The global financial crisis hit the Korean economy in two ways. First, the sudden reversal of capital flow dried up the domestic and international liquidity. Second, the global contraction of demand reduced Korea's export by over 40 percent in the fourth quarter of 2008. Consequently, the Korean currency depreciated sharply and the economic growth rate fell drastically. Even though Korea could not prevent the 2008 crisis, it was the first OECD country to escape the negative economic growth zone, possibly because of three reasons. First, Korea might have had better initial conditions than other economies thanks to the reform measures after the 1997–98 Asian financial crisis. Second, the Korean government has had significant experience in dealing with crises. Third, Korea had an international network of cooperation to establish swap arrangements of US$ 90 billion to stabilize foreign exchange market. Even though the Korean economy has become more resilient to future financial crises by learning from the crisis in 1997, the small open economy still has limited capacity to stabilize the financial market. Korea now faces a new issue, which is to learn from the global crisis on how to stabilize the foreign exchange market.

This paper provides an overview of the current economic situation in North Korea and suggests some possible strategies for recovery, including ways of mobilizing financing and implementing essential market reforms. Throughout the 1990s, North Korea suffered a severe economic downturn after the abrupt collapse of the cooperative network of socialist countries. Because the needs of the military had been given first priority and foreign trade was limited, infrastructure and capital stock deteriorated. At present North Korea is in a poverty trap, and the plans of the State Planning Commission no longer work. In addition to the “official” economy, North Korea's overall economic structure includes economies run by the Workers Party, the military, and ordinary citizens (the informal market). Efforts to promote foreign investment and trade, combined with only small changes in this inefficient economic structure, are unlikely to succeed. North Korea's economic rehabilitation should begin with more market-oriented policy reforms and capital formation, but because the country is unable to design and implement economic reforms or to accumulate capital stock on its own, assistance must be sought from outside.