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How does North Korea make its money?

By Susannah Cullinane, CNN
updated 8:24 PM EDT, Tue April 9, 2013
STORY HIGHLIGHTS
  • North Korea's main trading partner is China, estimated to account for 67.2% of its exports
  • The country has been hit by sanctions over its nuclear and ballistic missile programs
  • It has suffered from food shortages leading to malnourishment and stunting
  • Pyongyang has denied claims of involvement in illegal drugs and arms trading

Are you from South or North Korea? Send us your views on the crisis.

(CNN) -- There's a reason that the historical nickname of the "Hermit Kingdom" for the old unified Korea is now applied to the closed North Korea - officially known as the Democratic People's Republic of Korea (DPRK).

The country is notoriously difficult to get information on and its sanctions-hit economy is said to operate on a number of different levels, including a black market, with the government not even releasing official trade statistics.

CNN examines the North Korean economy and how Pyongyang generates its income.

What's the overall condition of North Korea's economy?

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Not good. North Korea's economy is one of the world's "most centrally directed and least open" and faces "chronic economic problems," according to the CIA World Factbook -- which collects information for U.S. government agencies.

"Industrial capital stock is nearly beyond repair as a result of years of underinvestment, shortages of spare parts, and poor maintenance. Large-scale military spending draws off resources needed for investment and civilian consumption," it continues.

The factbook projected data from a 1999 OECD study to estimate North Korea's Gross Domestic Product (GDP) in 2011 to be $1,800 per capita.

It puts growth at 0.8%. However, U.N. estimates for 2011 put per capita GDP at $506 and growth at -0.1.

In comparison, the factbook estimates South Korea's GDP per capita in 2011 to be $31,700 and puts growth at 3.6%. Figures for 2012 were $32,400 and 2% respectively.

What are North Korea's main sources of income?

The factbook defines North Korea's industries as military products, machine building, electrical power, chemicals, mining, metallurgy, textiles, food processing and tourism.

Its main exports were minerals, metallurgical products, manufactures including armaments, textiles and agricultural and fishery products and its main imports petroleum, coking coal, machinery and equipment, textiles and grain, it says.

Estimated industry accounted for nearly half of GDP, followed by services and agriculture, the factbook says.

South Korea's Ministry of Unification put the amount of trade between the two countries in 2011 at about $1.7 billion. Of that, about $914 million was inbound and $800 million outbound. Government and private humanitarian assistance to North Korea totaled about $17.4 million, the ministry said.

Jang Jin-sung is the editor-in-chief of the website New Focus International, which produces news based on a network of North Korean exiles and sources within North Korea. Jang himself in 2004 fled North Korea, where he said he had been on the DPRK Central Broadcasting Committee and the country's Poet Laureate.

Jang said South Korean investments generated the bulk of North Korea's foreign currency income with another large chunk of income coming from trade with China. The largest portion of this was from the arms trade, he said.

All North Korean businesses involved with China were also required to give part of their profits -- usually more than 50% -- to the government's financial organization known as "Office 38" as "loyalty offerings," Jang said.

Who are North Korea's trading partners?

The CIA World Factbook said China accounted for an estimated 67.2% of North Korea's exports and 61.6% of imports in 2011. South Korea accounted for 19.4% of exports and 20% of imports, while India received an estimated 3.6% of exports and the European Union provided about 4% of imports in 2011.

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Professor Jim Hoare is a senior teaching fellow at the University of London's School of Oriental and African Studies (SOAS). He established Britain's first embassy in North Korea in 2001.

Hoare said that for a time in the early part of the last decade South Korea had been Pyongyang's main known trading partner. However, that had deteriorated since the last president -- Lee Myung-bak -- ended Seoul's previous policy of engagement and China became Pyongyang's main trading partner.

"There are Chinese goods all over the country. China supplies it with oil and food stuffs and everything from buses to toilet seats," Hoare said.

What interest does China have in helping North Korea?

It's commonly believed that Beijing feels it is safer to have North Korea on its border than U.S. ally South Korea, Jang said. However, China moved against North Korea when it voted in favor of the U.N. resolution condemning Pyonyang's nuclear test earlier this year.

Jang said he believed China was supporting sanctions in response to attempts by North Korea's military to claw back power it had lost under the regency rule of Kim Jong Un's uncle Jang Song-taek and his aunt Kim Kyong-hui. The military under Kim Jong Il had created a headache for China and that it would rather have the regency holding power, he said.

Writing for 38north.org, Jenny Jun speculated that Beijing might have "experienced a classic mismatch between means and ends when efforts to maintain the status quo by propping up the internal regime ended up propping up the North's nuclear program as well."

Read more: Will China finally 'bite' North Korea

What standard of living do ordinary North Koreans have?

In 2011, UNICEF estimated that about a quarter of North Korea's population -- or six million people -- did not have enough to eat. Nearly a million of those were children under the age of five, it said. UNICEF said food was rationed in North Korea and that the country was "susceptible to food crises because of political and economic isolation, and climate change."

The World Food Programme says North Korea continues "to face regular, significant food shortages," with one in every three children chronically malnourished or too short for their age.

The United States suspended shipments of food aid to North Korea in 2009 after the North started rejecting shipments amid tensions over Pyongyang's nuclear program and concerns that the supplies were not reaching those most in need.

In March 2012, Pyongyang agreed to halt portions of its nuclear and missile programs and accept the return of nuclear inspectors in exchange for 240,000 metric tons of U.S. food aid.

However, later the same month North Korea's announcement of another rocket test ended the deal.

Hoare said the standard of living in Pyongyang differed from other parts of the country. "Pyongyang is the elite. A lot of people do have money -- the restaurants are used by Koreans, officials and others. Elsewhere, senior officials will have access to funds.

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"Most people live a pretty hand-to-mouth existence in the North apart from the elite."

The diet of North Koreans was a "much more reduced one than that in the South," he said. "Most people live on grains and vegetables with meat and fish very, very, rare in their diet. Even in Pyongyang, people aren't living that high on the hog," he said, although the elite and foreigners were protected.

Why is North Korea's economy in such bad shape?

The official economy was based around heavy industry on North Korea's east coast and until at least the mid-1970s, North Korea was one of the two main industrial nations in Asia, alongside Japan, Hoare said. While not an official member, North Korea had also benefited from the Soviet-led Council for Mutual Economic Assistance -- an economic union between Soviet states referred to as Comecon.

However, the collapse of the Soviet Union and a series of natural disasters saw its industrial sector enter a steep decline in the 1980s, which further intensified in the 1990s, leaving the economy "pretty decrepit," he said. The country also had an oil shortage. "It used to get its oil from the Soviet Union, it doesn't anymore," Hoare said. Agriculture had been on a "downward spiral" since the 1980s, with an overdependence on fertilizers. "The land is worn out, people are worn out, equipment is worn out."

But it's difficult to get reliable information on North Korea's economy. Hoare said Pyongyang had not published any statistics on its economy since the early 1960s. "This is all a very murky and difficult area. It's not clear, it is opaque and it's hard to get very precise figures and an exact picture. That's the nature of the animal," he said.

The country also had electricity shortages, he said, which was one of Pyongyang's arguments for developing nuclear power.

Since Pyongyang's first nuclear test in 2006, the U.N. Security Council has also targeted North Korea with sanctions over its nuclear and ballistic missile programs.

It has frozen economic assets controlled by entities engaged in or providing support for North Korea's nuclear and ballistic missile-related programs.

New sanctions introduced in March blocked the sale of luxury goods -- such as yachts and certain high-end jewelry -- to North Korea.

Don't the sanctions affect ordinary North Koreans?

U.S. Ambassador to the United Nations Susan Rice said the block on luxury goods would mean "North Korea's ruling elite, who have been living large while impoverishing their people, will pay a direct price" for the country's nuclear activities.

Jang said a body known as "Office 38" generated money for North Korea's ruling party and the infrastructure of the elite and had been seen as Kim Jong Il's personal fund when he was alive. It was foreign currency based, he said.

He said there was also a "people's economy" mainly based on the black market since North Korea's won currency had lost value.

This market economy had emerged "partly as a coping mechanism as a result of the famine - since the 1990s," Hoare said. He broke the economies down into the official economy, the people's economy, a military economy and an economy "to keep the leadership in the style to which it is accustomed."

What about the arms trade?

In its March 2013 resolution following North Korea's February nuclear test, the U.N. Security Council referred to the Korea Mining Development Trading Corporation (KOMID), as North Korea's "primary arms dealer and main exporter of goods and equipment related to ballistic missiles and conventional weapons."

On April 2 2013, North Korea was one of three U.N. member states -- alongside Syria and Iran -- to vote against the organization's first treaty to regulate the global arms trade.

What other illicit trades is North Korea allegedly involved in?

North Korean citizens, including government officials have been involved in drug trafficking for years, according to the CIA World Factbook. It said in recent years North Korea had been linked to large shipments of heroin and methamphetamine.

Other illegal exports North Korea had intended for foreigners had come back to bite the country, Jang said. Counterfeit notes proved to be too poor a quality for foreign use but had ended up on the North Korean market. The problem was so widespread that Pyongyang would not accept widely counterfeit $100 notes for loyalty offerings, insisting $50 notes were paid instead, he said. For its part, the North Koreans have denied any involvement in counterfeiting.

Similarly, recreational drugs intended for international criminal markets had instead become a domestic headache, with many North Koreans now suffering from addiction to drugs such as meth and opium, he said. Click here to read New Focus' article on drugs in North Korea.

North Korea has denied involvement in illegal drugs and arms smuggling.

So how do ordinary North Koreans get by?

North Korea had traditionally fed its people but when the Soviet Union collapsed they had nothing and started bartering for food and all kinds of items, Jang said. Items were brought in from China to be traded so Chinese traders dominate the people's market.

New Focus International reported that black-market trading "provides the main source of income for most North Koreans." The black-markets were known as "jangmadang," it said.

Hoare said that when North Korea's economy had been stronger, workers had received money through the state's Public Distribution System. "Wages are worthless but now people trade on the markets."

He said markets were "tolerated" and could sometimes be seen down side streets. "My wife and I once walked through what was known as a 'frogs market'." The term arose because traders would "leap up and disappear like frogs and then reassemble behind you as it were."

What currency is used in North Korea?

The DPRK's official currency is the North Korean won, but Jang said everything in North Korea was pegged on the U.S. dollar, including the black market economy. The won was effectively "like toilet paper" he said and because all business was done using dollars the currency was used by people to barter even at the lowest levels of North Korean society.

Pyongyang had tried to revalue the currency but because everyone used U.S. dollars to trade, the dollar consistently went up and the won continued to fall in value, he said.

Hoare said euros were increasingly being used in some areas because North Koreans were worried the U.S. would somehow cut off dollars. Foreign currency flowed into North Korea in a number of ways including cross border trade with China and visiting foreigners, he said. All embassies also had to operate in foreign currency.

"We were not supposed to handle North Korean money. So it's pretty widespread. If you go into a hotel or restaurant prices are in foreign currency rather than Korean won," he said. North Koreans in Japan or South Korea and defectors were also reportedly sending money back -- usually through China, Hoare said.

In its article on jangmadang, New Focus International describes how money sent by a defector to his family in North Korea is laundered on the illegal markets.

What is the Kaesong Industrial Complex?

North Korea has said it will pull out all of its workers and suspend operations at the Kaesong Industrial Complex, accusing the South of seeking "to turn the zone into a hotbed of war."

The complex sits on the North's side of the border but houses the operations of several of South Korean companies. The complex is considered to be an important source of hard currency for Kim Jong Un's regime. More than 50,000 North Koreans work in the zone, producing hundreds of millions of dollars worth of goods each year. Those workers earn on average $134 a month, of which North Korean authorities take about 45% in various taxes.

South Korean company Hyandai Asan -- affiliated to the carmaker Hyundai -- was involved in the complex's development.

Hoare said the complex was "all that's left of the engagement policy all that was used from 1997 on." Jang said it was the last card of any significance held by North Korea as Pyongyang knew that outsiders saw it as a symbol of cooperation.

Are there any other such joint projects between the Koreas?

The only other joint business project had been the Mount Kumgang Tourist Region, Hoare said, Hyundai Asan operated tours.

However, tours were suspended when a North Korean guard shot dead a South Korean woman in 2008 and Pyongyang refused Seoul's request for an inquiry. "North Korea effectively confiscated the South Korean complex and began to use it themselves for tourism," Hoare said. "There was talk in 2007 of developing other such complexes but then there was a change of president."

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