Economic Reform in North Korea: A Dynamic General Equilibrium Model

Bradford, Scott C. and Kim, Dong-jin and Phillips, Kerk L. (2010): Economic Reform in North Korea: A Dynamic General Equilibrium Model.

Abstract

This paper examines the impact of hypothetical market reforms in North. We build a dynamic general equilibrium model and simulate multiple reform scenarios. We first construct a baseline model which mimicks the current command economy. In this scenario the government allocates output in an inefficient way and simulated economic growth is negative. We next model a semi-market transition that allows producers choices regarding the distribution of available capital. However, total capital is still chosen by the government. Lastly, we consider two scenarios with full market reform allowing for the usual market mechanisms derived from consumer utility maximization, firm profit maximization, and market clearing prices. In one scenario we keep government investment in public infrastructure unchanged at the low baseline level. In the other we drastically increase the rate of infrastructure investment so that it matches that of South Korea. In all we maintain a closed economy assumption and a constant size for the military. Our simulations show little hope for the North Korean economy without a significant increase in infrastructure. Although all of the reforms raise the level of output and consumption per capita, only with significant increases in infrastructure investment does output growth change from negative to positive.

• Item Type: MPRA Paper
• Language: English
• Keywords: factor mobility; dynamic general equilibrium; specific-factors; Korea
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F22 - International Migration; F - International Economics > F1 - Trade > F15 - Economic Integration; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission

References

Bradford, Scott and Kerk Phillips (2005) “A Dynamic General Equilibrium Model of Phased Korean Reunification.” Journal of the Korean Economy, vol. 6 no. 1 pp. 27-49.

Eberstadt, Nicholas (1990) “The Coming Collapse of North Korea.” Wall Street Journal, 26 June.

Noland, Marcus (2000) “Avoiding the Apocalypse the Future of the Two Koreas.” Washington DC: Institute for International Economics, 2000.

Seliger, Bernhard (2005) “The July 2002 Reforms in North Korea: Liberman-Style Reforms or Road to Transformation?” North Korean Review, vol. 1 pp. 22-37.