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North Korean economic reforms a non-starter
By Bruce Klingner

Debate over the extent or even the existence of North Korean economic reform has raged among analysts and policymakers, with conclusions often being drawn along ideological lines. Those that advocate increased engagement with Pyongyang point to signs of meaningful changes in North Korean rhetoric and actions that reflect the initial steps in a strategic shift from a socialist economy toward implementing a "Chinese-style" market system. Conversely, those who espouse isolation of the North Korean regime dismiss any indications of change in the reclusive country.

The reality is that waiting for meaningful economic reform that improves life in North Korea is like "waiting for Godot".

Changes, but for what purpose?
North Korean leader Kim Jong-il has, in fact, implemented economic-liberalization measures that, in the case of the 2002 reforms, were surprising in their scope. However, as was the case with Soviet president Mikhail Gorbachev's far more extensive and widely hailed perestroika (restructuring) program, the changes were designed to maintain Kim Jong-il's absolute control over the citizenry and do not reflect a change to the character or policies of North Korean regime.

Political origins of North Korean economic reform
In the mid-1990s, Kim realized he could not address the economic devastation of his country, including the deaths of a significant portion of the population from starvation and starvation-related diseases, with his own resources. Faced with a new paradigm after the collapse of the Soviet Union and the increasing parsimony of his ally China, Kim assessed that the only potential sources of aid in sufficient amount to stem the tide were South Korea, Japan and the United States. Pyongyang first appealed for economic aid, publicly overplaying the extent of the impact of natural disasters on the country's harvests, and the outside world responded, to such a degree that North Korea became the largest recipient of US aid in Asia.

Despite the misinterpretation by many analysts, Kim Il-sung's policy of juche (self-reliance) had never meant total isolation from the world and North Korea had, of course, received massive aid from China and the Soviet Union for decades.

By the late 1990s, Kim Jong-il had decided that economic aid was insufficient and it was necessary to acquire the means for economic development to reverse North Korea's rapidly worsening economy. Foreign nations, however, balked at providing large-scale development largess because of suspicions born of North Korea's longtime hostility toward its neighbors. Kim, therefore, in 1999 began a charm offensive of engaging the outside world to alter other nations' perceptions of North Korea. Kim's policy worked, as a lengthening list of nations began to improve and then formalize diplomatic relations. While those nations provided some benefits, the big three (South Korea, Japan and the United States) remained the only means for large-scale advancement.

As a follow-on step, Kim initiated his "coming-out party" of summit meetings with the presidents of China, Russia and, most dramatically, South Korea. The euphoria accompanying the inter-Korean summit led to comparisons to the fall of the Berlin Wall, and some believed unification was imminent. The emotional reunions of families separated since the Korean War, Hyundai's tourist venture to Mount Kumgang in the North, and the dramatic march into the 2000 Sydney Olympics by a unified Korea team under a symbolic single flag, all appeared to provide tangible signs of improving inter-Korean relations.

Yet beneath the surface there were grounds for continued pessimism. Revelations that South Korea "bought" the summit with a payment of US$500 million tarnished then-president Kim Dae-jung's greatest achievement, along with his Nobel Peace Prize. Kim Jong-il to this day has yet to undertake the reciprocal visit to the South promised in the summit declaration. Even the much-vaunted Olympic event required a secret payment from the South, along with Seoul agreeing to purchase the North's uniforms and limiting the number of South Korean marchers to the size of the smaller North Korean contingent, leaving several hundred angry members of the South Korean team fuming outside the stadium.

North Korea's continued belligerence
International hopes for change in the Hermit Kingdom dimmed as Pyongyang maintained its traditional intransigence in negotiations, bellicose military threats, and resistance to economic reform. Kim Jong-il's trips to China, including a highly publicized one to Shanghai where he toured Western-style factories, were interpreted by many as clues of his growing fascination and acceptance of economic reform. Yet despite repeated entreaties from the Chinese leadership, few significant economic changes were implemented in North Korea.

Kim's complimentary comments on China's reforms, a significant change from previous regime condemnations, were interpreted as a harbinger of change in North Korea. Yet the full context of the North Korean leader's statements reflected a perception that such reforms, while effective in China, would still not work within North Korea because of the country's unique characteristics.

Growing criticism in South Korea over Kim Dae-jung's "asymmetric reciprocity" eventually constrained his ability to continue engagement with the North. Declining levels of public support for the South Korean president and his policies continued until overtaken by the anti-Americanism that arose during the 2002 South Korean presidential election. Growing South Korean disenchantment with the polices of US President George W Bush's administration toward Pyongyang, combined with multi-faceted factors resulting from historical trends and a changing society, led the South's populace toward a more benevolent re-evaluation of North Korea.

The impact of reforms
Kaesong Special Economic Zone is another foray by North Korea into "enclave capitalism" in which it creates an encapsulated environment for foreign firms to generate profits for the regime to use to subsidize its failing socialist economy. By literally fencing the areas off from the rest of the country, Pyongyang seeks to avoid the "contamination" of capitalism and its attendant risk of destabilization.

Seoul remains enthusiastic for the project, but the lengthy and complex nature of North Korean regulations that will govern foreign firms indicates that Pyongyang still has not grasped the lessons from its previous unsuccessful ventures in Najin-Songbong, Kumgangsan and Sinuiju, other economic zones that were undermined by excessive government restrictions. South Korea's Ministry of Commerce, Industry and Energy has concluded that the Kaesong industrial zone will likely not be as profitable as previously assessed, which will further discourage South Korean manufacturing firms from participating in the project.

The 2002 economic measures were sweeping and included a partial liberalization of wages and prices, endorsement of private markets, allowing farmers to cultivate abandoned plots, and devaluing the official exchange rate. The result, however, has been devastating on the populace, exacerbating social stratification and creating what United Nations officials deemed a "new class of urban poor".

The World Food (WFP) program reported this month that the 2002 reforms have led to sharply rising food prices, which many could not afford. Richard Ragan, WFP director in Pyongyang, commented, "As the economy shifts from a planned economy to a more market-based economy, there are winners and losers," and he said the country's public distribution system was unable to respond to the ongoing food-shortage crisis. The South Korean Yonhap news agency quoted Chinese diplomatic sources as assessing that the 2002 reforms had led to inflation, skyrocketing commodity prices, a plunging exchange rate, and escalating public anxiety over the prospects of economic reform.

Standard and Poor's warned last November that North Korea's economy was likely to fail, with an accompanying staggering cost to the South - perhaps as high as two to three times its gross domestic product. S&P's reversal from its previous assessment that North Korean economic collapse was "unlikely" was based on its conclusion that "the North Korean leadership lacks the flexibility and the vision to undertake a change" to a market-based system.

Effect on the region
The discovery of a covert North Korean nuclear-weapons program, along with Pyongyang's lack of meaningful economic reforms, seemingly endless appeals for aid, and restrictions on international aid monitors have caused "donor fatigue" among Pyongyang's foreign benefactors. Potential sponsors see few prospects of an end to North Korea's economic problems and, as a result, are more likely to direct constrained resources toward other regions that appear more amenable to change. The bellicosity of North Korea that constrains international largess, however, at the same time forces governments to remain at the negotiating table in hopes of preventing escalating tensions on the Korean Peninsula.

China continues to provide North Korea grain and oil inducements in an attempt to further the six-party talks on defusing Pyongyang's nuclear program, talks that Beijing sees as reflecting its political influence in the region. Japan has pledged an estimated $10 billion in wartime and colonial reparations, eventually, but it first demands satisfaction on the abductee issue and the establishment of diplomatic relations. South Korea, worried about the catastrophe of a collapsing North Korean system, desperately seeks to maintain the momentum of inter-Korean economic projects and negotiations in an attempt to alter North Korean behavior, along with pledges of even greater "comprehensive" benefits if Pyongyang satisfactorily addresses international concerns over its weapons programs. For its part, North Korea's economic initiatives with the South reflect Pyongyang's long-standing policy objective to wean Seoul from its relationship with Washington by emphasizing common interests between the two Koreas.

Bruce Klingner is director of analysis for Intellibridge Corp in Washington, DC. Intellibridge provides customized open-source intelligence analysis for government, corporate and sovereign clients. His areas of expertise are strategic national security, political and military affairs in China, Northeast Asia, Korea and Japan.

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Sep 1, 2004

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