This study analyzes the structural changes of North Korea's economy using social accounting matrix.

It finds that, since the early 1990s, North Korea's official economy has shrunk because of the collapse of state-owned enterprises, and the private economy has grown as a result of the people's effort to survive amid economic difficulties. Meanwhile, the military spending has increased demonstrating the military's important role in maintaining domestic stability and external security. Gradually, and often under state-initiated reforms like the reform measures introduced in July 2002, the private sector in North Korea has expanded at the expense of the official economy, thereby transforming the North into a market economy. International engagement toward a peaceful resolution with North Korea should begin with efforts to support growth in the private sector.