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North Korea’s Economic Futures: Internal and External Dimensions

November 2005

Wonhyuk Lim

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Contents

Introduction: Collapse of Collapse Scenarios?

Crisis and Response: North Korea’s Economic Reform in Context Economic Shocks and Initial Responses Policy Dilemmas and Challenges Ideological and Institutional Groundwork for Economic Reform Price and Incentive Reform, Decentralization, and Marketization Economic Opening

Alternative Futures for North Korea Driver I: Economic Reform Driver II: External Cooperation Prospective Outcomes

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North Korea: Stitch by stitch to a different world Jul 25th 2002 | PYONGYANG From The Economist print edition

Three Images of North Korea

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Regional Context: Two Northeast Asias at Night

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Can Northeast Asia be more like Europe?

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North Korea’s Economic CrisisEconomic Trends in North Korea, 1990~2000

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

GDP Trade Volume Oil Imports Fertilizer Use

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Crisis and Response: North Korea’s Economic Reform in Context

Economic Shocks and Initial Responses External Shocks, Economic Breakdown, and Famine Political and Security Crisis Tentative Improvisations: Limited Economic Opening and Condoning

of Informal Economic Activities Policy Dilemmas and Challenges

Financial Hollowing Out of the State: Growth of the Informal Sector and Increasing Burden of Public Subsidies (Arbitrage Opportunities)

Crack Down, Accommodate, or Throw in the Towel? Ideological and Political Justification for Economic Change Balance Between the Formal Sector and the Informal Sector Management of Risks from Economic Opening and Development

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Ideological and Institutional Groundwork for Economic Reform

Vision: Strong and Prosperous Nation Economy-First Policy Beneath Military-First Politics

Principles: Pragmatic Socialism and New Thinking No More Freebies: “Those who don’t work shouldn’t eat.” No More Average-ism: Performance-Based Reward as

Socialist Distribution Principle Expansive Definition: “Improving-Perfecting Socialism” Implementation of Changes without Rejection of the Past:

“Times have changed…” Institutional and Generational Changes

Weakening of the Party and Strengthening of the Bureaucracy Introduction / Amendment of Major Economic Laws

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Transformation and Rehabilitation of the Formal Sector

Reduction of Double-Distortions in Prices Relative Prices Between Goods Relative Prices Between Formal and Informal Sectors

Increase in, and Differentiation of, Wages Transition from de facto Rationing to Monetization Performance-Based Incentives

Decentralization of Economic Decision-Making Increase in Managerial Autonomy Increasing Reliance on Market Transactions

“Dual-Track Strategy”: Between the Plan and Market Accommodation of Markets in Return for Taxation

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Economic Opening and Geopolitical Considerations

Special Economic Zones and FDI Limits of Internal Resource Mobilization Learning Process: Rajin-Sonbong, Shinuiju, and Kaesong

Significance of Inter-Korean Exchanges North’s Transformation: earn money the old-fashioned way; learn

market principles; facilitate and consolidate internal reform. South’s Industrial Restructuring: provide an outlet for labor-intensiv

e SMEs; embark on infrastructure development projects in preparation for reunification.

Counterbalance Against China’s increasing influence in the North

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Composition of North Korea’s Exports

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226 234

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15.53.4 4.5 3.6 2.8 7.2

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152176

272289

258

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1995 2000 2001 2002 2003 2004

Year

$ m

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China

Japan

Russia

South Korea

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Composition of North Korea’s Imports

486451

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467

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255

207

249

135

92 8968

4364 77

116

206

64

272

227

370

435 439

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1995 2000 2001 2002 2003 2004

Year

$ m

il.

China

Japan

Russia

South Korea

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North Korea’s Alternative Futures

Key Drivers: Proximate Causes of Change Economic Reform External Cooperation

Prototypical Scenarios Outward-Oriented Developmental Dictatorship: South

Korea, China, and Vietnam Neither a Rogue Nor a Tiger: East Germany? Half Full, Half Empty: North Korea Today Arduous March: North Korea in the Mid-1990s More Extreme Outcomes with Far Lower Probabilities

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Driver I: Economic Reform Major Players

Kim Jong Il, Ideologues, Military, Technocrats Domestic and External Players Outside the Plan “Real World”: Feedback Mechanism

Motives Monopoly on Power and Its Benefits Ideological Inclinations vs. Economic Realities Elite and Popular Support for Increased Exchanges with th

e Outside World: Reform without Losers? Concern with the Impact of Economic Liberalization on Re

gime Stability: Reform with a Satiation Point?

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Driver II: External Cooperation

North Korea: Reluctant to Accept CVID Trade in the nuclear program for “security assurances.” Have cake and eat it, too.

United States: Reluctant to Accept CVIN Moral and Emotional Factors: Get rid of a rogue state. Strategic Considerations: Let it be a rogue state.

Regional Players: Keeping North Korea Afloat Geopolitical Considerations: “We can’t lose North Korea.”

(cf. controversy over Koguryo / Korea at the end of 19c.) Prohibitive Costs of War: No Credible Surgical Strike

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Outlook: Normative vs. Positive Dimensions

Solution: Non-Nuclear Future > Nuclear Future Security Assurances / Normalization of Relations Nuclear Dismantlement International Assistance for NK’s Development

Gridlock: “Non-Credible” Threats from Both Sides NK threat to demonstrate or transfer nuclear weapons:

backlash from China and SK US threat to impose sanctions: little support from othe

r parties without prior good-faith negotiation

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Half Full, Half EmptyGDP Growth Rate 2-3%

 - North Korea proceeds with major reform. - Security issues remain unresolved, but North Korea is actively engaged with its neighbors in Northeast Asia despite slow improvement in its bilateral relations with the United States. - A limited amount of economic assistance is available due to remaining economic restrictions.

Outward-Oriented Developmental DictatorshipGDP Growth Rate > 7%

  - North Korea proceeds with fundamental reform. - Security issues are resolved in a comprehensive manner (including energy assistance), and North Korea normalizes relations with the United States and Japan.  - Large-scale economic assistance is available as well as FDI on a commercial basis.

Neither a Rogue Nor a Tiger GDP Growth Rate 4-5%

  - North Korea pursues limited reform - Security issues are resolved. - A significant amount of economic assistance is available, but due to limited reform, private-sector capital inflows are limited.

Arduous MarchGDP Growth Rate < 1%

  - North Korea pursues little reform. - Security issues remain unresolved, and North Korea is largely isolated from the outside world. - Only a minimum amount of economic assistance is available.

ExternalCooperation

         

 

North Korea’s Alternative Futures

Economic Reform