Q&A: North Korea's economy

http://www.bbc.co.uk/news/business-21424127

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North Korea's third nuclear test has thrown the country back into the spotlight, as the threat of further sanctions looms over an already crippled economy.

The United Nations Security Council is holding an emergency meeting on Tuesday where countries such as the US, South Korea and even North Korea's main ally, China, could ask for further sanctions.

Although much of the information about its economy is based on anecdotal accounts from defectors, it is clear North Korea can ill-afford more economic pain.

So is the North Korean economy even functioning?

North Korea's economy is in a dire state. Analysts estimate per capita income is $1,000-$2,000 (£640-£1,280) per year.

Compare that with South Korea, where per capita income is almost $20,000. That means that even at the higher end of the range, North Koreans make just 10% of what their average southern counterparts make.

One estimate says it works out to about $4 a day.

However, information coming out of North Korea is very unreliable and so the numbers could be much worse.

There is also huge income inequality between the haves and the have-nots. Some in North Korea's capital, Pyongyang, are known to have all the luxury items popular with the rest of the world, such as mobile phones and laptop computers, while many outside of the capital survive on very little.

Robert Kelly, from the department of political science at Pusan National University in Seoul, calls North Korea the worst of the socialist failed states.

What industries does it have?

It is a mountainous country, and does have a supply of plutonium and uranium, which it is thought to have used for its nuclear tests.

However, it has very scant resources otherwise, and no real agricultural sector, therefore officially there is no export industry.

Anything it does export in terms of natural resources goes to China, in exchange for fuel and food coming into North Korea.

China is its only economic partner and it is very dependent on the mainland.

There is something of a tourism industry, with group tours that leave from Beijing and are quite expensive.

Is everything above board in terms of trade?

During the Cold War, North Korea's economy was propped up by China and the Soviet Union as they looked to become leaders of a communist block.

They provided cash, free rice and oil among other things.

After the Cold War ended, so did the support from those countries, and North Korea was unable to sustain itself.

The economy started collapsing in the early 1990s, and the system used to distribute food and other items stopped being effective.

That led to the famine between 1995 and 1997 and a wave of defectors to China.

According to Mr Kelly, these people were then pulled back into informal networks.

He says there is now a black market or underground economy supported by trade between North Korea and China across a porous border.

North Koreans bring food and consumer electronics back home, in return for resources taken to China.

This view is echoed by the Economist magazine, which in its latest edition wrote: "It is becoming clear that other merchants operate today on a far more ambitious scale, exporting raw materials to China and bringing back consumer goods.

"The merchants use an informal system of money-changing to move funds in and out of the country. In the capital those with cash go to restaurants and play the slot machines. It sounds surreal, but they are the North's nouveaux riches."

This increase in trade and flow of cash, has also spurred corruption, according to Pusan University's Robert Kelly.

He talks about large amounts of counterfeit money, drug running and weapons smuggling.

"The real economic story in North Korea is the massive corruption and informal market," says Mr Kelly.

"Everybody is on the take, everybody is shaking down everybody else."

What effect, if any, will more sanctions have?

North Korea is already one of the most sanctioned states in the world.

However, the sanctions are having very little effect, according to Jasper Kim, from the Asia-Pacific Global Research Group in Seoul.

He says the most effective sanction was a US-enforced ban on luxury goods going in and out of North Korea.

However, these items are still taken into the country through Beijing to appease high level officials, according to Mr Kelly.

"Ultimately sanctions are not gong to work unless China cooperates," he says.

The other key sanction that has had some effect was the US effectively blacklisting Banko Delta Asia (BDA) - a Macau based bank used as an intermediary by North Korea.

In terms of new sanctions, they can only add more individuals and financial institutions to the blacklist, Mr Kelly says.