Understanding North Korea's Economic Crisis

This paper provides an overview of the current economic situation in North Korea and suggests some possible strategies for recovery, including ways of mobilizing financing and implementing essential market reforms. Throughout the 1990s, North Korea suffered a severe economic downturn after the abrupt collapse of the cooperative network of socialist countries. Because the needs of the military had been given first priority and foreign trade was limited, infrastructure and capital stock deteriorated. At present North Korea is in a poverty trap, and the plans of the State Planning Commission no longer work. In addition to the "official" economy, North Korea's overall economic structure includes economies run by the Workers Party, the military, and ordinary citizens (the informal market). Efforts to promote foreign investment and trade, combined with only small changes in this inefficient economic structure, are unlikely to succeed. North Korea's economic rehabilitation should begin with more market-oriented policy reforms and capital formation, but because the country is unable to design and implement economic reforms or to accumulate capital stock on its own, assistance must be sought from outside. Copyright (c) 2002 Center for International Development and the Massachusetts Institute of Technology.