Eberstadt's presentation slides are available in Adobe Acrobat PDF format.

Eberstadt's related paper

Nicholas Eberstadt was introduced by Hon. Park Kun-woo, visiting professor at the Graduate School of Pan-Pacific Studies at Kyung Hee University in Yongin, Korea. Ambassador Park is the former vice minister for foreign affairs, and was the chief Korean delegate to the four party talks with North Korea beginning in 1998. His distinguished career with the Foreign Ministry included serving as ambassador of the Republic of Korea to the United States and the Organization of American States (1995-1998), Canada (1991-1994), and Colombia (1985-1991). After retiring from the foreign service, he became dean of the Graduate School of NGO Studies at Kyung Hee University from 2000-2001.

Thank you very much, Mr. Ambassador. It's a pleasure to be here today, not least because some of my teachers are here in the room. I started trying to learn about North Korea more than two decades ago, an endeavor that is still a work in progress. I'd be remiss if I didn't mention the kindness of David Steinberg, Sakong Il, and Bill Newcomb, who helped me start out on those studies. Of course, they're not responsible for anything that happened after that.

Yesterday some people mentioned the phrase "Grand Bargain." I'm glad to see Ashton Carter from Harvard here, because some of Ash's colleagues were involved in proposals for an earlier grand bargain, with Gorbachev's Soviet Union in the late 1980s. The idea was that international aid, to the extent of maybe $40 or $50 billion, could be mobilized as a transfer to the Gorbachev government to encourage it to engage in market reform and to stand down, some of its military menace. In the event, of course, the Soviet system collapsed, the military was demobilized, the market was privatized, and we didn't have to give away that money. That "grand bargain" ended up an even grander bargain than initially imagined--which in a roundabout sort of way brings me to the question of North Korean collapse.

For some reason, there are people in this room who seem to associate me with the notion that North Korea might be a state on the verge of collapse. I can't imagine why anybody would have that sort of idea! It might have started with an op-ed piece in 1990, called "The Coming Collapse of North Korea," and there might be a few other little things since then. North Korea obviously has not collapsed. It is here with us today, alive if not well, and that means I have some explaining to do.

If one believes that the odds of DPRK survival are low--and have been low for some time--how does one then explain the survival and continuation of the DPRK? And further, how does one look at the future prospects for this system? I try to go into all this in the paper I'm presenting.

The first section of this paper goes through what I call the epistemology of state collapse: how would you know in advance that collapse is nigh? I argue that for all of the quantitative examinations we can make, anticipating a big change in a state or system is more of a matter of art than of science.

There are different sorts of mistakes that can be made in predicting in big political changes. One is to miss the big changes. As Anders Aslund mentioned this morning, that error is more or less exemplified by the history of Sovietology: missing the big changes in the works. Another type of mistake that can be made is predicting incorrectly big changes. That certainly is the case in some of the revolutions that didn't occur: South Africa, perhaps; Spain is another--post-Franco Spain is another example; perhaps the DPRK today. But that doesn't exhaust the range of analytical mistakes I think one can make, and one of the mistakes that I dwell upon a little bit in this paper is the mistake of missing, or not understanding, an imminent but averted collapse.

There are real cases--these are not simply hypothetical--where systems or states come to the verge of collapse and have been saved at the last moment. The example that I offer is an Ottoman Empire example: the case of Gallipoli. Gallipoli is remembered today from the Peter Weir movie and a little bit of history--Churchill's being sacked, and his lifelong agony about that. It is remembered as an allied British Commonwealth disaster. What was not known to the allies until after the end of the war was that the Ottomans and their German advisers thought they were defeated--they thought the game was over. They had no means of defending Constantinople from this naval invasion. They were out of ammunition. They had moved the state archives. They had moved the money out of the state treasury. Revolt was starting in the city. And then, to the delight and surprise of the Ottoman government, for some inexplicable reason, the Brits halted. The Turks and Germans reinforced, and Gallipoli turned into a disaster for the Brits. It is an interesting tale to bear in mind.

Now let's talk about the DPRK. Of course it is not self evident that the Gallipoli analogy holds here. I do want to talk about the prospect of DPRK state collapse--but I do not want to talk about the prospect of a coup, or a putsch, at the top. I have no way of knowing about such movement at the top of the system. Nor do I wish to discuss the prospects for a revolt from the bottom. If that ever happens, people on the outside will be the last to know, not the first. What I want to focus upon is a particular type of possible systemic collapse, namely economic collapse.

This is a phrase, of course, which enjoys broad and often fuzzy usage. I've tried to use it in a very specific way. Jack Hirshleifer, of RAND and UCLA, talks about economic collapse in terms of the breakdown of the division of labor in a system--not hunger, not a slump, not a depression, not a dislocation--a breakdown in the division of labor within a system or an economy. In a system like the DPRK, the most pertinent way of framing that would be to say, "a breakdown of the ordinary mechanisms through which one can trade labor for food." We will frame the concept of "DPRK economic collapse" in those terms.

Let me show you some quantitative data that bear on the DPRK's risk of economic collapse and how that risk has changed. These are mirror statistics: reconstructed trends of DPRK imports as reported by its trading partners. They are hardly perfect, but they provide a first approximation. You'll see that from 1990 to 1994 DPRK imports dropped very substantially: dropped by about half. You'll also recall that the period from 1994 to the beginning of 1998 was a period described in DPRK terminology as the "arduous march." It was also the time of mass famine. Estimates of the death toll during the famine years range from Pyongyang's asserted 250,000 to maybe a million, or maybe even more--not a trivial number in humanitarian terms, nor is it a trivial number for a country of 20 million people.

Now look what happened to DPRK imports after 1998. (This is the period when Kim Jong-Il formally acceded to the highest living post of state.) Imports seem roughly to have doubled by 2002. The 2002 level is not a terribly high level, but in comparison to the recent past, it's not low either. It is as high as anything in the post-Soviet period.

How was this financed? Well, trying to reconstruct merchandise exports presents something like this: one sees that there is an increase in DPRK legitimate, or admitted, commercial exports since 1998, but really not terribly much of one. There is a great big merchandise trade deficit there. The unexplained financing of imports from abroad has risen from about $500 or $600 million a year in the starvation years of the "arduous march" to about $1.2 billion now--not a lot of money in the scale of the modern world economy, but the number has more than doubled. For the DPRK, this is not a trivial change: the starvation era seems to have ended, although I'll talk about that in a moment.

So what happened? The presumption is that China is the great patron for the DPRK. In the early post-Soviet period, if one looks at the balance of trade deficit with China as being a sort of implicit proxy for genuine aid, China was certainly the major patron of those initial Kim Jong-Il years.

But if we take China out of our trade-deficit tableau, we'll see something interesting. If you exclude China from the DPRK's balance of trade deficit, you'll see that the unexplained surfeit of imports over exports dropped very substantially after the end of the Soviet Union. During the years of starvation, 1994-1997, it's terribly low. Then, like a taepodong rocket, it goes right up after 1997 and continues to rise through to the end of these mirror statistics (which always lag after reality; the year 2002 is as far as I've been able to do them).

How do we explain this surge in unidentified non-China support for the North Korean system? I can't break it down for you. Some of it is drug money. Some of it is counterfeiting. Some comes from the "nuclear homework club," I imagine. But an awful lot of it is "engagement policy." That is to say: aid from South Korea, from Japan, from the United States, from the EU--from the Western world. We don't know exactly how much has been given, because the prosecutors in South Korea are still at work. We've learned bits and pieces about additional illegal transfers of ROK taxpayer money to the North, and I imagine we'll learn more in the future. But suffice it to say that this upward trend in Figure 4 since 1997 is explained in the main by Western "engagement policy"--and the upward trend is inversely related to the risk of North Korean economic collapse.

All this may sound surprising, considering the oppositional roles in the international system held by Washington and Pyongyang. But we have to understand that in the last decade the United States has become a major patron and financier of the survival of the North Korean state. I'm borrowing Mark Manyin's work to underscore this point. U.S. taxpayer support for the North Korean state from 1995 to the present amounts to a bit over $1 billion. Interestingly enough, in 2001 and 2002, the first two years of the big bad Bush administration, U.S. taxpayers spent $350 million on oil and food aid for the DPRK.

Looking a little more closely at the ratio of aid to exports, the DPRK today seems to be the most heavily aid-dependent economy, out of these many strategic partners and interesting states, in the U.S. bilateral policy portfolio in the five years of aid, from 1996 through 2000. The reported ratio of aid 1996-2000 to exports 2000 was 35 percent for Jordan; for Israel, 34 percent; for Egypt, 67 percent; for Haiti, 96 percent. For the DPRK that radio was 101 percent.

It is also interesting to compare this "aid-dependence" for the modern-day DPRK state to some earlier historical cases, such as U.S. support for Taiwan and the ROK during the Cold War. DPRK aid dependence today is not anywhere near being in the same league as the U.S. effort to help the South Korean state survive in the late 1950s and early 1960s. It's not even in the same league as the U.S. financing of Taiwan's survival in the late 1950s and early 1960s. But we have to remember that today the United States is no longer the only aid game in town. If one were to add in South Korean and Japanese and EU and other aid to the DPRK, we'd be getting to a level not quite as substantial as Taiwan's old circumstance, but not that different. Inflows of aid to the DPRK, in relation to the state's own export capacities, would look something like the international aid effort to promote the survival of Taiwan in the late 1950s.

To repeat: these calculations cast no light on the prospect for political change or political coups in the DPRK, and they certainly don't tell us why the police system has kept intact there. But they do help us to understand how the system has avoided a strictly-defined economic collapse.

Today we tend to think of the DPRK as an economic basket-case--and that it is. But North Korea was not always the poorest state on the Korean peninsula, and it was not always the state with the worst export capability on the Korean peninsula. One only has to go back as far as 1980 to see per capita exports of the DPRK roughly in league with Turkey, and the ratio of exports to imports, which are now grossly imbalanced for the DPRK, a bit more in line with South Korea's. Things had already started going downhill by 1990, when the Soviet Union was still North Korea's major export market, and now, in the year 2000, we're looking at a DPRK whose export profile more closely resembles Niger than Turkey.

Why? I offer two reasons in the paper, both bearing on calculations of state survival. The first is the slogan, "ideological and cultural infiltration," which is oft-discussed in DPRK media and statements. Briefly said, "ideological and cultural infiltration" brought down the Socialist systems of Eastern Europe and the Soviet Union, according to the DPRK's official rendition of that tragedy. And exactly what is "ideological and cultural infiltration"? Well, it includes what Pyongyang calls "economic cooperation": economic interaction and economic integration. So it is perhaps no coincidence that the absolute total of exports that the DPRK has managed to sell in "capitalist" countries has stayed more or less flat, from 1980 to 1990 to 2000, despite the obvious exigency of finding new markets after the Soviet collapse and despite the vast and growing markets that were available in these capitalist countries for generating export revenue. The failure to export is not totally a failure. It's partly a success--a successful avoidance of "ideological and cultural infiltration."

The other aspect of current calculations has to do with the "military-first politics" that are currently at the forefront of the kangsong taeguk movement, the "strong and prosperous state" movement, for the DPRK. Let me just read to you, if I might, one little paragraph trying to explain what military-first politics is all about. This is not me. This is Nodong Shinmun.

"A country's development and the placement of importance on the military are linked as one. Once we lay the foundations for a powerful, self-sustaining national defense industry, we will be able to rejuvenate all economic fields, to include light industry and agriculture, and enhance the quality of people's lives."

Ladies and gentlemen, let us dwell for just a second on the phrase, "a powerful, self-sustaining national defense industry." When have you ever heard of a defense industry that is "self-sustaining"? Yet they believe they can have one in North Korea, because North Korea's defense industry is made to generate revenues for the state through international military extortion. It's that simple.

Given where the DPRK is now, with a situation bounded on one side by an allergy to export-oriented growth, and on the other side by the precarious calculations of international military extortion, can we see a way to achieve a more stable survival path for the DPRK state? To many of us, the most obvious approach would be reform and opening. We've talked about that already at this conference. Many of us here, in fact, have already written a little bit about the significance of the July 2002 reforms. It is indeed significant that national leadership calls these "reforms," although as far as I can tell it hasn't yet dared to write that on paper. Talk of reform has usually been with foreigners or overseas, rather than in Nodong Shinmun, or Kyongje Yongu, or any of the other doctrinal publications for the DPRK. But that's okay--it is similar to the way reform started in China or Vietnam.

What are the July 2002 reforms? We can obviously debate this. But I think there's maybe a little bit less there than meets the eye. As far as I can tell, what the 2002 reforms really did was to remonetize a rather small portion of the economy, i.e. the consumer sector, in a largely demonetized economy--an economy which in fact was as demonetized as anything within living memory, shy of Khmer Rouge Cambodia. Remonitizing a limited portion of the economy is to be welcomed. It improves the quality of the consumer sector.

But it is important to also understand what such a limited remonetization does not do. It does not necessarily lead us towards market reform. If one were simply trying to reimplement orderly socialist planning, one would also have to remonetize the national economic system. Professor Kimura Mitsuhiko coined a wonderful phrase, the DPRK as a "planned economy without planning," that probably describes the post-1993 situation. Certainly, there have been no long-range plans offered since the miserable completion of the 1993 plan.

Furthermore, remonetization of a limited portion of the economy in itself doesn't necessarily lead to economic upturn. The sorts of supply responses that we'd need to see for that would depend upon a more fundamental reallocation of factors of production in the economy, and not to put too fine a point on that, we haven't seen any of this in North Korea yet. How do I know we haven't seen a big supply response? Well, I can cite some evidence. To begin, the black market value of the DPRK won has plunged from the July 2002 level of 152-153 to the dollar to, what now, 1000, 2000, to the dollar? This is not what one would expect if one were seeing a strong supply response from the domestic economy. (We've also seen this contrivance of the People's Life Bonds, which Mark mentioned yesterday, which soak up wages for people and payments for enterprises.) And just this week, the World Food Program warned that North Korea would slump back into mass hunger if new food aid shipments weren't approved. That's not exactly the srot of "supply response" I meant…

Will we see a movement to a China-style or Vietnam-style export orientation? We'll have to see rather more in the way of systemic changes in the DPRK before we can begin to imagine that. I mention three things in my paper that we should be on the lookout for, if we think something like this may be underway.

The first, of course, is a real economic opening itself, and I describe the sorts of blinker lights that we might see if there were a move towards economic opening in the DPRK.

But an economic opening per se isn't enough, because the DPRK, as was mentioned this morning, is a very different system from the real existing economies of Vietnam or China (or the way they were back at Doi Moi or in December of 1978). One of the big differences is the military. With the huge military of the DPRK, there would have to be an enormous demobilization of the conventional military--and if the DPRK is going to move to something other than military extortion to make its living, there would probably also have to be some sort of a settlement on the question of weapons of mass destruction.

But there can't be a settlement on the WMD question, and there can't be a demobilization of the DPRK military, until and unless the DPRK normalizes relations with South Korea. Unless and until the DPRK recognizes and accepts the right of the South Korean state to survive on that peninsula, these other things, cannot happen. If there is a genuine move towards accepting the legitimacy of the South Korean state, I don't think it will be hidden in the thickets. We'll know it when we see it.

Nicholas Eberstadt is the Henry Wendt Scholar at AEI.