North Korea's GDP Growth Better Than South Korea's

Despite a world recession, the North's performance perked up. But the communist regime's economy remains tiny, and last year was an anomaly

By Moon Ihlwan

When it comes to economic performance, it's hard to believe that impoverished North Korea could do better than its affluent capitalist neighbor to the south. South Korea's economy is known for its exports of Hyundai cars, LG Electronics phones, and Samsung Electronics semiconductors. Meanwhile, under the guidance of Dear Leader Kim Jong Il, the North Korean economy's export prowess is limited largely to nuclear weapon technology and counterfeit dollars.

Still, a look at growth rates for both sides of the demilitarized zone last year shows that the regime in Pyongyang managed to deliver the best growth on the Korean peninsula. In 2008, the basket-case economy in the communist country registered a growth of 3.7% after two consecutive years of contraction, according to data released this week by Bank of Korea, South Korea's central bank. That's better than the 2.2% posted last year by South Korea, which, like other export-dependent Asian countries, was hurt by the recessions in the U.S., Japan, and Europe. South Korea also suffered from a slowdown in the Chinese economy, with exports to China from South Korean consumer electronics makers and other companies falling sharply; they fell 33.3% in November and 35.4% in December, for instance.

Recessions and slowdowns in other countries didn't have much of an impact on the economy in the North, though. As the global economy began to slide into a recession last year, North Korea produced one of its strongest growth performances this decade. That's a reflection of just how isolated North Korea is.

Good Weather for Farming

The surprise underscores the tiny size of the North Korean economy, which could be easily swayed by such factors as weather and outside assistance. Just over two-thirds of the 3.7% growth came from the agricultural sector, and that is heavily dictated by weather. North Korea's agricultural output increased by 10.9% in 2008 after falling by 12.1% in the previous year as it managed to escape from major floods and drought. Its 2008 manufacturing production also grew by 2.5%, compared with a gain of a mere 0.8% in 2007, thanks to heavy oil supplies by the U.S. and its allies as a result of Pyongyang's agreement last year to begin dismantling its nuclear facilities.

Even as hope builds in South Korea about a recovery, with the U.S. and China showing signs of revival, prospects for North Korea's economy are looking grimmer. North Korea's nuclear test in May and the regime's missile tests this year have led to an end to outside help and economic sanctions by the U.N. This heralds a poor performance in the manufacturing sector, which will almost certainly face an acute shortage of oil and electricity this year.

Pyongyang can't count on the agricultural industry for any major contribution to economic growth in 2009, either. Even if North Korea manages to maintain the 2008 grain output of 4.3 million tons, which will be difficult to achieve unless last year's exceptionally good weather is repeated, it won't help the economy grow as it starts from a high base.

Those factors make North Korea's economic growth last year an anomaly. "There's no indication that North Korea's growth engine has improved in any fundamental way," says Bank of Korea economist Shin Seung Cheol. Even with last year's extraordinary growth, North Korea's gross domestic product was 1/38 of South Korea's $935 billion and its trade volume was 1/224 of the South's $857.3 billion in 2008. As long as North Korea's reclusive leader Kim Jong Il refuses to open up his country, the gap is bound to keep expanding.

Moon is BusinessWeek's Seoul bureau chief.

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