Working Paper
The Road to the Market in North Korea

North Korea's economic reform began in the mid-1980s. It was motivated by the increasing seriousness of the problems typical of centrally planned socialist economies.In general, the country's reforms have so far been limited both in scope and depth.

This is a main cause of the escalation of economic hardships. As a result of the deepening crisis, spontaneous marketization and privatization are occurring in the economy, especially in agriculture and the consumer goods sector, although there is not much fundamental change in the domestic economy.The controlled promotion of light industry and agricultural decentralization is intended to provide the North Korean population with basic necessities. An open-door policy is being used to meet the goal of modernization by reducing the foreign exchange gap. Progress is slow partly because of international political and economic circumstances affecting the Korean peninsula, and this is beyond North Korean control to a certain extent. Nevertheless, the open-door policy is expected to lead to the marketization of North Korea's economy by attracting new economic entities to the coasial zones, rural areas and eventually other areas.

Success with the open-door policy will mean that reforms in the domestic system can proceed in a more radical way. This will set the stage for a peaceful integration with South Korea. Such a transition strategy can be considered a 'soft landing' scenario.However, the economic situation in North Korea is rapidly worsening, and time is running out. Thus, a pessimistic 'hard landing' scenario is also a possibility. Here, the open-door policy ends up failing because of no US or international help.

In this case, the current crisis will deepen into a collapse, which will generate political leadership changes internally or lead to a South Korean take-over. In either case, the simultaneous and radical reform of the domestic system and of external economic relations that is initiated by either a new North Korean leadership or South Koreans would represent a natural course of events. Reform would proceed simultaneously with rapid economic integration with South Korea, and the German bigbang model would become relevant in the transition.It is true that, given the ever worsening situation in North Korea, the hard landing scenario seems more probable.

However, this does not mean that the sudden collapse of the government is the best option. The soft landing scenario does not mean 'act slowly'. To realise the scenario, we must act as quickly as possible to improve the situation in North Korea by taking unilateral actions and urging North Koreans to opt for more radical policies.However, an important element in the soft landing scenario is a more radical reform package.

Can we expect the current leadership to take such a policy line? The worsening situation is encouraging this option. However, it has also been leading the hard-liners, including the military, to seek more power inside the top leadership. This tends to make one sceptical about the policy alternatives.