North Korea: From Failing towards Reforming State?

According to most criteria, North Korea would be classified as a failing state. More often than not the country’s destiny has been predicted as collapse, chaos, and in the end, absorption by South Korea. However, so far the Kim Jong-il regime proved viable and cultivated the art to survive within a globalizing world without opening up. More recently, North Korean authorities appeared to revive an affinity towards South Korea’s sunshine policy. What is more, the country even seemed to initiate some rudimentary and cautious market-oriented reforms. If these are signs for a policy change, they are definitely not straightforward and they come with considerable uncertainties and risks. Especially, North Korea’s nuclear threat potential, its opaque international bargaining strategy, and its reliance on exports of military goods for hard currency revenues represent key obstacles. And yet, the North Korean elite, South Korean authorities, and the rest of the world do have a vital interest in avoiding an apocalypse on the Korean peninsula. All parties may have an interest in the maintenance of a politically sovereign, economically reforming state. This essay seeks to sketch a politically feasible and economically effective reform strategy for North Korea from a governance perspective. The main argument states that effective integration and economic transition of North Korea crucially depend on the emergence of specific transitional institutions which lead to efficiency gains and enhance the incentive compatibility of ruling the country and pursuing the nations’s welfare. JEL classification: O53, P26, P45 Draft version, comments welcome