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  1. Analysis
17 February, 2022

Why has North Korea opted for not-so-splendid isolation?

North Korea's isolation is self-imposed and brings great hardship to the country's population, but it seems unlikely to embrace foreign investment any time soon.

By Cara Lyttle

North Korea has garnered a reputation for being the most secretive country in the world. It has, of its own volition, become increasingly isolated from other countries ever since the end of the Korean War in 1953, which had started when North Korea – backed by the Soviet Union and China – invaded South Korea, which was defended by the UN (spearheaded by US forces). This level of secrecy is a key reason why the country creates so much intrigue, and suspicion, throughout much of the Western world.

Kim Jong Un’s ten years of power, not progress

December 2021 marked the ten-year anniversary of North Korean leader Kim Jong Un’s entry into power. In his speech to mark the occasion, he spoke of the country’s wavering economy and touched on future goals, adding that: “Emergency epidemic prevention work should be made a top priority in the state work.” He acknowledged the “harsh situation” the country faced in 2021 and set “an important task for making radical progress in solving the food, clothing and housing problem for the people” in 2022.

Any signs of economic progress will be welcomed throughout North Korea, a country where almost 60% of the population live below the poverty line and a gross domestic product (GDP) per capita is estimated at $1,700 (Won1.53m). By most measurements, North Korea is considered one of the poorest countries on Earth. It is also unique in that it is one of the world’s most ethnically homogenous regions. A small number of Chinese migrants, making up less than 1% of its population, constitute the only other significant ethnic group in North Korea.  

The country has been governed by the Kim dynasty since 1948, with three generations having ruled in this time, and it was in 1956, during the reign of Kim Il Sung, that the ideology of ‘juche’, or self-reliance, was first brought in.

Modern day North Korea’s economic goals, or to be more accurate economic struggles, can be attributed in no small part to the ideology of juche. The country celebrates the idea of self-sufficiency, which runs alongside the importance it attaches to Korean racial purity. In contrast to South Korea and other economically progressive countries in Asia, North Korea views international trade as a regrettable necessity to gain insight into new technologies. North Korea watchers widely agree that Kim Jong Un understands that a form of international cooperation is a required if the country is to make progress economically, but he fears North Korea becoming over-reliant on outside forces, which would threaten the indoctrinated juche policy. The economic failing as a result of this repression becomes all the more apparent when comparing North Korea with its southern counterpart.

Inter-Korea relations and post-war trajectories

An 'end' to the Korean War was formalised by an armistice signed in July 1953 rather than a peace treaty, meaning the countries are still technically at war. Since then, the Korean peninsula has been divided by a demilitarised zone, separating the Democratic People's Republic of Korea (better known as North Korea) and the Republic of Korea (South Korea). The border between the two remains one of the most heavily secured zones in the world, and is patrolled by armed guards and surveillance cameras contentiously monitoring activity, which act as a constant reminder of the lack of trust and ongoing tension between the two countries.

However, in spite of these fractious relations with its northern neighbour, South Korea experienced significant economic progression since the armistice was signed in 1953. By the 1990s, South Korea was recognised as one of the four 'Asian Tigers', alongside Taiwan, Singapore and Hong Kong, due to their fast economic growth fuelled by exports and rapid industrialisation. In 1996, it became an official member of the OECD, the second country from Asia to join following Japan, which further solidified its position as a developed country. In 2019, South Korea’s nominal GDP was 54 times that of North Korea's, highlighting the ever-widening gap between the countries. In the same year North Korea's gross national income per capita was 96% lower than its southern counterpart.

South Korea remains resilient in its effort to attract international investment and continues to reap the rewards from an economic perspective. The country’s economy expanded at its fastest pace in 11 years in 2021, with its GDP growing by 4%, owing to an increase in exports and construction activities. North Korea, on the other hand, struggles to maintain economic stability and attracts minimal levels of foreign direct investment (FDI).

FDI into North Korea primarily takes the form of joint ventures with local companies, but even then the country has received criticism for a lack of business clarity. Two international companies, Egypt-based communications company Orascom and Chinese mining company Xiyang Group, had invested significantly in North Korea in a move to gain a foothold in a country with almost 26 million potential customers. However, as a result of contradictory financial objectives with local authorities, Orascom was forced to admit it had effectively "lost control" of its joint-venture cellular operator Cheo Technology, and Xiyang Group had its investments expropriated in 2012, leaving the company with an estimated loss of $45m. At the time this was the largest state confiscation of private foreign investment in North Korea, and it has acted as a cautionary tale for prospective international investors in the country.

Are China and Russia still North Korea's strongest allies?

China’s support of North Korea dates back to the Korean War and since then it has provided economic and political backing to the country. China is North Korea’s largest trade partner, with bilateral trade between the two countries increasing tenfold between 2000 and 2015, according to data from Seoul-based Korea Trade-Investment Promotion Agency. Ongoing sanctions since 2006 have made trading with North Korea increasingly challenging for most Western countries, however, which has only served to heighten this reliance on China.

The two countries have also strengthened their bond by establishing additional physical links. In September 2015, a bulk cargo and container shipping route was established to boost North Korea’s export of coal to China. The same year China opened a high-speed rail route between Shenyang, the provincial capital of Liaoning Province, and Dandong, a Chinese city located on the western border of North Korea. In stark contrast to the desolate North-South Korea border, the border at Dandong is a hub for international business trade. The same year, the Guomenwan border trade zone opened in Dandong with the intention of increasing bilateral trade between China and North Korea. The aforementioned initiatives appear to have been successful; in 2019, China accounted for more than 95% of North Korean imports.

Despite the ongoing tensions surrounding the denuclearisation of North Korea, China’s primary concern is to maintain stability on the Korean peninsula. In February 2022, China’s ambassador to the UN, Zhang Jun, called upon the US to take a more flexible approach when working with North Korea, saying: “If they do want to see some new breakthroughs, they should show more sincerity and flexibility... They should come up with more attractive and more practical approaches, policies and actions, and accommodate the concerns of the Democratic People's Republic of Korea.”

Along with China, Russia has maintained a relationship with North Korea, although to a much lesser extent than the country did during Soviet times. In 2019, during a summit in Russia, President Vladimir Putin echoed the importance of denuclearisation and offered no support of sanction relief. Nevertheless, Russia continued to allow more than 10,000 North Korean labourers to work in the country despite international efforts preventing North Korea from earning foreign currency from forced international labour.

Russian companies also did not adhere to the strongly enforced UN Security Council resolutions and re-exported coal, petroleum and transhipped oil from North Korea to other countries. Despite these political and geographical ties, the current relationship between Russia and North Korea appears to be stagnant and unproductive. It seems unlikely there will be significant future development without some demonstration of denuclearisation from North Korea.

North Korea has received constant pressure from major world economies to denuclearise. The economic sanctions imposed on the country since 2006 have caused irrefutable damage to both its global standing and its economy. The impact of these sanctions has been made worse by a lack of domestic infrastructure necessary to facilitate the international trade North Korea so desperately needs. The country's decision to isolate itself has made potential trade partners nervous. Combine this with a lack of successful established foreign businesses in the country and it does little to encourage future greenfield investment. If North Korea's economy is to advance, it seems that the country must change its attitude towards FDI, although that could mean ditching the juche ideology, something that seems unlikely under the current regime.

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