Content area
Full Text
This paper uses a survey of North Korean refugees to investigate the evolution of informal economic activities of North Korean households. We find little evidence of increases in informal economic activities in terms of the aggregate participation rate in the informal economy from 1996 to 2009. However, service and manufacturing activities in the informal economy increased during 2005-2009 at the sacrifice of informal agricultural activities. Evidence shows that labor productivity has improved in the informal service sector, whereas the informal manufacturing sector has not experienced increases in productivity. These results imply that expansion of the informal service sector contributes to North Korea's economic growth, but the lack of private property rights constrains the development of manufacturing.
Keywords: North Korea, Informal economic activities, Labor productivity, Propensity score matching model
JEL Classification: J22, J24, O17, P20
I. Introduction
North Korea's Public Distribution System (PDS) of grain broke down during the so-called "Arduous March" in the mid- and late 1990s. This economic crisis led many households to rely on informal economic activities (IEAs) that had been previously repressed by the North Korean authorities. The authorities decided to tolerate such household activities, without which a considerably worse economic disaster would occur. Consequently, the informal economy in North Korea substantially increased in this period.
The informal economy existed in other socialist countries such as the Soviet Union. The majority of economists maintain that the Soviet informal economy was large (Grossman 1987; Ofer, and Vinokur 1992; Kim 2003). For example, Grossman (1987) estimates that in the late 1970s, private income accounted for 33% of the total income of urban households. By using classified Soviet archival material, Kim (2003) provides annual estimates of the informal economy from 1969 to 1990. The average share of Soviet households' informal expenditure in total expenditure was 23% during the above period. Furthermore, certain economists ascribe the collapse of the Soviet socialist system to IEAs that range from household's private economic activity to bribery and even organized crime (Treml, and Alexeev 1994; Grossman 1998; Solnick 1998; Wintrobe 1998).1 These debates produced a number of studies on the informal economy in a socialist system.2
The emergence of the informal economy in North Korea also elicited considerable research attention. Scholars have not only analyzed the size and determinants...