Developments and Prospects of the North Korean Economic Policies since 1990

Abstract

IntroductionNorth Korea has implemented several economic reform policies to overcome its economic difficulties since i990. These ecomonic reform policies include a series of news about opening of General Market (where all agricultural and indus- trial products were allowed to be traded) and the 7.i Economic Measures announced in July, 2002. In addition, new policies about currency reform, wage increase, and official price abolition have been forecasted.With these changes of North Korea in mind, this paper aims to analyze development mechanism of economic policies implemented in North Korea since i990, to evaluate those policies, and to forecast prospects for them. In this paper, developments of economic policies in North Korea are analyzed on basis of price because, theoretically, price implies limitations in economic principles of socialist countries and inevitability of reform. Actually, introducing economic measures dealing with price is major part of economic reforms in North Korea since i990.By using price variables, this paper analyzes shortage of daily necessities, expansion of market economy, and attempts for properly functioning planned economy in North Korea. If supply shortage persists while official price stays at a low level, black markets are usually formed. As gap between official price and market price is widening, centrally planned economy becomes contracted and is being put into confusion. In response to this situation, North Korean government had to take some actions including price marking to market to improve its dire economic situation. This is basic logic of analysis in this paper. Through this analysis, this paper proves: even though it is true that some changes of economic policies in North Korea were to be stemmed from will of or ability of political leaders, they were to be implemented by logical inevitability which was fundamentally inherent in economic structure of North Korea.The Pricing Mechanism and Economic Reform in Socialist CountriesThe barometer of evaluation for an economic situation in socialist countries is currency, i.e. price, same as capitalist countries. In socialist countries price is artificially decided by government whereas in capitalist countries it is determined by market. Artificial price-setting is inherently problematic because it is difficult to measure qualitatively different labor and to transform it into price in an objective manner. Moreover, policy of intentionally keeping price low for mass consumer products in order to fairly distribute scarce goods brings about price distortions. Ideologically, it represents superiority of socialism as a way of fair distribution but in reality it reveals problems of shortage of mass consumer products.In a socialist economy, insufficient supply is caused by inherent inefficiency and artificial price-setting brings about side effects due to price distortions. If already insufficient supply becomes worse, black markets are formed and, in some markets, transactions will be settled at a very expensive black market price. This can be simplified in one diagram in Figure i.When it is assumed that supply curve is vertical and demand curve slopes downward to right in socialist countries, price and quantity of supply are fixed at Pi and Q2 respectively because of low-price principle of government (or rationing system) but quantity of demand becomes Qi and it brings about excess demand of Qi-Q2. Then, this excess demand inevitably forces lineups and provides an opportunity to form black markets. When there is excess demand, people are willing to purchase goods at a higher price and when transactions are settled in response to this demand, black markets are formed. Then, price of black markets becomes P2.When such a shortage of supply lasts for a long time, private business tions become and more widened while double pricing, i. …