Wendt Scholar Nicholas Eberstadt

Earlier this year, with the transfer of presidential authority from Roh Moo-hyun to Lee Myung-bak, South Korea in effect completed a decade-long experiment in economic diplomacy with the Kim Jong-il regime.

Under two successive "Sunshine Era" governments, from early 1998 through early 2008, Seoul supported an initiative it called "inter-Korean economic cooperation": meaning, in practice, unconditional economic aid plus subsidized trade for the Democratic People's Republic of Korea.

(The phrase "inter-Korean economic co-operation" had of course been in circulation since the advent of North-South trade in the late 1980s, but in the Sunshine Era, the term took on a different coloration and a very specific connotation.)

The results of that experiment are now in; and judged by practically every objective initially presented by its proponents to justify it, this policy has proved to be a failure.

If the Lee Myung-bak administration wishes to achieve a more creditable record in its economic interactions with Pyongyang, it must begin by identifying and learning from the errors of its predecessors on their efforts at "economic engagement" of the DPRK. A clinical autopsy of the Sunshine approach to economic engagement of the North must begin by contrasting its claims and promises with its actual achievements. For a full decade, Sunshine theorists--in the Blue House and beyond--contended that the variant of "economic inducements" they preferred would accrue both security dividends and economic benefits. In fact it brought neither.

Consider the ledger on security. So far as we outsiders can divine, a decade of Sunshine-style economic cooperation with North Korea did absolutely nothing to alter Pyongyang's appetite for amassing an arsenal of nuclear weapons. At the beginning of this period, as we now know, North Korea was at work on its nuclear program covertly. More recently, it has been racing to produce nukes overtly. But the nuclear ambition continued throughout, apparently unabated. Now, at the end of Sunshine's inter-Korean economic experiment, South Korea has a nuclear neighbor with whom to share the peninsula.
 
Defenders and apologists of the Sunshine approach may counter that Pyongyang's nuclear gambits were aimed at (or provoked by) the United States, not the Republic of Korea. But any impartial analyst will have to recognize that the decade of Sunshine-style economic diplomacy has resulted in a change of North Korea's hostile posture toward the ROK of approximately--well, zero.

It may be necessary to spell out the obvious here: over the past decade, North Korea has not "built down" its offensive military forces menacing Seoul. It has not demobilized its WMD capabilities for devastating South Korean cities and civilian populations. To the contrary, so far as can be told, it has instead been augmenting these.

The North Korean regime has not altered the charter of the DPRK Korean Workers Party, whose preamble commits the North Korean government to the "revolutionary goals of national liberation and the people's democracy in the entire area of the country"--meaning the southern half of the peninsula. The decision not to alter the KWP charter, indeed, is all the more striking insofar as Kim Jong-il offhandedly announced to South Korean media executives visiting Pyongyang in 2000 that those words could be amended at any time.
 
After ten years of Sunshine economics, in fact, there was only one "South Korean" diplomatic mission in Pyongyang to be officially recognized and received by the North Korean government. This was the Anti-Imperialist National Defense Front, the make-believe resistance organization on North Korea's airwaves that insists the ROK is an occupied territory, suppressed by American bayonets and anxiously awaiting liberation by Kim Jong-il.

Even the seemingly non-ideological proposition that subventions and concessional economic diplomacy would gradually grant Seoul "leverage" in its dealings with Pyongyang now looks to be open to debate.

The flagship of Seoul's Sunshine economic initiatives in the North is, of course, the Gaeseong Industrial Complex, the heavily subsidized joint-venture area just north of the Demilitarized Zone. Yet as we now know, North Korean authorities will not hesitate to threaten the future of that venture when reasons of state so dictate.

Barely a month after President Lee Myung-bak's inauguration, Pyongyang expelled all South Korean officials from the Gaeseong Industrial Complex, with an intimation that more tough measures against the complex would be in store if President Lee did not seriously change his tune on North-South relations. To go by these particulars, it would seem that Pyongyang believes the edifice of "inter-Korean economic cooperation" provides Kim Jong-il with leverage over the South--not vice versa.

What about economic benefits, then? Since "inter-Korean economic cooperation" was always envisioned by the Sunshine theorists as a loss-leader--a worthy money-loser, but a money-loser nonetheless, ultimately underwritten by the South Korean taxpayer--the question of profitability is perhaps unfair to pose. But Sunshine economic diplomacy did promise to induce economic reform and to stimulate the transition to self-sustaining economic growth, for the North Korean system. Against the unforgiving mirror of actual results, however, both of these hopes have proved to be little more than daydreams.

With regard to the North Korean economy, it is important to distinguish between economic reform and economic change. There has been considerable economic change in North Korea over the past decade (including economic decay, a specific variant of change widely evident in the DPRK over the past several decades). There have also been signs of change in official DPRK economic policy: During the past decade, for example, Pyongyang promulgated the now-familiar July 2002 measures for what it officially terms "economic management improvement"; it has consented in overseas training for select students and officials in Western law, economics, and business practices; it has permitted cautious experiments with pragmatism at the margins of the economic system; it allowed a few delicate and euphemistic explorations of non-socialist economic ideas to be published in official economic journals, and so on. But nothing remotely resembling "economic reform" as this term is understood outside North Korea has yet been witnessed or attempted in the DPRK itself.

Remember: the July 2002 measures did little more than presage the de facto reintroduction of the DPRK won as a medium of exchange within the country: an arguable advance over the previous generation of juche economics' supply-by-requisition, to be sure, but not exactly a harbinger of a shift toward market relations (Stalin's USSR used domestic currency for consumer transactions, too).

On the other hand, during the Sunshine era of economic diplomacy, Pyongyang has proclaimed and promoted a number of policies or practices on their face inimical to any real-world conception of economic reform.

There is, to begin, Pyongyang's current policy centerpiece, "military-first politics," which was unveiled shortly after Sunshine economic diplomacy commenced. This doctrine, as officially elucidated, describes the country's defense industries as the economy's leading sector: the fulcrum for stimulating revival in agriculture and improvement in national living standards!

In tandem with military-first politics comes the continuing campaign against "ideological and cultural infiltration," whose noxious effects, in Pyongyang's official exegesis, are diagnosed as having destroyed Soviet socialism, and whose instruments for entering the DPRK are identified cultural exchanges, joint ventures, foreign investment and the like. North Korean leadership still unapologetically extols the ideal of North Korea as a "socialist fortress," and goes to great lengths to keep those parapets guarded: at this writing, in fact, the DPRK has yet even to activate its assigned internet country code (.kp) from ICANN, the global internet domain registration organization. North Korea's "socialist fortress" has been vigilantly guarded not only against international information, but also against international trade. Incomplete though they may be, analysts' estimates nevertheless suggest that North Korea's commercial exports and imports probably accounted for an even smaller share of the world's trade in goods and services in 2007 than in 1997--this despite the heavily subsidized nature of North Korea's international trade over this period with her two leading trade partners, China and South Korea.

To be sure, some "market-oriented learning" has come to North Korea over the past decade by official design--perhaps most notably, through technical training abroad, and the Gaeseong Industrial Complex at home. But there has been precious little of it, and this is also by official design. Moreover, the outside world has not exactly remained static over the past decade. If we were to compare economic policies and practices in North Korea with those in the rest of the world, the gap between the two would clearly loom larger today than it did a decade earlier. By this relative but highly meaningful metric, the DPRK economy appears actually to be less reformed today than at the onset of Sunshine-era economic diplomacy!

Finally, there is the indelicate issue of the North Korean economy's prospects for self-sustaining economic growth (a matter directly related, of course, to the regime's record with respect to economic reform). In the early years of the Sunshine era, official calculations by the ROK's Bank of Korea suggested that the North Korean economy had ended its terrifying post-Soviet nosedive, and had instead moved into a phase of economic upswing, marked by continuing year-on-year increases in the estimated size of North Korean GDP. At the time, some of us warned that the BOK's numbers on North Korean economic performance looked curious--and that the opaque method by which those figures were produced in any event prevented all outsiders from replicating (or verifying) the computations.

But even with the BOK's own inscrutable (perhaps overly optimistic) assessment techniques, the bad news about the North Korean economy could not be papered over indefinitely. Last year, the BOK reported that the North Korean GDP contracted in calendar year 2006. Since then, the bad news about the North Korean economic situation has become unavoidable even to the casual newspaper reader. News reports now indicate that North Korea is--once again--moving toward the brink of mass starvation. In the past several weeks, the United States and other governments have been urgently arranging for massive new flows of humanitarian food relief in the hope of preventing another deadly hunger crisis in that tormented land.
 
Far from having facilitated a shift to self-sustaining economic growth, then, a decade of Sunshine-style economic engagement has left the North Korean system right where it started: as an aid-dependent state-run shake-down operation, one which relies upon the kindness of strangers to feed its subjects even as the bosses of the operation generate their own preferred style of earnings through exporting threat and insecurity to the international community.

As South Korea's new president settles into office, it is clear that "inter-Korean economic co-operation" is very much on his mind. President Lee Myung-bak, indeed, has already unveiled his own Vision 3000 proposal, an ambitious new commitment to help to lift North Korean per capita income up to $3000 per year in a decade if Pyongyang completely abandons its nuclear quest. Given Seoul's troubled record of economic diplomacy with the North, what lessons and precepts might the Lee Myung-bak administration glean from the recent past?

As regards Vision 3000 specifically, it seems safe to say the proposal itself will remain a non-starter with the real existing government in North Korea--as we know it today. There is absolutely nothing (apart from wishful thinking) to suggest the Kim Jong-il regime would seriously contemplate the voluntary relinquishment its nuclear options for any reason--much less financial blandishments from a government it is doctrinally committed to destroy.

It is of course possible that a post-Kim Jong-il regime in the North might be tempted by Vision 3000--but it is also true that we do not know the date or the manner in which Kim Jong-il will join his father in eternity. Unless and until a new leadership group is in charge in Pyongyang, there seems little danger that the Lee Myung-bak administration will actually be taken up on its bold Vision 3000 offer.

If Vision 3000 is not in the cards for now, what more modest steps or approaches might be undertaken to improve the quality of "inter-Korean economic co-operation"?

Unfortunately, in the final analysis, the scope and scale for mutually beneficial inter-Korean economic relations today is determined in Pyongyang, not Seoul: and these possibilities pivot on the intentions and decisions of North Korean leadership. To make matters worse, the past decade of "inter-Korean economic co-operation" has taught, or reinforced, many bad habits on the part of the North Korean government. These bad habits must all be un-learned if genuine inter-Korean economic progress is to occur.

Here are three small but feasible suggestions for pointing North-South economic relations toward a better path:

1) Bring transparency to South Korea's economic interactions with the North. The ROK produces remarkably detailed and accurate statistics for its trade accounts with other countries. As a member of the OECD, furthermore, South Korea's international economic assistance data is implicitly measured against the standards of accuracy and openness established by the OECD's own Development Assistance Committee. But South Korea's own published official statistics on its economic dealings with the North are--let's be honest here--miserably turgid and often deliberately misleading. (We all know, for example, about the secret South Korean payments to Kim Jong-il for the historic 2000 Pyongyang summit, but just try to find those in the official ROK figures on "inter-Korea economic co-operation.")

The excuse for the low quality of South Korean official data on trade and aid for the North is that inter-Korean commercial transactions constitute domestic rather than international transactions--but that excuse should no longer be allowed to stand. In an otherwise information-rich society, South Korean citizens and taxpayers deserve much better; such degraded information only abets degraded policies.

2) Separate business from politics--for real, this time. "Separating business from politics" was a wonderful slogan from the Sunshine era, but unfortunately, it was never actually implemented then. Just the opposite: official ROK subsidies (and also official guarantees against loss) were regularly used to underwrite South Korean ventures with the North that could not be justified on a sound commercial basis alone.

In fairness, one must concede that the profit-insensitivity betrayed by South Korea's chaebol in their recent undertakings in the North do not exactly mark a shocking departure from the "privatize the profits, socialize the losses" mentality that has so often characterized these groups during South Korea's decades of economic ascent. But it is no kindness to those within North Korea who might actually wish to "learn from the market" to distort the scant few "market signals" to which their economy is exposed. Nor is subsidized trade a likely path to a vibrant and sustainable inter-Korean commerce: the example of cross-Strait trade between China and Taiwan (which was never subsidized) shows as much.

If Seoul wishes to encourage "learning by doing" by North Koreans, it should pay for technical assistance for DPRK students abroad. This will be much cheaper than indefinitely floating an economically unviable Gaeseong Industrial Complex.

3) Insist on international quality standards for humanitarian aid to the North. Over the foreseeable future, there will be a realistic and entirely unromantic case for certain types of foreign aid for North Korea, including, unfortunately, humanitarian aid. If and when South Korea does offer humanitarian aid to the North, however, Seoul should do its utmost to see that these resources feed the needy in North Korea, rather than nourishing the regime that afflicts them. Over the past decade, sad to say, South Korean governments have played the dangerous and disturbing role in offering see-no-evil "humanitarian" aid to the North that at times actually perverted the quality and the spirit of the relief effort.

As the only legitimately elected government on the Korean Peninsula for the time being, Seoul may perhaps today bear a special responsibility for advocating high-quality humanitarian aid for desperate compatriots--not only through its own programs, but also by monitoring the quality of "humanitarian" aid flows to North Korea from the rest of the international community.

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