Estimating the Minimum Size of the North Korean Shadow Economy

Estimating the relative size of the shadow economy, which is often called an underground economy, is important in any country to make effective economic decisions. In particular, it can be crucial to understanding the economic performance of North Korea, whose official economic sector is rapidly dismantling. This paper tried to estimate the relative size of the North Korean shadow economy and therefore defining the shadow economy as ‘all economic activities that are carried on outside the state-controlled economy. ’ This paper introduced the current status of the North Korean shadow economy as well as some background information behind it. Beginning with rough estimates made by rule of thumb, this paper employs three different methods to estimate the relative size of the North Korean shadow economy as of 1999. First, it tries to sum up individual shadow economic sectors based on various sources. Assuming that there are three supply routes for the shadow economy, this paper estimated each of them and adds them up. According to this method, the shadow economy is accounting for at least 12.2% of GDP. Second, by relying on surveys recently conducted with North Korean refugees, it tried to estimate the shadow economy by examining the differences between income and expenditure levels of North Korean households. This method estimates the North Korean shadow economy to be as big as 11.5% of its GDP. Third, assuming that electricity consumption is the single most important physical indicator that can explain the growth of an overall economy, this paper estimated the overall size of the North Korean economy first. After that, it calculated the size of the shadow economy by subtracting the official GDP from the overall GDP. This method can be regarded as the most rigorous method, and it estimated the North Korean shadow economic size as at least 11.5% of its official