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Speeches and Papers

North Korea's External Economic Relations

by Marcus Noland, Peterson Institute for International Economics

For publication in the book "North Korea and Northeast Asia: New Patterns of Conflict and Cooperation"
edited by Samuel S. Kim and Tai Hwan Lee
February 2001

© Peterson Institute for International Economics


This paper will be published in the forthcoming book North Korea and Northeast Asia: New Patterns of Conflict and Cooperation, edited by Samuel S. Kim and Tai Hwan Lee, published by Rowman & Littlefield Publishers, Inc.

 

For most of North Korea's history, international trade has been regarded as a necessary evil. Both the North Korean regime's juche ideology and the planned character of the North Korean economy are antithetical to the notions of comparative advantage and the exploitation of international trade for the purpose of increasing income and welfare, and, as one might expect, North Korea's economic relations with the rest of the world have been unusually brittle. The 1970s push for military modernization left the country heavily indebted relative to its meager export earnings, and the 1975 de facto default effectively cut it off from international capital markets. The economy suffered further negative shocks with the withdrawal of Soviet economic support in the mid-1980s and the subsequent collapse of the Eastern Bloc economies, which had been North Korea's largest trade partners, in the early 1990s.

This deteriorating position led the regime to include foreign trade, along with agriculture and light industry, as one of its oxymoronic "three firsts" in 1994, and as the decade wore on, the regime became more solicitous of international trade and investment. Yet as opportunities for traditional barter or quasi-barter exchange with other centrally planned economies dwindled, North Korea did not expand market-based exchange with other economies. Its volume of trade declined, and as it enters the new millennium, the DPRK is an increasingly aid-dependent economy (Figure 1). 1

This paper examines North Korea's external economic relations. It begins with an overview of its trade, financial, and aid relations, and concludes with a discussion of North Korea's current reform efforts. To preview the conclusions, it is clear that North Korea is attempting to revitalize its external economic relations. It is less clear just how far the regime is willing to go to accomplish this. Nor for that matter is it clear what the ultimate aims of the North Korean regime are—if economic reform were successful, would the gains from reform be used to address the pressing material needs of the North Korean people, or would the fruits of change be put to some other purpose?

 

International Trade 2

A variety of party and state organs handle trade policy matters. The governmental units were reorganized in the August 1998 constitutional revision into a ministry of trade. Historically, trade was funneled through a few large trading firms. This system was partially decentralized in 1984, and now roughly 100 trading firms are reportedly in operation. In theory, North Korea maintains a system of multiple currencies and exchange rates. In reality, although domestic currency is still used as a vehicle for small transactions, it does not appear to be used as a store of value or even a medium of exchange for larger transactions, and the economy appears to be effectively dollarized.

The North Korean government does not normally release international trade data. In principle, "mirror statistics" reported by North Korea's trade and investment partners can be used to deduce North Korea's external transactions. This data is subject to considerable uncertainty: the figures reported here are based on partner country submissions to the IMF and WTO, supplemented with data from the South Korean National Unification Board (NUB) in the cases of countries which do not report the commodity structure of their trade with North Korea to the international organizations. Per standard accounting conventions, in-kind aid contributions are omitted from these data. 3 Countries do not report barter or countertrade transactions; to the extent that North Korea has been able to successfully conclude barter deals, this trade will also be missing from the statistics. Figure 1 displays the time path of aggregate imports and exports. The data show that imports have consistently exceeded exports and that, after peaking in the late 1980s, trade has fallen substantially in the 1990s, though there appears to have been some rebound in recorded trade in 1999, largely due to an expansion of processing on commission trade with South Korea. 4

As can be seen in Table 1, China is by far and away North Korea's main trade partner. It has allowed the North Koreans to run annual bilateral deficits of approximately one half billion dollars since 1995. Indeed, China's prominence in North Korea's trade would be even larger if barter transactions and aid were counted in these figures. If North Korea's trade with China is regarded as politically determined, it is financing more than half of the North Korean deficit. Following China, North Korea's largest trade partners are Japan, South Korea, Russia, and Germany. 5

The commodity composition of trade for 1997 (the most recent year available) is reported in Table 2. Again, interpretation is problematic. The data reported in Table 2 by commodity, do not match the 1997 data (not shown) reported by partner. Some countries may report overall trade with the DPRK but not its commodity composition, so the part of the sample underlying the trade by partner figures are omitted from Table 2. For example, it is unclear how arms sales are counted (if at all) in these figures. These products could be misclassified (i.e. a missile is listed as "fabricated metals product" or put in the miscellaneous "non-identified products" category) or simply unreported. With these caveats in mind, the data in Table 2 indicate that natural resource products and light manufactures dominate North Korea's exports. On the import side, cereals, petroleum, and industrial intermediates are the largest import categories.

 

Other External Transactions

Data on North Korea's accumulated foreign debt and its debt/export ratio are displayed in Figure 2. North Korea's debt is modest in absolute terms ($7.6 billion in 1994), and the vast majority of this figure ($6.2 billion) is long-term debt owed to former CPEs. (The South Korean National Intelligence Service valued this at $11.9 billion at the end of 1997, with $7.35 billion owed to former CPEs and $4.55 billion owed to Western countries.) It is questionable how much, if any, of the ruble-denominated debt will ever be repaid. Approximately $650 million is long-term debt owed to OECD countries. This figure has been relatively constant, reflecting the unwillingness of Western banks, governments, and multilateral institutions to increase their long-run exposure in North Korea. (The North Koreans reportedly owe another $2 billion in arrears to Western banks.) The remainder ($1 billion) consists of short-run loans that are generally rolled over. Given that in reality North Korea has defaulted on most of its long-term debt, its reservice payments are modest ($70 million) except for a spike in repayments during the period 1990-91. Compared to other CPEs, North Korea's debt to exports ratio (including the ruble denominated debt) is quite high (770.6 percent). However, the debt service to exports ratio is low (6.9 percent) since North Korea has essentially stopped paying its debt and no longer has access to long-term capital markets.

A thin secondary market exists for North Korea debt that seems to move mainly on speculation and rumor. Although there was some run-up in the market prior to the June 2000 summit, prices for this "exotic" paper have drifted downward since, and as of this writing (January 2001), North Korean paper had been selling for less than 20 cents on the dollar for months.

Given North Korea's lack of access to conventional channels of international finance, the question naturally then arises: how has it financed the chronic trade deficits? One possibility is arms exports. North Korea sells small arms, training and consulting, and praetorian guard services.6 In the 1980s it emerged as a significant player in the global arms market, with the U.S. ACDA putting exports at more than one half billion dollars at times, accounting for more than one quarter of North Korea's exports (Figure 3). Having been linked to nearly every major exporter or oil, North Korea reputedly maintains the world's third largest store of chemical weapons and is alleged to have biological weapons including the smallpox virus. What has really attracted attention, however, has been its missile program.

The North Koreans produce a range of missiles. Single stage missiles include the medium-range Scud-B, Scud-C, and Scud-D (a.k.a. Rodong-1), while long-range multistage missiles include the Taepodong-1 (tested in August 1998), the yet untested Taepodong-2, and the Taepodong-3, which is still in development. The Rodong-1s have a range of 1000km with a 1000kg nuclear or chemical warhead putting them within striking range of both South Korea and Japan, while the Taepodong-1 is thought capable of hitting Guam and parts of Alaska. While the Rodong-1s are thought to have problems with their engines and guidance systems limiting their military usefulness, properly armed they could nevertheless present a significant deterrent to potential adversaries.

On 16 June 1998 the North Koreans admitted what the world had long suspected: that North Korea exports missiles. Most observers believe that these exports began in the 1980s. Over the years Iran and Syria have been among Pyongyang's most important customers, though the North Koreans are also alleged to have had dealings with Iraq, Libya, Nigeria, Pakistan, and Egypt.

Total revenues from missile sales are subject to dispute, with the conventional wisdom putting missile exports at around $100 million a year. The October 1999 moratorium on long-range missile testing reached in negotiations with the U.S. presumably limits North Korea's ability to develop and market the Taepodong series. The data reported by the ACDA does not support the idea that clandestine arms sales are sufficient to cover the trade gap (Figure 1, Table 1). Nevertheless, the fact that the military maintains its own trading channels outside the central plan is potentially of enormous policy importance; to the extent that the proceeds from arms sales are going directly to the military, the military may have a purely pecuniary incentive to continue selling arms, even if other parts of the government would like to restrict sales for broader foreign policy reasons.

One commentator likened the South Korean economy under the Chun government to a continuing criminal enterprise (Clifford, 1997). In contradistinction, the Kim Jong-il regime is a continuing criminal enterprise, and illicit activities— smuggling, drug trafficking, and counterfeiting, for example — offer another possibility for financing the trade gap. During the 1990s North Koreans, mostly diplomats, have been arrested for smuggling to evade border taxes (cigarettes, alcohol, gold), counterfeit goods (cigarettes and CDs), endangered species and ivory, and military equipment, in countries as diverse as Sweden, Finland, Estonia, Russia, Germany, Egypt, China, Nepal, Cameroon, Guinea, Kenya, Zambia, Thailand, and Cambodia. Official North Korean involvement in ivory trafficking has been so extensive that in 1999 the secretariat of the Convention on the International Trade in Endangered Species (CITES) actually sent a demarche to the North Korean embassy in Switzerland. The big money is in drug trafficking, though.

North Korea has been involved in at least 30 drug trafficking incidents internationally, many involving diplomats (Perl, 1999). These mainly appear to take the form of North Koreans attempting to distribute drugs produced for export in North Korea, or North Koreans using diplomatic immunity as an advantage in distributing drugs produced by non-Korean criminal cartels. North Korea is believed to have begun refining opiates for export in the mid-1980s, with peak production of 50 tons of raw opium occurring in 1994. Poppy cultivation was adversely affected by bad weather and shortages of fertilizers and insecticides, however, and the North Koreans have shifted toward the production of methamphetamine in more recent years. North Korean pharmaceutical labs reportedly have the capacity to process 100 tons of opium a year.

Methamphetamine production is relatively simple, and capacity virtually limitless, constrained only by the ability to finance intermediate inputs.7 A "conservative" estimate of North Korean revenues from drug trafficking would be $71 million annually, with $59 million coming from opiates and $12 million from amphetamines, suggesting that net exports of drugs are probably of the same order of magnitude as arms (Perl, 1999).8 If the estimates of the State Department's Bureau of Narcotics Control are correct, North Korea would have the world's third highest opium poppy acreage (trailing Afghanistan and Burma by a considerable margin). However, drugs would account for a lower share of exports in North Korea than in Colombia, Afghanistan, or Burma.

Counterfeiting is a third potential illicit source of revenue. Given the considerable expertise of North Korean counterfeiters, the move to new U.S. currency designs were reportedly undertaken in part to discourage their activities. High profile counterfeiting busts have occurred in Macau, Cambodia, and Russia. South Korean intelligence estimates put counterfeiting revenues at $15 million a year (Perl, 1999); U.S. officials regard this estimate as high.

North Korea receives official aid in the form of bilateral assistance, humanitarian assistance through UN agencies (principally the World Food Program), KEDO, and other channels from more than 20 countries as documented in Table 3. These figures indicate that North Korea has been receiving aid flows in the hundreds of millions of dollars annually, roughly two-thirds as large as aggregate exports, with the largest contributors typically being the U.S., South Korea, China, Japan, and the EU. However significant as the aid inflows listed in Table 3 might be for the North Korean economy, in principle they cannot be used to finance the trade deficit.9 The previously calculated trade deficit is defined with respect to market transactions on commercial terms. In balance of payments terms the lion's share of these aid flows amount to in-kind transfers. So, for example, the food aid listed in Table 3 is distinct from, and in addition to, the commercial imports listed in Tables 1 and 2.

Another possibility is that the trade deficits have been implicitly financed by China, which has permitted North Korea to accumulate large arrears in its trade account. A final possibility is that these deficits have been financed with remittances from Japan, which are sometimes reported to be in the billions of dollars. However research by Eberstadt (1996), Noland (1998), and Noland (2000) suggest that the actual values are probably far smaller, most likely less that $100 million annually, or roughly the same magnitude of the estimates of missile and drug revenues.10 It has also been alleged that Pyongyang demands large sums ($50,000-$100,000) for Koreans in the diaspora to visit relatives in North Korea.

In summary, North Korea maintains a highly unusual balance of payments profile. Trade volumes are very small, with annual recorded exports less than $1 billion. The country runs a chronic trade deficit, but without access to conventional financing, must finance the deficit in unconventional ways. Aid and revenues from illicit activities are roughly equal to the value of recorded exports. Yet the trade volumes are so small that a modest improvement in export performance would permit the North Koreans to forego aid and illicit activities without suffering a balance of payments squeeze— should the regime decide to pursue this course of action.

 

Prospects for Opening

The year 2000 witnessed considerable diplomatic activity on the part of North Korea, culminating in the June 2000 North-South summit. The April 2000 North-South summit announcement stunned the world. The timing, coming three days before South Korean national assembly elections in which Kim Dae-jung's party trailed in the polls, raised questions about whether this rapprochement was genuine, or whether it might be no more than a tactical move on the part of the North Koreans timed to extract maximal concessions out of an electorally weak Kim Dae-jung and to buy some insurance against a harder line U.S. administration possibly taking office in January 2001. Skepticism was fed by North Korea's history of extorting resources from foreigners to secure its participation in diplomatic activities, and South Korea's own history of "checkbook diplomacy," most notably in the process of normalizing relations with the USSR. Given the Berlin Declaration and Kim Dae-jung's willingness to directly underwrite the economic rehabilitation of the North, many continue to speculate as to what President Kim may have promised the North in order to secure the pre-election summit announcement.

In this light, the first question then is whether the North Koreans are serious about pursuing at a minimum economic reform, or whether recent the diplomatic activity of the past year amounts to an elaborate feint, undertaken to diversify the North Korean's aid donor base.

The evidence is on this point is mixed. One bit of evidence can be adduced from North Korean statements. For the past decade the North Koreans in general (and specifically in writings or statements attributed to Kim Jong-il) have been absolutely scathing in their denunciations of the reforms undertaken in Eastern Europe and the former Soviet Union. Foreign influences have been likened to "germs," "mosquitoes," and other vermin to be kept at bay. "Reform" has been described as "honey-coated poison" and "opening" as "a Trojan horse tasked with destabilizing socialism." 11

In 1994, the North Koreans went so far as to call the Chinese "traitors to the socialist cause" until their own worsening situation and growing dependence on China made it prudent to tone down the rhetoric. During Supreme People's Assembly leader Kim Yong-nam's visit to Beijing in 1999, the two countries adopted an "I'm OK, you're OK" formulation in which they agreed to pursue socialism according to their respective national characteristics.

The language used during Kim Jong-il's May 2000 pre-summit visit to Beijing was very different, however. In remarks widely broadcast in China and reported in the international press, Kim noted the "great achievements of opening up the country" by Chinese reformer Deng Xiao-peng and announced that North Korea "supports the reform policy pursued by the Chinese side." These comments suggest a new receptiveness to economic reform on the part of the North Koreans, and open up the possibility of Chinese adopting their natural role as mentors in this regard.12 This possibility received another boost with Kim Jong-il's January 2001 return trip to China, in which he visited economic venues such as the Shanghai stock exchange and a semiconductor factory. Some have interpreted these visits, in which Kim was accompanied by senior military figures, as an attempt to demonstrate to his reputedly recalcitrant military establishment the possibility of pursuing economic reform while maintaining political control and military strength.

That said, Kim's remarks have not been reported in the vernacular press, and indeed, the week after Kim returned from his first trip to China, North Korean television re-broadcast the "opening" as a "Trojan horse tasked with destabilizing socialism" editorial, which some have interpreted as indicating that Kim's Beijing remarks were insincere and/or made under economic duress. This evaluation may be too harsh. It is probably naïve to project onto Kim Jong-il the belief that a firewall can be maintained between statements widely broadcast in China and elsewhere and what reaches the North Korean elite. Indeed, a mild version of Kim's remarks are China were published in English by the official Korea Central News Agency on 1 June 2000. Moreover, politically it is hard to imagine that Kim could travel onto foreign soil, and then, in effect, announce that the previous fifty years of economic policy (undertaken by his deified father) was flawed. Rather, it is more likely that the North Koreans are searching for a face-saving way to introduce these ideas into domestic discourse. Indeed, during 2001 references in North Korean statements for the need for "new thinking" have begun cropping up.

A second piece of evidence can be inferred from what the North Koreans have signed. In November 2000, they signed four treaties on economic cooperation with the South. These treaties, establishing rules for taxation, investment guarantees, means of direct financial transactions, and settlement of trade disputes, create the legal framework for Southern investment in the North. As such, they could be quite important in terms of facilitating investment by South Korean small-and medium-sized enterprises.

A final piece of evidence can be adduced from North Korean actions. The most prominent example of North-South economic cooperation has been the contract that Hyundai signed with Pyongyang. Although the Mt. Kumgang tourism project understandably has attracted the most attention, the provision for Hyundai to construct an industrial park may have more economic significance in the long-run by encouraging investment by small- and medium-sized firms. Establishment of the industrial park has been delayed by a dispute over the proposed location. Kim Jong-il reportedly has expressed a preference for Shinuiju over the Haeju district, despite the latter's greater attractiveness as an economic hub. Some (e.g. Moon, 2000) have argued that the choice between Haeju and Shinuiju will signal whether economics or politics are driving policy. The announcement in August 2000 that the facility would be located at Kaesong would seem to suggest that economic rationality is beginning to assert some predominance over political symbolism. The possibility of a second Hyundai-developed special economic zone (SEZ), located at Tongchon, on the east coast near Mt. Kumgang, has also been reported. The North Koreans may have also begun to relax their stance with regard to Japanese tourists visiting Mt. Kumgang, which would have obvious implications for Hyundai's bottom line. 13

Assuming that the North Koreans have made the decision to undertake economic reform, the issue then is whether they are capable of successfully managing reform. In this regard they face significant obstacles, and have one tremendous advantage.

There is now an extensive corpus of evidence on the experiences of socialist economies making the transition from the plan to the market. What stands out is importance of idiosyncratic factors in determining relative success. To the extent that there are systematic determinants of success, the experiences of other CPEs indicate that there are three reasonably robust indicators of likely success in transition: the degree of macroeconomic stability at the time that reform is initiated, the existence of a functioning pre-socialist commercial legal system, and the existence of a large, labor-intensive agricultural sector.14

In the case of North Korea, there is some uncertainty surrounding each of these issues. Little is known about the current degree of macroeconomic stability, though the effective dollarization of the economy is not an auspicious sign in this regard. As for its pre-socialist commercial legal system, some argue that the commercial institutions of the Japanese colonial period, while not as advanced as say those in pre-socialist Czechoslovakia or Hungary, might form an acceptable foundation for the construction of market institutions. Perhaps the issue of the agricultural sector is both the most straightforward, and the source of the greatest misconception.

In Asia, one all too often hears the following syllogism. There are two ways of reforming centrally planned economies: the unsuccessful European big bang approach, and the successful Asian gradual approach. North Korea is an Asian country, ergo it will adopt the successful Asian gradual approach and begin growing 10 percent annually upon commencement of reforms. This view is mistaken, conflating the issues of speed of transition and initial conditions.

There are two large Asian countries that have experienced relatively successful transitions from central planning to the market, namely China and Vietnam. As shown in Table 4, both China and Vietnam had more than 70 percent of their labor forces in the agricultural sector when they began their reform processes, and the relative success of their reforms was strongly affected by the existence of this large pool of extremely low productivity labor in the agricultural sector. The authorities could liberalize agriculture, generating a relatively rapid supply response, and then release surplus labor from the agriculture sector into the nascent non-state owned light manufacturing sector. (In theory one could then tax the light-manufacturing sector to generate financial resources for the restructuring of the old state-owned heavy industry sector.)

This agriculture-led reform process may simply not be available to North Korea due to its very different initial conditions. Economically, North Korea more closely resembles some countries of Eastern Europe or the former Soviet Union than China or Vietnam. Vexing issues such as the restructuring of state-owned industrial enterprises, which no country has handled very well, may play a much more central role in North Korea's transition than they have in the experience of China or Vietnam.

A second obstacle is political. Again, consider the cases of Vietnam and China. In the case of Vietnam, North Vietnam and its Vietcong allies defeated South Vietnam in a civil war and unified the country. The government in Hanoi became the sole arbitrators of what it meant to be Vietnamese. When the reform policy of doi moi was undertaken in the late 1980s, the ideologues in Hanoi could come up with justifications of why the new policy was really what Uncle Ho had in mind. Similarly, while China confronts the rump of Taiwan, perhaps until the March 2000 defeat of the Kuomintang candidate for the presidency, no one seriously believed that the government in Taipei presented an ideological threat to Beijing. When Deng spearheaded the Chinese reforms in the late 1970s, the ideologues in Beijing were free to come up with slogans rationalizing the new policy.

The divided nature of the Korean peninsula presents prospective North Korean reformers with a very different ideological challenge. Reforms that bring North Korean society closer to South Korea could undermine the whole ideological justification for the regime— why be a third-rate South Korean when one can head south and become the real thing? The dynastic nature of the North Korean regime makes this political task even harder still, as the son will in effect, have to disavow the policies of the father.15

Balanced against these challenges is one great advantage with other transitional economies have not had— namely the existence of a benefactor in the form of South Korea.

 

Globalization in Our Own Style

International cooperation could be expected to yield economic benefits to North Korea in the form of enhanced trade and investment, assistance from multilateral development banks, and settlement of post-colonial claims against Japan. At the same time, to obtain these benefits, North Korea presumably would have to forego its current revenues from exportation of medium-range missiles and weapons of mass destruction, drug trafficking, and counterfeiting. Furthermore, North Korea would have to settle private claims arising from past international loan defaults were it to reenter international capital markets. Such a deal could well involve the alteration or renegotiation of the Agreed Framework upon which much of North Korea's economic interaction with the rest of the world is conditioned.

Fundamental reform of the North Korean economy would have two profound effects: first, there would be a significant increase in exposure to international trade and investment (much of this with South Korea and Japan, two countries with which North Korea maintains problematic relations), and second, changes in the composition of output could be tremendous, involving literally millions of workers changing employment.16 Both developments could be expected to have enormous political implications, or alternatively, these implications could be thought to present significant, perhaps insurmountable, obstacles to reform under the current regime.

Nevertheless, it is possible that North Korea could attempt a less ambitious reorientation of its economic policies and practices supported by help from abroad. The North Korean economy desperately needs two things to meet the minimum survival requirements of its population: food and energy. It may well be that the country obtains enough income through production or aid to attain the minimum survival basket, but chooses not to do so (i.e. the regime has a strong preference for guns over butter). Taking these preferences as given, how much additional income would the country need to hit the minimum survival basket? Under current conditions North Korea runs a structural food deficit of around two million tons. The cost of closing this gap through commercial imports would be on the order of several hundred million dollars, depending on prevailing global prices. For the last five years, this gap has mainly been closed through the provision of international assistance. This reflects both North Korean political interests— why pay for something that can be obtained for free?— and the political interests of Western governments, most prominently that of the United States, which face less domestic resistance to providing in-kind "humanitarian relief" to North Korea than straight aid to the Kim Jong-il regime.

In addition to food, North Korea needs energy. It is reliant on imported oil to generate fuels and fertilizer for use in transportation and agriculture. Electricity is mainly generated using coal and hydropower. Generation has been hampered by difficulties in extracting increasingly inaccessible and low quality domestic coal reserves. Beyond this problem, the power grid (largely underground for security purposes) is said to suffer from extraordinarily large transmission losses. The 1994 Agreed Framework between North Korea and the United States provides for the construction of two light water reactors and the provision of oil in the interim. The problem is that this is essentially a diplomatic agreement over North Korea's nuclear program, and does not really address the true needs of the North Korean economy. From an economics standpoint, it would be better to renegotiate the Agreed Framework, scrapping the costly light water reactors, and instead building more cost-effective electrical generating systems, refurbishing the existing electrical grid, and building the necessary infrastructure that would allow North Korea to export electricity to South Korea and China, and thereby earn foreign exchange.17 Nevertheless, if these estimates are correct and the Framework Agreement as negotiated is fully implemented, the actual cost of purchasing the estimated shortfalls in grain and energy inputs, as well as desperately needed supplies of fertilizers, pharmaceuticals, etc. might not be very large, less than $1 billion dollars (Michell, 1998). Assuming no more interruptions in service, the Hyundai Mt. Kumgang tourism deal guarantees North Korea nearly $150 million annually over the relevant time period. This is a minimum. North Korea receives a payment per visitor. If Hyundai were to fill all the berths on its ships, North Korea would stand to net approximately $450 million per year— or enough to cover its grain deficit on commercial terms. Moreover, other South Korean firms have expressed interest in similar tourist ventures. If the North Koreans went through with the other projects in the Hyundai agreement, including the establishment of a new SEZ at Kaesong, this could generate additional revenues.

These figures refer to recurrent flow expenditures. In addition, there are one-time needs to rehabilitate the North Korean infrastructure, and a variety of organizations have come up with estimates of what this might entail. To use a Seoul metaphor, to a certain extent it depends on whether one takes the black (expensive) taxi or the silver (cheap) one. For example, Williams, Hayes, and Von Hippel (1999) estimate that a rural energy rehabilitation program would cost about $2-3 billion over five years. Their estimated price tag for a more comprehensive economy-wide program is $20-50 billion over 20 years. The Construction and Economic Research Institute of Korea, a think-tank affiliated with the Ministry of Construction has estimated that the North Korean infrastructure is at around South Korea's 1975 level, and that it would cost more than $6 billion to bring it up to South Korea's 1990 level. Hong (2000) estimates that transfers on the order of 2-4 percent of South Korean GDP would be needed for an extended period of time to raise the level of North Korea's infrastructure to South Korea's 1980 level.

For $2 billion annually, one could undertake a fairly bare-bones reconstruction program in North Korea that would generate rising living standards and possibly reduce discontent and contribute to political stability, though one should be careful about making too hasty a linkage between material prosperity and political stability. Around half of this would be for recurrent flow consumption expenditures, and around half would be for industrial and infrastructural investments that could be self-financed through export revenues. Most of this trade would be with South Korea and Japan, with China and the U.S. playing smaller roles— even with the U.S. partially lifting its embargo against North Korea in June 2000.18 Thus the necessary recurrent external financing needs would be around $1 billion annually.

Where could this money come from? The government of South Korea has set up a special development fund, but the resources are far too small to meet the North's rehabilitation needs. Instead, the single biggest potential source of additional financing would be the resolution of North Korea's post-colonial claims against Japan. This issue was raised by former U.S. Secretary of Defense William Perry during his visit to Pyongyang in 1999. The Japanese government paid the South Korean government $800 million in compensation for colonial and wartime activities at the time of normalization of diplomatic relations in 1965, with $300 million in the form of grants, $200 million in development assistance loans, and $300 million in commercial credits. The North Korean government expects similar compensation. Adjusting the South Korean payment for differences in population, accrued interest, inflation and issue raised by the North Koreans that was not included in the South Korean package is compensation for "comfort women" who were pressed into sexual slavery during the Second World War. Reputedly, settlement figures on the order of $5-8 billion have been discussed within the Japanese government. In comparison, Yi Chong-hyok, Vice Chairman of the Korea Asia-Pacific Peace Committee, a KWP organization, in remarks before a Washington audience in 1996 indicated that $10 billion would be the minimum bound for compensation. Japan will certainly argue that its food aid and its one billion dollar contribution to the Korean Peninsula Energy Development Organization (KEDO) should be counted against this charge. Some have speculated that Japan will even try to claim credit for the costs of recapitalizing bankrupt Chochongryun-controlled financial institutions in Japan. In any event, such sums, properly deployed, could go a long way in restoring North Korea creditworthiness and financing economic modernization.

If North Korea were to accept the Perry review's terms of engagement, another carrot that the U.S., Japan, and South Korea could hold out would be membership in the international financial organizations and the prospect of multilateral economic assistance. Pyongyang has periodically expressed interest in joining the International Monetary Fund (IMF), World Bank, and Asian Development Bank (ADB), and formally applied to join the ADB in August 2000. Membership talks have never made much progress, however, for they have snagged on North Korea's unwillingness to permit the kind of access to economic data and information required for membership in these organizations, its position on the U.S. list of states supporting terrorism, and Japanese opposition relating to unresolved political issues, most notably the alleged kidnapping of Japanese citizens.19 Under normal circumstances, if North Korea were to join these organizations, in the absence of considerable reorientation in domestic economic policies, it would be unlikely that the multilateral development banks would make significant loans. However, given the political importance of North Korea to the U.S. and Japan (influential shareholders in the World Bank, and the dominant shareholders in the ADB), one would expect that North Korea might receive favorable treatment.20 Technical advice and assistance would really be more important than direct lending activities, which would ultimately only complement the activities of private investors. Working from the case of Vietnam (another Asian transitional economy where the government undertook rapid economic reforms) and scaling down the multilateral development banks' lending program for the smaller size of the North Korean population, one obtains lending on a scale of $150-250 million annually. Not trivial, but not enough to finance even a bare-bones recovery program. More money might be available if the U.S., Japan, South Korea and others set up a special fund for North Korea at the World Bank or ADB.21 Such a fund might be a particularly useful way of politically laundering Japanese reparations. It is possible that under some circumstances North Korea could obtain international financial institution loans even if it were not a member.22 For example, the World Bank maintains a special program for peace and sustainable development in the Middle East through which it makes loans in the areas controlled by the Palestinian Authority. It also has adopted a policy that allows it to assist countries that are emerging from crises even though they are not members in good standing of the Bank. This policy was adopted after the Bank was precluded from lending to Cambodia because of a debt arrearage problem. The key attributes in these cases appear to be a cooperative recipient government and strong support from major Bank shareholders. Bank staff has also expressed the view privately that an independent, poor North Korea would probably be able to access more lending than a unified middle-income Korea. North Korea was invited to the 2000 joint annual meetings of the World Bank and IMF, but declined to attend. In any event, the settlement of post-colonial claims with Japan would dwarf anything North Korea could expect from the multilateral development banks.

These developments might be thought of as the necessary, though not sufficient, conditions for consensual unification. Even if they were to occur, they would only get the two Koreas part way down the road. Moreover, these developments do not necessarily imply progress toward consensual unification. North Korea could adopt the minimalist reform program and reject unification overtures from the South. Indeed, while implementing such a program, the North might feel compelled to limit discussion of unification precisely to prevent system overload and a loss of control.

 

Conclusion

Like other CPEs, North Korea initially achieved some success in mobilizing resources for development. Its uniqueness lay in the extreme degree to which markets were repressed and decision making was invested in a single individual, Kim Il-sung. Like other CPEs, it began to stagnate when opportunities for "extensive" development had largely been exhausted and "intensive" development and technological dynamism were required instead.

Kim's response in the 1970s was to try to circumvent this conundrum by borrowing capital and technology from abroad. This tactic failed, however, and North Korea defaulted on its debts, leaving it highly dependent on the Soviet Union. Given its lack of alternatives, the decline in relations with the Soviets and the Soviet Union's eventual collapse were blows from which the North Korean economy has never recovered.

The regime found itself in a terrible bind— its economy was failing, its primary patron was no more, and it feared that economic reform would mean the end of the regime as it had in Eastern Europe. The regime's response was essentially two-fold: engage in one-off attempts to earn foreign exchange through projects that would not affect the systemic organization of the economy (the Rajin-Sonbong SEZ and the Mt. Kumgang tourism project), while at the same time engaging in brinkmanship to extract resources from the rest of the world.

Whether the events of 2000-1 mark a fundamental reorientation of North Korean policy is a critical issue. It could be that the Kim Jong-il regime has made the calculation that the best way to preserve their own power and perquisites within the North Korean system is to constructively engage South Korea and the rest of the world, and that moving down the path of economic reform, though risky, presents them with the highest likelihood of ultimate success in preserving themselves within their system. Or, it could be purely opportunistic.

How can we tell? Despite the reported stabilization of the economy (or even its revival), and enhanced revenues from the Hyundai deal, North Korea has increased its reliance on international food assistance. The share of food imported into North Korea has risen from nil in 1994 more than 80 percent today. In other words, concessional assistance has almost completely crowded out imports on commercial terms. Food is fungible and food aid acts as implicit balance of payments support— funds that would have otherwise been expended on food can be spent on other items. The issue is then the preferences of the regime, and in the case of North Korea, there is reason for unease.23

So what are the policy implications of this? From the standpoint of South Korea, Kim Dae-jung is fundamentally correct that the focus of policy should be aimed at supporting the constructive transformation of the North. Militarily, North Korea already holds Seoul hostage with its forward-deployed artillery. The South Koreans might as well engage North Korea in an attempt to reduce tensions and ultimately achieve reconciliation and unification, because the marginal increase in North Korea's threat capability that might be achieved through economic reform is relatively small. The South Koreans are already over that Rubicon.

Therefore the goal of the South Korea should be to domesticate North Korea, pursuing a two-track strategy of trying to defang it militarily while at the same time rehabilitating its economy. The problem from the standpoint of South Korea is the impact that increased integration with North Korea could have on the South Korean economy. The financial crisis has at least temporarily reversed a 20-year trend toward reduced direct state involvement in the South Korean economy. As a consequence of its increased presence in the financial sector and other, more indirect levers on power, the South Korean state has a bigger influence on strategic decisions by the chaebol than it did on the eve of the crisis. The difficulty is that despite the good intentions of the South Korean government, politics and economics are inseparable in the North— even in theory. Any significant interchange with the North will be highly politicized. The South Korean government inevitably will be tempted to directly intervene in the economy to promote its foreign policy goals.24

In this light, South Korea should promote two goals in its dealings with the North: transparency and the transformation of the North Korean system. With regard to the first goal, economic integration between the North and South may convey positive externalities to South Korea and the social rate of return on South Korean investment in the North may exceed the private rate of return on such investment. As a consequence, there is a public policy justification for encouraging investment in the North. It would be better though, to introduce broad tax incentives for investment in the North than use the state's influence over the financial system to encourage such investment on an ad hoc basis. The notion behind a tax-based policy would be to divorce the overarching societal goal of investment in the North from state influence on particular investment decisions. The advantage of such an approach is that it would preserve the microeconomic efficiency of private firms selecting among potential investment projects on the basis of expected rates of return, while taking the broader social imperative to encourage such investment into account.

With respect to the second goal, one can imagine a hierarchy of modalities of engagement. The worst would be projects such as the Mt. Kumgang project, which can literally and figuratively be fenced off from the rest of the North Korean economy and society and offer little prospect of structural transformation. Given the historical enmity and distrust between the North and the South, the Mt. Kumgang project may have been a necessary first step to build confidence and trust. But having successfully made that step, future projects should be evaluated with a more critical eye.

Marginally preferable to the Mt. Kumgang project would be mining concessions or special economic zones in remote areas such as Rajin-Sonbong. These are classic enclave economies with little prospect for spillover into the broader society.

Industrial parks, bonded warehouses, and other preferential investment zones in urban areas would be preferable, and free investment by South Korean firms throughout the country would be the best of all. The latter would not only maximize the contact between North and South Koreans (and thus demonstration or educational effects with respect to the operation of a market economy), free investment would create competition between local authorities to attract investment.

The point is that North Korea faces a fundamentally supportive international environment. South Korea, Japan, China, even the U.S. want to see a less belligerent North Korea survive until a consensual process of reconciliation and unification can take place on the Korean peninsula. The three questions are whether North Korea is willing to change, whether it is capable of successfully managing change, and to what purposes would it apply the fruits of change. I am hopeful on the first question, skeptical on the second, and wary about the third. I believe that the most likely outcome is a kind of muddling through in which the regime makes a series of ad hoc adjustments while supported by external powers that would prefer to see a less belligerent North Korea muddle along to the risks of instability or collapse. The outcome could well be what I have described elsewhere as "apparatchik capitalism," in which the political elite would use their control over state power to channel the lion's share of rents generated by a partially marketized and non-transparent economy to themselves.25

 

| Figure 1 | Figure 2 | Figure 3 |

 

Table 1: North Korean Trading Partners, 1999 (millions of US$)

North Korean Exports a

North Korean Imports b

Net Exports

China

Raw

93

391

Corrected

84

430

-346

Japan

Raw

200

147

Corrected

180

162

18

South Korea c

Raw

121

68d

Corrected

121

75

46

Russia

Raw

7

49

Corrected

6

54

-48

Germany

Raw

24

33

Corrected

22

36

-15

Global Total

Raw

922

1193

Corrected

830

1312

-483

Notes:

a IMF, Direction of Trade Statistics export data (of partner country) adjusted for "missing" transportation and insurance costs.
b IMF, Direction of Trade Statistics import data (of partner country) adjusted for transportation and insurance charges.
c North-South Korea trade data from South Korean National Unification Board (NUB). NUB data based on a customs clearance.
d Unilateral aid is subtracted from exports to North Korea. Corrected, aid-inclusive exports to North Korea come to US$ 233 million in 1999.

Sources: IMF, Direction of Trade Statistics; National Unification Board

 

Table 2a: North Korean exports by largest commodity groups, 1997

Exports

Share

Industry

(US$ millions)

(percentage)

(SITC-4 classification)

161.22

15.1

Gold, non-monetary

58.73

5.5

Parts of telecommunications and sound apparatus

54.86

5.1

Other outer garments of textile fabrics

49.72

4.7

Crustaceans and mollusks, fresh, chilled, frozen, etc.

47.48

4.5

Hay and fodder, green or dry

47.44

4.4

Gramophone records and similar sound recordings

38.81

3.6

Machines and appliances for specialized particular industries

36.24

3.4

Overcoats and other coats, men's

34.56

3.2

Thermionic, cold and photo-cathode valves, tubes, parts

25.72

2.4

Other fresh or chilled vegetables

1066.18

Total, All commodities

Table 2b: North Korean imports by largest commodity groups, 1997

Imports

Share

Industry

(US$ millions)

(percentage)

(SITC-4 classification)

96.43

7.7

Maize (corn), unmilled

65.49

5.2

Petroleum oils and crude oils obtained from bituminous minerals

65.47

5.2

Meal and flour of wheat and flour of meslin

53.80

4.3

Res: Petroleum products, refined

53.06

4.2

Iron ore and concentrates, not agglomerated

47.55

3.8

Rice semi-milld or wholly milled, broken rice

38.93

3.1

Passenger motor cars, for transport of passengers and goods

33.21

2.6

Mineral or chemical fertilizers, nitrogenous

26.55

2.1

Fabrics, woven, containing 85 percent of mool/fine animal hair

26.35

2.1

Fabrics, woven of continuous synthetic textile materials

1259.13

Total, All commodities

Source: Statistics Canada, World Trade Analyzer (1980-1997)

 

Table 3: Aid balance sheet (millions of US dollars)

1999

2000a

Australia

3.411

4.505

UN Agencies

2.279

3.905

Other Humanitarian Aid

-

-

KEDO

1.295

0.600

Austria

0.010

-

UN Agencies

-

-

Other Humanitarian Aid

0.010

-

KEDO

-

-

Canada

0.161

0.665

UN Agencies

-

-

Other Humanitarian Aid

-

-

KEDO

0.161

0.665

Chile

-

0.020

UN Agencies

-

-

Other Humanitarian Aid

-

-

KEDO

-

0.020

Denmark

0.557

1.511

UN Agencies

0.557

1.511

Other Humanitarian Aid

-

-

KEDO

-

-

European Union

0.338

-

UN Agencies

-

-

Other Humanitarian Aid

0.338

-

KEDO

-

-

Finland

0.814

0.883

UN Agencies

0.722

0.807

Other Humanitarian Aid

-

-

KEDO

0.092

0.075

Germany

0.638

-

UN Agencies

0.200

-

Other Humanitarian Aid

0.438

-

KEDO

-

-

Ireland

0.266

-

UN Agencies

0.266

-

Other Humanitarian Aid

-

-

KEDO

-

-

Italy

1.821

0.924

UN Agencies

-

0.924

KEDO

1.821

-

Other Humanitarian Aid

-

-

Japan

1000.433

219.414

UN Agencies

-

35.226

Other Humanitarian Aid

-

90.000b

KEDO

-

94.188

Mexico

0.100

-

UN Agencies

-

-

Other Humanitarian Aid

-

-

KEDO

0.100

-

Netherlands

0.237

0.100

UN Agencies

-

0.100

Other Humanitarian Aid

0.237

-

KEDO

-

-

New Zealand

0.261

-

UN Agencies

-

-

Other Humanitarian Aid

-

-

KEDO

0.261

-

Norway

0.816

2.139

UN Agencies

0.816

1.889

Other Humanitarian Aid

-

-

KEDO

-

0.250

Oman

-

0.050

UN Agencies

-

-

Other Humanitarian Aid

-

-

KEDO

-

0.050

Others, not classified c

19.056

22.543

UN Agencies

3.486

8.288

Other Humanitarian Aid

-

-

KEDO

15.570

14.255

Peru

-

0.100

UN Agencies

-

-

Other Humanitarian Aid

-

-

KEDO

-

0.100

Philippines

0.001

-

UN Agencies

0.001

-

Other Humanitarian Aid

-

-

KEDO

-

-

Singapore

0.400

0.300

UN Agencies

-

-

Other Humanitarian Aid

-

-

KEDO

0.400

0.300

South Korea d

50.500

339.209

UN Agencies

-

-

Other Humanitarian Aid

47.000

114.000e

KEDO

3.500

225.209

Sweden

4.404

2.935

UN Agencies

3.831

2.935

Other Humanitarian Aid

0.573

-

KEDO

-

-

Switzerland

-

0.951

UN Agencies

-

0.951

Other Humanitarian Aid

-

-

KEDO

-

-

United States

204.488

33.055

UN Agencies

39.388

18.055

Other Humanitarian Aid

100.000

-

KEDO

65.100

15.000

     

TOTAL

4785.111

404.095

Notes:

a Includes KEDO contributions through July 2000.

b Represents 500,000 MT of grain, pledged in 2000.

c Includes contributions to KEDO by EAEC (European Atomic Energy Community).

d All South Korean contibutions to KEDO accounted as $3.5 billion in 1999 as part of multi-year commitments.

e Includes in-kind aid (600,000 MT of grain and 300,000 MT of fertilizer in 2000) by the ROK government, as well as medical supplies and other donations by private organizations.

Sources: KEDO, UN Office for the Coordination of Humanitarian Aid, National Unification Bulletin, AP


Table 4: Percentage distribution of labor force at time of reform

 

Country

Year

Agriculture

Sector
Industry

Service

Czech Republic

1989

11

39

50

Slovakia

1989

15

34

51

Poland

1989

7

37

56

Hungary

1990

15

36

49

Soviet Union

1990

19

38

43

Ukraine

1990

20

40

40

Belarus

1990

20

42

38

Romania

1990

28

38

34

Bulgaria

1989

19

47

34

North Korea

1993

33

37

30

China

1979

71

15

14

Vietnam

1989

71

12

17

Source: Noland (2000), table 3.7.

 

 

References

Eberstadt, Nicholas. "North Korea's Unification Policy: 1948-1996," in Samuel S. Kim ed., North Korean Foreign Relations, (Oxford: Oxford University Press, 1998)

Hong, Soon-jick, 2000. "North Korea's Infrastructure Conditions and Strategies for Investment," VIP Report, Hyundai Research Institute, (July).

Manyin, Mark E. 2000. North Korea-Japan Relations: The Normalization Talks and the Compensation/Reparations Issue, CRS Report for Congress, Washington: Congressional Research Service, (April 21).

Michell, Anthony R. 1998. "The Current North Korean Economy," in Marcus Noland, ed. Economic Integration of the Korean Peninsula. Washington: Institute for International Economics.

Ministry of Defense. 1999. White Paper. Seoul: Ministry of Defense.

Ministry of Defense. 2000. White Paper. Seoul: Ministry of Defense.

Moon, Chung-in. 2000. Korea and Asian Security in the 21st century, Asian Voices: Promoting Dialogue Between the US and Asia. Washington: Sasakawa Peace Foundation USA.

Noland, Marcus. 2000. Avoiding the Apocalypse: the Future of the Two Koreas. Washington: Institute for International Economics.

Noland, Marcus, Sherman Robinson, and LiGang Liu. 1999. "The Economics of Korean Unification". Journal of Policy Reform, 3: 255-99.

Noland, Marcus, Sherman Robinson, and Monica Scatasta. 1997. "Modeling North Korean Economic Reform," Journal of Asian Economics, 8:1 15-38.

Noland, Marcus, Sherman Robinson, and Tao Wang. 2000a. "Rigorous Speculation: The Collapse and Revival of the North Korean Economy," World Development, 28:10 1767-87.

Noland, Marcus, Sherman Robinson, & Tao Wang. 2000b. "Modeling Korean Unification," Journal of Comparative Economics, 28:2 400-21.

Von Hippel, David and Peter Hayes. 1998. "DPRK Energy Sector: Current Status and Scenarios for 2000 and 2005," in Marcus Noland, ed., Economic Integration of the Korean Peninsula, Special Report 10, Washington: Institute for International Economics.

Williams, James H., Peter Hayes, and David Von Hippel. 1999. "Fuel and Famine: North Korea's Rural Energy Crisis", paper presented to the Pentagon Study Group on Japan and Northeast Asia, Washington, October 22.

 

Notes

1. It would be interesting to compare the responses of North Korea and Vietnam to the common shock of the withdrawal of Soviet aid and the collapse of the USSR. My supposition is that the Vietnamese were able to far more effectively reform their more agriculturally based economy and boost exports to ease the balance of payments constraint, while, in the absence of greater export orientation, the North Koreans were forced to reduce the level of domestic activity. Unfortunately the extreme uncertainty surrounding the North Korean balance of payments position (largely because of the issue of non-reported trade remittances addressed later in this paper) effectively precludes quantitative inquiry along this line. However, Eberstadt (1997) calculates that between 1989 and 1995, the Vietnamese nearly tripled their exports (largely by liberalizing the price of rice, their major exportable, thus encouraging increased output), while North Korean exports fell by half.

2. The following two sections draw on Noland (2000). See that source for additional details

3. For example, in reporting inter-Korean trade, South Korean organizations have at times misclassified KEDO contributions, in particular KEDO oil shipments, as South Korean exports to North Korea.

4. The prevalence of processing on commission trade, in which intermediate inputs are shipped through China for assembly into finished products, raise the possibility of significant double-counting of North Korea's trade with China and South Korea.

5. Noticeably absent from this list is the US, which effectively maintains an embargo against North Korea despite minor relaxation of restrictions in 1995 and 1999. However, while not engaging in much trade, the US has been a major provider of assistance in the form of food, KEDO payments, and payments for the remains of US soldiers missing from the Korean War. Indeed, North Korea is now the largest US aid recipient in Asia.

6. For example, North Korean troops have reportedly fought on the government side in the Congolese civil war, in exchange for uranium and other mineral concessions.
In both cases there are more benign explanations. The North Koreans use opium to make morphine for military uses as well as for use as a traditional medicine. Given shortages of imported medicines and pharmaceuticals, opium may increasingly be used as a pain reliever in the North. Likewise, methamphetamines were originally developed for military uses, and some share of production may be devoted to officially sanctioned domestic usage.

7. In both cases there are more benign explanations. The North Koreans use opium to make morphine for military uses as well as for use as a traditional medicine. Given shortages of imported medicines and pharmaceuticals, opium may increasingly be used as a pain reliever in the North. Likewise, methamphetamines were originally developed for military uses, and some share of production may be devoted to officially sanctioned domestic use.

8. In 1999, the South Korean Ministry of Foreign Affairs and Trade estimated revenues from all illegal activities (not including arms sales) at $100 million.

9. In theory, these aid flows could be used to finance the North Korean trade deficit if the North Koreans re-sold the aid shipments on world markets, and in the past there have been allegations of "calorie arbitrage" in which the North Koreans reputedly resold high value food aid for lower quality foodstuffs on world markets.

10. Alternatively, remittances could be much larger, as is often reported in the press, but in this case a corresponding magnitude of expenditures are missing, or North Korea is running a balance of payments surplus and exporting capital to the rest of the world (despite experiencing a famine). A critical issue is the extent to which the Chinese have been implicitly providing aid by permitting the North Koreans to build up arrears on their imports. Under the assumption that the Chinese simply barter their exports for whatever imports the North Korean can provide and allow the difference to be built up in arrears, the remittances necessary to finance imports would be less than $100 million, which is far lower than commonly thought. However, to the extent that the Chinese are successful in extracting hard currency payments from the North Koreans, they could be soaking up whatever remittances the Chochongryun can provide.

11. See Noland (2000) for specific references to these formulations.

12. In a similar vein, during US Secretary of State Madeleine Albright's October 2000 visit to Pyongyang, Kim expressed interest in the "Swedish model." During his second visit to China, he also reportedly expressed interest in the policies of Park Chung-hee.

13. North Korea and Hyundai have been in conflict over Hyundai's desire to significantly increase the number of tourists that it brings to Mt. Kumgang by including large numbers of non-Koreans. In September 2000 the two sides agreed to begin permitting a limited number of Japanese to take part in Hyundai's tours.

14. See Noland (2000) Chapter 7 for an extensive discussion of these issues, and references to the relevant literature.

15. The dynastic aspect of the regime could convey certain short-run advantages, however. Presumably Kim Jong-il will claim that in private conversations Kim Il-sung expressed views conveniently consistent with whatever policy Kim fils wishes to pursue.

16. On the first point, see Noland (2000). For detailed analyses pertaining to the second point, see Noland, Robinson, and Scatasta (1997), and Noland, Robinson, and Wang (2000a).
See Von Hippel and Hayes (1998).

17. See Von Hippel and Hayes (1998).

18. This assumes that liberalization in the North was on a non-preferential basis. As shown in Noland, Robinson, and Liu (1999) and Noland, Robinson, and Wang (2000b), the formation of a customs union between North Korea and South Korea would have a big impact on the North while it would have a trivial impact on the South. The customs union would represent a major trade liberalization on the part of the North, while the North's economy would be too small to have much of an impact on the South's economy. (Think of the impact of NAFTA on the US or the accession of a small central European economy on the EU.) This story — big impact on the North, small impact on the South— would change considerably if integration were to come through collapse, as discussed in Noland (2000).

19. Under US law, the US executive directors at the development banks could not vote in favor of extending loans to North Korea until it was removed from the list of countries engaging in state sponsored terrorism. At the ADB annual meeting in May 2000, US Treasury official Ted Truman reportedly stated that "our position on membership is unchanged. Both because our own legislation requires us to do so [and] because North Korea is an international terrorist state…as long as that situation prevails and the North Korean regime is one which is fundamentally incompatible with the principles of institutions such as the ADB, we would oppose membership" (Agence France Press, 7 May 2000).

20. World Bank President James Wolfensohn already signaled as much, writing in a July 2000 letter to South Korean President Kim Dae-jung that "We at the World Bank stand ready to support inter-Korean economic cooperation. We hope to assist in the development of North Korea, within our capacity and mandate, whenever the North Korean authorities are ready to work with us."

21. The ideas of a Northeast Asia fund or a Northeast Asia Development Bank have also been mooted.

22. An April 2000 statement to this effect by the IMF resident represenative in Seoul, David T. Coe, was immediately denounced by Rep. James Saxton (R- New Jersey).

23. According to the 1999 South Korean National Defense White Paper, North Korea increased its reserves of chemical weapons, boosted KPA manpower by 10,000 troops, created a missile division, and added 10 submarines to its fleet. In August 1999 it was revealed that North Korea had purchased roughly 40 aging MiG-21 fighters and eight military helicopters from Kazakhstan. It was subsequently reported that North Korea was trying to obtain more advanced MiG-29 and SU-30 fighters as well. In September 1999, a classified US Air Force report allegedly describing continued North Korean work on its Taepodong missile was leaked to the press. In October, in testimony before the Senate Armed Forces Committee General Thomas Schwartz, the newly appointed commander-designate of US Forces Korea stated that North Korea had accelerated its arms build-up and was forward-deploying artillery and rocket-launchers in underground facilities. In March 2000, Admiral Dennis Blair, Commander-in-Chief US Pacific Forces, indicated that North Korean military exercises during the winter of 1999-2000 had been the most extensive in recent years. Other US military sources indicate that the 2000 summer exercise cycle too, was the most extensive in years. In the 2000 White Paper, the South Korean National Defense ministry indicated that North Korea had deployed 500 short-range missiles and other artillery near the border with South Korea. For it's part, North Korean official statements have been replete with references to it's "military-first" policy.

24. A good example of this would be the travails of Hyundai Engineering and Construction. Hyundai narrowly averted bankruptcy in November 2000 when state-dominated banks extended it emergency loans. Hyundai is one of the prime contractors on the KEDO project and the industrial park at Kaesong could play an important role in inter-Korean economic integration. According to South Korean press reports, as of December 2000, the firm's Mt. Kumgang tourism project has lost nearly $400 million dollars. The fear, of course, is that the South Korean government will be tempted to reward Hyundai or other firms that do its bidding in the North with preferential treatment.
See Noland (2000) chapter 9 for further elaboration on this theme, and a comparison to the Romanian case.

25. See Noland (2000) chapter 9 for further elaboration on this theme, and a comparison to the Romanian case.


RELATED LINKS

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