The stand-off over North Korea's nuclear-weapons program continues to defy easy resolution. And though the central issues in the ongoing North Korean nuclear drama are obviously strategic and political, there is also an economic aspect to the problem. North Korea's autarkic economy today seems utterly incapable of using peaceful international commerce to generate the revenues necessary to sustain the Democratic People's Republic of Korea. (Last year North Korea probably earned less than $50 per capita through normal nonmilitary trade--a shockingly low level for a modern industrial society.) Given the profound and continuing failure of its civilian economy, Pyongyang relies heavily upon international military menace to extort the aid it needs from abroad. Under such circumstances, North Korea's extraordinarily belligerent international stance, far from being irrational, may instead represent a well thought-out approach to regime survival.
Given this, we might conclude that U.S. pressure--or for that matter, any other sort of outside pressure-cannot succeed in forcing Pyongyang's leaders to alter their current course because they do not have any other viable economic option. However, this may not be the case and alternative solutions may yet exist.
Economically speaking, North Korea's situation is far from hopeless. Furthermore, from a political standpoint, it is possible to imagine a deal that meets the minimum basic demands of all sides, i.e., one that ends North Korean military threats but allows for continued Communist rule in the D.P.R.K. One proposal that the North might be induced to take as a way out of the current impasse is the combination of "ordinary" Stalinist economic policy and "defense sufficiency."
North Korea's recent dismal economic performance cannot be explained in terms of the generic inefficiencies of communist economies. Rather it must be understood as the consequence of Pyongyang's particular and peculiar interpretation of "socialism with Korean characteristics," in which hypermilitarization of the economy figures centrally.
Even though the regime's current top slogan is "military-first politics," the astonishingly high priority placed on the defense sector is not new, and it is clear Pyongyang has been running North Korean society and economy on a war footing since at least the start of the 1970s. The D.P.R.K.'s own data suggest the government was fielding a force of more than 1.2 million men in the late 1980s--a mobilization level comparable to that of the U.S. in 1943. There is no sign that military mobilization has declined since then.
North Korea's economy is the only one in East Asia to have declined substantially since the end of the Cold War. The most vivid sign of that failure was the 1990s famine-the only famine ever to be visited upon a literate, urbanized population in peacetime. North Korea's economic performance has also been miserable in terms of commercial exports, one of the few economic indicators that can be traced with relative confidence. Between 1990 and 2003, reported world exports of merchandise more than doubled, but the D.P.R.K.'s commercial merchandise exports dropped by an estimated 50%. North Korea's confrontational external posture, in short, has coincided with declining economic self-sufficiency.
The D.P.R.K. has not always been an economic basket case. In fact, the North's per capita exports were higher than South Korea's until about 1970, and per capita gross national product in the two Koreas may have been equal as late as 1975. Between 1975 and 2003, however, South Korea's per capita output nearly quintupled, and its volume of merchandise exports rose by a factor of 16. By contrast, North Korea's inflation-adjusted commercial merchandise exports actually declined between 1975 and 2003, and its per capita level of real commercial merchandise exports may have fallen by nearly two-thirds.
These divergent results from a divided Korea cannot be attributed to differences in culture, history or ethnic background for the two populations in question-the very same people inhabit both sides of the demilitarized zone. One immediate suggestion might be that North Korea was subject to communist central economic planning, and central economic planning always fails. Such an answer might seem plausible in the aftermath of the collapse of the Soviet empire--but it is contradicted by both theory and fact.
In terms of theory, Nobel economics laureate Friedrich Hayek and his mentor Ludwig von Mises demonstrated in the 1920s and '30s that central planning systems suffered from an irresolvable "socialist calculation problem"-an inability to determine scarcity relationships for allocating resources efficiently. But the Austrian school's insight merely consigned centrally planned systems to mounting inefficiencies and unnecessarily heightened costs, not to sharp and prolonged economic decline.
From the empirical standpoint, estimates by eminent economic historians such as Angus Maddison suggest that the Soviet bloc economies and Mao-era China did in fact experience considerable and long-term material advance. Even if their "total factor productivity" suffered, command mobilization and technical innovation forced output up for many successive decades.
North Korea's conspicuous economic failure, therefore, can only be explained as a consequence of "socialism with Korean characteristics" as it evolved in the D.P.R.K. over the past generation-what North Korean officialdom terms "our own style of socialism." Aside from hypermilitarization, there are several other ways in which North Korea has wrecked its economy by going to extremes unheard of in other communist states.
The state has ruthlessly suppressed the consumer sector, impairing the development of human capital and destroying incentives for work. Pyongyang has largely removed money from the economy, meaning that many transactions have to be accomplished using barter (a situation still true despite the limited reintroduction of money via the consumer sector through the so-called "July 2002 reforms"). There is little financial intermediation, and indeed the political system is hostile to entrepreneurial activity, even by state-owned companies. North Korea has defiantly refused to pay its international debts since the 1970s, meaning it is unable to get credit, and it shuns trade with countries it regards as imperialist.
This imposing array of destructive policies and practices makes it depressingly clear why North Korea has been stuck in prolonged and severe economic decline. But it also offers a ray of hope: Reversing course could bring huge benefits. In fact, merely reverting to a range of economic policies such as those pursued by the Soviet Union under Josef Stalin--i.e., classic central economic planning--could potentially bring about improvements that would qualify in North Korea today as a veritable economic renaissance.
Stalinism would also entail cutting back military spending and resources to those needed to maintain a sufficient deterrent against an attack by South Korean and U.S. forces. North Korean leaders might worry that demobilization and reduction of the constant barrage of propaganda about impending attack might make it harder to maintain loyalty to the regime. But just as for Stalin after World War II, this would hardly look to be an insurmountable problem-and North Korea today is if anything an even more "perfect" police state than Stalin's Soviet Union.
Such a "bold switchover" in security policies and practices would enhance the productive potential, trade performance, and financial stability of the North Korean state. To begin, it would permit an enormous reallocation of resources, both manpower and capital, from military purposes to potentially productive civilian enterprises. Given the scale of this possible redirection, there would be a significant supply-side stimulus. Furthermore, this would generate pressures that inevitably militate for relaxation of the other constraints of perverse policies and practices currently shackling the D.P.R.K. economy.
Most important of these would be the end of North Korea's international military extortion. Without the instruments of international military menace that Pyongyang has utilized so assiduously over the past decade and a half to extract aid from the international community, Pyongyang would be obliged to move toward a more internationally open economic orientation, with all that such a change would imply.
Naturally, there would be a lag between the switchover and the economic benefits it would bring. In economic terms, that period would be the time of maximum vulnerability for the domestic economy, and politically the time of maximum pressure on the government. But these pressures could be mitigated by new inflows of external aid.
In considering the magnitude of the international aid needed to support a "bold switchover" of security policy of the D.P.R.K., the appropriate metric is arguably the amount of official aid and public loans necessary to maintain current North Korean levels of imports from the outside world. That's because, despite its ideology of self-sufficiency, the North Korean economy depends on imports for many of its critical needs.
Looking at "mirror statistics" derived from reports by North Korea's trade partners, the absolute estimated level of North Korean imports varied between about $1.2 and $3 billion a year from 1989 to 2003. The fluctuation of estimated imports tracks quite closely what we know of the D.P.R.K.'s state of economic well-being during that period.
Two distinct types of international government funding would be available: political aid and development aid. The former would be contingent upon a credible change in security policy; the latter would be conditioned upon changes and reforms in North Korean economic policy.
Which governments would provide aid to Pyongyang after a genuine security switchover, and how much would they be willing to give? In terms of political aid, South Korea could easily approve an additional $2 billion a year, perhaps even more. Japan might give as much as $1 billion a year over 10 years, the kind of package that was reportedly under consideration in 2000, the last time normalization talks between Japan and North Korea were seriously bruited. With a new and credible leadership in Pyongyang, even the U.S. might offer a few hundred million dollars a year.
Development aid, on the other hand, would depend upon North Korean willingness to meet a variety of conditions. Aid from multilateral lenders such as the World Bank and Asian Development Bank is contingent upon gaining membership of those organizations, which in turn is dependent upon being a member of the International Monetary Fund. While these institutions would have to examine the credibility of the particular programs and projects proposed, it is certainly possible that the North could secure hundreds of millions of dollars a year or more in development aid.
That means Pyongyang could plausibly expect an annual aid inflow in the range of $4 billion or more in the initial years. Even if some of these resources merely replace current illicit North Korean earnings (i.e. drug trafficking, ballistic missile sales, etc.), overall import levels could still be increased by perhaps $3 billion a year, or double current estimated levels.
These numbers imply that shortages of economic resources would not be the limiting constraint under such a future regime. Quite the contrary-the North Korean economy could expect to enjoy a higher level of imports, on both an absolute and a per capita basis, than ever before.
Greater inflows of aid, to say nothing of private-sector investment, could be expected if the regime embarked upon the path of "reform socialism" trod by China and Vietnam. But even if the leadership did not want to attempt this, North Korea's economy would be in a better position to grow and develop than at any time since the 1960s.
So North Korea might well be able develop its economy, after a fashion, while retaining its closed, highly controlled system. It could maintain an independent socialist polity, committed to central economic planning and dictatorship of the proletariat and to a continuing partition of the Korean peninsula. Its government could remain Leninist, and leave Western criticisms concerning human-rights abuses unaddressed. It is even theoretically possible to imagine this change in regime behavior without a concomitant change in regime personnel, unlikely as that may be.
Does this analysis have a bearing on the resolution of the nuclear crisis? If North Korean leadership insists that its quest to amass a nuclear arsenal is a vital national interest, then no, for governments do not trade away their vital security interests. If this analysis is correct, however, there may be considerably more scope for applying pressure to Pyongyang today than Seoul, Beijing, Tokyo, and even Washington appreciate-for Pyongyang has viable, and from its standpoint relatively palatable, alternatives to its current economic course.
The international community's perennial fear with Pyongyang is that D.P.R.K. leadership will feel itself backed into a corner, and then lash out violently. Naturally, the regime will resist change. The rent-seekers in Pyongyang's Royal Court, North Korea's security services and the D.P.R.K. military will struggle to maintain the special corrupt arrangements that presently underwrite their own personal enrichment. Nevertheless, a strong argument can be made to North Korea's leaders that "ordinary" Stalinism offers them the best economic chance of regime survival. All that we are lacking is the international skill, and fortitude, to make that case persuasively.
Nicholas Eberstadt holds the Henry Wendt Chair in Political Economy at AEI.
