This document summarizes the article published by the author in Politics and Policy (2019) and was prepared with the assistance of ChatGPT 5.2. I suggest reading the original text.
Introduction
This study seeks to explain why China and North Korea, despite sharing similar socialist institutional origins, have followed markedly different paths of economic institutional change. Both countries established centrally planned economies modeled on the Soviet system and relied heavily on Soviet political and economic support during their early stages of development. However, their subsequent trajectories diverged significantly: China implemented gradual and state-led market reforms that produced sustained economic growth, whereas North Korea experienced the expansion of informal markets under conditions of economic crisis and political control. The central question of the study is why similar initial institutional conditions produced such different outcomes.
Existing explanations often emphasize leadership choices, regime type, or domestic political preferences to account for these differences. While these factors are important, they do not fully explain why reforms emerged at particular moments or why the processes unfolded in different ways. This study argues that institutional change must be understood within a broader historical context that includes the influence of external environmental changes and the long-term effects of earlier institutional trajectories.
In particular, the study highlights the role of major exogenous shocks, such as the termination of Soviet aid, shifts in Cold War geopolitics, and the collapse of the Soviet Union. These external events created critical junctures that disrupted existing institutional arrangements and forced political leaders to reconsider their development strategies. However, the study also emphasizes that external shocks alone cannot determine outcomes. The direction and stability of institutional change depend on how political actors interpret and respond to these shocks.
Another key focus of the study is the role of informal institutions in the process of institutional transformation. Economic practices, local experimentation, informal markets, and unofficial networks often emerged as adaptive responses when formal institutions failed to function effectively. In China, such informal practices were gradually incorporated into formal reforms, contributing to a stable process of marketization. In North Korea, by contrast, informal markets expanded primarily as survival mechanisms and remained in tension with formal political control.
To analyze these dynamics, the study adopts a historical institutionalist framework, particularly the concepts of path dependence and reactive sequences. Institutional change is understood as a cumulative process shaped by critical junctures, political choices, ideas, and the interaction between formal and informal institutions over time.
By comparing China and North Korea, the study demonstrates that similar external shocks can produce divergent institutional paths depending on political responses, ideological frameworks, and the way informal practices interact with formal institutions. The findings contribute to broader debates in comparative political economy by showing that institutional change is not simply determined by structural conditions but evolves through historically contingent processes of adaptation and interaction.
Chapter 2. Theoretical Framework
This chapter presents the theoretical foundation for analyzing the institutional change trajectories of China and North Korea by introducing the key concepts of new institutionalism and historical institutionalism. While traditional institutionalism focused primarily on formal organizations and legal structures, new institutionalism expands the scope of analysis to include informal elements such as norms, ideas, and networks in order to better understand how institutions operate in practice. At the same time, new institutionalism recognizes that institutions constrain individual behavior but also emphasizes that actors’ choices and strategies can influence institutional continuity and change.
Within new institutionalism, different approaches offer distinct explanations of human behavior. Rational choice institutionalism views individuals as strategic actors seeking to maximize their interests and interprets rule compliance as the outcome of calculated decisions. Sociological institutionalism, in contrast, emphasizes that individuals act according to socially constructed norms and cultural expectations, highlighting the cognitive and cultural dimensions of institutions. Historical institutionalism differs from both perspectives by stressing that institutional formation and change occur within specific historical contexts and that past decisions exert long-term effects on subsequent institutional development.
A central premise of historical institutionalism is that history matters. Political events occur within particular historical conditions, and actors learn from past experiences and form expectations about the future based on those experiences. These accumulated experiences shape preferences and constrain the range of available policy choices. Institutional change, therefore, cannot be understood simply as a functional response to present conditions but must be analyzed in relation to historically accumulated structures and prior decisions.
The chapter introduces path dependence as the core analytical concept of historical institutionalism. Path dependence refers to the process by which contingent events or choices at a particular moment shape the direction of institutional development and make deviation from that trajectory increasingly difficult over time. Critical turning points, referred to as critical junctures, play a decisive role because choices made at these moments establish the long-term direction of institutional evolution.
Path dependence can be distinguished into two types of sequences. The first is a self-reinforcing sequence, in which initial choices generate increasing returns and rising costs of change, thereby strengthening the existing institutional arrangement and making reversal progressively more difficult. The second is a reactive sequence, in which events unfold through a chain of causally connected reactions over time. In such cases, an initial event triggers a series of subsequent developments, and relatively small differences at the beginning can eventually produce significantly divergent outcomes.
An important task in historical institutional analysis is to identify the factors that trigger shifts in institutional trajectories. Earlier studies often emphasized exogenous shocks such as wars, economic crises, or revolutions as sources of critical junctures. However, such explanations alone cannot fully account for the specific direction and process of institutional change that follows. It is therefore necessary to examine how external environmental changes interact with political actors’ choices, interests, and ideas to produce particular developmental paths.
From this perspective, the chapter explains that the present study analyzes the economic institutional changes of China and North Korea by focusing on major exogenous shocks—particularly the termination of Soviet aid and the collapse of the Soviet Union. These external disruptions are treated as critical triggers, while the subsequent political responses and institutional developments in each country are interpreted as reactive sequences. In China, external changes combined with leadership decisions to produce a gradual reform and opening trajectory, whereas in North Korea similar shocks contributed to the expansion of informal markets and a more unstable pattern of institutional adjustment.
Overall, the chapter proposes an analytical framework that understands institutional change not as the outcome of isolated policy choices or structural conditions alone, but as the result of the interaction among exogenous shocks, historical context, political agency, and cumulative causal processes over time.
Chapter 3 The interaction between formal and informal institutions
This chapter begins by questioning explanations of institutional change that rely only on major disruptions such as revolutions, wars, or economic crises. While the study treats Soviet aid and its disruption as important exogenous factors—especially in the case of China—the author argues that institutional change must also be understood during “normal periods” when no dramatic external shock is present. To capture these dynamics, the chapter emphasizes the need to analyze the interaction between formal institutions, informal institutions, political agency, and ideas, rather than relying solely on structural or external explanations.
From a historical institutionalist perspective, institutions are defined broadly as both formal and informal structures embedded within political and economic systems. Formal institutions include laws, official procedures, and organizational rules, but these alone do not determine actual behavior. Informal practices, routines, norms, networks, and unwritten rules shape how institutions function in practice. The chapter therefore treats institutions as a composite system in which formal and informal elements coexist and interact, often producing outcomes that differ from official intentions.
To explain the emergence of informal institutions, the chapter draws on classic organizational theory, particularly Selznick’s work. Large organizations inevitably experience deviations between formal rules and actual behavior. These deviations are not temporary anomalies; when they recur and stabilize, they generate informal arrangements and unwritten rules that structure everyday practice. Over time, such informal patterns become institutionalized, forming a parallel structure that may be more influential than the formal system itself. Informal institutions therefore arise as a structural response to the limitations of formal control rather than as simple rule violations.
The chapter further explains that informal institutions do not merely exist alongside formal institutions but actively reshape them. When formal systems lose their effectiveness in guiding behavior, informal practices may either support formal goals by compensating for their weaknesses or systematically modify those goals in practice. As these practices become entrenched, previously informal arrangements may eventually be formalized. Institutional change, therefore, often proceeds from informal adaptation to formal recognition, rather than from top-down design alone.
This process is closely linked to power dynamics within organizations. Selznick’s concept of informal cooptation describes how leadership incorporates emerging informal actors or practices into the formal structure in order to maintain stability and organizational survival. By sharing authority or recognizing new interests, political or administrative elites neutralize potential threats and restore control. Informal institutionalization, in this sense, is not simply a sign of disorder but a mechanism through which governing authorities adapt to changing social and economic realities.
The chapter also situates these dynamics within a broader theoretical shift in institutional analysis. Earlier approaches focused heavily on formal rules and organizational structures, but more recent scholarship places greater emphasis on agency, relational practices, discourse, and norms. Institutional outcomes depend not only on official design but also on how actors interpret, negotiate, and implement rules in practice. This perspective is especially important for understanding socialist systems, where formal policy often diverges significantly from real economic behavior.
In addition to informal practices, the chapter highlights the crucial role of ideas. Ideas provide the cognitive and normative frameworks through which political actors interpret problems and justify policy choices. Unlike formal rules, however, ideas change slowly because they require social consensus and sustained political effort. When central authorities introduce rapid institutional reforms, a gap often emerges between new formal rules and prevailing beliefs or expectations. Informal institutions tend to grow within this gap as actors develop practical ways to reconcile new policies with existing realities.
The concept of adaptive informal institutions, drawn from Kellee Tsai, is introduced to explain how such processes facilitate endogenous institutional change. These institutions emerge when actors operate within restrictive formal environments but create informal arrangements to pursue economic or organizational activities. The example of Chinese private entrepreneurs registering their firms as collective enterprises (“wearing a red hat”) illustrates how informal practices allowed economic activity to expand before formal legalization occurred. In this way, informal adaptation can gradually reshape the institutional environment and pave the way for formal reform.
Tsai’s framework suggests two important implications. First, adaptive informal institutions play an analytically significant role in explaining gradual institutional transformation. Second, institutional change is relational rather than purely hierarchical; it emerges from ongoing interactions among local actors, officials, and organizations rather than from a single top-down decision. These bottom-up processes accumulate over time and influence the direction and feasibility of formal policy change.
Overall, the chapter establishes the analytical foundation for the comparative analysis that follows. External shocks may create critical junctures, but the trajectory of institutional change depends on how political leaders interpret those shocks, how ideas justify policy responses, and how informal practices adapt to or reshape formal rules. By emphasizing the mediating role of informal institutions and ideas, the chapter explains how similar external pressures can produce very different reform paths in China and North Korea.
Chapter 4. Political Dynamics and Economic Institutional Changes in China
This chapter explains that China’s economic institutional change was not simply the result of policy choice but emerged through the interaction of political power dynamics and changes in the external environment within a historical process. After the founding of the People’s Republic in 1949, the Chinese Communist Party rapidly consolidated control over political and social institutions and established a centralized planned economy modeled on the Soviet system. Early industrialization relied heavily on Soviet capital and technology, and the state controlled production, distribution, and pricing.
China’s development path faced a critical turning point following the deterioration of Sino-Soviet relations after Stalin’s death. The termination of Soviet aid created a major external shock, leading to the Great Leap Forward and the emphasis on self-reliance. The failure of this campaign and the People’s Commune system resulted in severe agricultural collapse and famine, undermining the political legitimacy of the regime.
Political conflict between radical ideological forces and pragmatic reformers intensified in the aftermath, culminating in the Cultural Revolution. Although this period produced profound instability, it also generated widespread disillusionment with ideological extremism and strengthened pragmatic orientations within the leadership. After Mao’s death, Deng Xiaoping consolidated power and placed economic development at the center of national priorities.
Changes in the international environment further facilitated reform. The normalization of relations with the United States in the early 1970s significantly altered China’s strategic position. Combined with deteriorating relations with the Soviet Union, these changes created favorable external conditions for opening and reform.
Beginning in 1978, reform and opening were pursued gradually under the banner of “socialism with Chinese characteristics.” State-owned enterprise reforms expanded managerial autonomy, introduced profit responsibility, and replaced direct fiscal subsidies with bank lending. These changes aimed to improve efficiency without dismantling state ownership.
In the 1990s, deeper structural reforms were implemented through corporatization and the establishment of a socialist market economy. Large strategic enterprises remained under state control, while smaller firms were privatized or restructured. This produced a hybrid system combining market competition with state dominance.
Overall, China’s reform path was stabilized through ideological legitimation, collective leadership, and incremental institutional adjustment. Economic liberalization proceeded without political democratization, resulting in a controlled and gradual marketization trajectory.
Chapter 5. Political Dynamics and Economic Institutional Changes in North Korea
This chapter argues that economic institutional change in North Korea was not the outcome of a state-led reform strategy but emerged from informal market expansion under conditions of severe external shock and regime crisis. North Korea’s political system, characterized by hereditary leadership and centralized personal authority, prioritized regime stability over structural reform.
The collapse of the Soviet Union in 1991 constituted the most significant external shock to the North Korean economy. The loss of aid, preferential trade, and energy supplies fundamentally weakened the planned economic system. Subsequent changes in Russian and Chinese economic relations further exacerbated resource shortages.
These external shocks translated into internal systemic failure during the mid-1990s famine, when the public distribution system largely collapsed. Citizens increasingly relied on private exchange and local markets for survival, leading to the rapid expansion of jangmadang throughout the country.
The state initially attempted to suppress market activity but gradually shifted toward partial tolerance. The 2002 Economic Improvement Measures introduced limited market mechanisms, including price and wage adjustments, but did not represent a transition to a market economy.
As markets expanded and private accumulation increased, authorities reasserted control through restrictive regulations and the 2009 currency reform. These efforts produced economic disruption and were eventually relaxed, revealing a cyclical pattern of control and accommodation.
Market expansion became intertwined with political power, as officials controlling licenses and trade access extracted rents and collaborated with emerging entrepreneurial groups known as donju. Markets thus evolved into bureaucratic structures rather than autonomous private sectors.
Overall, North Korea’s institutional change followed an unstable, bottom-up trajectory characterized by repeated oscillation between market accommodation and political control.
Chapter 6. Interaction Between Formal and Informal Institutions in China
This chapter emphasizes that China’s reform trajectory was shaped by the interaction of external shocks, political choices, and the dynamic relationship between formal and informal institutions. The termination of Soviet aid and subsequent political crises exposed the limitations of the planned economy and facilitated reform-oriented leadership.
Using Goldstone’s reactive sequence framework, the chapter identifies exogenous shocks, cultural ideas, and political responses as interacting forces that shaped institutional change. Market-oriented ideas legitimized reform while nationalism constrained political liberalization.
Local experimentation and informal adaptation played a crucial role in shaping reform outcomes. Central policies were adjusted through bottom-up practices, which were gradually incorporated into formal institutional arrangements.
Collective leadership and ideological compromise stabilized reform by preventing abrupt policy reversals. State-owned enterprise reform expanded market mechanisms while preserving political control.
China’s marketization thus followed a controlled and incremental path, sustained by the complementary interaction between formal reforms and informal experimentation.
Chapter 7. Interaction Between Formal and Informal Institutions in North Korea
This chapter explains that North Korea’s institutional trajectory developed through persistent tension between formal institutions and expanding informal markets. Informal economic activity emerged as an adaptive response to systemic failure rather than as a policy initiative.
Markets expanded rapidly during the 1990s and became central to everyday economic life. The state responded with partial institutional absorption rather than comprehensive reform.
Repeated cycles of regulation and relaxation characterized economic governance. Market activity remained politically constrained and never fully institutionalized.
Informal markets became integrated with power structures through rent extraction, licensing, and collaboration between officials and donju.
Compared to China, North Korea’s formal–informal interaction produced instability and discontinuity rather than gradual consolidation.
PhD, Kayeon Lee 
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