The Evolution of the Informal Economy in North Korea

Abstract

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