How to reform North Korea

The economics profession is being criticized these days because it was unprepared for the recent crisis. Few people had thought about the fact that liquidity problems of such dimensions could appear in interbank markets. Thus it is now very welcome to think about hypothetical situations instead of studying past phenomena. One such hypothetical is what to do if North Korea would suddenly abandon its Juche system (self-reliance).

Scott Bradford, Dong-jin Kim and Kerk Phillips tackle this with a simulated dynamic general equilibrium model, pretty much the only solution given that there is no history to draw on and no reliable data. Also, this is definitely a situation where reduced forms would not teach us anything. So, structural they go. First, they try to emulate the current situation with massive mis-allocation of resources and little infrastructure. It is quite obvious that from this starting point almost any reform is beneficial. But suppose the reform is purely internal: no opening of the economy, and no touching the military. Then introducing market forces, but this still be of limited extend given the immense lack of infrastructure, Massive investment in infrastructure is needed much more urgently than market reform. And serious commitment to reform that would benefit residents is likely to attract significant foreign aid, which makes it much more affordable.