Uncertainty In China Adds To Gloomy Outlook For North Korea

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North Korea is struggling for economic growth due to a number of factors, one of which comes from outside its borders.

In fact, China may be the single most important factor in the continued survival of the current North Korean government. More than anything else, an economic recession in China would have dire consequences in North Korea, writes Andray Abrahamian for Reuters.

2015 a bad year for North Korea’s economy

Over the past few years, the North Korean economy has been growing slowly. However in 2015 the situation has worsened, due in part to an Ebola quarantine imposed by Pyongyang, partly to bad weather, and also because of instability in the Chinese stock market.

Pyongyang only ended its crippling Ebola quarantine in March 2015 after 5 months in which anyone entering North Korea was subject to a 21-day quarantine, which soon became a travel ban. Foreign investors were dissuaded from visiting the country thanks to the unappealing prospect of spending 3 weeks shut in a North Korean hotel room, and trade and tourism were badly affected.

Although both industries are now growing again, the long-term effects of the quarantine may not yet be known. Such drastic government action does nothing to improve North Korea’s reputation as an unreliable destination for investment, even though government officials are currently attempting to attract foreign capital.

Meteorological factors come into play

Shortly after the quarantine policy was ended, the weather conspired against North Korea. The country is facing a drought which officials have said is the worst in 100 years. In the short-term, many North Koreans have suffered economic hardship as a result, with electrical output disrupted.

North Korea produces most of its electricity from hydropower; according to data submitted to the United Nations it boasted 6 thermal power plants and 8 hydropower plants between 2005 and 2009. As the snow melts in late winter and early spring, electrical output usually increases. However this year foreign residents of Pyongyang reported that power cuts were longer and more frequent than in recent years.

Others reported that even in the center of the capital city residents were relying on fuel-run generators for nearly 100% of their power. That figure is usually less than 50%.

The water shortages also affected the planting of rice crops. Office workers are usually pressed into service to help farmers plant rice in May and early June. This year it was reported that “a more labor-intensive method of planting” was being used to make up for a lack of water, and planting season seemed to last longer than usual.

Office workers spending time in the fields also has an economic impact. If factory staff disappear for a few days, production is halted. Not only are they expected to plant rice, they also have to fulfill their normal duties, which can provoke exhaustion.

Pyongyang hoping for Chinese economy to improve

Even now that rice-planting season is over, North Korea is faced by the threat of economic strife in China. Equities have already suffered, and global commodities markets may be next, with potentially grave consequences for North Korea.

Over 80% of Chinese investors are individuals, rather than institutions. This means small investors are suffering losses, which could provoke slower growth in China and a reduction in personal consumption.

Such a change would impact the small companies in Northeast China who employ North Korean migrants in their factories, and may have once been good candidates to set up shop in North Korea itself.

Troubles in global commodity markets could cause further issues. Iron ore, which represents an estimated 1% of North Korea’s exports, recently reached six-year lows before rebounding. Other minerals are likely responsible for 30-40% of the country’s exports.

Two such minerals are coal and anthracite, and prices of both have declined so far in 2015. It is reasonable to predict continued decline after China’s stock market slump, which means less profits for North Korean companies.

What next for North Korea and China?

Analysts are divided over the future prospects of the Chinese economy. Some believe that changing demographics have produced a structural change, while a real estate bubble is made worse by the huge amount of bad debt held by Chinese banks. Others say the recent instability is just a short-term market correction.

Either way, the Chinese economy currently presents another unwelcome problem for North Korea. A long-term decline in Chinese economic strength would be disastrous for North Korea, but given the aforementioned factors it would not be difficult for officials in Pyongyang to believe that 2015 just is not their year.

A suffering Chinese economy could pose an existential threat to the Kim regime, which relies on exports to its neighbor to keep its economy afloat.

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