Is the Mixed Economic System of North Korea Sustainable in the Long Run?: An Evolutionary Approach

In this paper, we attempt to analyze whether North Korea’s mixed economic system, with a planned sector and an illegal market sector, is sustainable in the long run. Using an evolutionary game theoretic approach, our model describes distinct ways in which North Korea’s planned economy could eventually be displaced by a decentralized market economy. As more people trade using unofficial market transactions, the probability that they will be apprehended and punished or fined declines, thereby increasing the expected payoff from market transactions. An extension of this model demonstrates how the government could introduce legal but more restricted markets as a strategy to prevent further decentralization. Our model suggests, however, that there is perhaps surprisingly broad scope for government-owned stores to become replaced by private markets. Evolutionary game theory provides one way to understand which kinds of shocks could lead to such a transition in which economic agents gradually adopt trading institutions that fit better with their changing environment.