ICAS Fall Symposium &
Humanity, Peace and Security
October 11, 2002 12:00 PM - 5:50 PM.
U.S. Senate Russell Office Building Room 418
Washington, D. C.
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Biographic Sketch & Links: Nicholas Eberstadt
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State of the Affairs and Prospects
Presentation to the ICAS Fall Symposium on "Humanity, Peace, and Security"
by Nicholas Eberstadt
American Enterprise Institute for Public Policy Research
Washington, D.C. October 11, 2002
As you all know, some very interesting and, for the DPRK, historically precedented events, call them changes, are evident today. Some of these are in the international diplomatic arena. Some of these are in the domestic economy. Some of them are manifest in official political pronouncements. In the next few minutes, I am going to put these changes into perspective. But I have to begin by offering an important disclaimer.
The DPRK is an extraordinarily difficult state for outside observers to follow and to make sense of. There are three fundamental reasons for this. The first is that the DPRK as a state operates in a universe whose coordinates are not familiar to us children of the western enlightenment. The DPRK after all is both a Marxist-Leninist state and a hereditary Asian dynasty. Few of us have an immediate intuitive understanding of such an environment.
The second problem is the ongoing data famine that prevails over North Korea. If we live in the age of the information revolution, the leaders of the Democratic People's Republic of Korea are the most dogged counter-revolutionaries of our age. I offer two examples of how tight the veil of secrecy over the DPRK's informational sources might be: First, North Korea is a state-I'd venture to say practically the only modern state- that has never bothered to publish a statistical year book. Second, though Kim Jong Il may be a devotee of the Internet and a web surfer himself the fact of the matter is that the DPRK has no domain name, no country code. Every country in the world is assigned a two-letter code. At the Internet Content Adaption Protocol there is a two-letter code awaiting someone to come and pick it up.
In addition to the intuition problem and the information problem, there is also a third problem for outsiders in trying to understand the DPRK. More perhaps than any other contemporary government, the DPRK is devoted to the proposition of strategic deception-what in the good old days we used to call maskirovka. From the DPRK government's standpoint, throwing its international potential adversaries off-base about its capabilities, intentions, and strategy is critically important. The most famous- or infamous-example of strategic deception by the DPRK, of course, was the surprise attack against South Korea, in June of 1950, only a few days after the DPRK had tabled a new peace initiative to engage and distract the Syngman Rhee government.
But of course that is hardly the only instance of strategic deception. We know some of the more significant episodes of recent strategic deceptions, such as the attempt to mislead the IAEA about the amount of plutonium that had been processed in the early 1990s. But that deception, when detected, led to the nuclear crisis of 1993 and 1994. There are perhaps undetected deceptions, which we're not yet in a position to evaluate and identify.
When you take all of these particulars into account, you will appreciate why it should be the case that knowledgeable observers of the DPRK might come up with diametrically opposite interpretations of current events in the DPRK. I can't resolve this dilemma for you. I will offer a necessarily "Eberstadt-o-centric" interpretation of the situation-but you must bear in mind the limitations of any interpretation that I or others will offer about developments in the DPRK.
If we place the North Korean economy in the context of other post-World War II economies, it is probably fair to say that Pyongyang stands out as the most distorted modern economy on the face of the earth. These distortions can be categorized diversely, but for brevity's sake, I will mention five areas of distortion.
The first is the extraordinary small space that has been granted to consumer preference and to consumer activity. The DPRK economy's consumption share seems to have been unusually low-even for a Marxist-Leninist economy. The low share of consumption is particularly striking, considering North Korea's relatively low income. When one insists upon suppressing consumption levels for a poor population, the sacrifices demanded from the population at large are that much greater. North Korea's un-naturally low consumption patterns, incidentally, are not a new phenomenon-they are fully characteristic of the sweep of North Korea's economic history over the half century since the Korean War cease-fire.
Second, and directly related to this un-naturally diminished scope for consumer activity, we should note that North Korea's economy is one in which currency played an amazingly limited role in the allocation of goods and services. As I mentioned already, North Korean data are in extremely scarce supply. If one, however, takes some of the available data and does some back-of-the-envelope calculations, it would seem that in the mid-1980s, before the more recent disastrous developments, the entire annual wage bill for workers, office workers, and farmers in the DPRK would have equaled roughly one- fifth or one-sixth of the reported national income. Clearly, the medium of domestic currency was almost marginal to the operation of the DPRK economy by that point. In this respect, the DPRK is an extreme outlier from the modern economic experience. The only other economy to come close would be Cambodia's in the late 1970s, under the dark days of the Khmer Rouge, when the Pol Pot leadership simply abolished money for a time.
The flip side of North Korea's war against the consumer has been the hyper- expansion of the military, and this is the third distinctive feature of the DPRK economy. For an economy not actually in the midst of war, nothing like the DPRK's level of militarization has been seen in recent times. One index of this extraordinary militarization can be seen in the disposition of military manpower. Some years ago I did a study on the demography of North Korea on the basis of a few little tidbits that the DPRK had released to the United Nations Population Fund and concluded that by the late 1980s, North Korea's non-civilian, "military," male manpower totaled about one-and-a- quarter-million persons. That would have been about 6 percent of the national population; it would have been about 20 percent of the population of men between the ages of 16 and 50. That level of military mobilization was equivalent to the U.S. manpower mobilization in 1943, during a period of total war. The DPRK's allocations to military investment and military expenditures are much more difficult to determine for reasons I'm sure you can appreciate, but there is no reason to think that these two do not track with the disposition of military manpower. North Korea is a hyper-militarized economy, and the phenomenon is not recent-hyper-militarization has characterized the DPRK economy for decades.
Fourth, we should note that international trade plays an extraordinarily small role in the DPRK economy. The contradiction is particularly evident if we keep North Korea's level of human resources development in mind. The DPRK is a predominantly urbanized society. It is a predominantly literate society. Despite these economic advantages, it looks from "mirror statistics" as if the DPRK generates about $50 a year per citizen in terms of identifiable export earnings. There are some countries in the world where per capita exports appear to be as low or even lower, but these are for the most part immiserated sub-Saharan countries where illiteracy is prevalent, large portions of the population engage in subsistence, and civil strife or war depresses international commerce abnormally.
Finally, there's the peculiarity of the DPRK's approach to international finance. To exaggerate only slightly, the DPRK's approach to international finance has been "borrow but never pay." We in the West are now learning about these interesting habits that seem to have developed during the DPRK's days of reliance upon the Socialist community in the 1950s and 1960s. Perhaps somebody could correct me, and tell me that indeed there was an instance when the DPRK did actually repay more of a loan than was refinanced and re-credited. But I am unaware of any such instance. As a general rule, the DPRK made a point of not repaying its borrowings, and of all the countries in the world, the DPRK has probably been the most defiant debtor state with respect to loans from the West. Since the mid-1970s, North Korea has made basically no progress in repaying any of those contracted sums.
All this being said, the DPRK's performance over the past half century has not been one of unremitting failure. Surprising as it may sound today, for the first quarter century after the partition of the two Koreas, it was the DPRK, rather than the ROK, which was the more affluent, the more developed, and seemingly the more promising. Before the Korean War, North Korea was more urbanized and more industrialized than the South. After the war, it seemed to be making more rapid economic progress. Immediately after the Korean War, it rapidly rebuilt with help from Socialist countries. One measure of the international opinion of prospects for North and South Korea is how people voted with their feet. Although it may not be remembered today, in the late 1950s and early 1960s, an enormous number of ethnic Koreans in Japan moved back to the Korean peninsula-but they did not move to South Korea. They moved to North Korea. A total of almost 100,000 people eventually moved from Japan to the DPRK in the late 1950s and 1960s.
How could economic trends have turned so bleakly negative for North Korea from this seemingly promising beginning? There were a number of reasons for this of course; I would suggest that one of the most important actually involved events in South Korea. In April 1960, ROK President Syngman Rhee was deposed from government by students and others. The North Korean government made no move at that time, and according to some sources, thereafter Kim Il Sung, long-time ruler of DPRK, rued his having missed the opportunity to intervene and to unify all Korea under his leadership. Those same sources concluded Kim wanted to be sure that the DPRK would never miss another opportunity to take advantage of conditions in the South to unify the peninsula on his own terms. Barely months later, in December 1962, the DPRK embraced a program to build up the military potential of North Korea. (This was the beginning of the modern North Korean hyper-militarization to which I earlier referred.) In fairness to the "Great Leader," in the 1960s international developments may have indeed seemed to suggest that unification on DPRK terms might actually come to pass. The U.S. intervention, and eventual failure, in Vietnam certainly raised in many U.S. minds the question of whether U.S. military commitment was going to continue in the ROK; it would be reasonable for observers from other countries to wonder about this as well.
By the 1970s North Korea's military investment swelled to encompass an even greater share of the DPRK's resources and began to slow down the North Korean economy as the South Korean economy continued to ascend. By the 1980s the balance of power had changed rather dramatically in the Korean peninsula. The DPRK was hobbled by all of the distortions which I've already alluded to. The ROK, whose economy was of course hardly free from costly distortion, continued to advance economically very rapidly, and by the late 1980s began to enjoy a movement towards open democratic governance.
Then during the 1980s, to cope with increasingly adverse shifts in the "correlation of forces" North Korea made a strategic bet. After the death of Leonid Brezhnev, North Korean leadership leaned very heavily toward the USSR. That option was not possible before Brezhnev's death, because personalities do matter in politics, and Leonid Brezhnev seems to have harbored a deep personal loathing for Kim Il Sung. Brezhnev had the honor of being the Soviet representative to the Third Korean Workers Party Congress in P'yongyang in 1956 and gave a hardly veiled critique of Kim Il Sung at that session; and their relations remained chilly forever after. As soon as Leonid Brezhnev lay cold in the ground, however, relations between Mosocw and Pyongyang began to develop much more robustly. North Korea began to gain much more in the way of Soviet aid, including military aid, than it had received before. This closer relationship may be seen as Pyongyang's way of trying to balance power in the peninsula.
It was a productive strategy for as long as it lasted, but all good things come to an end. And when the Soviet Union came to an end, the advantages conferred by its Soviet relationship concluded for the DPRK in a jolting and abrupt manner. The end of Soviet aid was a severe blow for a terribly distorted economy already bruised by its own actions. North Korea's economy went into a tailspin in the 1990s, the worst manifestation of the decline being the famine of the mid-90s. No one in the outside world really knows how many people starved to death in North Korea during these bleak years. (We lack this knowledge, one should note, despite the fact that Western sources have provided over a billion dollars of humanitarian aid to the DPRK to mitigate the tragedy.) Some informed guesses suggest that a death toll of a million people might be a good estimate. If true, that would be a proportional toll not dissimilar from China's in its Maoist catastrophe of 1959-62, in the wake of The Great Leap Forward.
The famine was hardly the only economic feature in North Korea in the 1990s. Economic policy during that period was replete with failure. Half-hearted attempts to mimic China's new direction in form, but not substance, were conspicuously unsuccessful. Think of the failed attempt at an economic opening in the special economic zone in Najin-Sonbong, bally-hooed officially by North Korea at the time but utterly uninteresting as an economic proposition to all but the politically committed and the ideologically convinced. Najin-Sonbong failed badly, and the official most closely associated with it seemed to suffer some very bad political health immediately after that.
We should also mention the breakdown of the Socialist planning system. One might of course have surmised that the system had broken down by dint of the simple fact of widespread famine in a predominantly urban and industrialized society. But by April of 1999, the DPRK basically announced to the outside world that its planning system was no longer functioning. How did it do so? By promulgating a new "Law on Socialist Economic Planning." You do not have to be a consummate Kremlin-ologist to read that document and see the import of what it was requiring: "Data must be collected at local units; it must be collected authentically and faithfully; it must be passed without distortion to higher units;" and so on and on. The DPRK's planning system had broken down. North Korea was not only a planned economy without data: it had become, quite clearly, a planned economy without plans.
With all of these problems, one might have imagined that North Korean leadership would rush to redress these obvious, glaring shortcomings. Of course, as we know, DPRK leadership did no such thing. We should ask: why did North Korean leadership not redress some of these destructive practices whose completely predictable consequences were to imisserate the population, lower the country's productivity, and prevent recovery?
The most obvious answer to this question is given by the North Korean press itself which, upon reading, tries again and again to explain the reason rather patiently to the presumably obtuse reader. Two factors in particular are emphasized again and again by the DPRK to those who listen to what it happens to say.
Firstly, the North Korean government has no intention of following Eastern European Socialist States or the Soviet Socialist State into the dustbin of history. In the DPRK official exegesis, the reason for the failure of Eastern European Socialism and Soviet Socialism was what the North Korean government calls "ideological and cultural infiltration." Ideological and cultural infiltration, in this exposition, corrupted the populations of Eastern Europe and the population of the Soviet Union, infected them with the "bacillus" of bourgeois nationalism, eventually leading to the horrifying situation wherein the masses in these countries no longer recognized the legitimacy of the workers parties that ruled over them. Again and again, the North Korean statement has declared that "Ideological and cultural infiltration will not happen here."
What is cultural and ideological infiltration? Again, the North Korean government has spelled this all out. This dread syndrome is found in exchanges with outside groups. It is in joint ventures. It is in financial transactions with the outside world. It is in foreign direct investment. It is even in ordinary exchange of goods and services in the world market. It is, in short, everything which some of us from a different world perspective would call "globalization." Thus the North Korean government has effectively insisted that globalization is subversive of its authority and may be inimical to its very system.
Secondly-and also carefully spelled out in DPRK public pronouncements- Pyongyang takes the posture that the road to prosperity for states such as the DPRK, or for any other virtuous state is not to be found in voluntary market exchange, division of labor, and comparative advantage in trade. Instead, the road to prosperity leads from the barrel of a gun. That tenet is enunciated very clearly in the DPRK's doctrine of "military first politics" which stipulates it is imperative to support military investment and allocations above all else, since this security investment is the basis of all subsequent wealth accrual.
It also coincides very nicely with the DPRK's more recent objective of becoming what is called "a rich and powerful country." There is a continuing policy of military extortion. Whereas interchange of goods and services was not part of North Korea's comparative advantage, the DPRK has been very skillful indeed in attempting to extract resources from other states through creating crises and attempting to generate menace and instability. It may not have exported many goods, but it did export international insecurity and was paid not to do so. There is an entire coherent ideological corpus to justify the actions or inactions, practices, that have led the DPRK economy to where it found itself in July of 2002.
Interestingly, however, some new and rather different practices, words, and policies, began quietly, without fanfare, to emanate from the DPRK. A few weeks after the fact, in late July of 2002, the world learned that North Korean economic policy underwent a major overhaul in a number of respects. For one thing, the direct provision of goods to the populace, the mechanism which had permitted the virtual shutdown of the monetized economy over the previous decades, was being severely cut back. For another, prices were being allowed to rise radically (if not necessarily to float) for many basic commodities. Wages were being correspondingly, although not entirely proportionately, boosted. The exchange rate which had been set at an imaginary, and utterly artificial, rate of 2.15 DPRK won to the dollar, was lowered to about 150 to the dollar. After these changes, still other more dramatic changes were announced. North Korean officials started to use the word "reform"-a term previously unutterable by any DPRK authority. North Korean officials created this interesting new situation in Sinuiju which they've described now as a special autonomous region which will purportedly have its own economic rules, its own rules for travel, and its own administrator. All this would represent a dramatic departure from past DPRK economic practice.
Of course, it is not enough by itself to say that these new measures are dramatic by comparison with anything which we can find in North Korea's economic history. The question at the table at the moment is whether they are sufficient, or are the beginning of something that will be sufficient to rescue and revitalize North Korea economically. So far, we cannot at all be certain that these new changes will achieve such an objective. Initial indications, indeed, would seem to augur quite the contrary. 1 Before an economic reform worthy of the name can be implemented and can succeed, the North Korean government will have to make major movement on these critical issues.
The first involves economic opening. Those recent changes that have already occurred may be necessary changes on the path toward an economic opening to the outside world, but they are hardly sufficient: among the other points that would have to be resolved before an economic opening could take root include official recognition of the legitimacy of economic profit as a concept-even as a practice in DPRK society- and, correspondingly, the legitimacy and propriety of transactions generating profits for foreign partners. Until now, North Korea has treated the existence of a profit in a transaction with a foreign partner as a matter of national dishonor. That sort of attitude will have to be changed.
The international debt will also have to be resolved, and so far there has been no indication of movement in that direction. In addition, North Korea will have to become a society in which information is available. Simply put, it is unreasonable to expect foreign investors or foreign partners to deal in a data-less, information-less wilderness. And resolving all of those other things would require even bigger changes than North Korea has embraced in the last few months.
But economic opening is only one of a tripartite set of issues that have to be satisfied for North Korean economic reform to succeed. It is perhaps the most obvious, but is linked inextricably to others. Even if a vibrant economic opening were underway, so long as an enormous proportion of the economy's resources are being cast into the bottomless pit of military expenditures, it would be unreasonable to expect that opening to revitalize the entire economy. Thus, for economic reform to be successful, the North Korean government will have to demobilize militarily in a rather radical way-to reallocate resources from its unproductive military sector towards potentially productive civilian, commercial opportunities. So far there is no indication whatever of movement in that direction.
The third issue, related to military demobilization, concerns relations with the ROK. Up to this very day, the North Korean government has taken the posture that it is the only legitimate political entity on the Korean peninsula; that the South Korean state is an illegitimate construct supported by American imperialism, only capable of surviving on the strength of American bayonets: and that all of the sacrifices that the North Korean people have endured over the past half century have been in the name of the noble and glorious objective of the unification of the entire Korean peninsula under an independent Socialist state. (That would be the state that the Kim family of Pyongyang currently runs.)
So long as the DPRK takes this as its posture and, indeed, as its raison d'etre, it is inconceivable that the state will be able to recognize the right of the South Korean government to exist. Without recognizing the right to exist of the South Korean government, the prospects for movement of military resources toward peaceful purposes and economic opening can only be extremely limited.
Will the DPRK move towards a more economically pragmatic and economically successful future? We can see what it needs to do to develop a more successful economy. Whether its leadership recognizes as much is a question I cannot answer. When Pyongyang will seriously reach for such options-whether it ever will-is a question we will only be able to answer conclusively at a future date.
EBERSTADT: I do not know what their next move is going to be. But I can try to explain some of the constraints on their next move. In the days of the Cold War, North Korea played a very skillful game of using Moscow against Beijing-getting aid from both governments and never aligning itself entirely with either of them. That game came to an end in 1991 with the collapse of the Soviet state. The Soviet collapse was very unfortunate for the DPRK. Pyongyang knew how to do this sort of extortive, aid-seeking diplomacy with Moscow.
Over the past decade, it was incumbent on the DPRK to find new big powers for its aid-seeking stratagems. With Moscow no longer really playing this game, there were three obvious other sources for aid: the United States, Japan and South Korea. Of course, they're all gathered together in one neat buddle in the KEDO, the light water reactor project, but they're also individually requested at various times in bilateral aid submissions to the DPRK.
In the past year, developments have not been very auspicious for the DPRK with respect to aid-seeking from the United States, although we should emphasize that the United States is still a major aid-donor to North Korea, no matter what the White House's words may be. Food and heavy oil both flow from U.S. taxpayers to North Korea at this moment, but in more reduced levels than a year or so ago. For various reasons in South Korea also, the public and the government have been a little bit less forthcoming in donations to the DPRK.
By the process of elimination, that suggests that it's Japan's turn, and I think what we saw in the last few weeks with the Koizumi visit to Pyongyang is North Korea's hope of an eventual transmission of funds-call it aid, call it reparations, the wording is complicated-from Japan parallel and in some sense equivalent to the 1965 normalization credits and aid that South Korea received from Tokyo. The numbers that one hears run between five and ten billion dollars. Something like five or ten billion dollars would of course be an enormous windfall for the DPRK, a government whose total imports each year seem to total around two billion dollars.
What has become clear in subsequent weeks is that the Japanese government is taking the position that these sorts of transfers would not be remitted until normalization itself, and that normalization of relations will depend upon the resolution of a number of very untidy issues that still complicate Japanese-DPRK relations.
It would make sense for the next step in North Korean aid-seeking diplomacy to be to turn to Europe. Europe is still a large and fertile field that has been unplowed as far as foreign aid is concerned.
QUESTION: What about China? ....... ..... China has been pushing North Korea to have the same policy of ..........
EBERSTADT: I can tell you what I know. I was in Beijing in the middle of June and I talked with a number of my friends in the North Korea-watching community in China, and with some friends in the Chinese foreign ministry, and none of them- none-seemed to believe that anything was going to change in DPRK economic policy soon. This leads me to suspect that the recent economic changes in North Korea were not the culmination of previous consultations with the Chinese government, and may even in some sense have come as a surprise to relevant officials in China. The choice of Yang Bin as the overlord of Sinuiju is extremely particular if not idiosyncratic. He was not an obvious choice for a number of different reasons, but apparently over the past months or years, he had cultivated a personal relationship, even friendship, with Kim Jong Il. It is true that it is impossible not to break the law in China if one wishes to make profits, at least the formal legal code, but there are indeed also people who have amassed money in China who have not done it in a way that would be consistent with Western civil or legal codes, and Mr. Yang Bin's background seems to be very complicated. China has shown that it can prevent the take-off of a new special economic zone in North Korea if it so chooses, and it so chose.
QUESTIONS - COMMENTS: (inaudible)
EBERSTADT: I have no privileged knowledge about any of this, but as a newspaper reader, my impression is that there is no one in the Bush Administration-I mean, not in HHS, not even in OSHA, who trusts North Korea's government. I don't think there's any political appointee that one could identify in the Bush Administration who would trust the DPRK government.
QUESTION: Is this ambivalent or ......
EBERSTADT: Well, distrust is an attitude rather than an operational policy, and it seems to me that the Bush Administration has yet to translate its attitudes into policy with respect to the DPRK. At the risk of being overly simplistic, it seems to me that there are two major camps in the Bush Administration. One camp might be called "Hawk Engagement." Professor Victor Cha of Georgetown has described this concept as sort of a strict and reciprocally oriented diplomacy, looking at performance. The other major camp in the Bush Administration is "Regime Change." The latter camp would, if asked, take the viewpoint that diplomatic engagement with North Korea is at best a waste of time and at worst a sort of dangerous delusion that loses valuable time. These two different viewpoints have been much at loggerheads over the last two years. I wrote a chapter in a book which has just appeared this week, Strategic Asia 2002-2003: Asian Aftershocks, in which I argue that the Bush Administration really didn't have a North Korea policy yet. Perhaps that might be understandable because of the priorities in the international war on terror. It reflects the fact that the decision makers in the Bush Administration think that waiting isn't so bad because other things will fall into place to make it easier rather than more difficult to deal with the DPRK. But I think that a third component-I don't know how influential in the overall calculus-is that there's significant disagreement in the administration and my perception is that Assistant Secretary Kelly's visit to P'yongyang has not resolved those sets of disagreements. It has intensified them.
QUESTION: ...... ballistic missile program. Is that something ..... saber- rattling ......... Or is this something that they plan to use at some point?
EBERSTADT: I don't know. It is a critically, critically important question and I don't know the answer to the question. If it is a bargaining chip, presumably, it can be purchased at the appropriate price. If it is not a bargaining chip, if instead it is viewed as an insurance policy for state survival, it may be sold, but it will never be dismantled and scrapped. It may be sold many times while they continue to possess it. Governments do not negotiate over or barter away items of vital national security. If this is considered an item of vital national security-and there are at least a number of hints that it may be viewed that way-it may be possible eventually for foreign powers to coerce an end to the ballistic missile program, but it certainly will not be possible to negotiate an end of it.
END OF EBERSTADT PRESENTATION
1. Sure enough: in the months since this talk, the partial re-monetarization of the DPRK economy, in the absence of new supplies of consumer goods, has resulted in runaway inflation. Whereas the new official exchange rate was set at about 150 DPRK won to the U.S. dollar-close to the reported black market rate at the time-the unofficial exchange rate by May 2003 was reportedly around 800:1. The IMF defines "hyperinflation" as a situation in which prices increase by more than 1000 percent per year. If we take the unofficial exchange rate as a reasonable proxy for changes in domestic price levels, North Korea would seem to be approaching just such an annual pace. Thus, the DPRK may now have the worst of both worlds: a broken distorted Stalinist economy plus market-style hyperinflation! <!- - - ->