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BOK Working Paper No.2018-13, Analysis on the Openness and Economic Welfare of North Korea

Economic Research Institute (+82-2-759-5431) 2018.05.14 4401

Title : Analysis on the Openness and Economic Welfare of North Korea

Author : Hyeok Jeong(Seoul National University), Changyong Choi(KDI School of Public Policy and Management), Jiyoung Choi(BOK)


<Abstract>


North Korea's trade volume in 2016 was three times higher than in the mid-1990s. North Korea’s external openness seems to have considerably increased, but it still faces difficulties in expanding its external openness due to economic sanctions by the international community.

This study uses Arkolakis, Costinot and Rodriguez-Claire's model (ACR model), which measures the economic welfare effects of various international trade models. In the ACR model, the "import penetration ratio," which is the ratio of imports to domestic demand, indicates the degree of external openness, and "gains from trade" is a measure of the real income growth rate that occurs when switching from a closed to an open economy. We estimated the import penetration rate and gains from trade of North Korea during 1996-2016 using North Korean foreign trade data from UN Comtrade, IMF DOTS and KOTRA as well as inter-Korean trade data from the Unification Ministry of Korea.

The main results of this study are as follows. North Korea's import penetration rate has shown a gradual increase, indicating an expansion of international openness. This trend has become especially clear since 2000 when the North Korean economy began stabilizing after the end of “the Hardship March,” although it faltered slightly from 2014 to 2016. In addition, it is estimated that gains from trade is in the range of 1.5%-4.5% based on real income, and the annual change trend is similar to that of the import penetration rate.

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