From the Korea Herald:
Sanctions will cripple N.K. economy: KIEP
10/17/2006
Kim So-hyun
The international sanctions to be imposed on North Korea will further cut into the country’s moribund trade volume and drag it deeper into recession, a South Korean think tank said in a report released yesterday.
The sanctions – being taken under a U.N. Security Council resolution – will likely reduce the North Korean economy to a state worse than in the mid-1990s when millions died of hunger, the Korea Institute for International Economic Policy said.
“The North Korean economy is expected to contract much more severely than in the so-called ‘marching in torment’ times (in the mid-1990s),” the KIEP report said. “More financial sanctions and a block on foreign capital inflow will deepen the shortage of foreign currency, resulting in a wider gap between market and official exchange rates.”
The official exchange rate of the North Korean currency was 137 won to the U.S. dollar in the first half of 2005. However, the dollar was traded for between 1,900 won and 2,600 won in the market, up to 19 times higher than the official rate.
The prohibition of financial transactions and capital inflow is regarded as the most powerful punitive measure since it has been cited by Pyongyang as one of the main reasons for boycotting six-party talks and pressing ahead with its reported test of a nuclear device.
“Although trade accounts for less than 15 percent of North Korea’s gross domestic production, trade and support from neighboring countries allowed its economy to inch up a bit recently,” said Choi Soo-young of the Korea Institute for National Unification.
“Whereas the North could ask for international help when it suffered natural calamities such as draughts in the mid-1990s, it now has to live without such generous aid.”
Since the U.N. resolution bans direct or indirect supply of weapons or any materials that could contribute to the North’s weapons of mass destruction programs, a reduction in Chinese imports of related materials could trigger stagnation in the nation’s machinery, electronics and chemicals output, the KIEP report said.
“The trade volume between North Korea and China has surged by some 30 percent a year since 1999, and this has accelerated the North’s economic growth by 3.5 percentage points annually,” KIEP researcher Chung Seung-ho said.
China accounts for about 40 percent of North Korea’s relatively small volume of trade. South Korea, Thailand, Russia and Japan each take up 26 percent, 8.1 percent, 5.7 percent and 4.8 percent, respectively, according to Chung.
It remains to be seen whether neighboring countries will take individual measures in addition to the sanctions under the U.N. Security Council resolution.
The United States, Japan and Australia are considering harsher measures of their own while South Korea and China seem reluctant to follow suit.
“As China’s involvement in the sanctions is likely to be only symbolic, the level of South Korean participation will determine the degree of the North’s economic decline,” KINU’s Choi said.
China could consider reducing its uncompensated grants to North Korea, which soared 162 percent to $38 million last year, according to KIEP.
“China is expected to partially or entirely stop the trade of machinery and electronics that could be related to weapons of mass destruction in North Korea, but it wouldn’t go as far as forbidding private commercial trade across the border,” the report said.
“Stopping the supply of crude oil, for which North Korea depends entirely on China, is unlikely.”
