Transition from the Bottom-Up: Institutional Change in North Korea

Second Annual Association of Comparative Economic Studies Presidential Address Boston, MA

January 7, 2006

During the 1990s, a famine in North Korea killed perhaps 3 to 5 percent of the population. In the context of this trauma, the state’s inability to fulfill its normal obligations instigated an unmanaged yet rational process of coping and adjustment under duress by enterprises, households, and local institutions. Policy reversals in the fall of 2005 may reflect an attempt by central authorities to reverse this transition process and may intensify distress in the future. This model of transition—driven essentially by state failure—may become increasingly prominent in the future.

It is a great honor to deliver the second annual Association of Comparative Economic Studies presidential address. I am tempted to deliver one of those “state of comparative economics” talks, but many others here this evening could do so far better than I. Instead, I will review the last 15 years or so of North Korean economic history, which is hopefully of some intrinsic interest, with the aim of illustrating a conceptual theme regarding the nature of institutional change. (And if I slip up and refer to “we,” it is not that my position as president of the association has gone to my head but that much of the research to which I will refer has been done jointly with Stephan Haggard.)

Economists often think about institutional change as the outcome of top-down reforms designed by policymakers or technocrats interested in improving efficiency or achieving other political or economic goals. Specialists in comparative economics probably have a more nuanced understanding of political-economy incentives and the nature of institutional change than the economics profession as a whole but generally conceive of change as emanating from an intentional process. I would like to discuss North Korea as a case study of a different conception of change, one in which the failure of the state to perform its normal functions generates transition through an unmanaged, yet rational, process of coping and adjustment under duress by lower-level social units and institutions.

During the 1990s, a famine in North Korea killed perhaps 600,000 to 1 million people or roughly 3 to 5 percent of the population, making it one of the worst famines of the 20th century. The inability of the state to fulfill its obligations under the existing institutional relationships necessitated coping responses by local party, government, and military units as well as enterprises and households and contributed to a bottom-up marketization of the economy. Transformation of the institutions of the North Korean economy over the past decade can best be understood not as a top-down attempt by the governing authorities to marketize or improve efficiency, as usually characterized, but rather as a bottom-up grassroots de facto marketization arising from coping responses to the trauma of famine, which the government has sought to both ratify but control ex post. Policy reversals in the fall of 2005—banning private trade in grain, resuscitating the quantity rationing system, and reversion to confiscatory seizures from rural cultivators—both reveal policymakers’ discomfort with this process and its outcomes and may augur a future intensification of distress through disruptions to both the demand and supply sides of the food economy. With many of the Central and Eastern European countries converging on Western institutional norms, while parts of the former Soviet Union remain more closely wedded to earlier economic and political models, this transition modality essentially arising out of state failure may become increasingly prominent in the future.

More From: 

Marcus Noland Senior Research Staff