How North Korea’s Extractive System Adapts to External Shocks

Understanding how North Korea (Democratic People’s Republic of Korea or DPRK) adapts to external shocks, particularly international sanctions, requires analyzing its economic system not as a conventional socialist economy or a transitioning market system, but as an outright extractive system—an extreme outlier. North Korea’s institutions are engineered to divert wealth and assets upward to a chosen few, ensuring regime preservation even during periods of profound economic turmoil. Further analytical work is required to develop an assessment framework that reflects these structural realities, enabling more accurate evaluations of sanctions effectiveness and their unintended consequences.

North Korea’s Extractive Model

One fundamental characteristic of the DPRK is its dual economy, consisting of a formal state sector that provides workers with artificially fixed nominal wages and centrally allocated resources but offers meager compensation; and informal markets that generate the bulk of household income. Extraction disproportionately impacts both the formal sector and informal markets, explaining why sanctions often produce outcomes that defy conventional policy expectations. Rather than reforming or collapsing under pressure, the regime intensifies coercion, expands extraction, and recalibrates the relationship between workers and markets to reinforce control.

At the center of this analysis is the extractive model of economic survival, grounded in the Nobel Prize laureates’ Acemoglu–Robinson framework distinguishing extractive and inclusive institutions. According to them, extractive institutions are those “designed to extract incomes and wealth from one subset of society to benefit a different subset.” North Korea is an embodiment of this principle, a system engineered to channel labor, value, and resources upward to the regime and privileged elite. This occurs through five core mechanisms that transfer economic value from households to the state and the chosen few. They are:

• Outright extraction: The regime routinely deploys workers for mass mobilization campaigns—such as the “Seventy Day” and “200 Day” campaigns of 2016 or seasonal construction drives—where people are compelled to work without pay.
• Extraction equivalent to opportunity-cost: By mandating participation in state-assigned projects, the regime prevents individuals from engaging in informal-sector activities, where they could earn significantly higher returns. The prevalence of 3 arrangements illustrates the magnitude of this opportunity cost. Workers’ willingness to buy themselves out of state-assigned activities underscores how compulsory labor limits opportunities to earn more in the informal sector.
• Inflationary extraction: When the state prints money and uses this newly issued currency to procure goods and services for the chosen few elite and select institutions, it triggers hyperinflation. Inflation acts as a “hidden tax” on the informal economy, transferring wealth from households to the state.
• “Patriotic contributions”: Households are expected to contribute labor, goods, or money to state funds—including schoolchildren collecting produce, and adults donating cash or labor hours to local Party projects.
• Bribery-based extraction: With state wages averaging approximately 3,000 won for bureaucrats, survival depends on soliciting payments from the public. Households pay an estimated 9 percent of their income in bribes.

Estimating the Scale of Extraction in North Korea

Estimating the scale of extraction in the North Korean economy requires adapting standard macroeconomic tools, which were never designed for such a highly distorted system.

This can be done by applying the production, income and expenditure approaches to GDP while acknowledging the gaps between outcomes. GDP measures goods and services produced, and in market economies, the three approaches yield identical results. However, in the DPRK, all three formulas must be modified to accurately depict the deviant processes that enable the regime to survive.

The Bank of Korea (BOK) estimates North Korea’s GDP using the production approach (Yₚ): Yₚ=Qᵢ x Pᵢ. In its official reports, the BOK states that it is “using the basic data on production quantities supplied by relevant institutions…with the use of South Korea’s prices and value-added ratios.” These widely cited GDP estimates capture outputs like electricity, coal, construction, agriculture, education, health services, and more, but do not account for the fact that the state obtains goods and services without fully compensating for their market value.

The income approach (Yᵢ) assesses real household earnings including wages (W), interest rates (i), dividends (D) and rents (R): Yᵢ=W+i+D+R. In a typical market economy, this identity holds because private property rights, financial institutions, and market-based compensation mechanisms allow households to earn wages, receive interest on savings, obtain dividends on equity ownership, and collect rental income from privately owned assets. In North Korea, however, the absence of private property rights and market institutions means households cannot own residential or commercial assets, nor receive private rental income, access commercial banks or the stock market. Consequently, interest, (i) dividends (D), and rents (R) are effectively irrelevant.

However, the income GDP formula must be reformulated to reflect North Korea’s unique economic features. First, the regime rents out state property, including buildings, land, machinery, equipment, and even labor, through acquiescence, generating rentier income (R). Second, investment streams come from private moneylenders, donju (iD), who function as de facto financial intermediaries, and bribes, which constitute an estimated 9 percent of household income and serve as a primary source of income for bureaucrats. Third, wages (W) must be split into two components: W₁ representing income from informal activities that constitute roughly 97 percent of total household earnings, and W₂, representing income from the formal sector, which contributes less than 3 percent—resulting in W=W₁+W₂. Any model estimating North Korea’s GDP must therefore recognize that household welfare and national income are driven almost entirely by the informal sector rather than the formal state economy.

Taken together, these structural changes require that the income-side GDP be reformulated as follows: Yᵢ=W₁+W₂+Rₛ+iD-Bribes. Bribes must be subtracted as they do not generate further economic activity; rather, they constitute sunk costs to the market participants.

Extraction can be estimated by the difference between what North Korea produces and what the state actually pays. The state is effectively the sole procurer of goods and services in the formal economy, yet it does not fully compensate workers. Thus, although North Korea clearly produces output—measured by institutions like the BOK using satellite data and South Korean prices—the state’s failure to compensate producers at market value means expenditure can never equal income. The difference between measured production and the state’s much lower spending reflects the scale of uncompensated extraction.

Thus, the magnitude of extraction in the country can be gauged as the difference between the GDP estimates based on the production approach and the income approach:

Extraction=Yₚ-Yᵢ=(Qᵢ.Pᵢ)-(W₁+W₂+Rₛ+iD-Bribes)=(Qᵢ.Pᵢ)-W₁-W₂-Rₛ-iD+Bribes.[1]

How the System Adapts to External Shocks

International sanctions imposed on the DPRK lead to severe contraction of its GDP across the board, though to varying degrees. Sanctions have had a major impact on heavy industry and agriculture by limiting access to vital imports of oil, machinery, fertilizer, and industrial chemicals. Estimates suggest crop production declined by 20 percent between 2016 and 2018, highlighting the severe impact of sanctions on agriculture, which represents 23 percent of North Korea’s GDP. Using the production approach, the BOK estimated that North Korea’s GDP contracted by -3.5 percent in 2017 and -4.1 percent in 2018. Because the BOK’s figures include output generated through illicit income and extraction, the estimated contractions of GDP for 2017 and 2018 understate the full impact of sanctions. Without this additional leverage, the contraction in GDP would have been more severe.

The income approach highlights the core structural impacts of sanctions. Sanctions trigger predictable responses: increased compulsory labor mobilization, mandatory loyalty contributions, greater extraction through bribes, and reallocation of limited resources toward the elite. In the equation Yᵢ=W₁+W₂+Rₛ+iD–Bribes, W₁ represents earnings from the informal sector which dominates over the other components—an estimated 97 percent of household income is generated through markets. Because the household sector is both the main source of livelihood and the most exposed to sanctions-driven trade restrictions, the contraction of informal market activity translates directly into a sharp decline in aggregated income. Consequently, income fell by 25 percent between 2017 and 2019—a steeper decrease than what GDP estimates based on the production approach would suggest.

The expenditure approach demonstrates that sanctions reduce export earnings. This in turn creates a trade deficit—$2.36 billion in 2018 and $2.69 billion in 2019—leading to a decrease of government revenue and a budget deficit. The state manages the resulting shortfall and rising expenditure through four measures: 1) cutting procurement of goods and services; 2) printing money to cover the deficit, which causes inflation, and facilitates the transfer of wealth from households to the state, weakening purchasing power; 3) extracting resources from the shadow economy via contributions and levies; and 4) increasing the number of compulsory hours on state works. Without these extraction measures, GDP would have fallen far more sharply.

Evidence indicates that real GDP would have declined far more sharply according to the income or expenditure approaches than what estimates based on the production approach suggest. Should the state compensate for the budget deficit by printing money, nominal GDP would increase, but real GDP would decline.

What Experts Have Missed

Experts are split into two dominant opposing schools of thought when assessing how sanctions have impacted marketization in North Korea. Both provide useful insights, yet ultimately misinterpret the nature of marketization in the DPRK and overlook the deeper structural dynamics that sanctions activate.

The first school argues that sanctions hinder or reverse marketization. Experts like Professor Byeong Yeon Kim contend that the 2017 sanctions sharply reduced household incomes derived from market activities and pushed participation in informal trade back to levels not seen since the Kim Jong Il era. Consequently, they argue that sanctions impede the informal sector and weaken “marketization from below.”

The second school argues that sanctions accelerate marketization. Yechan Moon and Taehee Whang note that sanctions impact heavy industry, causing job losses in the formal sector, increasing reliance on informal activity, and fueling the growth of North Korea’s informal economy.

Both interpretations tend to overlook the origins of North Korean marketization. Marketization was never a top-down reform instigated by state authorities, but resulted from the state’s benign neglect: “marketization from below” emerged in response to the failure of central planning and the state sector. Sanctions harm informal market activities but strike the formal economy even harder by restricting trade, fuel, and agricultural output. The resulting contraction of market activity neither indicates that sanctions strengthen the socialist sector nor reverses marketization.

Both views also overlook the deeper mechanism: sanctions cut the state’s access to foreign currency and critical imports, forcing the regime to intensify extraction regardless of whether the informal sector is expanding or shrinking.

Why Market Economists Fail to Understand the North Korean Case

The failure of many market-oriented economists and external observers to reach a coherent assessment of North Korea’s economic trajectory stems not from insufficient data, but from the absence of a rational theoretical framework to adequately assess the DPRK’s fundamentally deviant political economy. Analyses that rely solely on data—defector surveys, satellite imagery, trade statistics—may produce descriptive insights, but they cannot provide either a rational explanation or coherent logic to determine how North Korea adapts to external shocks. Without the theoretical model of extractive economy, these interpretations can be superficial, inconsistent, and misleading.

North Korea is not just an outlier of socialist or authoritarian states; it is a deviant case of an extractive political-economic system. Power is concentrated in a single leader, who uses it to maximize the transfer of resources from the mass population to the chosen few elite while preserving the regime’s core priorities: national defense and the survival of the regime. This extractive logic is applied to all economic decision-making, especially under conditions of external shocks, like sanctions.

Ultimately, any credible analysis of North Korea’s economic behavior must start from the recognition that the DPRK does not respond to incentives the way market economies do. As Hazel Smith observes, in the aftermath of sanctions, ordinary people including children, the sick, and the elderly face severe economic pressures, while the privileged minority remain largely unaffected, highlighting the regime’s extractive nature. Until analysts adopt a framework that accounts for this fundamental reality, their assessments will continue to diverge, contradict, and fall short of explaining North Korea’s distinctive—and deeply resilient—economy.

1. [1]

   Extraction can also be gauged by subtracting the estimate obtained using the expenditure model from the estimates obtained using the production approach: Extraction=Yₚ-Yₑ=(Qᵢ.Pᵢ)-(C+G).