The Index of Economic Freedom is published by the Heritage Foundation and the Wall Street Journal. The index tracks the march of economic freedom around the world, becoming a must-have resource for investors, policymakers, academics, and others who want to learn about the link between economic freedom and prosperity. The 2006 Index of Economic Freedom measures 161 countries against a list of 50 independent variables divided into 10 broad factors of economic freedom. Low scores are more desirable; the higher the score on a factor, the greater the level of government interference in the economy, and the less economic freedom a country enjoys.
Accoding to the 2006 Index:
The Democratic People’s Republic of Korea is undergoing some economic changes. In 2002, the government initiated tentative steps toward markets and entrepreneurship by creating semi-private markets, shops, and small business across the country. Part of these reforms included the phasing out of a decades-old food rationing and public distribution system and allowing prices and exchange rates to float. Nevertheless, the country remains firmly rooted in its communist and authoritarian system with its central command economy, and deeper institutional reform is constrained by the degeneration of North Korea’s industrial, transportation, and energy infrastructure, which continues to be neglected for the sake of the government’s military policy. Although reports indicate that there is greater economic activity in Pyongyang and other cities, economic deprivation seems to be worsening for most of the population. The country remains heavily dependent on external assistance for its food supplies, and there are indications that the economy is opening up to more trade with its two neighbors, China and South Korea. North Korea’s trade volume in 2004 is estimated to have reached its highest level since 1991—$2.85 billion. However, the possibility that North Korea might open wide-scale trade remains low because of lingering tensions about its nuclear weapons program. The Democratic People’s Republic of Korea’s overall score is unchanged this year.
North Korean trade data are compiled from trading partners’ statistics and published by the South’s Korea Trade-Investment Promotion Agency…. [M]uch trade is de facto aid, mainly with North Korea’s two main partners, China and South Korea.” According to the Korea Trade-Investment Promotion Agency, North Korea imported slightly over $2 billion in goods in 2003 while exporting slightly more than $1 billion.
“North Korea has the dubious distinction of being first in and last out of the developing world’s debt crisis, initially defaulting in the 1970s and remaining mired in debt today,” reports the Economist Intelligence Unit. “This dire debt record has not stopped North Korea from seeking new foreign investment. Its first special economic zone, at Rajin-Sonbong in the north-east, was gazetted in 1991. A raft of detailed foreign business laws in the 1990s suggested serious intent, but found few takers. Rajin-Sonbong is remote and still lacks basic infrastructure. Wage rates were unrealistically high, as the state controls labour supply and insists on taking its share. More recent special zones, at Mt Kumgang and Kaesong, are more enticing…. Continued nuclear defiance will inevitably deter investors from what remains largely a leap into the unknown.” Aside from these few economic zones where investment is approved on a case-by-case basis, foreign investment is prohibited.
“North Korea largely lacked a financial sector in the capitalist sense. Most funding for industry came from the state, which also earned revenue by taking a percentage on transactions among enterprises…. At least two foreign aid agencies have recently set up microcredit schemes…. Reports in early 2005 suggested that a radical overhaul of the financial system is under way. As a next step in market reforms, investment funds will no longer be allocated by the state under a plan. Instead, as normal elsewhere, firms will have to borrow from banks, whose role and importance are therefore set to grow and change markedly.” Because of debts dating back to the 1970s, most foreign banks will not consider entering North Korea. The central bank also serves as a commercial bank with a network of 227 local branches. A South Korean bank has opened a branch in the Kaesong zone, and a Hong Kong hotel and casino in Rajin-Sonbong includes a bank. The state holds a monopoly on insurance through the State Insurance Bureau and the Korea Foreign Insurance Company. The state continues to dominate the financial sector.
The government controls and determines all wages and prices. According to the Economist Intelligence Unit, “Only in 2002 did real change begin. In July wages and (more so) prices were raised drastically for producers and consumers typically tenfold or more. Enterprises were told to charge prices that reflected their costs, and no longer expect subsidies.” In addition, “the government had adopted a law that acknowledged the existence of farmers’ markets for the first time [in 2003]. However, with no matching supply-side measures to boost output, the result of these tentative reforms has been rampant inflation for many staple goods.” According to the U.S. Department of State, “Government ministries set wages.”
North Korea’s informal market is immense even though the government imprisons many who engage in such activity. Informal market activity in agricultural goods flourishes as a result of famines and oppressive government policies. There is also an active informal market in currency and in trade with China.
Major exports: minerals, metallurgical products, machinery, textiles, fishery products
Major export trading partners: China 37.1%, South Korea 27.1%, Japan 16.3%
Major import trading partners: China 30.6%, South Korea 21.2%, Thailand 9.9%