Financial sector reform: The North Korean (non-)experience

Financial sector reform is critical to achieving sustained economic growth. Park (2003) presents a comprehensive review of the North Korean financial system. The system is based on the same monobank system of the former Soviet Union and Chinese economies in which central bank and noncentral bank functions are controlled by the central bank. In North Korea the central bank is responsible for issuing notes, maintaining the payments system, maintaining the foreign exchange rate system, accepting deposits, making industrial loans, and providing insurance. Monobank systems are based on the supremacy of the production plan in which finance is merely used to bridge gaps between receipts and expenditures and financing is not predicated on credit evaluation or monitoring. Hence, there is no need for institutions separate from the central bank to accept deposits and make loans.

…

A banking sector separate from the central bank is required to evaluate creditworthiness, monitor performance, and impose financial penalties to achieve a rational allocation of the nation’s savings. The banking sector needs to be able to evaluate the creditworthiness not just of individual firms, but of specific projects. The banking sector needs to be able to enforce repayment of loans, not just to give managers incentive to invest wisely but also because this acts as a selection mechanism for better productive arrangements and superior technologies. Unless they are willing to shut down inefficient firms that cannot repay their bank loans without government support, then any reforms will still ultimately lead to the accumulation of inefficient firms and outdated methods of production and rising nonperforming loan problems.

…

From this paper. Of course we all know the Western world works differently. It’s only in North Korea total government control of the financial industry causes problems.