North Korea is largely isolated and disengaged from the world’s economy. Data collection is extremely challenging, and reported statistics on the economy remain largely speculative, requiring careful evaluation. North Korea’s economic freedom score is 1.5, making its economy the least free in the 2013 Index.
North Korea remains an unreformed and essentially closed dictatorial state. Despite experimenting with a few market reforms over the past decade, the world’s most repressed economy adheres firmly to a system of state command and control that upholds the regime’s long-standing songun (“military first”) policy. The Workers’ Party tightly controls every aspect of economic activity. The impoverished population is heavily dependent on government subsidies in housing and food rations, and the state-run rationing system has deteriorated significantly in recent years.
North Korea may be attempting to open its economy slightly by encouraging limited foreign direct investment. However, the dominant military establishment and ongoing leadership transition make any substantial near-term economic policy changes unlikely. Normal foreign trade is minimal, with China and South Korea being the most important trading partners.
Background
The December 2011 death of long-time North Korean dictator Kim Jong-il rocked the Democratic People’s Republic of Korea. There were widespread predictions that Kim’s anointed successor, his 28-year-old son Kim Jong-un, would not be able to consolidate power, but the transition appears to be on track. Despite Jong-un’s exposure to Western political and economic systems during his teenage years of study in Switzerland, there is no evidence that he is any more likely than his predecessors to implement political or economic reform. Belligerent foreign policies have led to international sanctions and restrictions on humanitarian assistance, and the DPRK still relies heavily on Chinese economic support. The regime has reimposed strict controls against black markets, which had provided a relief valve for the failed state distribution system.
Property rights are not guaranteed. Almost all property belongs to the state, and government control extends even to chattel property (domestically produced goods and all imports and exports). A functioning modern judicial system does not exist. Corruption in the government and security forces is rampant. The ruling Workers’ Party, the Korean People’s Army, and members of the cabinet run companies that compete to earn foreign exchange.
No effective tax system is in place. The government commands and dictates almost every part of the economy. The government sets production levels for most products, and state-owned industries account for nearly all GDP. The state directs all significant economic activity. Large military spending further drains scarce resources. Despite the state’s attempts to crack down on them, black markets have grown.
The state continues to regulate the economy heavily through central planning and control. Entrepreneurial activity remains virtually impossible. As the main source of employment, the state determines wages. It also tightly controls the labor market and the movement of people. The botched currency reform in late 2009 resulted in increased inflation and confiscation of operational capital and savings earned by private traders.
Formal trade is minimal. Most legitimate trade is de facto aid, mainly from North Korea’s two main trading partners, China and South Korea. Inter-Korean trade remains constrained by North Korea’s unwillingness to implement needed reforms. Limited foreign participation is allowed in the economy through special economic zones where investment is approved on a case-by-case basis. The financial sector is firmly controlled by the state.