North Korea runs 'bad news' trade surplus

After decades in the red, North Korea may be running a trade surplus, according to two economists who warn the breakthrough makes Pyongyang less vulnerable to pressure on its nuclear program. Marcus Noland and Stephen Haggard, both North Korea experts at the Washington-based Peterson Institute for International Economics, say their research suggests the North's current account went into surplus in 2011. In a posting Tuesday on the institute's website, they said the improvement had come "largely on the back of expanding trade with China" and added that preliminary research also pointed to a 2012 surplus. The findings will surprise many given the North's reputation as an economic basket case wrecked by decades of mismanagement and ruinous spending on military hardware. While acknowledging "significant uncertainty" in calculating the North's balance of payments, Noland and Haggard said their conclusion was "bad news" -- both for North Koreans and the rest of the world. "It is bad news for North Korea because as a relatively poor country, they should be running a current account deficit, importing capital, and expanding productive capacity for future growth," Noland said. Instead, they are exporting capital, with money flowing abroad presumably, Noland suggests, to fund the up-market consumption habits of the ruling elite. "It is also bad news for us. If North Korea is running current account surpluses, then they are less vulnerable to foreign pressure," he added. The UN tightened sanctions on Pyongyang after North Korea carried out its third nuclear test last month. The new measures sought to tighten restrictions on North Korea's financial dealings, notably its suspect "bulk cash" transfers. Nolan and Haggard stress that constructing a balance of payments for North Korea is inevitably speculative, given that its actual trade figures are state secrets and can only be extrapolated using "mirror statistics" reported by a trade partner. Their calculations included illicit activities such as counterfeiting to build a high and low range estimate for the current account -- the broadest measure of trade with the rest of the world. "In all likelihood, North Korea has run current account deficits for most of its history. That meant that the country was consuming more than it was producing, and the difference had to be financed from abroad," Noland said. Their median estimate shows the account in deficit throughout the famine-tainted 1990s as well as the following decade, before posting a surplus of around $250 million in 2011. According to South Korea's state statistical agency, North Korea's trade with its only major ally China nearly tripled between 2007 and 2011 to around $5.6 billion.