Saturday, April 08, 2006

If Only North Korea was a Totally Different Country

Sometime back The Marmot put up this post about a Conference held in Beijing January 18-19, 2006 entitled: "Regional Economic Implications of DPRK Security Behavior: The "Bold Switchover" Concept". The authors of the on-line papers are three well known scholars: Nicholas Eberstadt, Bradley O. Babson and Marcus Noland. Although labeled by the Marmot as a "MUST Read" I'm guessing by the number of comments left (ie: none) that few people paid him any heed. Personally, I paid no heed. I didn't even see that post until after I'd read the papers. But read them I have. I now present for your enjoyment/boredom summaries and comments on all three papers.*

Regional Economic Implications of DPRK Security Behaviour: The 'Bold Switchover' Concept

Three conditions:
1. The DPRK maintains sovereignty of Northern Korea
2. The DPRK remains a socialist system with a planned economy
3. The DPRK satisfies its neighbours' various security concerns
4. The DPRK achieves a successful transition from 'military-first' politics to 'defence sufficiency'

Economic Implications of a 'Bold Switchover' in DPRK Security Policy: Potentialities for a Still-Socialist DPRK Economic Policy, International Financial Assistance, and North Korean Economic Performance

By Nicholas Eberstadt

The Argument
If DPRK, for whatever reason, did enact a 'bold switchover' in economic policies what implications would this have for:
- DPRK economic policy
- Chances of receiving international aid
- Chances of moving toward self-sustaining economic growth

A 'bold switchover' in the DPRK's would involve a shift in policy from military first to economic development. Such a shift would in turn conceivably lead to the DPRK's removal from the US list of rogue nations. This would in turn allow for an easing of US sanctions and allow US companies to do business with the North. Removal from the list is also a pre-requisite for opening the doors to the IFIs such as the World Bank and Asia Development Bank.

To test the economic impact of a policy change DPRK levels of illiteracy, urbanization, and life expectancy are used. We are informed that all of these variables can be substituted (if necessary) in lieu of the usual economic indicators because they are directly related to economic productivity- and all of them provide a good predictive base for estimating any unknown country's level of exports per capita or economic output per capita. (see pp 20-22). The paper then goes on to input these data, crunch some numbers and show us how great it would be, economically, for the DPRK to embark on a 'bold switchover.

The Conclusion
Korea's dismal economic performance is not only due to its socialist style economy but also to its military first policies. Therefore a switch from hyper-militarisation to defence sufficiency would improve economic performance. International aid could be forthcoming if DPRK were to embrace such a shift without necessarily renouncing its socialist planned economic system. Therefore a 'bold switchover' would likely lead to positive economic implications for North Korea.

Given the assumptions, this is a very interesting article. It conveniently deletes any considerations as to why and how the DPRK would get to the point of implementing a 'bold switchover' policy and gets down to the much more interesting business of what this would mean economically for North Korea. The quantitative analysis conducted to answer the question is well worth a read (and probably more so if your knowledge of statistics is stronger than mine).
Where I hesitate is how easily and quickly the US would accept that a DPRK switchover was legitimate. I don't want to get outside the premise of the paper but I think that if we considered that the DPRK did a bold switchover it might be to convince the US to take it off the rogue list and to create the right circumstances to allow for eventual membership with the IFIs. In such a case, timely encouragement (relaxation of sanctions, a goodwill gesture, etc) from the US, IFIs etc could play a vital role in augmenting such a switchover in policy in the DPRK. It would be interesting to bring in possible ways for the US and IFIs to be able to detect and respond, in a timely fashion, to a credible switchover.

Implications of a 'Bold Switchover' in Security Policy for Involving the International Financial Institutions in Financing North Korean Economic Development

By Bradley O. Babson

The Argument
This paper looks at the steps and advantages IFIs could bring to the DPRK to support economic development in the event of a 'bold switchover'. The paper argues that, should the DPRK choose to join the IFIs and agree to all that such membership would entail there would be irresistible opportunity for rapid economic transformation. However, before an efficacious relationship between the DPRK and IFIs could be established a myriad of challenges await. The key IFIs to assist the DPRK in such a switchover would be the IMF, World Bank and ADB in cooperation with the ROK, China, Russia, Japan and US.

The main challenges deal with how to deal with public financial management mechanisms and institutional arrangements, technical and institutional capacity, and knowledge gaps. The possible obduracy of the DPRK over matters relating to data collection, transparency, information dissemination and knowledge sharing among government agencies, the public, foreign investors and international bodies is also addressed. And uniquely for Korea, the matter of how to account for inter-Korean transactions would need to be changed. If the DPRK joined the IFIs as a sovereign state any intra-Korean transactions would have be recorded as international business.

The paper gives little consideration to what the DPRK would consider as preconditions for joining IFIs. Instead, the majority of the paper looks more closely at what the IFIs would require of the DPRK in order to establish a relationship rather than what the DPRK would need. However, it does duly note that "The DPRK would need to want to build the relationship and accept the international norms that would accompany the development of relations."

As a suggestion on how to get the ball rolling, the author informs us of the Special Trust Fund option which would allow the Bank to begin a relationship with the DPRK prior to formal membership being approved. The Special Trust Funds are usually for post-conflict areas and have been set up to provide aid to non-member countries. The trick would be putting the DPRK in a 'post-conflict' context or setting a precedent to set up a Special Trust Fund for a country that is not post-conflict.

The Conclusion
Given the complexity and uncertainty of the DPRK's willingness to become a member of the IFIs in spirit as well as the letter, the author suggests a phased approach. The suggested sequence is to start talking and engage in some education and training. This would be followed something small-ish via a Special Trust Fund and would seek to establish some formality in dealing with each other and demonstrate commitment by both sides. Subsequent phases would begin and proceed in accordance with progress, both economic and in terms of the relationship. The paper also notes that positive steps between the IFIs and the DPRK, premised on the legitimacy of the bold switchover, should also encourage bi-lateral aid from, probably, EU, Japan, Canada and Australia.

The unlikelihood of this eventuality makes this paper a borderline case of fiction. Not that the IFIs can't offer the DPRK a tantalising package of skills that would help spur its economic development in the event of a switchover. The story loses credibility because it is premised on the DPRK giving over the type and amount of information that would be needed even to apply for membership. Fortunately the paper doesn't attempt to give possible scenarios on what might prompt such action - that would've ruined the story.

There is another way that it reads like fiction and that is in how incredibly exciting it would be it this was to occur. The tantalising prospect of delving into the financial and institutional arrangements of the DPRK, the lure of conducting and being able to read Article IV reports from the IMF! I was also drawn in by the lure of the need for infrastructure PPI projects in the DPRK. I have a good friend in the Bank who works on PPI and the temptation of DPRK PPI projects has occupied many a fascinating conversation for us (yes, I realise how sad that sounds). And this paper reinforced and expanded on how BIG it would be if a 'bold switchover' prompted the DPRK to seek IFI membership. I envy the lucky bastards that would get to work on DPRK membership to the IFI community.

The Economic Implications of a North Korean Nuclear Breakout

By Marcus Noland

The Argument
The paper supposes a nuclear breakout on the part of the DPRK and considers what the economic consequences of this might be. The paper goes through two scenarios; the mild shock of a nuclear test and the major shock of the DPRK being caught selling nuclear material possibly to a non-state actor. Each scenario looks at the likely impact it would have on South Korea, China and Japan.

In both cases, the most likely economic fallout would occur not because of the trade links existing with the DPRK but with geographic proximity and assessments by other nations as to the future risk of trading in the region. Among the factors that need to be considered in such an assessment is the degree of economic openness. To determine some potential political fallout the current policy and sentiment in the country toward North Korea is considered. As benchmarks, the author looks at the 1998 Pakistani nuclear test and the 1997-8 East Asian financial crisis.

The paper also shows that the DPRK would also not be immune to some economic fallout. North Korea has some trade links which would be affected and its chances of joining any IFIs would be suspended indefinitely. Japan would very likely block remittances as well. In the major shock it is guessed that North Korea could likely collapse from intense international pressure if not by military force.

The Conclusion
Following the two scenarios through, the paper concludes that the economic fallout would mostly hit South Korea and Japan with political consequences in all countries but significantly in Japan. For Japan the re-militarisation debate would likely hot up. China would likely face international economic pressure from EU and US among others to reduce support for the DPRK. The possibility of a nuclear test by the DPRK underscores the need for cooperative efforts to avoid such eventualities or to deal with them if they should arise.

This is a fairly straight forward article and was an easy read. I found it to be mostly intuitive. I am not sure I found the comparison with the Pakistani test very useful as it seems the situation is too divergent from a possible scenario involving a North Korean test. The 1997 analysis was slightly more useful. A more lengthy and in-depth paper could probably do better justice to this topic by including more review on the consequences, especially in Japan, of the 1998 North Korean missile test as a benchmark of what would happen if they tested a nuclear weapon. It is also hard to consider the economic impact of the DPRK attempting to sell fissile material as the political/military consequences would surely dictate the economic fallout and those are not easily guessed.

* Disclaimer: these summaries and comments may or may not have anything to do with the papers they claim to be summarising and commenting on. Kathreb is not responsible for any misinterpretations of the articles and denies all knowledge of ever having read them.

Currently reading:

"Hell" by Yasutaka Tsutsui