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Economics

The Korean War and the Great Divergence Between North and South

The 1950–53 war killed an estimated 700,000 South Korean and 900,000 North Korean civilians, plus about 140,000 North Korean, 183,000 Chinese, 47,000 South Korean and 36,574 US soldiers.

Key figures at a glance
  • The 1950–53 war killed an estimated 700,000 South Korean and 900,000 North Korean civilians, plus about 140,000 North Korean, 183,000 Chinese, 47,000 South Korean and 36,574 US soldiers.[3]
  • In 1940 the northern half of Korea was richer per person: $2,624 against $1,975 in the south (2011 prices).[1]
  • CIA estimates put North Korea’s income per person ahead of the South’s until 1976; South Korea’s KDI dates the crossover to 1969.[6]
  • The United States gave South Korea $12.6 billion of economic assistance from 1946 to 1976; in the mid-1950s aid made up nearly 80% of government revenue.[5]
  • South Korea’s exports rose from 2.6% of GDP in 1960 to 45.8% in 2025.[9]
  • North Korea’s 1990s famine killed an estimated 600,000 to 1 million people, 3–5% of the pre-crisis population.[13]
  • The Bank of Korea estimates North Korea’s gross national income per person at 1.87 million won in 2025, 3.6% of the South’s 52.57 million won.[11]
  • By 2022, South Korea’s GDP per person was about 26 times North Korea’s in the Maddison Project data.[1]

Korea is the nearest thing economics has to a natural experiment. Before 1945 it was one country with one language, one culture and one history. Then it was split in two. The war of 1950–53 devastated both halves and fixed the border almost where it started. Afterwards, the two states chose opposite economic systems: a market economy that relied on exports in the South, and a centrally planned, inward-looking economy in the North.

Seventy years later, the result is one of the largest income gaps between neighbours anywhere in the world. This chapter traces how it happened. It shows that the North was not always behind; for twenty years or so it may have been ahead. That makes the story a powerful lesson about how institutions, policies and the outside world shape what a country does with a war-ruined economy.

1. Background: how the war began

During the Second World War, the United States and the Soviet Union agreed to divide Korea temporarily at the 38th parallel to oversee the removal of Japanese forces. Neither side would allow its Korean ally to be threatened by unification. The Soviet Union backed Kim Il Sung in the Democratic People’s Republic of Korea (DPRK) in the north, and the United States backed Syngman Rhee in the Republic of Korea (ROK) in the south.[2]

American forces withdrew from the South in the late 1940s. In June 1950, Kim’s army attacked the South and almost conquered the whole peninsula. A United Nations-authorised force led by the United States pushed the North’s army back beyond the 38th parallel. China then entered the war in late 1950. Only in 1953 did the two sides reach an “uneasy truce”, which fixed the division that still exists today.[2]

DateEvent
1945Korea divided at the 38th parallel between US and Soviet forces.[2]
June 1950North Korean forces attack the South.[2]
Late 1950China enters the war.[2]
27 July 1953Ceasefire signed at Panmunjom; US–South Korea mutual security treaty follows.[3][2]
1954–1960North Korea rebuilds with Soviet, Chinese and East European aid.[4]
1961Park Chung Hee takes power in the South; trade policy shifts towards exports.[8]
1969–1976South overtakes North in income per person (estimates differ).[6]
1970sNorth Korea defaults on international creditors.[15]
1994–1998Famine in North Korea.[14]
2006UN Security Council creates the North Korea sanctions regime (resolution 1718).[17]
2017UN bans North Korean coal, iron, seafood, textile and food exports and caps oil imports.[16]
Mar 2024Russia vetoes renewal of the UN sanctions Panel of Experts.[17]
June 2024Russia and North Korea sign a Comprehensive Strategic Partnership Treaty.[18]
July 2026Bank of Korea estimates North Korean growth of 3.5% in 2025.[11]

2. Where things stand now: the legacy today

As of October 2026, the peninsula remains divided along the 1953 line. The economic gap between the two Koreas is enormous.

The Bank of Korea (BOK), South Korea’s central bank, publishes the most widely used estimates of the North Korean economy. In July 2026 it estimated that North Korea’s real GDP grew by 3.5% in 2025, after 3.7% in 2024 and 3.1% in 2023, the third straight year above 3%.[11] North Korea’s nominal gross national income (GNI) was 48.5 trillion won (about $33.8 billion), just 1.8% of South Korea’s 2,717.1 trillion won. GNI per person was 1.87 million won, or 3.6% of the South’s 52.57 million won.[11] In other words, the average South Korean’s income is about 28 times the average North Korean’s on this measure.

North Korea’s recent growth is linked to closer ties with Russia. After the two signed a mutual defence treaty in June 2024, North Korea sent more than 10,000 troops to help Russia’s war effort, and its troops fought in Russia’s Kursk region in 2025. One estimate cited by the US Congressional Research Service puts North Korea’s earnings from the relationship, mainly artillery deliveries, at $7.7–14.4 billion up to the end of 2025.[18] That is large compared with an economy whose GDP the BOK converts to about $26.6 billion in 2025.[12] Russia and North Korea opened their first road bridge across their border in 2026.[18]

South Korea, by contrast, is a high-income economy struggling with slow growth. Its real GDP grew by 1.0% in 2025, according to the World Bank,[9] and the IMF forecasts 3.3% in 2026.[19] Life expectancy at birth was 83.6 years in the South in 2024 against 73.7 in the North, and infant mortality was 2.3 per 1,000 live births against 13.3.[9]

Common mistakeNumbers for North Korea are estimates, not official statistics. Pyongyang publishes almost no economic data. The BOK estimates North Korean output by applying South Korean prices and value-added ratios to North Korean production data, and some researchers argue this overstates the North’s GDP. Always say “according to Bank of Korea estimates” and treat small year-to-year changes with caution.[20]

3. The economy before the war

Until 1945 Korea was under Japanese rule.[2] In that period the two halves developed differently. In 1940, according to the Maddison Project Database, GDP per person was about $2,624 in the North and $1,975 in the South (in 2011 prices). In 1911 they had been almost the same, at $1,074 and $1,108.[1] So the North entered the post-colonial era richer per person.

Division itself was a shock to the South. Its GDP per person in 1946 was only $916, less than half its 1940 level.[1] On the eve of war it was still very much a farming economy with highly unequal land ownership: in 1944, 3% of landowners held 64% of farmland.[5] The National Assembly passed a land reform act in 1949, which was carried out during the war itself.[5]

GDP per person, South vs North Korea, 1911–2022 (2011 US$ (PPP))
South KoreaNorth Korea
010,00020,00030,00040,00050,000US$1911193019461953197019902010
Source: Maddison Project Database 2023, from Cha et al. (2020) [1] Before 1945, figures refer to the southern and northern parts of Korea. No North Korea data in this database for 1941–1989. Uneven spacing of years.

4. The economic impact: indicator by indicator

4.1 Human losses

Estimates of civilian deaths vary between one and two million. Australia’s Department of Veterans’ Affairs suggests about 700,000 South Korean and 900,000 North Korean civilians probably died.[3] Military deaths were also very large:

SideMilitary deadWounded
North Korea140,000240,000
China183,108383,218
South Korea47,000183,000
United States36,574105,785
Other UN forces (incl. UK, Türkiye, Canada, Australia)about 4,100about 12,300

Source: Australian Department of Veterans’ Affairs, Anzac Portal.[3] Other UN totals summed by the author from the same table.

Economically, these deaths destroyed human capital: the skills, health and labour of people who would have worked for decades.

4.2 Output and physical destruction

The North was bombed for three years. North Korea itself claimed that industrial output at the end of the war was nearly 40% below its 1949 level and that farm output was down by about 24%. Nearly three-quarters of homes were destroyed. Electricity production fell to 26% of pre-war levels, chemicals to 22%, and fuel and metallurgy to 11% and 10%. Some 70% of trains and 85% of ships were destroyed.[4] Pyongyang put the damage at 420 billion won, nearly $170 million at the exchange rates of the time.[4]

In the South, the war “left upward of two million dead” and cities and towns in ruins.[5] South Korean GDP per person fell from $1,189 in 1949 to $991 in 1951, a drop of about 17%, before recovering to $1,317 in 1953.[1]

4.3 Aid and reconstruction: two sponsors, two models

Both Koreas rebuilt with foreign money, but from rival blocs.

North Korea received what it called “fraternal aid”. In 1954, aid made up 31.6% of the North’s state budget. Of reconstruction aid, about one-third came from the Soviet Union, 29.4% from China and 37.8% from Eastern European countries. Nearly half a million Chinese People’s Volunteers provided labour, repairing homes and building bridges and dams until they left in October 1958.[4] According to Soviet statistics, by April 1960 the North had received 5.5 billion roubles (about $1.4 billion) in free aid from socialist countries, plus Soviet low-interest loans worth about $900 million.[4] As the economy recovered, aid’s share of the North’s economic development fell from 33.4% in 1954 to 2.6% in 1960.[4]

South Korea relied on the United States. The US provided $12.6 billion of economic assistance between 1946 and 1976, with aid highest in the decade after the war. In the mid-1950s, aid made up nearly 80% of government revenue and covered over half of the government’s budget.[5] In 1956, South Korea exported just $25 million of goods but imported $389 million: aid paid for the gap.[5]

Sources of foreign aid for North Korea's reconstruction (% of reconstruction aid)
010203040%Eastern EuropeSoviet UnionChinaMongolia & N. Vietnam37.833.329.40.5
Source: Shen and Xia (2012), NKIDP Working Paper 4 [4] Based on North Korean Foreign Trade Ministry documents.

4.4 Growth in the first post-war decade: the North pulls ahead

In the 1950s, the North grew faster. Kim, Kim and Lee, adjusting official data for hidden inflation, estimate that North Korea’s GNP grew by about 9.3% a year between 1954 and 1960.[7] Shen and Xia, using archival sources, cite growth of 36% a year in the reconstruction period 1954–59, and conclude that by the early 1960s North Korea’s development was “much more impressive than South Korea’s and would remain so until at least the mid-1970s”.[4] The two figures differ because they measure different things: official industrial-output claims grow much faster than independently adjusted GNP.

The South, by contrast, grew by about 4% a year under the Rhee and Chang Myon governments, and by under 2% a year per person once rapid population growth is taken into account.[5] President Rhee’s government protected domestic industry by blocking imports, a strategy known as import substitution, which suited a small, resource-poor country badly.[5]

4.5 When did the South overtake the North?

This is genuinely disputed, because North Korean data are unreliable and the two economies used different price systems. Estimates include:

  • CIA: North Korea’s GNP per person was $375 in 1965 against $245 in the South, and $425 against $365 in 1970. The South only moved ahead by 1976 ($605 against $590).[6]
  • Korea Development Institute (KDI): the South overtook the North as early as 1969.[6]
  • UN data, as reported by the Korea JoongAng Daily, show the North’s GDP per person staying higher than the South’s through 1973.[21]
  • Kim, Kim and Lee (2007): after adjusting for hidden inflation, the South’s GNP per person “began to surpass that of North Korea from the mid-1960s”.[7]

Whichever estimate is right, the important point is that the North was at least level with, and probably ahead of, the South for roughly the first fifteen to twenty years after the war.

CIA estimates of GNP per person, North vs South Korea (US$, current)
North KoreaSouth Korea
0200400600800US$196519701976375425590245365605
Source: Jeon (1982), RAND, citing CIA estimates [6] KDI estimates put the South ahead from 1969.

4.6 Trade: export-led industrialisation in the South

After Park Chung Hee came to power in 1961, the South switched from import substitution to export promotion. Hong (1979), cited by Connolly and Yi, documents 38 separate reforms designed to promote exports.[8] Two stand out. In the early 1960s, Korea removed tariffs on imported inputs and capital goods, but only if they were used to make exports. Then, from the 1970s, it gradually cut its general tariff rate from about 40% to 13%.[8]

The results were dramatic. Merchandise exports rose from 2% of GDP in 1962 to 30% in less than twenty years, and almost all the increase was manufactured goods. Manufactures made up 35.2% of merchandise exports in 1960 but 96.9% in 1995.[8] World Bank data show exports of goods and services rising from 2.6% of GDP in 1960 to 27.7% in 1980 and 45.8% in 2025.[9]

South Korea: exports of goods and services, 1960–2025 (% of GDP)
01020304050% of GDP1960197019801990200020102020
Source: World Bank, World Development Indicators [9]

North Korea went the other way. It maintained a centrally planned economy along Soviet lines, “remarkable only in the extent to which markets were repressed internally and its autarky” (self-sufficiency).[15] After defaulting on international creditors in the 1970s, it was frozen out of world capital markets and relied on aid from socialist allies, remittances from ethnic Koreans in Japan, and illicit activities to earn foreign currency.[15] By 2022, its total recorded trade was just $1.59 billion, compared with South Korea’s $1,415 billion, according to the BOK.[10]

4.7 Output and growth over the long run

South Korea’s real GDP per person grew by an average of 6.6% a year between the early 1960s and 1995. In 1961 its GDP per person was 11% of the US level, similar to Côte d’Ivoire and Sri Lanka; by 1995 it was 49%, comparable to Portugal or Slovenia.[8] Maddison data show South Korean GDP per person rising from $1,548 in 1960 to $13,874 in 1990 and $41,321 in 2022.[1]

North Korea’s growth slowed sharply after the 1950s. Kim, Kim and Lee estimate GNP growth of 3.3% a year in 1960–70, 4.6% in 1970–75, 2.2% in 1975–80 and 2.7% in 1985–89. GNP per person grew by only about 1.2% a year from 1960 to 1989. They also estimate that North Korean productivity was about 33% lower than the Soviet Union’s.[7]

4.8 Collapse and famine in the 1990s

Aid to the North declined from the mid-1980s.[15] In the 1990s, the economy collapsed. Maddison data show North Korean GDP per person falling from $2,456 in 1990 to $1,580 in 1998, a drop of about 36%.[1]

North Korea: GDP per person, 1990–2022 (2011 US$ (PPP))
1,4001,6001,8002,0002,2002,4002,600US$19901993199619992002200520082011201420172020
Source: Maddison Project Database 2023, from Cha et al. (2020) [1]; famine dates: Noland (2013) [14] Famine conventionally dated 1994–98.

The famine is conventionally dated from 1994 to 1998, though food availability was already falling in the late 1980s; in 1990 the government launched a “let’s eat two meals a day” campaign.[14] Haggard and Noland estimate that 600,000 to 1 million North Koreans, about 3–5% of the pre-crisis population, died in “one of the worst famines of the 20th century”.[13] Estimates differ widely. Some contemporary claims ran as high as 3.5 million, which Noland regards as unreliable; later census-based work by Spoorenberg and Schwekendiek suggests 237,000 to 420,000 excess deaths.[14] Noland argues the famine was already under way when floods hit in 1995, which “undermines the politically convenient depiction of the famine as a product of natural disasters”.[14]

When the state could no longer supply food, families, firms and local officials began to trade privately. The authorities tolerated informal markets, which became the main way most families obtained food. Central planners began to lose control of the economy.[15]

South Korea also had a crisis in the 1990s, the Asian financial crisis, but of a very different scale: GDP per person fell from $21,056 in 1997 to $19,625 in 1998, about 7%, and recovered to $21,541 the following year.[1]

4.9 Sanctions

The UN Security Council created a sanctions regime on North Korea in 2006 (resolution 1718).[17] In 2017 the sanctions became economy-wide.[16]

  • Resolution 2371 banned exports of coal, iron, iron ore and seafood.
  • Resolution 2375 banned textile exports and limited refined petroleum imports.
  • Resolution 2397 capped refined petroleum imports at 500,000 barrels a year and crude oil at 4 million barrels; banned exports of food, farm products, machinery, electrical equipment and other goods; and required countries to send home North Korean workers earning income abroad within 24 months.[16]

The BOK estimates show North Korean GDP shrinking by 3.5% in 2017 and 4.1% in 2018, then by 4.5% in 2020 when the border was closed during the pandemic.[10] North Korea’s trade fell to $710 million in 2021 before recovering to $1.59 billion in 2022.[10]

Enforcement has since weakened. On 28 March 2024, Russia vetoed renewal of the UN Panel of Experts that monitored the sanctions (13 votes in favour, Russia against, China abstaining), so the panel’s mandate ended on 30 April 2024.[17] The US and 10 other countries set up a Multilateral Sanctions Monitoring Team instead. Russia has been accused of shipping oil above UN limits, and more than 40,000 education visas granted to North Koreans in 2024 and 2025 are suspected of being used for work.[18] Russia’s government argues the UN sanctions regime is outdated and should be revised.[17]

Real GDP growth, North vs South Korea, 2012–2025 (% change)
North Korea (BOK estimate)South Korea
-6-4-20246%2012201420162018202020222024
Source: Bank of Korea [10][11]; World Bank [9] North Korea: Bank of Korea estimates (2012–22 from 2023 release; 2023–25 from July 2026 release). South Korea: World Bank.

4.10 Human development

Both Koreas started the 1960s with similar health outcomes. In 1960, life expectancy was 53.8 years in the South and 55.8 in the North. By 2024 it was 83.6 years in the South and 73.7 in the North.[9] Infant mortality fell from 74.4 per 1,000 in the South in 1960 to 2.3 in 2024; in the North it fell from 81.8 to 13.3.[9] Figures for the North are modelled estimates and should be treated with caution.

Life expectancy at birth, 1960 and 2024 (years)
South KoreaNorth Korea
020406080100years19601990202453.871.683.655.870.573.7
Source: World Bank, World Development Indicators [9] North Korea figures are modelled estimates.

5. What went well and what went wrong

What went well (mainly in the South)

  • Land reform. The 1949 reform capped holdings at 7.5 acres. By 1956 the top 6% of landowners held 18% of farmland, down from 64% held by the top 3% in 1944.[5] A more equal start helped spread the gains from later growth.
  • Switching from import substitution to exports. Duty-free imported inputs for exporters and gradual tariff cuts pushed firms to compete in world markets.[8]
  • Using aid as a bridge. US aid financed imports and government spending in the 1950s, when exports were tiny.[5]
  • Rapid reconstruction in the North in the 1950s. Large-scale aid and mobilisation restored industry quickly, with GNP growth of about 9% a year.[7][4]

What went wrong

  • Aid dependence in both Koreas. Nearly 80% of South Korean government revenue came from aid in the mid-1950s, and growth was slow until policy changed.[5] In the North, aid made up almost a third of the budget in 1954.[4]
  • Planning hit diminishing returns. After the 1950s, North Korean growth slowed and productivity lagged even the Soviet Union’s.[7]
  • Debt default and isolation. The North’s 1970s default cut it off from world capital markets.[15]
  • Famine. The state food system failed and hundreds of thousands died.[13][14]
  • Sanctions and military priorities. UN sanctions from 2017 cut off the North’s main exports, and the BOK estimates output fell in 2017–18.[16][10]

6. The economics behind it

6.1 Institutions: the main lesson

Economists often use Korea to show that institutions, the rules of the game such as property rights, markets and how governments are held to account, matter for long-run growth more than geography or culture. The two Koreas share geography, language and history before 1945, yet incomes diverged by a factor of more than 26 by 2022.[1]

But the Korean story is more subtle than “markets good, planning bad”. Central planning worked well for a while. When the task is to rebuild known factories, roads and power plants with plenty of aid, a planned economy can mobilise resources fast. That is what happened in the North in the 1950s.[4][7] The problems came later, when growth required innovation, efficient use of capital and access to world markets.

DiagramDraw two production possibility curves (PPCs) for 1953, both shifted far inwards by war destruction. In the 1950s, the North moves quickly back towards its curve and shifts it outwards by adding capital (extensive growth from more inputs). The South recovers more slowly. Now draw the curves for 1970 and 1990. The South’s PPC keeps shifting outwards because exports let it specialise, import technology and raise productivity (intensive growth). The North’s PPC barely moves after the 1970s, and in the 1990s the economy falls well inside its curve as fuel, inputs and food run short. The key idea: growth from adding inputs runs into diminishing returns; long-run growth needs rising productivity.

6.2 Extensive versus intensive growth

Extensive growth comes from using more inputs: more workers, more machines. Intensive growth comes from using inputs better: higher productivity. Because each extra unit of capital adds less output than the one before (diminishing returns), growth based only on adding inputs eventually slows. This explains why North Korea’s per-person growth fell from about 5.7% a year in 1954–60 to under 1% in the late 1960s, according to Kim, Kim and Lee.[7]

6.3 Trade, comparative advantage and export-led growth

South Korea had few natural resources and a small home market.[5][8] Export promotion let it specialise in goods where it had a comparative advantage, first labour-intensive manufactures and later more advanced products, and pay for imported machinery and technology. Connolly and Yi find that Korea’s tariff cuts and the global GATT tariff reductions can explain up to 32% of South Korea’s catch-up with the G7 in manufacturing output per worker between 1962 and 1995.[8] That is a large share, but it also means most of the miracle came from other factors, such as investment, education and institutions.

Exam tipDo not write that South Korea grew because it had “free trade”. Korea’s average manufacturing tariff was about 40% in 1962 and stayed high until the 1970s. Its strategy combined export promotion with protection of goods sold at home.[8] The key contrast with the North is not “state versus no state” but openness to world markets and competition versus autarky.

6.4 Sanctions and trade diversion

Sanctions work by raising the cost of trade. When North Korea’s exports of coal, textiles and seafood were banned in 2017, its official trade and output fell.[16][10] But sanctions only bite if trading partners enforce them. After 2022, North Korea found a new partner in Russia, which needed munitions. This is trade diversion: trade does not disappear but moves to partners outside the sanctions coalition.[18] The BOK’s estimate of three years of 3%+ growth from 2023 to 2025 is consistent with this.[11]

6.5 Famine economics

Amartya Sen’s work on famines stresses that famines are often caused less by a total shortage of food than by the collapse of people’s entitlement to food: their income, rations or ability to trade. North Korea’s famine fits part of this pattern. People depended on the state’s public distribution system, and when it collapsed most families could not buy food in markets that were still suppressed.[15] The emergence of private markets in response is a textbook example of how markets arise when planning fails.

7. Outlook and the way forward

As of October 2026, there is no sign of reunification or a peace treaty. Three broad scenarios can be described.

  1. Continued divergence (most likely in the near term). North Korea earns hard currency from Russia and trades more with China, giving modest growth of around 3% a year, as the BOK has estimated for 2023–25.[11] But with GNI per person at 3.6% of the South’s,[11] even fast growth for decades would leave a huge gap. Risks include the end of the war in Ukraine reducing Russian demand, and stricter enforcement of sanctions.
  2. Gradual reform and opening. If the North allowed more markets and trade, it could grow fast by catching up, as China and Vietnam did. Its population is about 26.5 million, roughly half the South’s.[9] This would require sanctions relief, which depends on nuclear diplomacy.
  3. Sudden reunification. Merging two economies with a 26-fold income gap would be far harder than German reunification. It would involve huge transfers, mass migration from North to South and the rebuilding of the North’s infrastructure. No official cost estimate is current; it would depend entirely on how and when it happened.

For the South, the main long-run challenges are not war-related: slow growth, an ageing population and high exposure to world trade, with exports equal to about 46% of GDP.[9] But the security risk from the North remains a permanent factor in its economy.

Lessons for other post-war economies:

  • A war-ruined economy can recover quickly with aid and mobilisation, whatever its system.[4]
  • Sustained growth over decades depends on productivity, which needs competition, openness and institutions that allow mistakes to be corrected.[7][8]
  • Aid can be a bridge, but heavy dependence on it is a risk when donors change their priorities, as North Korea found from the mid-1980s.[15]
  • Equal starting conditions, such as land reform, can help growth be widely shared.[5]

8. Exam-style questions

MediumQ1. Explain why North Korea’s economy grew faster than South Korea’s in the decade after 1953. Show answer guide
North started richer per person ($2,624 vs $1,975 in 1940, Maddison). Large fraternal aid: 31.6% of the state budget in 1954; about $1.4bn of free aid by 1960 plus Soviet loans. Central planning could mobilise labour and capital to rebuild known industries (extensive growth); Kim, Kim and Lee estimate GNP growth of 9.3% a year in 1954–60. The South grew about 4% a year, with import substitution and heavy dependence on US aid. Use a PPC diagram to show the North moving back towards its frontier faster.
MediumQ2. Using the data in this chapter, explain what is meant by export-led growth and how South Korea achieved it. Show answer guide
Define export-led growth: a strategy where rising exports drive aggregate demand and productivity. Exports rose from 2.6% of GDP in 1960 to 27.7% in 1980 and 45.8% in 2025 (World Bank); manufactures rose from 35.2% to 96.9% of merchandise exports by 1995. Policies: duty-free imported inputs for exporters, tariffs cut from about 40% to 13%, policy shift after 1961. Link to comparative advantage, economies of scale and technology transfer.
HardQ3. Analyse the effect of the 2017 UN sanctions on North Korea’s economy, and explain why their effect may have weakened after 2022. Show answer guide
Sanctions banned coal, iron, seafood, textile and food exports and capped oil imports. BOK estimates show GDP falling 3.5% in 2017 and 4.1% in 2018. Use a supply-and-demand or AD/AS analysis: lost export revenue reduces AD and imports of inputs, reducing SRAS. After 2022: Russia’s demand for munitions, earnings of $7.7–14.4bn by end-2025 (one estimate), Russia’s veto of the Panel of Experts, oil shipments, workers on education visas. Explain trade diversion and enforcement problems. Note BOK estimates of 3%+ growth in 2023–25, and caveats about data.
ExamQ4. Evaluate the view that differences in economic institutions, rather than the effects of the Korean War, explain the gap in living standards between North and South Korea today. Show answer guide
For institutions: same geography and culture before 1945; both devastated by the war, yet the North led until somewhere between the mid-1960s and 1976; afterwards the South’s export-oriented market economy grew at about 6.6% per person a year to 1995 while the North’s per-person growth fell to about 1.2% (1960–89); productivity 33% below the USSR; famine of 1994–98 linked to failure of the planned food system; GNI per person now 3.6% of the South’s. Against/qualifications: the war shaped institutions by fixing the division and the alliances; aid flows (US to South, socialist bloc to North) depended on the war; the loss of Soviet-bloc support and sanctions are external shocks; data on the North are uncertain. Judgement: the war created two states and two systems, but the long-run divergence is best explained by the institutions and policies each chose and by access to world markets.

Glossary

  • Autarky: a policy of economic self-sufficiency, with little trade with other countries.
  • Central planning: an economic system in which the state, not markets, decides what to produce, how and at what price.
  • Comparative advantage: the ability to produce a good at a lower opportunity cost than other countries.
  • Diminishing returns: each extra unit of an input adds less output than the one before, when other inputs are fixed.
  • Entitlement (to food): a person’s ability to obtain food through income, production, trade or rations.
  • Export promotion (export-led growth): a strategy of growing by selling more to world markets.
  • Extensive growth: growth from using more inputs such as labour and capital.
  • Gross national income (GNI): total income earned by a country’s residents, including income from abroad.
  • Import substitution: a strategy of protecting domestic industry so it can replace imported goods.
  • Institutions: the formal and informal rules that shape economic behaviour, such as property rights and the rule of law.
  • Intensive growth: growth from raising productivity, getting more output from the same inputs.
  • Trade diversion: trade shifting from one partner to another because of a change in barriers, such as sanctions.

References

  1. Bolt, J. and van Zanden, J. L. (2024). “Maddison style estimates of the evolution of the world economy: A new 2023 update”, Journal of Economic Surveys; Maddison Project Database 2023 (GDP per capita in 2011 US$). Groningen Growth and Development Centre, accessed 14 October 2026. Korean series from Cha, M. S., Kim, N. N., Park, K.-J. and Park, Y. (eds.) (2020), Historical Statistics of Korea, Springer. https://www.rug.nl/ggdc/historicaldevelopment/maddison/releases/maddison-project-database-2023
  2. US Department of State, Office of the Historian (n.d.). “Korean War and Japan’s Recovery”. Milestones in the History of U.S. Foreign Relations (archived). https://history.state.gov/milestones/1945-1952/korean-war
  3. Australian Government, Department of Veterans’ Affairs (n.d.). “Casualties”, Ceasefire, Panmunjom, 27 July 1953. Anzac Portal. https://anzacportal.dva.gov.au/wars-and-missions/korean-war-1950-1953/events/ceasefire-panmunjon-27-july-1953/casualties
  4. Shen, Z. and Xia, Y. (2012). “China and the Post-War Reconstruction of North Korea, 1953–1961”. North Korea International Documentation Project Working Paper #4, Woodrow Wilson International Center for Scholars, May 2012. https://www.wilsoncenter.org/sites/default/files/media/documents/publication/NKIDP_Working_Paper_4_China_and_the_Postwar_Reconstruction_of_North_Korea_Web.pdf
  5. Seth, M. J. (2013). “South Korea’s Post-Korean War Economic Development: 1953–1961”. Education About Asia, 18(3), Winter 2013. Association for Asian Studies. https://www.asianstudies.org/wp-content/uploads/an-unpromising-recovery-south-koreas-post-korean-war-economic-development-1953-1961.pdf
  6. Jeon, K.-M. (1982). “Differences in Estimates of North Korea’s Gross National Product”. RAND Paper Series, RAND Corporation, March 1982 (via DTIC). https://apps.dtic.mil/sti/tr/pdf/ADA118034.pdf
  7. Kim, B.-Y., Kim, S. J. and Lee, K. (2007). “Assessing the economic performance of North Korea, 1954–1989: Estimates and growth accounting analysis”. Journal of Comparative Economics, 35(3), 564–582. https://www.nkeconwatch.com/nk-uploads/asessingnkeconperf.pdf
  8. Connolly, M. and Yi, K.-M. (2009). “How Much of South Korea’s Growth Miracle Can Be Explained by Trade Policy?”. Federal Reserve Bank of Philadelphia Working Paper 09-19, June 2009. https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2009/wp09-19.pdf
  9. World Bank (2026). World Development Indicators: exports of goods and services (% of GDP), GDP growth, life expectancy at birth, infant mortality and population, Republic of Korea and DPR Korea. Accessed 14 October 2026. https://api.worldbank.org/v2/country/KOR;PRK/indicator/SP.DYN.LE00.IN?format=json&date=1960:2025
  10. Bank of Korea (2023). “Gross Domestic Product Estimates for North Korea in 2022”. Press release, 28 July 2023 (copy hosted by North Korean Economy Watch). https://www.nkeconwatch.com/nk-uploads/GDP_of_North_Korea_in_2022.pdf
  11. Yonhap / The Korea Times (2026). “N. Korean economy grows over 3% for 3rd consecutive year in 2025: BOK”. 31 July 2026. https://koreatimes.co.kr/foreignaffairs/northkorea/20260731/n-korean-economy-grows-over-3-for-3rd-consecutive-year-in-2025-bok
  12. Sokolin, A. (2026). “North Korea’s economy grows over 3% annually since 2022: BOK”. NK News, 31 July 2026. https://www.nknews.org/2026/07/north-koreas-economy-grows-over-3-annually-since-2022-bok/
  13. Haggard, S. and Noland, M. (2008). “Famine in North Korea Redux?”. East-West Center Working Papers, Economics Series No. 97, October 2008. https://www.eastwestcenter.org/sites/default/files/private/econwp097.pdf
  14. Noland, M. (2013). “Famine Deaths, Again”. North Korea: Witness to Transformation blog, Peterson Institute for International Economics, 30 July 2013. https://www.piie.com/blogs/north-korea-witness-transformation/famine-deaths-again
  15. Noland, M. (2006). Statement at the hearing “North Korea: Illicit Activity Funding the Regime”, US Senate Committee on Homeland Security and Governmental Affairs, 25 April 2006. https://www.hsgac.senate.gov/wp-content/uploads/imo/media/doc/042506Nolan.pdf
  16. United Nations Security Council, 1718 Sanctions Committee (n.d.). “Resolutions” (summaries of resolutions 2371, 2375 and 2397 of 2017, and Panel of Experts mandate renewals). https://www.un.org/securitycouncil/sanctions/1718/resolutions
  17. United Nations (2024). “Security Council Fails to Extend Mandate for Expert Panel Assisting Sanctions Committee on Democratic People’s Republic of Korea” (SC/15648), 9591st meeting, 28 March 2024. https://press.un.org/en/2024/sc15648.doc.htm
  18. Congressional Research Service (2026). “Russia-North Korea Relations” (IF12760). Updated 18 September 2026. https://www.everycrsreport.com/files/2026-09-18_IF12760_dc57da8b9ca2b31003af25371be55652c45900f1.html
  19. International Monetary Fund (2026). World Economic Outlook data: “Real GDP growth”, Republic of Korea, via IMF DataMapper. Accessed 14 October 2026. https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/KOR
  20. 38 North (2024). “Why and How Estimates of North Korean GDP by the Bank of Korea Are Deceptive”. Stimson Center, November 2024. https://www.38north.org/2024/11/why-and-how-estimates-of-north-korean-gdp-by-the-bank-of-korea-are-deceptive/
  21. Kang, J.-K. (2015). “For two Koreas, 70 years of divergence”. Korea JoongAng Daily, 13 August 2015. https://www.koreajoongangdaily.com/korea/for-two-koreas-70-years-of-divergence/11132651
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