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Determinants of Economic Growth in Transition Economies: Their Implications for North Korea Economic cooperation, North Korean economy

Author Hyung-Gon JEONG Series 14-01 Language Korean Date 2014.11.28

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Since Kim Jong-un came to power, the North Korean regime has placed greater emphasis on the economy, adopting the policy line of “Simultaneous development of Economy and nuclear weapons capability” in 2013. North Korea has promoted the “Measures for Our Way of Economic Improvement”(so-called June 28th measures) since 2012 with the aim of increasing the efficiency of its economic operation. In addition, the Kim Jong-un regime newly designated 19 special economic zones in an attempt to attract more foreign investment and has not suppressed the market despite changes at home and abroad. Partly boosted by these efforts, North Korea’s economy is reportedly improving in recent years. However, there are few signs of a rapid economic growth that North Korea is so eager to achieve. This is attributable to North Korea’s system itself, the socialist economic system, acting as a primary constraint to the country’s economic growth. For North Korea’s robust economic growth, economic reforms within the system are not sufficient, but rather the country should move forward towards transition to a market economy.
This study was conducted to identify the determinants of economic growth for North Korea and to present policy suggestions for its successful transition. To this end, the study analyzed the determinants of economic growth of transition economies as well as countries by income level. Based on the analysis, it deduced the determinants of economic growth for North Korea.
In this study, variables such as infrastructure, institutional conditions, human capital, domestic investment were identified as important variables for economic development of North Korea along with several transition-related variables such as privatisation, corporate restructuring, and trade/foreign exchange system. The policies which simultaneously affect all the determinants of economic growth are not feasible, and are likely to put a greater burden on the country both politically and economically. In this regard, this study suggests policies along with timing and sequencing for the economic development of North Korea, through analysis of examples from transition economies.
The study proposes policies that can successfully eliminate fundamental barriers to economic development in North Korea, providing greater economic boost but reducing the possibility of shocks for the country. By conducting theoretical analysis for the socialist economies in addition to the empirical analysis, the study seeks to improve the coherence of the empirical study.
This study presents policies by period, dividing the periods into short term, mid term and long term. In the short term, North Korea should set out to introduce small-scale privatisation on its own along with price liberalization, and the international community should offer help with respect to improvement of the impoverished country’s essential infrastructure and nutritional/dietary conditions of its population. For the mid and long term, it is necessary to promote policies regarding improvement of trade and foreign exchange systems, large-scale privatisation, corporate restructuring, and competitiveness. During the process of adopting these policies, the assistance of the international community is indispensable.
Policies regarding North Korea have often been suggested without firm academic evidence. Against this backdrop, the results of the study can provide evidence which can help empirically evaluate economic policies of North Korea. This study is distinguished from previous studies in this issue in that it also suggests inter-Korean cooperation policies on the part of the South Korean government, considering both sequencing and timing.
Unfortunately, this study was not able to consider all variables regarding economic growth. Instead, it chose variables that can be applied to policies and of which relevant data were accessible. Despite such limitations, this research can hopefully become a stepping stone for further policy research on North Korea’s economic growth.

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