https://dx.doi.org/10.2139/ssrn.5367910

This study models North Korea as a Solow economy to measure the role of different causes driving the country’s growth underperformance visa -vis South Korea from 1958-2018. Counterfactual experiments show that North Korea’s nonperformance resulted primarily from productivity failure, with the disintegration of the Soviet Union and high defense burden aggravating the decline. These findings align with the outcomes from experiments using a Ramsey model calibrated to stand for South Korea and subjected to North Korean shocks. The productivity divergence resulted primarily from the increasingly despotic North Korea’s failure to shed misallocation as rapidly the democratizing South Korea did. 

Keywords: North Korea, total factor productivity, savings, defense burden

JEL Classification: N15, O11, O41, O43, O47