Collapse and Recovery of DPRK Economy

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NAPSNet Special Report

Recommended Citation

"Collapse and Recovery of DPRK Economy", Special Reports, March 04, 1999, https://nautilus.org/napsnet/napsnet-special-reports/collapse-and-recovery-of-dprk-economy/

NORTHEAST ASIA PEACE AND SECURITY NETWORK 
*****   SPECIAL REPORT   *****

March 4, 1999

The following are excerpts from a study on the DPRK economy by 
Marcus Noland of the Institute for International Economics; 
Sherman Robinson of the International Food Policy Research 
Institute; and Tao Wang of the Institute for International 
Economics.  The authors attempted to construct a model of the 
DPRK economy using available data and techniques.  They then 
modeled various strategies of reform.  They concluded that an 
import-oriented strategy would be more efficient for solving the 
DPRK's food shortages than an agricultural recovery strategy.  
They also argued that military demobilization would greatly 
improve the DPRK's economy.  The full paper, including data 
tables and references, is available at: 
http://www.iie.com/CATALOG/WP/1999/99-1.htm

-------------------------------

INSTITUTE FOR INTERNATIONAL ECONOMICS

Working Paper 99-1 

RIGOROUS SPECULATION The Collapse and Revival of the North Korean 
Economy 

Marcus Noland, Institute for International Economics 

Sherman Robinson, International Food Policy Research Institute 

Tao Wang, Institute for International Economics 

Abstract 

In this paper we use cross-entropy estimation techniques to 
construct the underlying data base for a computable general 
equilibrium model (CGE) of the North Korean economy, starting 
from incomplete data ridden with gross measurement errors. The 
cross-entropy estimation approach is powerful and flexible, 
allowing us to make full use of what information we have in 
whatever form. CGE modeling forces internal consistency. The end 
product is a model that incorporates fragmentary information in a 
rigorous way and allows us to examine the implications of a 
number of alternative scenarios including rehabilitation of 
flood-affected lands, liberalization of the international trade 
regime, and military demobilization. 

North Korea is experiencing a famine. Its economy is 
characterized by systemic distortions and comparative 
disadvantage in the production of grains. As a consequence, the 
potential pay-offs to economy-wide reforms, even defined narrowly 
in terms of domestic food availability, dwarf more targeted 
attempts to raise agricultural productivity. Too many, this 
finding that a famine might be better addressed by the export of 
manufactures than the recovery of flood-damaged lands—is a 
striking and counter-intuitive result. Moreover, we find that if 
reforms were undertaken, the country could generate a significant 
additional "peace dividend" by partially demobilizing its 
enormous military. 

INTRODUCTION 

As well as can be ascertained, North Korea is now into its eighth 
year of economic decline. It has been facing food shortages at 
least since the early 1990s and is well into a famine of unknown 
magnitude. Despite the desperate situation internally, the 
government maintains the most militarized society on earth, with 
more than one million men (and increasingly women) under arms and 
devoting an estimated 25 percent of GDP devoted to military 
expenditures (US ACDA 1997). Economic reform could have enormous 
benefits in this highly distorted economy, especially in light of 
the country's dire situation. Yet, at the same time, the effects 
of reform—a significant increase in exposure to international 
trade and investment (much of this with South Korea and Japan, 
two countries with which North Korea maintains problematic 
relations) and huge changes in the composition of output, 
involving literally millions of workers changing employment—
could be expected to have enormous political implications, 
possibly presenting large, perhaps insurmountable, obstacles to 
reform under the current regime. 

The paucity of reliable statistical information about North Korea 
has bedeviled researchers, and, as a consequence, studies of the 
North Korean economy have tended toward either uncritical 
recitations of official statistics or compendia of anecdotes. In 
this paper we use cross-entropy estimation techniques to 
construct the underlying data base for a computable general 
equilibrium model (CGE) of the North Korean economy, starting 
from incomplete data ridden with gross measurement errors. The 
cross-entropy estimation approach is powerful and flexible, 
allowing us to make full use of what information we have in 
whatever form. CGE modeling forces internal consistency. The end 
product is a model that incorporates fragmentary information in a 
rigorous way and allows us to examine the implications of a 
number of alternative scenarios including rehabilitation of 
flood-affected lands, liberalization of the international trade 
regime, and military demobilization. We do not consider the 
likelihood of the current regime undertaking any of these 
actions, or, indeed, any significant policy changes at all. 
Rather we simply examine the possible implications of various 
alternative actions. 

Although we apply this approach to a reclusive Stalinist regime, 
in principle the same techniques can be applied to other 
situations in which economic data is fragmentary and/or of 
questionable reliability—a situation frequently encountered in 
developing countries. 

To preview the results, we confirm that the North Korean economy 
is extraordinarily distorted. Due to the large, systemic nature 
of these distortions and North Korea's comparative disadvantage 
in the production of grains, the potential pay-offs to economy-
wide reforms, even defined narrowly in terms of domestic food 
availability, dwarf more targeted attempts to raise agricultural 
productivity. Under reform domestic production of food declines, 
but human survival requirements are easily met through imports. 
In contrast, flood rehabilitation leads to an increase in 
domestic food production, but this increase falls short of human 
survival requirements. To many, this finding—that a famine might 
be better addressed by the export of manufactures than the 
recovery of flood-damaged lands—is a striking and counter-
intuitive result. Moreover, we find that if reforms were 
undertaken, the country could generate a significant additional 
"peace dividend" by partially demobilizing its armed forces and 
redeploying its soldiers to more economically productive uses.

CONCLUSION 

In this paper we have used cross entropy estimation to construct 
the data base for a CGE model of the North Korean economy. The 
modeling work extends the literature on the North Korean economy 
in a number of important ways. The model we construct is, to our 
knowledge, the first behavioral economic model to explicitly 
address the issue of North Korea's famine and the potential gains 
to the economy from military demobilization. 

Because the North Korean economy is so distorted, we find that 
the returns to systemic reform dwarf those associated with more 
narrowly conceived policies focused on agricultural recovery. 
Even defined narrowly in terms of the domestic food availability, 
the pay-offs to systemic reform are multiples of even costless 
recovery of flood-affected lands and the replacement of the 
flood-damaged agricultural capital stock. Potential increases in 
GDP from reform are on the order of 60 percent, with an 
additional 18 percent obtainable as a "peace dividend" if North 
Korea were to substantially demobilize its enormous military. 
With reform, domestic output of food declines, but domestic food 
consumption easily exceeds human survival requirements because of 
the availability of imports. In contrast, flood rehabilitation 
leads to an increase in domestic food production, but this 
increase falls short of the human survival target. 

 


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