North Korea: Building the Institutions to Raise Living Standards

Abstract

This paper examines the nature of the economic failure that has brought North Korea such low living standards, and considers how the economic system might be reformed to facilitate a return to overall growth in both aggregate income (GDP) and general living standards. The focus is on institutional aspects of the needed reforms, emphasising the importance of building on existing institutions and practices wherever possible, rather than starting from scratch from a tabula rasa. Food supplies, the large military establishment, and the astonishing failure to adapt to the trade shock resulting from the collapse of the USSR are reviewed in detail, and potential lessons are explored from EU enlargement, German reunification and the very messy Russian transition. In proposing reforms, the paper is pragmatic and flexible, prioritising measures to improve food supplies while also emphasising a wide range of local, experimental and decentralised reforms that surely have greater chance of success than a top-down approach.

Keywords:

• Institutions
• transition
• markets
• food supplies

JEL Classification:

• P36

Notes

¹This quote refers to a training course for senior North Korean officials to which I contributed a few years ago. When the relevant North Korean embassy saw an outline of our training material they insisted that the word ‘reform’ must be removed, but the funders of the course insisted that we must talk about reform. We avoided a diplomatic incident by replacing the word ‘reform’ with ‘change’, amending nothing else. The course proved remarkably successful.

²A similar story can be told for Cuba after 1991, although Cuba was always less industrialised and the main product for which it needed to find new markets was sugar.

³On the other hand, even if North Korea did apply for WTO membership there is no immediate chance that it could be accepted. This is because of the country's stance in relation to nuclear technology (with fears that it could develop its own bomb), its experiments with missile launches (developing a potential delivery mechanism for a nuclear bomb), and its trade in illegal and contraband products. In any event, for purposes of handling trade disputes, the WTO would clearly have to regard North Korea as a state trading nation, not as a market-economy country.

⁴The framework was never quite complete, as much remained within the competence of the member states, and in fact the evolution of the EU has been marked by frequent debates over whether this or that issue should remain devolved or whether the centre (Brussels) should assume greater powers.

⁵This is no easy task, of course, under the best of conditions, as we are learning very painfully in Western Europe through the experience of the Eurozone.

⁶However, Russia did also experience massive capital flight during most of the 1990s, as anyone with the opportunity to do so got their money out of the country and placed it in safer locations, such as London, the US, Cyprus, and a few other places.

⁷Something so basic that in rich, western societies, we hardly think of it any longer as a basic necessity, as we simply take it for granted. As a result, we are more likely to think of a mobile phone as a basic necessity!

⁸To see this, one only needs to think of the terrible example of Iraq, immediately after the ouster of Saddam Hussein. The army was foolishly disbanded and mayhem, quite predictably, ensued.