North Korea has a long road ahead to economic recovery

Kim Jung Il, the ruler of North Korea, died almost two weeks ago, reportedly of a massive stroke. He will be missed by no one.

His death opens up the possibility of changes in that reclusive country's policies, both domestically and internationally. In terms of politics and policy, North Korea is probably the hardest country in the world to reliably understand.

We can observe the final results of whatever process determines policy, but very few people outside North Korea have any clue how that process actually proceeds. So it is entirely possible that nothing will change in practical terms as a result of Kim Jung-il's death. Still, if you are a bit of a gambler, the odds are higher now than they have been in a long time.

North Korea by almost any economic standard is a real basket case today. This wasn't always the case. Korea was occupied by Japan from 1910 until the end of World War II. By agreement of the allied powers at the Yalta conference the Soviets occupied the peninsula north of the 38th parallel and the U.S. occupied the south.

At that time, the south was largely agrarian and the little manufacturing capacity there was, was mostly in the north, closer to natural resources from Manchuria, which Japan also occupied. Up until the 1970's, standards of living in North Korea were actually higher than those in South Korea.

The real slide in standards of living came with the fall of the U.S.S.R. Up until that time, the North Koreans had skillfully played off of the antagonism between it and China. When the Soviet Union ceased to exist, both China and Russia felt less of a need to compete for North Korean loyalty and the subsidies virtually ceased.

For several years, I have been working with my BYU colleague, Scott Bradford, to try and predict what would happen if economic policy in North Korea were to change. In a recently published paper with a former student, Dan Kim, now at Cambridge University, we examined what would happen if the government there were to open to market reforms, much like China did in the 1970's and 80's. We found that simply implementing a market pricing mechanism is insufficient to bring North Korea out of a downward spiral.