Rigorous speculation: The collapse and revival of the North Korean economy

Abstract

In this paper, we use cross-entropy estimation techniques to construct the underlying data base for a computable general equilibrium model (CGE) of the North Korean economy, starting from incomplete data, ridden with gross measurement errors. The cross-entropy estimation approach is powerful and flexible, allowing us to make full use of what information we have in whatever form. CGE modeling forces internal consistency. The end product is a model that incorporates fragmentary information in a rigorous way and allows us to examine the implications of a number of alternative scenarios including rehabilitation of flood-affected lands, liberalization of the international trade regime, and military demobilization. North Korea has been experiencing a famine. Its economy is characterized by systemic distortions and comparative disadvantage in the production of grains. As a consequence, the potential payoffs to economy-wide reforms, even defined narrowly in terms of domestic food availability, dwarf more targeted attempts to raise agricultural productivity. To many, this finding-that a famine might be better addressed by the export of manufactures than the recovery of flood-damaged lands-is a striking and counterintuitive result. Moreover, we find that if reforms were to be undertaken, the country could generate a significant additional 'peace dividend' by partially demobilizing its enormous military. (C) 2000 Institute for International Economics. Published by Elsevier Science Ltd. All rights reserved.