Why and How Estimates of North Korean GDP by the Bank of Korea Are Deceptive
The most commonly used indicator to gauge a country’s economic capacity and well-being is Gross Domestic Product (GDP). GDP is defined as “the market value of all final goods and services produced within a country in a given period.” It measures the flow of money based on transactions in a market economy, where income and expenditure should be equal. In the case of the Democratic People’s Republic of Korea (DPRK or North Korea), the Bank of Korea’s (BOK) estimates are the most widely cited metrics by international organizations and policy actors when assessing the DPRK’s economic situation. However, these numbers can be deceptive as the BOK uses the production approach to estimate North Korea’s GDP, which does not reflect its actual economic situation.
Even though the BOK’s use of the production approach has flaws when measuring the DPRK’s GDP, other approaches are also insufficient. The biggest deficiency in current estimative approaches is the inability to properly account for the state procuring goods and services without payment or at a fraction of the cost, undermining the market principle that income should equal expenditure—a common trait among communist states. Because the North Korean regime does not disclose reliable information on its economy and resorts to widespread extraction of labor, conventional economic thinking cannot be applied to assess its economic reality. At the same time, the country’s dependence on an extractive system is increasingly risky, as most other instances of this approach have led to a state’s demise.
How Bank of Korea Estimates Mislead
According to the BOK, the real GDP of the DPRK declined by 8.4 percent from 2017 to 2022. Many have disputed these estimates: Korea Economic Institute of America Senior Advisor William Brown has suggested retiring the BOK’s report because of these inaccuracies. In addition, Seoul National University’s Professor Byung-Yeon Kim has argued that household income in North Korea actually fell by half between 2017 and 2022, according to testimonies from defectors, resulting in GDP decreasing by 25 percent. Despite acknowledging the BOK’s flaws, no one has fully captured why and how the BOK’s GDP figures are so misleading. A closer look into the different approaches to estimating a nation’s GDP coupled with an analysis of the impact of labor extraction in North Korea is essential to grasp the discrepancies.
In general, there are three ways economists measure GDP: the production approach, the income approach, and the expenditure approach. In market economies, when using any approach, the GDP calculated in principle would be the same. The BOK implements the production approach when assessing North Korea’s economic performance by “using the basic data on production quantities supplied by relevant institutions…with the use of South Korea’s prices and value-added ratios.”
However, this approach does not account for labor extraction, where, either voluntarily or through coercion, workers contribute labor to produce goods and services in North Korea for free or at a highly discounted rate. This should be interpreted as a “hidden tax” on labor where the worker’s time is redirected by the state, thereby causing the worker to lose earning potential while the state collects returns on the worker’s outputs. The BOK’s estimation assumes no extraction of labor and thus shows an artificial increase in the value added to the economy, skewing estimates of its economic activity.
The Difficulties of Measuring North Korea’s GDP
Of the three major approaches to measuring GDP, each presents distinct flaws when applied to North Korea.
The Production Approach
The BOK uses South Korean prices in its estimates, which distorts changes in North Korean prices. Since the 2017 sanctions, North Korea has experienced a sustained trade deficit due to decreased exports, causing a drop in government revenue and the rise of the foreign exchange rate, resulting in inflation—a phenomenon that is overlooked when using South Korean prices. This can be illustrated by the 2019 data, which shows a trade deficit of $2.69 billion, or 9.5 percent of North Korea’s nominal GDP, as estimated by the BOK. Yet that same year, the BOK stated that GDP grew by 0.4 percent. In reality, the real income of North Koreans has sharply declined due to inflation and a sharply declining won-dollar exchange rate. All in all, North Korean GDP is overstated by the BOK.
The Income Approach
The income approach aggregates income from household wages, dividends, rent from private properties, and interest. In North Korea, the state owns the means of production; there is no stock market, property rights, or banking system. Therefore, national income can only amount to aggregate household income, composed of economic activity in the shadow economy and government-paid wages, representing a fraction of the market wage because of labor extraction. For example, Ri Il Gyu, a former high-ranking North Korean diplomat and recent defector, claimed to earn only the equivalent of $500 monthly while working in Cuba and $0.30 monthly in North Korea. Consequently, he was compelled to engage in the shadow economy via smuggling to make up for his low income and support his family.
Not accounting for labor extraction in the income approach will result in a much lower GDP figure than the production approach. This is confirmed by empirical research, including testimonies I gathered in July 2024 from North Korean defectors who arrived in South Korea in October 2023, verifying the intensification of labor extraction and the precipitated decline in state-provided wages during the COVID period. Professor Kim had similar findings and concluded that the GDP decreased by 25 percent between 2017 and 2022. The BOK’s approach clearly overstates real income in the DPRK, thereby exaggerating GDP.
The Expenditure Approach
The expenditure approach estimates GDP by summing consumption, investment, government spending, and net exports. The BOK’s approach overstates North Korean GDP compared to the expenditure approach in several key ways. First, output produced without due compensation via extraction would logically result in both decreased government expenditure, as the government does not pay for labor, and household income, as individuals are not paid for their labor. Decreased household income results in lower household consumption, which, therefore, impacts the population’s economic well-being. Such a phenomenon is not effectively captured in the BOK’s estimation, which inflates the GDP. Second, the expenditure approach is the only open model incorporating foreign trade, the bulk of which is with China, providing a lifeline to the regime and ensuring its survival. Exports are the largest source of North Korea’s government revenue, so its sustained trade deficit causes government revenue to decrease and impacts the types of output North Korea can produce. The sustained trade deficit causes the foreign exchange rate to increase and prices to rise. Yet, the BOK’s approach does not account for this as it uses South Korean prices and does not consider net exports.
Accounting for Extraction
The DPRK uses the extraction of labor on a large scale. As an example, news reports in May 2024 showed students, from those in elementary school to those in university, being forced to transplant rice seedlings for no pay as part of the state-mandated farm assistance period. By forcing people to work for no income, much of the DPRK’s economic activity is not captured in traditional GDP data.
As the foreign exchange rate rises and the budget deficit deepens, the DPRK must compensate for this by printing money, eventually leading to inflation. However, instead of resorting to printing money, the regime has relied more and more on labor extraction, which is not accounted for in the BOK’s estimation.
Finally, in the DPRK, investment can only come from the government as the inability of individuals to save precludes private investment. Revenue must exceed expenditure to ensure net investment from the government into the economy—without sustained investment, the country’s economic capacity will contract, and depreciation will occur, resulting in eroding infrastructure, the contraction of productive capacity, and pervasive adverse effects on the economy in the long run. The DPRK resolves this through extraction, both when paying workers a fraction of the market wage or when procuring goods and services below the market value. By not taking into account all these factors and using the production approach, the BOK’s estimate overstates North Korea’s GDP.
Conclusion
Each approach to estimating a state’s GDP has its own blind spots, and all of them fail to illustrate North Korea’s dire economic situation. Its accumulated trade deficit after the increased sanctions in 2017 and self-imposed COVID-19 isolation in 2020 forced Kim Jong Un to deplete the foreign exchange reserves and rely on hacking, smuggling, and other illegal activities to replenish its diminishing coffers. The future of the DPRK is bleak, and the regime has no other choice but to rely on labor extraction and harsh repression of its people. Pyongyang’s increased belligerence internationally is merely a sign of the regime’s desperation to enhance its economic plight and ensure the survival of its extractive system.
Recent Nobel Prize laureates Daron Acemoglu and James Robinson explained in their book Why Nations Fail that extractive systems, like the one in North Korea, impede economic development because the economy’s benefits accrue to only a few chosen members of the ruling class and are not shared among people. Therefore, it should be noted that the economic failure of extractive systems is not an indictment of the people in that country but a system that, throughout history, has consistently failed. North Korea must replace its extractive system with an inclusive one if it is to achieve real economic development and avoid collapse.