South Korea’s Central Bank Report Exaggerates North Korea’s Economic Growth

The Bank of Korea. (Photo: iStock, Young K Song)

The most recent report by the Bank of Korea (BOK) on North Korea’s economy, released last week, seems to be a case of “objective analysis”: The bank apparently wanted to show some modest North Korean economic growth and it tilted its presentation to achieve that objective. In the process, many important questions remain unanswered regarding economic growth, trade, manufacturing, agricultural and electricity output. It may be time to take the training wheels off of North Korea and push it to report its own economic data, even if it is likely to be inaccurate or incomplete.

Breaking Down the Report

Ever since the BOK started reporting in 1991 on the North Korean economy, its purpose has been to compare North and South Korean output of various products and services. Arguably, this was a valid goal then, but by now these differences are so large as to be meaningless. The 2019 report is comprised of three parts.

  • Production: The first section focuses on change in North Korea’s real, or inflation-adjusted, gross domestic product, measured in percent change and absolute levels as valued in South Korean prices, and using a production model rather than the more familiar expenditure-based model used by the US and most Western countries. It’s not wrong and everyone also publishes these “product” accounts, but they are not very useful in determining policy or in forecasting change. Analytically, it would have been better to try to gauge and separate consumption, investment, government spending and trade, providing information on how the economy disposed of its production. But the report provided no information on this question.
  • National Income: The second part focuses on the change in nominal (i.e., not inflation-adjusted) national income, a slightly different concept than GDP but essentially equal in the aggregate. This is also awkwardly measured in current South Korean won but usefully divides income by the population, resulting in a 1.4 percent nominal decline in per capita income. Normally a decline in nominal income would imply an even greater decline in real income—pretty bad news for the average North Korean who already lives barely above subsistence. But the way the BOK handles prices, using South Korean won rather than an estimate of North Korean inflation, obfuscates the analysis. There is no good solution, absent North Korean data, but the results need to be better explained.
  • Trade: The final section looks briefly at the change in North Korea’s international trade, measured here in nominal US dollars. Exports rose a tiny amount, from a negligible $240 million in 2018 to $280 million in 2019, while imports rose from $2.6 billion in 2018 to $2.97 billion in 2019, leaving a record $2.7 billion trade deficit in goods. But the deficit figure must be calculated as if the bank doesn’t want to explain such a large figure. Instead, it adds imports and exports to give an aggregate, and virtually meaningless, total trade figure, saying it increased 14 percent. Lastly, the report, at least in the English version, does not try to combine all this varied data in an analytically meaningful and unified way, which is how national income and product accounts are supposed to be done. The BOK does this for South Korea so it knows how to do it; it does not make clear why it doesn’t do this for North Korea.

The report may include reasonable data—probably the best that can be done from outside North Korea—but it fails to give much insight into what is really happening in the economy. And it makes some serious unforced errors, such as failing to explain why nominal income fell and real GDP grew, the latter being the headline but the former, arguably, being more important. Did the North really import ten times the value of its exports and incur a $2.7 billion trade deficit, its largest in history? Is per capita income really one twenty-seventh of South Korea’s level and declining? Did the manufacturing share of the economy rise even as manufacturing output declined? Did agriculture do well in South Korean value terms but terrible in nominal North Korean output terms? Did electricity output plummet or is that a function of declining South Korean prices for electricity. All these assertions are true, according to the report.

The Fog of Analysis

BOK headlines its report, “North Korea’s real GDP increased by 0.4% in 2019.” So, media and North Korea watchers are going to take that data point and run with it. They won’t question why real, or inflation-adjusted, data climbed whereas nominal data showed declines. The BOK seems to be trying to hide an important fact—it apparently thinks North Korea is undergoing deflation. I say apparently because the methodology—using South Korean prices to measure North Korean output—is confusing. It may be that relevant South Korean prices declined but this would have no real bearing on the North Korean economy, so why calculate it this way? The headline easily could have been “North Korea’s national income fell last year, and people became even poorer.” It is not clear why the BOK is emphasizing growth, even if it’s a tiny amount.

Most curiously of all, the report doesn’t even mention inflation, the value of North Korean money or trade deficits, all of which are hidden in its data. Myriad press releases from sources such as Reuters and Bloomberg News and major South Korean newspapers were all headlining something like “North Korea returns to growth despite sanctions.” Aside from the headline “growth” idea, the BOK data shows North Korea to be rather stagnant, certainly not on the “rebound,” as The Korea Times puts it. And The New York Times takes the report and places North Korea’s per capita GDP at an absurdly accurate $1,184.79. The estimated GDP growth is far below any reasonable margin of error and the decline in nominal national income, especially per capita, is very damaging for a country with so many people at a subsistence level. Deflation may sound good, but it is actually very dangerous, suggesting a lack of demand and economic recession.

But to say that the North Korean economy is stagnant misses the mark. The bank seems to suggest very low investment levels, which may be the case, and would imply major trouble for the future. And it ignores the fact that Chinese Customs data—which it uses for the trade analysis—say North Korea imported no vehicles, no machinery and no electronics last year, which are normally billion-dollar items. Instead, it focuses on tiny increases in assembled watch and wig exports, neglecting to mention that the country is importing the timing devices and snapping them together.

North Korea Needs to Step up to the Plate

The annual BOK reports on the North Korean economy need to be rethought and probably retired. Perhaps they should continue the project but bury the data in a comprehensive report that gives the bank’s best analysis of North Korea’s entire macroeconomic situation. And it should give much more attention to the country’s oddly dollarized monetary system and socialized banking system. You expect that from a central bank and it is very important to current policy deliberations. As a member of the United Nations, the Pyongyang government is obligated to provide lots of data to the public and the United Nations Development Programme has spent tens of millions of dollars over the past thirty years to help them construct national income and product data of this sort. Perhaps it is time for South Korea to bow out of this task and press North Korea to do its own job. How else is it going to learn to deal with the real world?

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