ICAS Special Contribution

No. 2002-1212-SCC

Strategizing Economic Cooperation

Suchan Chae

Institute for Corean-American Studies, Inc.

965 Clover Court, Blue Bell, PA 19422

Tel : (610) 277-9989; (610) 277-0149
Fax: (610) 277-3992
Email: icas@icasinc.org

Biographic Sketch & Links: Suchan Chae

[Editor's note: We gratefully acknowledge a generous contribution, with a written permission, of this paper by Suchan Chae. This is a kind gift of Suchan Chae to ICAS. : sjk]

Strategizing Economic Cooperation

by Suchan Chae*

A New Crisis

The recent admission by the North Korean government that it has an active nuclear weapons program has put its external relations in disarray.1 Their admission amounts to nullifying the Geneva Agreed Framework, which has been the mainstay of the solution for the concerned countries in dealing with North Korea’s nuclear ambition.2 As a consequence, the U. S. has toughened its stance and is reexamining its previous deals with North Korea. The situation is forcing South Korea to reevaluate its overall approach to the policy of rapprochement with North Korea. Japan’s new initiative to pave the way to normalizing relations with North Korea is put on hold. North Korea’s external relations that have been improving steadily in recent years can now reverse the course. Given the current US policy stance on weapons of mass destruction, there will probably be no resolution of the current diplomatic impasse unless North Korea recommits to giving up its nuclear program.

One important issue is whether it is desirable for outsiders to continue economic cooperation with North Korea in light of the new revelation. The rationale for continuing the economic cooperation would be that if economic cooperation is going to bear fruit and contribute toward peace and stability, it should not be handled in a off-again on-again manner following the ups and downs of the political situation. The ground for discontinuing economic cooperation would be that North Korea should be punished for breach of agreement.

In normal circumstances, one has only to think about achieving the best performance out of existing policies. A crisis situation forces strategists and policy makers to look at problems at more fundamental levels. One needs to reevaluate the long-term goals and seek effective policy instruments. In analyzing the issue, I would like to make the following assumptions:
  • (leadership) The top priority of the North Korean leadership is its own political survival.

  • (regime support) The North Korean political system is maintained by the military, party, and security apparatus with constant propaganda and political oppression.

  • (political change) North Korea has currently no internal force for political change.

  • (internal stability) The North Korean regime is afraid that once North Korean people know what is going on in the outside world, their political system will be destabilized.

  • (people) The North Korean people are suffering from extreme economic hardship.

  • (economy) The North Korean economy collapsed to such a degree that it cannot sustain itself without massive outside assistance.

  • (reform) North Korea does not have human resources (leadership, bureaucrats, managers) necessary for reforming its economic system.

  • (military power) As a result of the economic collapse, the North Korean military capabilities have deteriorated to such a degree that it cannot carry out a sustained war.

  • (WMD) North Korea is developing weapons of mass destruction (nuclear, chemical, and biological) that can inflict severe damage to South Korea and possibly Japan as well.

  • (weapons export) North Korea has capabilities to export long-range delivery weapons (missiles) to irresponsible regimes around the world.

Seeking Outside Resources

Before it hit the snag, North Koreans were visibly expressing their willingness to pursue opportunities to obtain outside resources. After the naval clash with South Korea at the end of June 2002, the North Korean government expressed "regret" about the incident on facing the prospect that the flow of economic resources from South Korea would stop. To pave the way for normalizing relations with Japan, the North Korean government admitted having kidnapped Japanese citizens in the past. The single most important motive for pursuing normalization with Japan is undoubtedly receiving reparations for the past colonial rule. North Koreans are swallowing their ego, seeking economic resources.

An important question is how to interpret North Korea’s change of attitude. Does this mean that North Koreans are becoming more pragmatic, abandoning their rigid political positions? It is hard to imagine that a regime that has allowed millions of people to starve to death has had a sudden change of heart. It must be the case then that the economic deterioration has progressed to such a degree that the loyalty of the main supporters of the system (the military, party, and security apparatus) is being eroded. In this view, the main motive for the change of attitude is not so much to improve the lives of the people but to secure the loyalty of regime supporters. For instance, not being able to feed and supply the army would certainly erode the support of the military for the leader. Lack of state resources would certainly erode the control of regional resource allocations by the central party. Hungry and demoralized security agents cannot be trusted with enforcing the order. The North Korean regime must secure some minimum amount of resources to operate the core machinery that holds the North Korean system together. Thus the North Korean regime has no other feasible option for sustaining itself but to seek outside resources. This explains well North Korea’s recent change of attitude.

The Strong-Nation Program

Given that North Korea has been desperate seeking outside resources, why did North Korea take an action (that is, admitting to a nuclear weapons program) that would jeopardize what it has achieved on the diplomatic frontier?

The North Korean leadership has been impatient with lack of progress in improving relations with the U. S. In the eyes of the North Koreans, the current U. S. administration has denied them any opportunity to move forward by ignoring their concerns and by maintaining the position that North Korea has to come all the way to meet the U. S. concerns before any meaningful dialogue can start. Rather than waiting out the hard-line stance of the current U. S. administration, the North Korean leadership has chosen to force a deal by creating a situation that has be dealt with. The gamble has backfired. It has worsened the overall situation for them.

One reason why the North Korean leader chose to gamble on a new deal may lie in the internal political consideration. Given the internal economic failure, the North Korean leader may have been pressured to prove to his supporters that he has diplomatic skills to outmaneuver the opponents in getting what he wants. With the Geneva Agreed Framework, he has demonstrated to his supporters that he could leverage the military might for economic gains. This has enhanced his position among his supporters, especially among the military. The military was happy to be able to tell the political and economic functionaries that the military could generate economic resources by flexing its muscles. Thus the program of Strong Nation was born. The program required maintaining credible military power and developing more disruptive weapons as bargaining chips.

What they did not take seriously was their share of the bargain in the Geneva Agreed Framework, which requires that North Korea give up their nuclear program. It may be odd to outsiders that they did not take it seriously. But it could be easily understood if one considers that they have been accustomed to and adept in deceit and denial, both internally and externally.

As North Koreans expanded their sphere of interaction with outsiders they began to realize the importance of trust. They have had ample opportunities to experience the costs of not being trustworthy. They are usually getting the worst possible deals in commercial transactions due to their reputation for not holding to commitments. The merits of transparency began to be understood by North Koreans. To some extent, their admitting to kidnapping Japanese citizens could be understood in this light.3 In the case of admitting to a nuclear program, this should have been at least one factor, especially in view of the U. S. demand that the inspection regime should start now. But impatience, over-confidence, and domestic political consideration are other factors that have explanatory power.

North Koreans have not yet come to grips with the reality that their Strong-Nation program does not square with their efforts to attract outside resources. This is something they will have to learn out of the current crisis.

Strategic Approach to Economic Cooperation

In the last five years, Kim Daejung’s Sunshine policy has set the tone for the outsiders’ dealings with North Korea. As a strategic policy, the Sunshine policy had its merits and flaws. Its principal merit was its strategic focus on reducing North Koreans’ hostility toward outsiders by means of material assistance and by being more understanding of their concern for regime survival. The principal flaw was not having built-in policy devices to induce changes in the North Korean system.

Proponents of the Sunshine policy regarded confidence building as their first strategic target. Some went further and argued that the less-threatened North Korean regime would be more willing to adopt reform measures. This argument is flawed for two reasons. First, it is the regime itself that is creating the perception of outside threat for the purpose of internal political consolidation. Second, the North Korean regime has no intention or ability for a serious reform. Their priority is not economic recovery but regime security. They well understand that reforms would improve the lot of the people but not of the regime.

The reality is that there would be no genuine solution to the problems of North Korea that does not involve changes in the system, because the system itself is the biggest problem. It is the North Korean system that has brought upon itself the economic disaster and is prolonging it. Thus the point of departure for a new strategic direction must be recognizing this problem and seeking solutions.

What I propose is to strategize economic cooperation by recognizing the need to change the North Korean system. This can be done, I submit, by drawing a line between two types of projects for economic cooperation: regime-positive projects and regime-neutral projects.

Regime-positive projects are ones that generate significant political benefits to the regime. This type of projects can and should be used as instruments of bargaining. Projects that result in cash infusion into the regime’s chest without significant positive impact on economic development such as the Mount Kumgang Tourism project belongs to this category. The light water reactor project also belongs to this category, even though the project also can generate significant economic benefits to the North Korean economy.

Regime-neutral projects are ones that have great merits for the economic development of North Korea but have ambiguous political effects on the North Korean regime. The industrial park project near the South Korean border and the project for reconnecting railroads belong to this category. These projects may initially benefit the regime but can eventually destabilize the North Korean system. Humanitarian aid also belongs to this category. It increases the good will of the North Korean people toward outsiders. This type of projects should continue even under adverse political circumstances.

One can contrast the above proposal to alternative proposals. One alternative would be a general economic sanction. The problem with this is that by stopping regime-neutral economic cooperation outsiders will punish themselves rather than North Koreans. Another alternative would be respecting existing commitments but stopping new projects. This approach has more problems. In addition to punishing themselves by preventing any new regime-neutral projects, outsiders will continue existing regime-positive projects without reciprocal concessions from the other side. Still another alternative proposal would be to continue economic cooperation unconditionally. The problem with this approach is obvious. To the extent that not all projects of economic cooperation are regime-neutral, outsiders will reward the regime without receiving what they want. In resolving the current crisis, North Koreans should be given an opportunity to realize that they cannot seek outside resources without conforming to the international norm of acceptable behavior. It is particularly important that North Korea be denied an opportunity to prove that they could extract economic gains from outsiders leveraging their military capabilities.

My proposal is meant to provide a guiding principle in deciding what projects of economic cooperation should continue during the crisis and what projects should stop or be put on hold until the problems are resolved. When the idea is put in practice, the criterion may be influenced by the ideological positions of policy makers. For some, any economic cooperation with an evil regime is evil. For some others, all economic cooperation is good.

*Suchan Chae is Associate Professor of Economics at Rice University. During the last Asian economic crisis, he advised Korean policy makers and wrote numerous newspaper columns on solving the crisis. He organized North Korea Workshops, international conferences focused primarily on the economic development of North Korea, in 1998 and 2000 at the James A. Baker III Institute for Public Policy at Rice University. He visited North Korea in May 2002.
1 Kang Sok-ju, North Korea's Vice Foreign Minister, admitted to a secret nuclear weapons program based on uranium enrichment during U.S. Assistant Secretary of State James Kelly's visit to Pyongyang, October 3-5, 2002.
2 The United States and North Korea signed the Agreed Framework on October 21, 1994. In return for North Korea’s agreeing to freeze and ultimately dismantle its nuclear program, the United States agreed to finance and construct in North Korea two light-water reactors totaling 2,000 electric megawatts and to provide North Korea with 500,000 metric tons of heavy fuel oil each year until the first of those reactors is completed.
3 Kim Jong-il, North Korea's Chairman of the National Defence Commission, admitted to the kidnappings during Japanese Prime Minister Junichiro Koizumi's visit to Pyongyang on September 17, 2002.

ICAS Fellow
Speakers &
Lectures &