Academic journal article Seoul Journal of Economics

Initial Conditions, Economic Performance, and Reform Prospects in North Korea

Academic journal article Seoul Journal of Economics

Initial Conditions, Economic Performance, and Reform Prospects in North Korea

Article excerpt

This study aims to predict the possible changes in the North Korean economic system by examining 27 countries that have experienced economic transition since 1990. This study divides the 27 transition countries into three groups (i.e., outstanding, fine, and poor transition) through discriminant analysis based on the outcomes of economic reforms over the past two decades. The discriminant analysis reveals that North Korea can be classified into the poor transition group and is likely to follow the pattern of the Commonwealth of Independent States. Pyongyang must realize that transition from its rigid socialist economy to a market economy is the only way to escape from poverty.

Keywords: North Korea (DPRK), Economic transition

JEL Classification: F59, P20

I. Introduction

North Korea is one of the weakest and most vulnerable economies in the world. Famine, poverty, and economic decline have gripped North Korea; thus, its situation is likely to deteriorate. To escape from poverty. Kim Jong-un has greatly emphasized the revitalization of the moribund economy. In his first speech as the nation's leader in April 2012, he insisted that he "would ensure that North Koreans would never have to tighten their belts again."1 Since then, North Korean official media have repeatedly announced that the country will be concentrating on strengthening the economy in addition to its military capability. Thus, whether the new economic measures will bring about positive changes in North Korea has received much interest. However, the previous decade suggests that the economic policies of the country bear many startling resemblances to the reform policies of past socialist countries. An economic reform experiment in 2002 failed because of a crackdown on markets when market and trading activities expanded and boomed. Since then, however, markets have expanded spontaneously even under the control of North Korean authorities. Nearly 83% of the North Korean population are involved in household economic activities mainly related to raising vegetables, livestock, or poultry.2 This rate of participation in household economic activities can be deemed the same, or similar at least, as that in informal economic activities. Advances in marketization will weaken the state control of North Korean authorities. In addition, the spread of markets suggests the high possibility of transition to a market economy, which occurred previously in socialist states in Eastern Europe and China. Predicting the transition of North Korea to a market economy might still be premature. However, considering the economic situation and the expansion of the informal economy, the country is placed in an abnormal situation where a planned economy and markets coexist. Thus, marketization in North Korea is inevitable.

The future of the economy of North Korea is difficult to predict and therefore presents South Korea and its neighboring countries with unknown problems. Even if we disregard the necessity of North Korean economic reform itself, the troubled economy of North Korea is as much an object of concern of neighboring countries as its nuclear weapons program. Thus, how the North Korean economy will develop and what direction the autocratic, poor, and isolated country takes are two of the most important issues faced by the neighbors of North Korea.

The development of the North Korean economy depends on the initial conditions of the economy because such conditions influence economic development during reform. Growth rate and economic performance depend on the inherited conditions of a country and on the transition process (Stiglitz 1999; Falcetti, Raiser, and Sanfey 2002). However, although such initial conditions are critical, their influence on economic performance diminishes rapidly over time (De Meló et aL 1997; Berg et ai 1999). To achieve economic growth, market reform should be implemented while maintaining macroeconomic stability. Initial conditions more significantly influence the determination of the severity of output decline than policy choice; the effects of initial conditions on variations in performance have a long half-life of perhaps a decade (Krueger and Ciolko 1998). …

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