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Economy's Ills Shape North Korean Crisis

by Marcus Noland, Peterson Institute for International Economics

Op-ed for BBC News Online
April 22, 2003

While the North Korean nuclear stand-off has grabbed the headlines, one underappreciated aspect is the role of North Korea's economic woes, both in contributing to the nuclear crisis—and in its potential resolution.

North Korea's economy has been in the doldrums for more than a decade.

Perhaps as many as a million people perished in a famine during the 1990s, and the food situation inside the country remains precarious today.

There are two hypotheses about why a country facing such problems has pursued nuclear weapons.

The first is that its nuclear programme is merely a bargaining chip to be traded away to extract political and economic concessions from the US—a kind of atomic "trick or treat".

The other possibility, of course, is that the North Koreans regard nuclear weapons as an end in themselves—a military deterrent and the ultimate guarantor of the regime's survival.

North Korea's foreign ministry said as much on April 18.

It declared: "The Iraqi war teaches a lesson that in order to prevent war and defend the security of a country and the sovereignty of a nation, it is necessary to have a powerful deterrent force only."


Peace Dividend

Yet even from this perspective, there is an intriguing economic angle.

If a nuclear North Korea were to foreswear aggression toward South Korea, then its huge conventional forces would be redundant.

Its million-man army, an albatross around the economy's neck, could be demobilised.

In fact, before the nuclear crisis erupted last October, North Korea floated trial balloons regarding the possibility of such a demobilisation.

But if the North's army is to be demobilised, those troops have to have jobs to go to.

Last July, the government announced a package of policy changes designed to revitalise the economy.

These included marketisation, the promotion of special economic zones, and a diplomatic opening toward Japan, which the North hoped would pay billions of dollars in post-colonial claims and aid.

However, the rapprochement with Tokyo has stalled, and the expected capital infusion has not materialised.

The consensus of outside observers is that, so far, the reforms have largely failed to deliver.

Indeed, some of the policy changes, such as the creation of massive inflation and the demand that North Koreans surrender their holdings of dollars, could be interpreted as an attempt to re-assert state influence rather than reform the system.

Last month, Pyongyang introduced a new financial instrument it called a bond, though it is more like a lottery ticket. A mass campaign encouraging citizens to purchase these bonds suggests that politics, not personal finance, is the main selling point.

To make matters worse, the oil flow through a pipeline from China on which North Korea depends was interrupted earlier this month for several days.

The official explanation was that mechanical failure, not diplomatic arm-twisting, was the cause.

In sum, the economic situation remains dire.


Message from Iraq

For its part, the US wants to present North Korea with a stark choice—give up its nuclear ambitions and integrate peaceably and prosperously with the world community, or develop nuclear weapons and face complete military, political, and economic isolation.

The television footage from Baghdad of a US tank pulling down a statue of fellow "axis of evil" charter member Saddam Hussein surely unnerved the North's leader, Kim Jong-il.

However, both China and South Korea have indicated that while they want to see a negotiated resolution, they are unwilling to embargo North Korea in the way the US envisions.

This reluctance to sanction Pyongyang undercuts the credibility of the US threat to isolate North Korea.

The Bush administration's own rhetoric also calls into question its willingness to promote North Korea's constructive integration into the global community.

Thus, a mixture of factors pushed North Korea towards the negotiating table. They included economic difficulty, diplomatic pressure and the recognition that the outcome of a confrontation with the US might be worse than imagined, while participation in multilateral talks might secure lifelines from its neighbours.

That said, the complexity of the forthcoming negotiations in Beijing cannot be overemphasised.

It will be enormously difficult to construct sufficiently reassuring multilateral security guarantees to induce the North Koreans to surrender their nuclear programme.

At the same time, having been burned once before, the US will demand a verification regime of exceedingly high rigour.

In all likelihood, the Beijing talks will merely be the first step in a protracted, difficult process.


Policy Brief 15-24: An Assessment of the Korea-China Free Trade Agreement December 2015

Book: Witness to Transformation: Refugee Insights into North Korea January 2011

Peterson Perspective: North Korea's Immunity to Outside Pressure: Part I December 12, 2012

Policy Brief 10-1: The Winter of Their Discontent: Pyongyang Attacks the Market January 2010

Working Paper 10-2: Economic Crime and Punishment in North Korea March 2010

Paper: FTAs and the Future of US-Korean Trade Relations November 2009

Paper: Implementing the KORUS FTA: Key Challenges and Policy Proposals February 2008

Policy Brief 08-6: North Korea on the Precipice of Famine May 2008

Policy Brief 07-7: The Korea-US Free Trade Agreement: A Summary Assessment August 2007

Policy Brief 06-4: Negotiating the Korea–United States Free Trade Agreement June 2006

Working Paper 07-7: North Korea’s External Economic Relations August 2007

Book: Avoiding the Apocalypse: The Future of the Two Koreas June 2000

Book: Free Trade Between Korea and the United States? April 2001

Working Paper 08-4: Migration Experiences of North Korean Refugees: Survey Evidence from China March 2008