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BOK Working Paper No.2020-24, Estimating Capital Stock in North Korea and Its Implications

Economic Research Institute (82-2-759-5188) 2020.11.09 1189

Title : Estimating Capital Stock in North Korea and Its Implications

Author : Hak Kil Pyo(Seoul National University) Taehyoung Cho(BOK), Minjung Kim(BOK)

<Abstract>

This study aims to estimate the capital stock in North Korea from 1955 to 2018, based on the perpetual inventory method, and then to explain its economic growth. The capital stock is estimated by decomposing it into construction assets and equipment assets. 

Estimates show that North Korea's capital stock increased rapidly from 1955 to 1989, then decreased significantly in the 1990s, and recovered since the 2000s. The capital stock estimate as of 2018 stands at 24% higher than that in 1989. The capital stock/GDP ratio as of 2018 is around 3.9 times, which is higher than 3.0, the ratio commonly observed in many advanced economies. The estimated share of equipment capital within total capital is only 8% as of 2018, which compares with the corresponding rate (32%) during the 1970-1990 period in South Korea.

Growth accounting analysis shows that North Korea achieved a rapid input-led growth in the early stages of economic growth, but has since shown stagnant or sluggish growth, due mainly to a drop in total factor productivity. It suffered from the economic crisis in the 1990s, and after 2000 the low growth pattern was maintained as productivity continued to remain sluggish amid a lower input growth rate. Since 2017, the economic growth rate has plummeted due to a further drop in the input growth rate and a significant drop in productivity in the wake of sanctions. We believe that the negative GDP growth rate during the so-called “Arduous March Period,” and the low growth seen in succeeding periods that has been characterized by idle capacity with a poverty trap, can be explained by a Harrod (1939)-Domar (1946) model based on the Leontief production function as outlined in Barro and Sala-i-Martin (1995). 

As North Korea's growth conditions have deteriorated significantly due to the embargo on capital goods, it is required to improve its system that promotes productivity, efficiency and creativity through innovation in the ownership structure and management of farms and enterprises. More favorable foreign relations and an active opening policy are also necessary to attract foreign investment and technology, which is essential for human and physical capital accumulation and the resulting economic growth. 

Despite the estimates of this study, efforts should continue to be made to compare the historical accumulation process of individual assets, to calculate deflators, and to enhance the accuracy of production data used in estimating economic growth. In particular, the capital stock estimates in this paper should be understood as preliminary figures, as it is linked to work to improve the estimation of North Korea's other macro statistics.

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