North Korea: Country outlook
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- Economist Intelligence Unit
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- Economy, Outlook, Forecast, Overview
- Political Geography
- North Korea
North Korea: Country outlook
FROM THE ECONOMIST INTELLIGENCE UNIT
POLITICAL STABILITY: The Economist Intelligence Unit does not expect the leadership of Kim Jong-un to be challenged during our forecast period (2021-22). Since succeeding his father, Kim Jong-il, in 2011, Kim Jong-un has successfully consolidated his position within the country's three major institutional bodies: the Workers' Party of Korea (WPK), the Korean People's Army (KPA) and the State Affairs Commission (SAC). Kim Jong-il had allowed the KPA to grow singularly influential, but his son has focused instead on strengthening the role of the WPK.
ELECTION WATCH: North Korea is a dictatorship, with no free elections at any level. Local elections for provincial and township assemblies are scheduled to be held every four years; the most recent took place in July 2019. These elections are mostly symbolic and the elected institutions hold no real power.
INTERNATIONAL RELATIONS : North Korea will remain a secluded country in 2021-22, with its nuclear programme and armed forces continuing to pose a global and regional security threat, particularly in North-east Asia. Its relations with the US and South Korea will remain fraught. We do not expect denuclearisation talks to conclude in the foreseeable future, as the North Korean leadership deems the country's nuclear programme to be vital to the regime's survival. It will not completely relinquish this, even with any proposed security guarantee from the US. However, we believe that North Korea and the US will resume negotiations in 2021, owing to political and economic changes in both countries.
POLICY TRENDS: Policy attention in 2021 will overwhelmingly focus on battling the threat of the coronavirus and sustaining public livelihoods. We expect the border with China--which has been closed since late January 2020 to prevent crossborder transmission--to remain shut for most of 2021. The nationwide anti-coronavirus campaign, including social distancing and mass quarantine measures, will remain in place to prevent the country's fragile public healthcare system from being overwhelmed by spikes of infection. These virus-control measures will disrupt agricultural and industrial production, necessitating an increase in state welfare support. North Korea will also seek external aid and assistance to mitigate its shortages of medical resources and food. Despite its claim of recording zero coronavirus cases, in December 2020 the country reportedly applied for vaccines planned for low-income countries by GAVI, an international vaccine alliance. The overwhelming public health threat posed by the pandemic, along with the subsequent threat of mass starvation--which has been compounded by extreme adverse weather conditions in 2020--will induce the regime to moderate its isolationist stance in 2021.
ECONOMIC GROWTH: Our economic forecasts for North Korea are based on data from the UN Statistics Division and estimates from the Bank of Korea (South Korea's central bank). However, there remain disparities in the reporting of various indicators of North Korea's economic performance. Structural weaknesses in the economy will persist, and the difficult operating environment, coupled with sanctions on the country, will exacerbate challenges in reviving economic growth.
INFLATION: Price stability will remain a problem in North Korea, as a result of chronic supply-side shortages that have been exacerbated by the current sanctions. We expect food prices to surge in 2021 owing to reduced imports from China, the disruption of agricultural activity by adverse weather conditions and an anticipated decline in food production. Meanwhile, a moderate increase in global oil prices in 2021 will exert inflationary pressure (North Korea imports all of the oil that it consumes). Price pressures will alleviate in 2022, however, as trade with China resumes and increased international humanitarian aid may become available.
EXCHANGE RATES: In 2009 the regime redenominated the currency at the rate of 100 old won to 1 new won. A lack of confidence in the won has seen black-market rates diverge markedly from the market exchange rate, as the currency is now largely seen as worthless, both abroad and at home. We believe that falling export and tourism revenue during the coronavirus pandemic will create a shortage of hard currency. Along with persistent economic difficulties, this will lead to continued depreciation of the won in 2021, falling by 3.4% against the US dollar. We expect the currency to appreciate slightly in 2022 as economic activity and trade flows recover.
EXTERNAL SECTOR: Goods trade with China accounts for over 90% of total trade flows, owing to international sanctions that have clipped North Korea's official trade ties with the rest of the world. However, the border closure that started in January 2020 severely stemmed this important source of industrial inputs, consumer products and foreign-exchange revenue. North Korean exports to China, as reported by China's General Administration of Customs, plunged by 72.1% year on year in US-dollar terms in the first three quarters of 2020, while imports declined by 72.9%. The decline in bilateral trade was aggravated further in October and November, following reports of new coronavirus infections in China. We believe that border closures will remain in place for most of 2021, diminishing North Korea's export receipts for that year. Even after borders reopen, tourist flows from China will not recover to pre-pandemic levels in the foreseeable future, which will depress export revenue on the services account. The current-account deficit will widen in 2022, reflecting a recovery in imports from China, amid increasing domestic demand for agricultural and industrial inputs.
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