FOR-Asi-0032-Stock

1. What is your assessment on the recent situations in the North Korean economy (or North Korea's economic situation in 2009)? Some says that at the moment, North Korea is suffering from the recession of inter-Korean trade and the international economic pressures. On the other hand, others say that North Korea's economy is not affected much by the international pressures, and that the conservative economic policy such as the "150-day battle" is a result of North Korea's political motives. What is your evaluation of this?

If I may: the first question we should always ask about the DPRK economy is: "what do we know, and how do we know it"? Frankly speaking, far too much discussion and analysis of the DPRK economic situation proceeds without addressing these fundamental precursor questions.

Comparison of the DPRK and the Soviet economies makes the point. The US government's attempt to understand and describe the USSR economy was the largest social science project ever undertaken in history. In retrospect, we now know that project missed the mark on many key respects: size of Soviet GDP, degree of Soviet military burden, and rates of Soviet economic growth just being some of these. Yet US economists had vastly more Soviet data with which to pursue their analysis than we have today for the DPRK. Moreover, there are troubling hints that some of the few official DPRK data we do possess today (especially demographic data) are patently implausible, or possibly even deliberately falsified. Thus we are to an astonishing degree left in the position of having to offer a "pre-quantitative" evaluation of DPRK economic performance--much as were "classical" economists of the early 19th or even the late 18th century.

That preamble stated: 2009 does not look to have been a good year for the DPRK economy. It is probably not useful to observe that the DPRK economy is in crisis today: that particular political-economic system, in a meaningful sense, is always in crisis: war-planning-type economies always are. However, there are indications that the perennial crises the DPRK was forced to confront became larger, not smaller, over the course of calendar year 2009. We can surmises as much from two key bits of empirical evidence: 1) "mirror statistics" on the DPRK's international trade trends (which suggest that the country's seemingly permanent balance of trade deficit, which may proxy net resource transfers from abroad, certainly declined in the first half of 2009 by comparison with 2008, and was on track to declined for the entire year 2009 by compassion with 2008) and 2) the disastrous currency "reform" at yearend 2009, which, far from stabilizing nominal domestic prices of key consumer goods, seems instead to have pushed those key consumer price levels upward, above pre-"reform" levels: suggesting that the DPRK has just taken an inadvertent step toward hyperinflation.

Of course, Pyongyang's policymakers do not judge the success or efficacy of their economic policies by economic results alone: their calculations are instead inherently political. Whether the North Korean economy served to advance Pyongyang's political and strategic objectives despite these seemingly serious setbacks is a very different question--but one that should not be neglected or forgotten by students of North Korean affairs.

2. North Korea has carried out a currency reform in early December, 2009. What do you think is the fundamental reason for the North Korean government to carry out a currency reform at this point in time? And do you think what the government intended to do through this reform be successful?

In brief: the DPRK 2009 currency "reform" marked the end of a period of hesitant economic experimentation (not "economic reform") that commenced in 2002.

The upshot of the "July 2002 measures" was to reintroduce the role of money into the North Korean economy--or at least, in the country's deliberately constricted consumer sector. Even before the collapse of the USSR and the North Korean economic troubles of the 1990s, the DPRK's "wage bill" accounted for an amazingly small share of national output: direct provision of consumer goods to North Korean subjects was Pyongyang's preferred alternative for determining (and controlling) the population's living standards. But with the collapse of the public distribution system and the ensuing famine, North Korean leadership was forced to tolerate the emergence of market activity in the country--otherwise it would have faced a systemic breakdown in the division of labor and a de facto economic collapse.

Now in themselves, money wages and markets are by no means incompatible with even the strictest Communist rule (they were part of the economic terrain, for example, in both Mao's China and Stalin's USSR). And by comparison to barter exchange or crude predetermined state supply of household goods, relying upon money and markets for meeting consumer needs surely enhances an economy's overall performance (not least through facilitating what economists call 'x-efficiency'). But under capitalist and socialist systems alike, there is always trouble when too much money is chasing after too few goods: and North Korea's 2002 economic package triggered a tremendous bout of domestic inflation.

We can roughly gauge the dimensions of this inflation from reported trends in the unofficial (black market) exchange rate of the DPRK won: by November 2009, its value in US dollars was barely 5% of the level when the "July 2002 measures" were implemented--a depreciation averaging over 3% per month. By the end of 2009, DPRK policy had generated a huge "monetary overhang" looming over the socialist economy; perhaps no less troubling was the new mentality (and pockets of independent economic authority with the nation) that the seemingly permanent presence of de facto private markets was eliciting.

The North Korean government attempted to redress these problems with a single swift political blow. On the last Monday of November 2009 it announced without warning the terms of an immediate "currency reform": new won notes to be issued for old ones on a 1-for-100 basis; no more than 100,000 old won per person (under $40 at unofficial rates) to be accepted; old currency completely void at the end of the week. This policy volte face amounted to a summary confiscation amounted to an overnight confiscation of the overwhelming majority of won holdings by ordinary North Korean households, and severely disrupted the workings of the country's already fragile and beleaguered markets for foodstuffs and other goods.

In the face of public outcry, the government backtracked, conceding that larger personal holdings of old money might be exchanged for new. But the zig-zagging continued thereafter. Belatedly, the government apparently realized that foreign currency plays a role in North Korea's consumer economy, too. (By some estimates, in fact, the convertible foreign exchange holdings of North Koreas may total $ 1 billion or more.) Three weeks after the completion of the currency reform, Pyongyang issued a directive stipulating that foreign currency could no longer be used in domestic transactions, and that all foreign notes must be exchanged at the regime's own wildly unrealistic official rates.

At that point, that the DPRK's official currency went into complete freefall. In effect, the DRPK won went from being a weak nonconvertible currency to a positively toxic asset that no one in their right mind would willingly hold. Money may have been re-eliminated from the North Korean consumer sector--for the time being, at least. But how the DPRK leadership will provide for the living needs of its subjects in the aftermath of this "reform" is not yet clear.

The currency "reform", in short, looks to have been a total failure--maybe a disaster--by purely economic criteria. It may also have moved North Korea one terrible step closer toward a renewal of mass famine. By all indications, the consequences of the 2009 currency "reform" came as a surprise to DPRK leadership--a fact in itself suggesting a truly frightening level of economic ignorance on the part of Pyongyang's leadership.

3. What kind of economic management method do you predict for the North Korean government to pursue following last year's currency reform? And what is your prediction on this year's North Korean economy in general as compared to last year (or any other year)? What is your reason for such predictions?

As already indicated, North Korean leadership appears to be "managing" the nation into a renewed food crisis. Just how the government responds to its new self-inflicted wounds depends on imponderables beyond our knowledge at present.

One big question concerns the continuity state's command over its population. The aftermath of the 2009 currency "reform" was politically noteworthy in one particular respect: For the first time in the regime's history, a Pyongyang ukase generated widespread public resistance visible to the outside world. International news coverage reported market women cursing their government, and even told of local riots against the currency reform that were only suppressed by force of arms. This sort of dissidence might seem a small issue for many other dictatorships in low-income areas. But for DPRK leadership, it is unprecedented--and may have ominous portent.

North Korean leadership has devoted extraordinary attention to studying the downfall of socialism in Eastern Europe and the Soviet Union. A likely bet would be that the leadership's concerns with absolute control of its subject population will increase in the wake of the currency "reform", and the hardships it is creating.

4.There exists a view that there will be hardships for North Korean economy on food, international sector, and other spheres. What do you think is this year's most vulnerable sector in North Korea's economy?

It is difficult to answer the question as formulated: "vulnerability" depends upon the criterion we happen to select.

To be sure, the food situation in DPRK looks worrisome to me--but I am infected with the "bacillus of bourgeois values", to borrow an official North Korean formulation. And as we saw in the 1990s, North Korean leadership preferred to see hundreds of thousands of its subjects perish rather than opt for more economically pragmatic policies which could have saved lives but diminished leadership control over the domestic economy.

More worrisome to DPRK leadership may be the international trade situation: more specifically, the trends in net resource transfers from abroad. Given its phenomenally distorted economic structure, the DPRK system depends upon continuing net resource transfers from abroad for its continued operation, and indeed survival. When those net resource transfers (as proxied by balance-of-payments trends reflected in "mirror statistics") drop below a certain level, the North Korean system heads into famine. (And remember that the DPRK is the only literate urbanized society in history to suffer a famine in peacetime--this alone attests to the level of dysfunction in the real existing DPRK economy).

5. Recently, movements by North Korea are observed to resolve its economy's structural problem through international economic sector by attracting foreign investments and showing interest in Special Zones. How do you assess such strategy, and do you think this will be successful?

To date, the DPRK's most interesting experiment with attracting international investment to a special economic zone was the 2002 Sinuiju initiative--which would even have left a foreigner (Chinese national Yang Bin) in charge of policy in that administrative area! Of course, as we know, the experiment was completely aborted, and Yang Bin ended up in a Chinese jail.

To date, all DPRK attempts at encouraging special economic zones have ended in failure. (I am not excluding the Kaesong Industrial Complex from this generalization, by the way--that project has only gone as far as it has under the unremitting subvention of the South Korean taxpayer).

Two big problems confront such initiatives in North Korea: both of them political. First: the DPRK leadership sees such ventures, if economically successful, as embodying precisely the sort of "ideological and cultural infiltration" that it deems to have led ultimately to the demise of the Soviet Bloc states. Second: the North Korean government has a deep philosophical resistance to the notion that any "foreigners" (and here South Koreans are most assuredly included) should make a profit on North Korean soil.

Unless and until official North Korean attitudes on these two counts undergo dramatic changes, the prospects for foreign investment will be decidedly limited. (Chinese businesses have admittedly made some inroads here, but it is still unclear how many, if any, of those enterprises are actually earning profits in North Korea.)

6. There are many people who predict a positive turn of events for North Korea, i.e. an improved US-DPRK relation, a breakthrough in inter-Korean relation in the form of inter-Korean summit, and a new movement to turn around the Japan-DPRK relation. What is your assessment on such prospects?

North Korean leadership's international calculations, not surprisingly, entail both tactics and strategy. "Better relations"--whether with South Korea, Japan, the United States, or any other government--are always tactical instrumentalities in the service of greater strategic objectives. And given those strategic objectives, such "better relations" tend to be impermanent and fleeting.

I am tempted to say: forget about any genuine "breakthroughs" in inter-Korean relations--at least under current North Korean leadership. Temporary atmospheric improvements in the "North -South" climate can be tolerated by North Korean leadership, so long the South is serving North Korean objectives (transfer payments for summits, subscribing to the DPRK agenda for unification as per the "June 15 declaration", moving in directions deemed to make an end to the US-ROK alliance more likely, etc). But North Korean leadership still views the very existence of the ROK state on the Korean peninsula as an abomination--an historical injustice still in need of correction. (Anyone who still doubts this should listen to the regularly-released statements of the "Anti-Imperialist National Defense Front", the supposedly "South Korean" liberation organization that broadcasts out of Pyongyang.)

Prospects for basic improvements in relations with Japan are similarly problematic. North Korean leadership views the government of Japan as a longstanding historical enemy--and a possible target of North Korean nuclear strikes. Japan can serve North Korean purposes by offering massive "reparations payments" (perhaps modeled after the 1965 normalization with the ROK, except with much larger sums on the checks) and ending its military alliance with the United States (an agenda item already more than hinted at in North Korean media). The intersection of these North Korean objectives and Japan's own national interests, unfortunately, are not immediately obvious.

As for Pyongyang's relations with the US: Pyongyang's long-term objectives may have been revealed in October 2000, during DPRK National Defense Commission Vice-Chair Jo Myong Rok's visit to Washington. At a US State Department Banquet, he declared that the US-North Korea prospect could improve significantly as soon as Washington provided "security assurances" for the "territorial integrity" and the "national sovereignty" of "the DPRK". What did this mouthful actually mean? To begin, just consider what the DPRK officially regards as its own "territorial integrity". (Hint: in the official DPRK conception, the DPRK's territory includes all of South Korea.)

Whether or not the DPRK is ultimately induced back to the so-called "denuclearization discussions" known as the Six-Party Talks should not be a matter of pressing concern to those genuinely interested in a North Korean nuclear disarmament. We have had almost two decades in which to probe DPRK "nuclear intentions". Those intentions could hardly be clearer: Pyongyang wants to be a nuclear state. (Such desired nuclear status, indeed, is part and parcel of the state's official proclaimed doctrines of kangson taeguk and songun chongchi--is it possible to imagine the real existing DPRK as a "strong and powerful state" without such weapons of mass destruction?) If North Korea does return to the Six Party Talks or some successor variant of that conference diplomacy, it will be to seek aid from abroad; or to exploit divisions among her adversaries; or perhaps to attempt to transform those talks from discussions about "denuclearization" to negotiations over "arms control". But the current leadership configuration in North Korea has no interest whatever in committing to "complete verifiable irreversible denuclearization".

7. Lastly, what do you think is the desirable policy on North Korean economy by South Korea, the U.S. and the international community? In connection to this, do you reckon that the international pressure on North Korea arising from the 2009 UN Resolution 1874 will continue to be valid?

In the immediate future, South Korea, the US and the rest of the international community must prepare for the possibility of resurgence of mass hunger in North Korea--and must think about how to fashion much more effective humanitarian relief policies than those implemented in the 1990s (which fed the regime first, and the needy last).

Looking ahead a little further, the West should also have an interest in technical assistance and training for students from the DPRK (in such areas as accounting, international law, banking, etc--not nuclear physics!). We do not know when a turn in policy in North Korea will occur--but when it does, a cadre of well-trained specialists and technocrats will be essential to making the most of new economic opportunities.

The international community must also think hard about how it can help the current DPRK regime "unlearn" much of its current malign international economic behavior. I do not just mean the sort of international military extortion for which post-Soviet North Korea has become notorious. The DPRK, to a striking degree, operates as an international criminal enterprise. From its drug-running operations to its planning and perpetrating immense frauds in international insurance markets to its more prosaic and routine failure to adhere to its commercial contracted obligations (including debt repayment), the North Korean government's notion of "business as usual" is plainly unacceptable by global legal norms. Un-teaching this behavior will require sustained "engagement"--but of global police authorities and international courts.

Finally, and not least important: the international community needs to engage in sustained and serious contemplation of how the prospect of ordinary North Koreans might be dramatically improved in a post-Kim Jong Il--or a post-DPRK--environment. Economic reform worthy of the name cannot be expected to commence under the current North Korean regime. But we should be ready to promote just such reforms with willing North Korean partners as soon as they are possible. Such efforts are most likely to meet with success if they are carefully thought through in advance.

Nicholas Eberstadt is the Henry Wendt Scholar in Political Economy at AEI.

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