The Levitating North Korean Economy

December 18, 2013 9:45 AM

A question repeatedly asked in recent months, most recently by Ruediger Frank, is what underpins the apparent increase in North Korean prosperity. Two complementary explanations are that the prosperity is partly an illusion, the product of concentrating expenditures on a narrow, but highly visible, strata of Pyongyang, and that it is financed by the growth of trade with China, particularly in minerals exports.

Recently a third explanation surfaced: North Korea was "selling gold." The explanation was framed as a sign of growing North Korean desperation and a signal of impending collapse: in order to keep the bread and circus act rolling, Kim Jong-un (or was it Jang Sung-taek?) was selling off the patrimony. The story struck me as probably an exaggeration, or possibly even the product of a disinformation campaign. North Korea has gold mines and has long sold the mineral. Proceeds from gold sales were one of the primary sources of funds that got impounded in the BDA episode if memory serves. The "desperation" interpretation would be more interesting if it turned out that they were not selling mined ore, but rather de-accumulating monetary gold reserves.

Enter Kent Troutman, research analyst, who reads the BIS Quarterly Review for grins. The BIS figures indicate that in 2011 North Korea obtained $272 million in loans, but this was more than offset by a $311 million decline in loans in 2012, leaving the amount of outstanding loans at $53 million in June of 2013. The sudden stop in bank lending in 2012 was accompanied by a $23 million draw down on deposits. The de-accumulation of deposits continued in the first half of 2013, down another $42 million, leaving a balance of only $37 million. Some of this drawdown of deposits may have been undertaken in anticipation of financial sanctions or disruptions associated with the nuclear and missile tests this past spring, and not simply a function of deteriorating economic circumstances. But at face value, the BIS figures suggest that for the past two years, North Korea has been eating the proverbial seed corn.

If commodity prices are weakening, as I have argued, then one can envision selling some gold or drawing down on reserves to maintain or smooth consumption. But this is precisely the problem I pointed to earlier—if conditions begin deteriorating, the North Koreans will find themselves in trouble without conventional macro stabilization tools. Selling reserves would fit into that narrative nicely.

That said, contra Yonhap, it is a pretty big leap to collapse of the regime.


Joshua Stanton

After BDA, North Korea dumped gold on the London and Bangkok markets as a survival strategy. Iran is doing the same thing now, probably in Dubai or elsewhere in the Gulf. So while I share your instinct that this story's conclusions are exaggerated, gold selling is the sort of behavior we've seen before from regimes in financial distress. It will be interesting to see if we observe more of this behavior as Jang's money trees are clear-cut.

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