Transition of North Korea to a capitalist market economy remains a probable though relatively distant possibility. The model of centrally planned economy based on government (public) ownership of all major economic assets and direct regulation of economic activities by authorized state bodies (usually termed “the Soviet model” by Russian economists) has revealed lack of efficiency and ability to adapt to changing conditions. For that reason it has been replaced with a capitalist economic model in all countries of the former Soviet bloc, as well as in China and other former “socialist countries” of Asia. This system has already led to degradation and actual crisis of official economy in North Korea and to its partial replacement with semi-legal quasi-market economy, which combines administrative distribution of major resources with private initiative and de-facto market distribution of an increasing number of products and services. As this has not led to official abandonment of communist ideology and legalization of private sector, the current quasi-market system includes wide-scale corruption as its vital integral part.
The likely pattern of future transformation of North Korean economic system into a full-fledged capitalist market model is likely to be determined by the present state and structure of North Korean economy. Theoretically speaking, the process of transformation may take the form of gradual evolution through adaptation (‘Chinese model’), or of acute crisis and abrupt replacement (‘Soviet model’). The first of these two options implies gradual and measured liberalisation that would allow keeping political, economic and social situation in the country under control of the top leadership. The second one means that the necessary adaptation is constantly delayed by the authorities according to “too little, too late” scenario, which makes inevitable the collapse of old economic and political system.
Comparison of the present economic situation and institutions in North Korea to that of China in the end of 1970’s and that of the USSR in mid-1980’s suggests that the future transformation of economic system in North Korea is more likely to follow the Soviet path. Commonalities include comparatively low share of rural economy, dominant position of military production in manufacturing industry, strong aversion of the leadership to the idea of private property, strong resistance to political change of any kind. Like in the case of the Soviet Union during last years of its existence, North Korean communist leaders demonstrate their inability to narrow the gap between changing realities and outdated ineffective institutions by implementing thoughtout reforms. Instead, they cover the gap with pretence and corruption, thus making eventual collapse of the old economic and political system inevitable in the long run.
That makes possible to use Russian experience of the Soviet-era crisis and the post?Soviet transformation to draw conclusions on the likely characteristics of future North Korean transformation and effectiveness of different policy options. Most important of them include 1) necessity to legalize market regulation and set up relevant institutions before surrendering rights of autonomy to industrial enterprises; 2) the need to set up a firm and clear distinction between private and public assets to prevent the latter being used for private gains; 3) key importance of choosing appropriate model for privatising government assets: 4) necessity to allow for new opportunities for every segment of society, including beneficiaries of the old system, to prevent stalemate or dangerous distortion of the transformation process as a result of powerful social unrest and resistance.
Another important lesson to be learnt from Soviet and post-Soviet experience is that the process of transforming and modernizing a centrally planned economy is not necessarily preconditioned by a transit to a Western model of political system. While economic democratization is a must if successful transition to a capitalist economy is to be secured, formation of a new political system may depend on specific circumstances and be a very conservative process.