North Korea – last in economic freedom in 2009

The purpose of these types of indexes is to put pressure on world governments to improve their economic policies.  Unfortunately, the DPRK has come in last place for as long as I have been paying attention….

From the 2009 Index of Economic Freedom:


North Korea’s economic freedom score is 2, making its economy the least free in the 2009 Index. North Korea is ranked 41st out of 41 countries in the Asia-Pacific region.

North Korea does not score well in any single area of economic freedom, although it does score some minimal points in investment freedom and property rights. The Communist Party controls and commands almost every aspect of economic activity. Since the early 1990s, North Korea has replaced the doctrine of Marxism’Leninism with the late Kim Il-Sung’s juche (self-reliance) as the official state ideology. Yet the country’s impoverished population is heavily dependent on government subsidies in housing and food rations even though the state-run rationing system has deteriorated significantly in recent years.

North Korea devotes a disproportionately large share of GDP to military spending, further exacerbating the country’s already poor economic situation. Normal foreign trade is minimal, with China and South Korea being the most important trading partners. Trade with India is increasing. No courts are independent of political interference, and private property (particularly land) is strictly regulated by the state. Corruption is rampant but hard to distinguish from regular economic activity in a system in which arbitrary government control is the norm.

The Democratic People’s Republic of Korea is one of the world’s most oppressed and closed societies, and its Communist rulers have repressed basic human rights and nationalized all industry since the country’s founding in 1948. In the 1990s, floods and droughts exacerbated systemic shortcomings and led to severe famine and millions of civilian deaths. North Korea’s economy is mainly supported by international aid and trade with its major trading partners, China and South Korea.

Business Freedom
The overall freedom to start, operate, and close a business is extremely restricted by North Korea’s national regulatory environment. The state regulates the economy heavily through central planning. Economic reforms implemented in 2002 allegedly brought some changes at the enterprise and industrial levels, but entrepreneurial activity is virtually impossible.

Trade Freedom
The government controls all imports and exports, and formal trade is minimal. North Korean trade statistics are limited and compiled from trading partners’ data. Most trade is de facto aid, mainly from North Korea’s two main trading partners, China and South Korea. Non-tariff barriers are significant. Inter-Korean trade remains constrained by North Korea’s unwillingness to implement needed reform. Given the minimal level of trade, a score of zero was assigned.

Fiscal Freedom
No data on income or corporate tax rates are available because no effective tax system is in place. The government plans and manages almost every part of the economy. Given the absence of published official macroeconomic data, such figures as are available with respect to North Korea’s government expenditures are suspect and outdated.

Government Size
The government owns virtually all property and sets production levels for most products, and state-owned industries account for nearly all GDP. The state directs all significant economic activity. Large military spending further drains scarce resources.

Monetary Freedom
Price and wage reforms introduced in July 2002 consisted of reducing government subsidies and telling producers to charge prices that more closely reflect costs. Without matching supply-side measures to boost output, the result has been rampant inflation for many staple goods. Because of the ongoing crisis in agriculture, the government has banned sales of grain at markets and returned to rationing. A score of zero was assigned.

Investment Freedom
North Korea generally does not welcome foreign investment. A small number of projects may be approved by top levels of government; however, the scale of these investments is also small. Numerous countries employ sanctions against North Korea, and ongoing political and security concerns make investment extremely hazardous. Internal laws do not allow for international dispute arbitration. One attempt to open the economy to foreigners was North Korea’s first special economic zone, located at the remote Rajin-Sonbong site in the Northeast. Wage rates in the special zone are unrealistically high because the state controls the labor supply and insists on taking a share of wages. More recent special zones at Mt. Kumgang and Kaesong are more enticing. Aside from these few economic zones where investment is approved on a case-by-case basis, foreign investment is prohibited.

Financial Freedom
North Korea is a command-and-control economy with virtually no functioning financial sector. Access to financing is very limited and constrained by the country’s failed economy. The central bank also serves as a commercial bank and had more than 200 local branches in 2007. The government provides most funding for industries and takes a percentage from enterprises. Foreign aid agencies have set up microcredit schemes to lend to farmers and small businesses. A rumored overhaul of the financial system to permit firms to borrow from banks instead of receiving state-directed capital has not materialized. Because of debts dating back to the 1970s, most foreign banks will not enter North Korea.

Property Rights
Property rights are not guaranteed. Almost all property, including nearly all real property, belongs to the state, and the judiciary is not independent. The government even controls all chattel property (domestically produced goods as well as all imports and exports).

Freedom From Corruption
After the mid-1990s economic collapse and subsequent famines, North Korea developed an immense informal market, especially in agricultural goods. Informal trading with China in currency and goods is active. There are many indicators of corruption in the government and security forces. Military and government officials reportedly divert food aid from international donors and demand bribes before distributing it.

Labor Freedom
As the main source of employment, the state determines wages. Since the 2002 economic reforms, factory managers have had limited autonomy to set wages and offer incentives, but highly restrictive government regulations hinder any employment and productivity growth.


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