The Evolution of the Informal Economy in North Korea

Abstract

I. IntroductionNorth Korea's Public Distribution System (PDS) of grain broke down during the so-called Arduous March in the mid- and late 1990s. This economic crisis led many households to rely on informal economic activities (IEAs) that had been previously repressed by the North Korean authorities. The authorities decided to tolerate such household activities, without which a considerably worse economic disaster would occur. Consequently, the informal economy in North Korea substantially increased in this period.The informal economy existed in other socialist countries such as the Soviet Union. The majority of economists maintain that the Soviet informal economy was large (Grossman 1987; Ofer, and Vinokur 1992; Kim 2003). For example, Grossman (1987) estimates that in the late 1970s, private income accounted for 33% of the total income of urban households. By using classified Soviet archival material, Kim (2003) provides annual estimates of the informal economy from 1969 to 1990. The average share of Soviet households' informal expenditure in total expenditure was 23% during the above period. Furthermore, certain economists ascribe the collapse of the Soviet socialist system to IEAs that range from household's private economic activity to bribery and even organized crime (Treml, and Alexeev 1994; Grossman 1998; Solnick 1998; Wintrobe 1998).1 These debates produced a number of studies on the informal economy in a socialist system.2The emergence of the informal economy in North Korea also elicited considerable research attention. Scholars have not only analyzed the size and determinants of the informal economy, but also its effects on the economy (Lee 2007; Kim, and Song 2008; Haggard, and Noland 2009; Lee 2009; Kim 2009; Kim, and Koh 2011; Kim, and Yang 2012). Most research that uses surveys of North Korean refugees finds that the size of informal economy in the North Korean households is at least 70% in terms of the share of total income as well as labor force participation rate. Therefore, North Korea's informal economy is extremely large with a scale that was not found in any former socialist countries.Compared with the size of the informal economy, its evolution over time attracted relatively less attention mainly because of the deficiency of the data. This is a significant research gap because the dynamics of the informal economy may have important implications for the future of not only the North Korean economy but also its society. Although studies on this issue have been conducted, their findings are based either on aggregated figures or on some case studies. For example, Kim and Song (2008) find that labor participation rate in plot-related activities or stockbreeding significantly increased from 2002 to 2004, whereas market trading did not during the same period. Kim and Yang (2012) evaluate the effects of different market policies by the North Korean government (i.e. appeasement policy vs. anti-market policy) on the informal economy, and find little evidence on an increasing trend of the informal economy from 2002 onwards. However, the above studies are based on a simple test of whether significant discrepancies occur in the size of the informal economy between different periods at the aggregated level; that is, the participation rate in the informal economy. As regards case studies on the development of the informal economy, Kim and Yang (2014) report the specialization of IEAs by illustrating diverse cases that include suraegi, which indicates a manufacturing dealer. By using in-depth interviews of 39 North Korean refugees, Lee et al. (2014) assert that markets for consumer goods and services have been expanding. However, these studies are insufficiently rigorous because of the method of analysis based on the small sample.This study aims to contribute to the literature in two respects. First, we use a large dataset of North Korean refugees settled in South Korea accumulated from 2004 to 2011 to investigate the dynamics of the IEAs in North Korea at the individual level. …