North Korea and Economic Integration in East Asia

Yeongseop Rhee, Patrick Messerlin

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9780429602795
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Throughout North Korea's history, it has regarded external relations with suspicion and as a potential threat to its regime. With North Korea working towards denuclearization, there is now hope for an economic opening. This book examines the external economic strategies that North Korea may consider for its reforms and development, which are related to the East Asian economic integration process.

This book emphasizes that considering theoretical factors as well as conditions of the North Korean economy, economic opening and integration should have high priority, anteceding or at least being parallel to economic reforms and transformation. Also, among various alternative strategies for achieving the goal of economic reform and development based on economic opening, the utilization of East Asian regional economic integration framework would be the best option for North Korea, because this framework can provide an opportunity for North Korea to overcome structural problems in its external economic relations and to circumvent political conflicts, thus leading to a smoother rapprochement towards economic opening.

This book is timely as it shows how a new economic recovery strategy on the Korean Peninsula may be accomplished.

1
Introduction

1. Background and purpose¹

There is no doubt that denuclearization is the top priority for the area within the range of North Korea’s missiles (which includes not only South Korea but also all of China and a part of the US) as well as for the entire world if North Korea is smuggling nuclear material to other chaotic countries. The problem is that this issue is so important that it tends to “freeze” all the parties involved in the Korean Peninsula (a classical situation in the face of nuclear threats). Nobody is ready to move because the costs and risks generated by a violent collapse of the current North Korean regime are felt to be too high. As stated by Kim Jong Nam in his interview (the uncle of the current North Korean Leader used to live in Macau and was assassinated in 2017):

I personally believe that economic reforms and openness are the best ways to make life better for the North Korean people. However, taking North Korea’s unique position into account, there is a fear that economic reforms and openness will lead to the collapse of the present system.²

This prevailing view of “make no move now” relies on arguments that can be briefly summarized in terms of the main four actors in North Korea.

• Members of the top nomenklatura are not ready to move because they fear that they will lose their current wealth and possibly their lives in a transition process that they perceive will be very fast at best, violent at worst, and in any case incontrollable.
• Members of the lower ranks of the nomenklatura share the same view – though with (possibly large) variations, depending on the extent to which these officials are truly protected from food crises, on how much money they earn by oiling the system via corruption, and also on how much they care about the rest of the population among whom they live (some officials have loosely enforced some of the policies dictated by the top nomenklatura in order to protect North Koreans from the worst effects of these policies).
• North Koreans running officially blessed private businesses focus all their energy on consolidating what they have already achieved at such great pain, and may be afraid of expanding their businesses in a more market-oriented environment.
• The rest of the North Korean population is probably mostly consumed by the struggle to survive. The consequences that the brutal reversals of North Korean economic policies during the last two decades have had for their welfare may even have made them more nostalgic of the Kim Il-sung era (the only memory they have of a period of stable economic conditions) than of an unchartered market economy.

To make things even more difficult, fear of a market-based future is, almost certainly, deeply entrenched in these four layers of the North Korean population. Of course, this fear has been fueled by intense propaganda for three generations now. But, more importantly, it has been magnified by North Korean policies that have associated (black) market-based successes with punishment: The 2009 currency change was a spoliation of all the savings made in the previous currency unit by North Koreans (except those of the top nomenklatura made in foreign currencies). It was magnified by devastating hyper-inflation that has hurt every North Korean – and sheds a light on the profound lack of economic understanding in the top nomenklatura.³ Last but not least, black markets that are not protected by the rule of the law are better than empty shelves, but they have surely created countless frustrations among North Korean consumers.

These four ideas make a lot of sense. Indeed, they describe a population and its ruling group exhausted by 70 years of an increasingly inefficient economic regime and by one of the strictest single-party arrangements. That said, they do not eliminate the reverse arguments that should often cross the minds of North Koreans and would induce them to move forward. These ideas can be briefly summarized as follows.

• Members of the top nomenklatura can witness the reality that their peers in other communist countries have survived the transition process—indeed, they have done well. Those who have lost the power they used to have are now very wealthy by North Korean standards and even often by the standards of their own countries under communist rule. Since the fall of the Berlin Wall, no one has lost his/her life in this process (with exception of Nicolae and Elena Ceauşescu), in sharp contrast with the many violent deaths under communist regimes. The danger involved in belonging to the top nomenklatura is often under-rated in democracies while it is certainly very present in the minds of top North Koreans: Life at the top of despotic regimes is full of fear, as amply documented by history from Han Wu-di to Stalin. Market-based and democratic countries are the only ones where being at the top does not involve the risk of being violently overthrown.
• Lower-ranking members of the nomenklatura should consider the experiences of their peers in other former communist countries, with some of them even running their own countries (Vladimir Putin being the best example). Very few members of the lower ranks of the nomenklatura have paid a price for having been part of the communist system: The hunt for former East German Stasi or Romanian political prisons staff or the members of the Polish Communist Party has not gone very far.
• The managers of officially blessed private businesses have not had the same role in other communist countries as in North Korea: According to some estimates, roughly half of North Korean food and basic consumer goods is produced and/or delivered by these managers.⁴ Despite the absence of evidence on the fate of these managers after the fall of communist regimes in other countries, it seems reasonable to assume that they have faced the usual fate of every business: The clever ones have adjusted to the changes and survived or prospered, while others have simply gone out of business.
• The rest of the North Korean population have some hint – when they can get some news about the rest of the world – that they have little to lose because there are very few countries in the world as poor as North Korea.

Most North Koreans who have time to think about their future (and some access to information about the rest of the world) should be torn between these two sets of arguments. The number of these people may not be large, but it is probably large enough to trigger reforms and to support them if launched. What could be done to make the balance of arguments shift from those favorable for the status quo to those favorable for change?

A good start seems to debate concrete proposals – the key word being “concrete” – about every economic policy to be implemented for economic reforms and development: What should and can be done, how fast, how wide, etc. The main goal of these debates would be to provide enough information and options to North Koreans for them to realize that the transition is not necessarily a fall into a chaotic and hellish world, but a reasoned and manageable shift to a more prosperous one via economic policy. Even crude, concrete proposals have some merit for conveying ideas about the future, while improving North Korean knowledge of economic issues. By contrast, keeping the debate on the economic future of the Korean Peninsula to broad generalities cannot be conducive to the much needed trust among North Koreans because it leaves too much room open to interpretation, fueling countless suspicions and leaving intact the existing fears.

In short, the primary role of these debates on concrete proposals is to build trust among all the parties of the Korean drama, including building trust among the North Koreans themselves regarding their own ability to move on to a path to transition. Regarding reforms and economic development of North Korea, various proposals are floating around. Despite the wide range of proposals, it is clear that they agree on one thing: Implementing economic reforms and modernization based on economic opening is the only option to prevent a further deterioration of the North Korean economy and a destabilization of its regime. North Korea should adopt economic opening and expansion of its external economic relations as a part of a grand development strategy, not just as an instrument to collect hard currency, so that economic opening can provide meaningful impetus to economic development.

Participation in East Asian regional economic integration is probably the best option among alternative approaches to economic opening of North Korea. In particular, utilization of a regional economic cooperation framework in East Asia will make it possible to overcome the structural problems in North Korea’s external economic relations and to encourage and sustain its development projects. East Asia can provide a large market for North Korea’s exports. The East Asian market is larger than and growing faster than other regional markets, and North Korea shares a border with the largest countries in the region, including South Korea, China, and Japan. Once North Korea is open for participation in regional economic integration, it can easily expand its trade with neighboring countries.

The expansion of external economic relations through regional economic integration is not confined to trade, but also extended to foreign investment. In the world financial market, East Asia as a region is a net creditor; a huge amount of capital is readily available for investment in the region. In particular, large capital holders in the region are actively seeking new investment opportunities, because investments in their domestic markets are somewhat saturated and it is not easy to expect high returns. If big potential risks resulting from the internal problems of North Korea and external problems such as international sanctions are reduced, North Korea can attract huge foreign investment from neighboring countries.

Also, participation in regional economic integration can lessen the political constraint, and will lead to a smoother movement towards economic reforms and opening of North Korea to the international community. If North Korea becomes a party to regional economic arrangements, it can have more contact with neighboring countries. As discussing economic policies becomes more and more routine, ideological confrontation would be reduced. Thus such a movement towards economic reforms through regional cooperation would be politically desirable.

This book intends to contribute to the debates on concrete proposals for trade policy and foreign investment policy, focusing on North Korea’s external economic relations (of course, there should be similar debates on other economic policies). It will specifically discuss how North Korea can utilize the East Asian regional economic integration framework to formulate trade and foreign investment policies so that North Korea has incentives to be more open and to make use of the regional economic integration processes for its economic reforms and development.

Under the present circumstances, the most likely place to start such debates is South Korea. But, that is not specific to the Korean Peninsula. Most of the debates on what could and should be done in Central Europe in the early 1990s started in Bonn (German reunification), Brussels (accession of Central European countries), and London (covering the former Soviet Union with the European Bank for Reconstruction and Development) before spreading to the Central European countries involved.

Indeed, rather than the initial location for these debates, what counts is their capacity to percolate into North Korea. This capacity is a function of the abundance and quality of the options discussed, and their ability to attract the attention of the North Korean actors (including all four social strata), and reduce the imbalance of information between the two Korean economies.

The fact that such debates should start in Seoul has a useful side. South Koreans are not immune to fears and suspicions on the future of the Korean Peninsula. Instinctively, they realize that profound changes in North Korea will require effort from them, possibly for many years, as best illustrated by the German experience. Still today, it is easy to find in Eastern Germany buildings as decayed as those existing in the early 1990s, despite the billions of euros spent by West Germans. As a result, South Koreans need to discuss the best possible concrete options from their own point of view among all those available.

2. Synopsis of the book

This book is comprised of eight chapters. Chapter 1 introduces the book, emphasizing the importance of the study and clarifying the issues to be covered.

Chapters 2 and 3 critically review theoretical debates surrounding the relation between North Korea issue and the issue of regional integration. Chapter 2 examines the relationship between economic transformation and economic integration, which is often discussed for the development of a transition country like North Korea. It first looks at the experiences of European transition countries. When Central and Eastern European (CEE) countries attempted to join the EU after the collapse of socialist systems in the early 1990s, the debate on whether economic integration or economic transformation should come first was intense in those countries. One group argued that the former Soviet Republics should be allowed to join the EU before they had completed the transformation from socialism to democracy, while the other argued that they needed to complete the transition first. Also, when East Germany collapsed, there was another hot debate on whether to follow the big bang approach or the gradual approach. Proponents of the big bang approach were more inclined to immediate unification and preferred that economic integration of East and West Germany precede the economic transformation of East Germany, while proponents of the gradual approach advocated for East Germany to complete its economic transformation before the two countries could be unified. Considering the lessons from these experiences in Europe and also the situation of North Korea, we derive the first principle that economic opening and integration should precede economic reforms and transformation.

Chapter 3 examines North Korea’s view on economic opening and regional economic integration. North Koreans have had mixed feelings about this and so far the country has adopted a conflicting stance towards economic opening and regional economic integration. Clearly economic opening is considered a significant threat to the stability of its regime. But North Korea also recognizes that regional collaboration and integration will bring direct benefits such as an influx of foreign currency and infrastructure development; this will also bring indirect benefits such as support for a smooth movement towards economic reforms within a politically more acceptable framework. When we suggest that North Korea include the issue of regional economic integration in formulating its external economic policies, it is necessary to consider these mixed feelings. Based on this consideration, we derive the second principle that the strategies for opening North Korea should mitigate the regime’s perception of economic opening as a potential threat to its existence.

Chapters 4 and 5 critically examine North Korea’s external economic relations and the progress of East Asian economic integration as a whole. It is necessary to understand the current situation and unique features of North Korea’s external economic relations before seeking a possible strategy for the opening of North Korea to the East Asian and international communities. Thus in Chapter 4, we show trends in North Korea’s external economic relations and explain important features of international trade and foreign direct investment in North Korea. Above all, the North has very limited economic interactions with the international community. The poor record of North Korea’s international transactions reflects its mixed feelings towards the international community that “International economic exchanges are needed, but not liked and actually feared”.⁵ North Korea still has mainly negative perceptions of economic opening and regional economic integration and fears a threat to the stability of its regime; it therefore has allowed only limited contacts with a few countries, in particular China.

Chapter 5 describes the existing regional arrangements in East Asia, including those under hard negotiation. Along with the pursuit of regionalism, various strategies have been proposed for regional integration in East Asia. Although East Asia lags behind Europe with regard to regional economic integration, it is also crowded with many bilateral and multilateral economic arrangements, some of which have served economic development, integration, and globalization very well. We categorize those arrangements into three groups—pan–East Asian initiatives, sub-regional initiatives, and trans-regional initiatives—and explain their main features and challenges. The chapter ...

Table of contents

• Cover
• Half Title
• Series Page
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Preface
• 1 Introduction
• 2 Theory of economic integration and transformation
• 3 North Korea’s motives and strategies for external economic relations
• 4 North Korea’s external economic relations
• 5 Progress of regional integration in East Asia
• 6 North Korean trade policy: Constraints and options
• 7 Regional financial cooperation and North Korean development
• 8 Conclusion
• Bibliography
• Index