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Working Paper 07-7

North Korea’s External Economic Relations

by Stephan Haggard, University of California, San Diego
and Marcus Noland, Peterson Institute for International Economics

August 2007

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North Korea’s economic interaction with the world is increasingly centered on China and South Korea, though the nature of the interaction with these two partners is very different: Economic integration between North Korea and China appears to be increasingly occurring on market-conforming terms; its involvement with South Korea has a growing noncommercial or aid component. Haggard and Noland expect the upcoming inter-Korean summit to reinforce this trend. South Korea’s aid to North Korea has exceeded China’s since 1999, and by an increasingly wide margin. Overall, aid and transfers finance more than 40 percent of North Korean imports. On the export side, North Korean exports have grown since 2000. The authors believe improperly recorded transactions and illicit activities to be exaggerated; as a share of total trade or revenues they appear to be falling, possibly due to interdiction, accounting for 14 percent of exports. These results call into doubt the notion that engagement with South Korea is encouraging reform in the North—just the opposite, at least compared to China, it appears to be reinforcing state-oriented development.


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