A Perspective on Institutional Change in North Korea

Abstract

IntroductionNorth Korea remains one of the last economies in the world modeled after the Stalinist economic planning model. Despite its small size North Korea is a major concern in both Asia and the world because of its nuclear ambitions and achievements, its provocative rhetoric, its relationship with Iran and Syria, and its isolation from much of the world. The socialist experiments of the last half of the twentieth century, ranging from the Stalinist central planning model to the milder forms of socialism in the United Kingdom and the United States, began to collapse in the 1970s, and by the end of the 1980s an economic liberalization process dominated much of the world. North Korea is the notable exception.Cargill and Parker (2005) provide a brief review of North Korean economic growth based on various sources and note that the socialist economic institutions appeared to serve North Korea in the 1950s and 1960s, but the North Korean economy began to stagnate by the 1980s. North Korea then experienced a decade of intense economic distress during the 1990s combined with famine in 1995 and 1996. This occurred because of inherent inefficiency of North Korea's economic institutions, especially agriculture and the distribution system; the military policy of the North Korean government; and bad weather and shortages of energy (Kim, 2003). In response, North Korea began to reform its economic institutions toward more decentralized decision making in general and relaxation of constraints on the agricultural sector. There was some evidence that the economy began to recover in the first few years of the new century: external trade expanded (Haggard and Noland, 2008a) and economic interactions with China and South Korea increased.Four events, however, reduced hope that North Korea was ready to become part of a world trading system. First, North Korea continued to play the nuclear trump card, detonating a nuclear reaction in July 2006, testing long-range missiles, providing nuclear technology to Syria and in general, rhetorically threatening the United States, South Korea, and Japan. Second, North Korea reversed some of the policy reforms of 2002 and moved to restrict market activity, especially in the agricultural sector. Third, according to a detailed review of North Korea's food balance by Haggard and Noland (2008b) and Haggard, Noland and Weeks (2008), North Korea again appears at the brink of famine, though not yet as serious as in the mid-1990s. According to the Bank of Korea, GDP growth declined in 2006 and 2007 after being positive since 1999. Fourth, the election in December 2007 of Lee Myung-bak as President of South Korea has hardened relations between the North and South. Lee's government has been critical of the previous decade of sunshine policy in which unconditional aid and money were given to the North, and has indicated that future aid will require North Korea to cease its nuclear ambitions and improve its human rights record. North Korea responded negatively to the change in political environment in the South and other activity such as balloon diplomacy1 and threatened to close the border in early November 2008. On November 24, 2008, North Korea closed tourism to the Kumgangsan resort area (also referred to as Mt. Kumgang or Mt. Diamond), closed a seldom-used rail line to the Kaesong Industrial Complex (KIC), and limited access to the KIC by South Korean managers. Most important however, North Korea did not close the KIC and in fact, stated it intended to continue and support commercial activity in the KIC.Despite these events, the October 2008 decision by the Bush administration to remove North Korea from the list of terrorist states and the possible regime change because of the potential physical/cognitive impairment of Kim Jong Il offers some degree of hope that North Korea will continue on the path established in 2002. The public delisting is a major change in official U. …