Famine in North Korea: Causes and Cures

Marcus Noland (PIIE) and Tao Wang (PIIE)
Working Paper
99-2
January 1999

In this paper we start from incomplete data ridden with gross measurement errors to construct the underlying data base for a computable general equilibrium model (CGE) of the North Korean economy using cross-entropy estimation techniques. This model incorporates fragmentary information in a rigorous way and allows us to examine the implications of a number of alternative scenarios. First, we model a production-oriented recovery program as the restoration of flood-affected lands. We then model an external assistance program as the acquisition of all food aid necessary to attain the United Nations organizations’ estimates of minimum human needs. The trade-oriented recovery program is modeled as a relaxation of agricultural import quotas and the importation of food on commercial terms. Finally, we model a systemic reform program as the elimination of quantitative restrictions on all external trade.

We find that only the trade- and reform-centered strategies are likely to provide a sustainable solution to North Korea’s problems. Because of North Korea’s lack of comparative advantage in the production of grains, the production-oriented strategy fails to attain the country’s minimum human needs target. The target could be obtained through international assistance, but it appears that this assistance has been motivated by donors’ non-famine-related foreign policy goals and may not be sustainable. Higher levels of assistance depress agricultural prices (and domestic production), rural wages, and the wages of the low skill urban workers, contributing to income inequality. In contrast, not only minimum human needs, but also normal human demands are met under the trade-oriented strategy. However, total normal demand is met only through systemic reform. Under both of the trade- and reform-oriented strategies, GDP rises and wages for all labor groups increase, offering the possibility of a recovery strategy where everyone gains.