Market Reforms in North Korea: Are They for Real?

Abstract

IntroductionNorth Korea has been in the headlines with increasing frequency lately thanks mainly to the nuclear standoff with the United States, natural disasters, or famines. Although overshadowed by these events, what is quietly taking place in North Korea and is of much greater long-term importance to the people of North Korea are the economic reforms that have been under way since July 1, 2002.Opinions are divided on the prospects for the reforms' success. Some believe that the current reforms are merely a desperate attempt on the part of the current regime to salvage the central planning that has been rendered unworkable due to the economic collapse brought about by the withdrawal of economic aid and favorable trade terms by the former Soviet Union, followed by a string of natural disasters in the 1990s. They believe that the regime will revert back to the predominantly commanddriven economy once the economy recovers from its current illness (Klingner, 2004). Others believe that the current reforms are similar in essence to the Liberman-style reforms attempted unsuccessfully in the Soviet Union and its Central and East European satellite countries in the 1960s and 1970s, and hence are not likely to work in North Korea. Seliger (2005), for example, points out that the present economic structure of North Korea in terms of degree of industrialization is closer to those of the Soviet Union and its European satellites of the 1960s and 1970s than that of China of the 1970s or Vietnam of the 1980s, and the Chinese and Vietnamese reform experiences are not an appropriate comparison. Seliger also points out correctly that the agricultural reform in North Korea does not go as far as the Chinese model. Others, including myself, are more optimistic about the chances of success of the current North Korean economic reforms, although the optimism must in all practicality be based on the premise that the current nuclear standoff with the United States will be satisfactorily resolved.I attempt in this paper to analyze and assess the significance of current economic reforms in North Korea and their prospects for success in light of the country's history of an open-door policy and economic reform attempts, as well as the current geopolitical and economic climate of Northeast Asia. The conclusion I derive is that the prospects for success of the current economic reforms in North Korea are far better than the pessimists would like us to believe. The paper consists of five sections. The first section presents a historical overview of the North Korean macroeconomic performance and North Korea's open-door policy attempts prior to July 1, 2002. The second section is a brief description of the July 2002 economic reforms and the subsequent follow-up measures. Lessons from the economic reform experiences of other socialist economies are discussed in the third section. The fourth section addresses the prospects for success of the current North Korean economic reforms. The last section offers conclusions.A Brief Historical Overview of the North Korean Macroeconomic Performance and Pre-July 2002 Open-Door Policy AttemptsNorth Korea emerged from the end of World War II and the end of Japanese occupation as a predominantly industrialized economy. North Korea's economic growth was remarkable: it surpassed that of South Korea during the initial period after the war and registered positive growth throughout the 1970s. By the end of the 1970s, however, the North Korean economy was beginning to show serious problems typical of all centrally planned economies, manifested in serious inefficiencies due to lack of incentives and difficulties of planning coordination. The collapse of the former Soviet empire in 1991 dealt a serious blow to the North Korean economy, which had been depending on the Soviet Union to meet much of its energy and raw materials needs on favorable terms, and on the Soviet bloc countries for an export market. …