newest round of negotiations between the United States and North Korea ended. The North Korean side has agreed to freeze its uranium-enrichment program and refrain from long-range missile testing in exchange for food aid from the United States.

The Western media has predictably expressed hope (admittedly, limited and conditional) about the revival of nuclear talks, and the U.S. State Department has described the negotiations as a "modest first step."

Yes, it was a "step," and not the first in the seemingly endless nuclear negotiations between the United States and North Korea -- but toward what?

The United States' official stance is unwavering: Its stated goal is the complete, irreversible, and verifiable nuclear disarmament of the North. This position has not changed over the past 20-odd years. In the meantime, the North has successfully tested plutonium devices, conducted a number of long-range missile launches (admittedly not so successful), and started an impressive uranium-enrichment program. We have never been as far from denuclearization as we are today.

This shouldn't be surprising: U.S. policy is hopelessly unrealistic. Under no circumstances will the North Korean government consider relinquishing its hard-won nuclear capabilities. And why should it?

The North's nuclear capability provides a deterrent that ensures that the leadership in Pyongyang won't suffer the sorry fate of Saddam Hussein and Muammar al-Qaddafi. Pyongyang's leaders assume, probably correctly, that the two dictators would still be alive and in power had they developed nuclear weapons. Once upon a time, in interacting with the North Korean dignitaries, Western diplomats would frequently cite Qaddafi's decision to surrender his half-baked nuclear program as a shining example to emulate. North Korean diplomats were not impressed, and they have been proved right.

From North Korea's perspective, nuclear weapons have been a great investment. They are a key means for the North to receive generous and all but unconditional aid from the international community, important for the regime's survival because its dysfunctional economy cannot be reformed due to internal political constraints.

The North's nuclear blackmail has worked brilliantly. Look no further than the recent deal: an agreement by the North to slow down its nuclear developments in exchange for a large volume of unconditional aid. Denuclearization cannot be made attractive because Pyongyang understands that by possessing a nuclear weapons capability, it can demand aid through negotiations.

Not only is the carrot useless, but so is the stick. Outside pressure and international sanctions won't persuade Pyongyang to give up its nuclear weapons. Because only a post-Kim Korea might conceivably surrender its nukes, regime change could work, but the human and financial costs of a military operation would be prohibitively high.

Sanctions fail because China will be unlikely to participate in a sanctions regime. Even with genuine Chinese cooperation, the main victims will be normal North Koreans, whose survival ranks fairly low on the regime's agenda. Effective sanctions would merely result in the death of countless North Korean farmers, not a reversal of Pyongyang's policies. In the long run, such pressure might bring a revolution -- but not before a million or two people starve to death. Even this is uncertain: If pressed, the regime will pretend to take steps toward denuclearization and start receiving aid again, bringing us back to where we are today. For the governments of democratic countries, sanctions have made sense to show voters that something is being done, but as a policy sanctions have failed completely -- and likely will again.

The only practical solution is for the United States to learn to live with a nuclear North Korea -- and wait until the regime crumbles under the weight of its own inefficiency.

North Korean diplomats clearly state that their current aim is a deal about nuclear arms limitations. North Korea seems willing to freeze its nuclear program, stop producing additional nuclear weapons, and stop perfecting existing delivery systems as long as it is allowed to keep its current stockpile of plutonium and existing stock of nuclear devices. In exchange, Pyongyang wants its carrot: regular delivery of food aid and two light-water reactors.

Such a solution seems unacceptable to Washington because it amounts to an admission of North Korea's nuclear status. It is rightly seen as a dangerous precedent. North Korea is the only state that has withdrawn from the Nuclear Non-Proliferation Treaty and proceeded to successfully develop nuclear weapons. If it is allowed to do so with impunity, other rogue states might follow.

Rewarding Pyongyang monetarily for such a small step is unpalatable, not to say repugnant, to many in Washington. It would be seen as rewarding a parasitic blackmailer. But politics is seldom a choice between good and bad; more often it's the choice between two evils. A nuclear compromise as outlined above might indeed be the lesser evil.

Whatever the United States does, the North Korean nuclear program is not going to disappear -- at least as long as the Kim family retains control in Pyongyang. Instead, the program is likely to become more sophisticated and dangerous. Over the past few years, North Korea's nuclear technicians have worked hard to manufacture enriched uranium. They probably have done so because a uranium program is far more difficult to control and contain and hence can be sold to the United States at a higher price. (Indeed, it seems likely that the uranium program from the very beginning was conceived as a rapidly appreciating export item, to be eventually swapped for U.S. aid.)

If the United States continues to insist on the complete denuclearization of North Korea as the only acceptable solution, we will see the continued expansion of the North's nuclear programs. There will be proliferation incidents, too -- as North Korean adventures in Syria and Myanmar testify.

Sooner or later, one would expect the United States to relent and provide the North with regular "compensation" for its willingness to freeze its nuclear program, without surrendering its existent nukes. Commitment to eventual denuclearization could feature prominently in the official statements for face-saving reasons.

Such a deal is not likely to happen soon, but if the Kim family stays in power in Pyongyang for another decade or two, this seemingly unthinkable compromise may be grudgingly accepted. The recent nuclear deal might indeed be the "modest first step" in that direction, even though its American participants do not yet realize it.