The 2020 Parliamentary Session in North Korea: Self-Criticism and Dubious Optimism Concerning Economic Development
The North Korean Supreme People’s Assembly session took place this Sunday. Here are the main takeaways:
- North Korea’s economy remains inward-oriented. Neither a major crisis nor a major economic breakthrough was reported.
- The term “sanctions” did not appear a single time in the report, reflecting the official, defiant position towards that issue; nevertheless, they seem to have contributed to a greater availability of mineral resources for domestic use.
- Grain production has supposedly increased strongly, allowing the state to shift the focus of its agricultural policy towards a more diverse diet.
- The COVID-19 pandemic did have an impact on North Korea’s economy, although it is still claimed that the country does not have a single infection.
- Self-criticism appears in both reports, including the ominous admission of “some drawbacks in executing the state budget.”
- If we use budgetary revenue as a proxy, the North Korean economy in 2019 grew moderately, but more strongly than in 2017 and 2018.
- Economic planners seem to be cautiously optimistic about the prospects for the development of the economy in 2020; however, the report presents no evidence about which sector or factor is the cause of this optimism.
The 2020 SPA Session Was Held in Standard Fashion
On April 12, 2020, the 3rd session of the 14th Supreme People’s Assembly (SPA, the DPRK’s parliament) convened in Pyongyang. Such meetings take place annually in the spring, before the highest holiday in North Korea, the “Day of the Sun,” which is celebrated on April 15th, commemorating the birthday of the country’s founder Kim Il Sung. Thus, neither the parliamentary session nor its timing this year was particularly extraordinary. Speculation in the West about a cancelation of the SPA session, fueled by a two-day delay in the original schedule and concerns over the potential impact of the COVID-19 pandemic, turned out to be premature. In fact, after Kim Jong Un decided to skip his annual New Year’s speech this year, the SPA sessions in April remain the only stable and regular official events in North Korea.
As usual, the 2020 SPA session was preceded by a Korean Worker’s Party Politburo meeting which took place on April 11. The agenda of that meeting included key items such as the Budget Report that were later handled by the SPA, thus confirming the de facto subordinate position of the parliament vis-à-vis the Party in North Korea.
The SPA passed three new laws on “recycling resources,” “tele-education” and “providing living conditions for discharged officers.” Two reports were delivered on the work of the Cabinet and the State Budget. Both provide rare insights into North Korea’s economic priorities, and in particular, the Budget Report is one of the few instances when North Korea issues official statistical data on its economy.
The Cabinet Report: No Mention of Sanctions
The basic tone of the report reflected the environment of tough sanctions under which North Korea’s economy has been forced to operate over the past years. The main strategic lines for economic development remain import substitution and a focus on domestic demand, or, in North Korean terms, the independent development of the economy (자력갱생).
The official figures for overall production were positive, claiming that the targets for industrial production were over-fulfilled at 108 percent. One sector stands out with particularly high growth rates: coal production increased by 23 percent. This is remarkable since coal was a major export item before United Nations (UN) Security Council Resolution 2397, passed in December 2017, imposed a total ban on the DPRK’s export of minerals. If we assume that China has not secretly increased its imports from North Korea, and if the numbers provided in the report are correct, then the only reasonable explanation for this growth in production would be an increased allocation of coal to domestic demand, such as electricity production, steel production and heating. This would support the argument that some of the sanctions have unintended positive effects for North Koreans.
On another key item, grain production, the report claimed that “the peak-year level was exceeded” (최고수확년도수준을 돌파). This stands in contrast to an FAO report which expected crop production in 2019 to “drop to its lowest level in five years.” Rather, the Cabinet declared its intention to focus on the qualitative improvement of the people’s diet by setting the goal to increase meat and egg production.
The Cabinet report explicitly renewed North Korean claims that “not a single case [of COVID-19] has so far been reported in our country.” (우리 나라에서 아직까지 단 한명의 감염자도 발생되지 않게 하였다.) The credibility of that statement notwithstanding, it does correspond with the fact that the photos of the SPA session show a convention hall filled with hundreds of delegates who were not wearing a face mask. However, later in the report, it was stressed that the Cabinet would “subordinate everything to the health and safety of the people” (건강과 생명안전), which at the very least implies serious concerns.
The report reminded the members of the parliament who is calling the shots in North Korea by stressing that “as long as there is the wise guidance provided by the Party, we can live on our own and open up the road of our own development and prosperity no matter how desperately the enemies may try.” This was followed by the admission of “serious mistakes” (심중한 결함들) in the work of the Cabinet. No details were provided.
While such criticism is nothing new in North Korea and has been part of many major speeches of Kim Jong Un, including his report to the 2016 Party Congress, I cannot recall having read such a passage in a previous Cabinet report at the SPA session.
There were no clear indications of a relaxation of the state’s control over the economy and market-related reforms. Having said that, with some goodwill, we could interpret a few statements as leaving room for a coexistence between the state and the non-state sector. For example, the Cabinet is praised as the “organizer” (조직자) of the economy—not its owner or commander. Furthermore, while claiming the Cabinet’s full control of the resources of the state (국가), with regard to the country’s economy (나라의 경제), the Cabinet is only required to have the capability of managing and operating it in a unified manner (통일적으로 관리운영). An optimist might see parallels with the “strong state” paradigm of East Asia’s developmental dictatorships after World War II.
The term “sanctions” did not appear a single time in the report, reflecting the somewhat defiant official North Korean leadership’s position that they are not concerned about their impact. There even seems to be a good deal of trade-related optimism prevalent in the Cabinet when it aims to apply “strict discipline and order in import and export” (수출입활동에서 엄격한 규률과 질서).
The Budget Report: Growth and Outlook Are Optimistic
Considering that the biggest part of North Korea’s economy is owned by the state, it is fair to treat the growth rates of the state budget as a proxy for the growth of the economy—an indicator that in other countries is measured as the GDP. None of the other components, such as the second economy (owned and operated by the military) and the de facto private economy, are included in the official state budget figures. But there is reason to believe that due to privileged access to resources and higher competitive pressure, these two parts of North Korea’s economy are more dynamic than the state-operated part. The state budget growth rates can, therefore, be treated as a rather conservative proxy for the overall performance of the North Korean economy, and that actual performance might have been even better.
The numbers included in the budget report do not reveal any dramatic changes, some cautious optimism can be seen about the future of North Korea’s economic development with an expected growth rate for 2020 of 4.2 percent. This optimism corresponds with UN estimates of North Korea’s GDP growth for 2019 of 1.8 percent, the first time in three years that the UN projected positive growth at all.
Figure 1 shows the year-on-year growth figures of the last two decades in comparison to the values for the previous years.
Figure 1. Annual Growth Rates of North Korea’s State Budget, 2000~2020.
Growth rates and expectations continue to be relatively modest if compared to the upbeat mode during the reform period 2002-2005 and the final years of Kim Jong Il. There is a certain rebound in the growth of 2019 budgetary revenue (5.3 percent) after slightly lower rates in 2017 and 2018 (4.9 and 4.6 percent, respectively), both of which can be associated with the harsher economic sanctions mentioned above.
There seems to be some optimism among North Korea’s economic planners who set the projected growth figure (“planned revenue”) for 2020 at 4.2 percent, which is about the same rate as for 2013 and 2014. The same is true for “planned expenditure,” which is projected to grow 6 percent, the highest such rate since 2014. We should acknowledge, however, that all these rates are still far below the double-digit figures in 2005.
Source of Growth Optimism Remains Unclear
The sources of the projected growth in revenue remain unclear. Transaction taxes and profits from state enterprises are the two main sources of state budgetary revenue, together accounting for over four-fifths of the total. But the projected growth rates of both sources of income are down to about 1 percent, which is substantially lower than last year when they stood at about 4 percent. This is the lowest such growth rate in over a decade.
Other sources of state income also show lower growth rates than in previous years. Income from real estate rent, which was set to grow 9.5 percent in 2014, is now almost stagnant at a mere 0.1 percent. Income from economic and trade zones is expected to grow only 0.3 percent, compared to 5.1 percent in 2014.
As Figure 1 shows, since 2008, the North Korean state has planned to spend more than it earned. The gap between the planned growth of revenue and expenditure for 2020 stands at 1.8 percent and is thus only slightly higher than in 2019 (1.6 percent). For a country that is facing less extraordinary circumstances than North Korea, this gap could be interpreted as a budget deficit that would be covered by new debt. A rate of 1.6 percent is much lower than the 3 percent of new debt-to-GDP that was set as one of the convergence criteria for the Euro. It should thus not be much of a concern—except that North Korea is unable to get any loans from international financial institutions.
Therefore, no matter how small that gap is, the question remains: How does North Korea finance its deficit? One could speculate that either the numbers are fake, or that there are illicit activities, or both. An alternative answer could be that there is no such deficit, since the figures for actual, or “achieved” revenue are usually higher than planned and thus lead to a more balanced budget and occasionally even a small surplus, at least according to the official figures.
Another possible explanation is that income from non-state sources is growing; in other words, the state is taxing quasi-private operations on the markets and among enterprises. But this should nevertheless be reflected somewhere in the budget, for example under “profits of cooperative organizations.” However, this value, too, is set to grow only very mildly at 0.4 percent. Local budget revenue, something I previously suggested using as a proxy for the quasi-private economy, has not even been mentioned explicitly this time, although its contribution to the state’s revenue remains relatively stable at 25.7 percent. A somewhat obscure formulation in the budget report states that “the provinces, cities and counties would cover expenditure with their own revenue and contribute lots of funds to the centrally-run budget.” At the very least, this tells us that local units are left to fend for themselves, and that in addition they are asked to finance the state’s expenditures.
Last but not least, for the first time ever in a budget report, there is an acknowledgment of “some drawbacks in executing the state budget” (국가예산집행에서는 결함도 있었다), followed by the same passage as in the Cabinet report on the need to follow the instructions of the Party. Since little detail is usually provided on how the budget of the previous year was spent, it is difficult to describe exactly these drawbacks. However, the surprisingly modest projected growth rates for 2020 could be an indicator that the state might have had difficulties collecting enough taxes, fees, and other forms of revenue. This, in turn, could either mean that less taxable profit was made in 2019, or that tax evasion has been more successful.