North Korea’s economic freedom score is 5.8, making its economy the 180th freest in the 2018 Index. Its overall score has increased by 0.9 point, with a significantly higher score for the government integrity indicator exceeding a decline in property rights. North Korea is ranked last among 43 countries in the Asia–Pacific region, and its overall score is the lowest recorded in the Index.
North Korea, one of the world’s most centrally directed and least open economies, faces chronic economic problems. The despotic military regime has largely resisted reform, although it has tolerated some private entrepreneurship to generate growth and enhance its chances for political survival. Industrial capital stock is nearly beyond repair after years of underinvestment, shortages of spare parts, and poor maintenance. Frequent weather-related crop failures aggravate ongoing systemic problems in agriculture, including a lack of arable land, collective farming practices, and poor soil quality.
Founding president Kim Il-sung’s family has ruled the Democratic People’s Republic of Korea with an iron fist since 1948. Kim Il-sung’s grandson, Kim Jong-un, has strengthened the DPRK’s position as a self-contained and self-reliant nuclear power, further isolating the hermit state. Test launches of an ICBM that could soon threaten the U.S. with nuclear weapons have energized debate about allied policy toward Pyongyang. The North Korean regime defiantly dismisses tougher U.N. sanctions. Both North and South Korea warn that evidence of imminent attack could lead them to initiate preemptive attacks, raising the potential for miscalculation that could lead to major conflict. After decades of economic mismanagement and resource misallocation, the DPRK has faced chronic food shortages since the mid-1990s.
Almost all property belongs to the state. Government control extends even to chattel property (domestically produced goods and all imports and exports). A functioning, modern, and independent judiciary does not exist. Bribery is pervasive and corruption is endemic at every level of the state and economy. 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 almost every part of the economy and directs all significant economic activity. The government sets production levels for most products, and state-owned industries account for nearly all GDP. Disproportionately high military spending further drains scarce resources. Despite an attempted state crackdown, black markets have grown.
Private-sector business activity remains virtually impossible in North Korea. In 2016, the regime initiated two mass mobilizations meant to increase production and complete construction projects quickly. The state determines wages, but factory managers have limited autonomy to offer incentives to workers. North Korea receives extensive food and energy subsidies from China.
Trade is highly restricted both by the actions of the North Korean government and by sanctions imposed by others. The government allows limited foreign participation in the economy through special economic zones, investment in which is approved on a case-by-case basis. The financial sector is completely controlled by the state.