Hard Target

Sanctions, Inducements, and the Case of North Korea

Stephan Haggard, Marcus Noland

• Publisher: Stanford University Press
• Year: 2017
• ISBN:
  9781503601994
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: National Security
• Index: Politics & International Relations

Because authoritarian regimes like North Korea can impose the costs of sanctions on their citizens, these regimes constitute "hard targets." Yet authoritarian regimes may also be immune—and even hostile—to economic inducements if such inducements imply reform and opening. This book captures the effects of sanctions and inducements on North Korea and provides a detailed reconstruction of the role of economic incentives in the bargaining around the country's nuclear program.

Stephan Haggard and Marcus Noland draw on an array of evidence to show the reluctance of the North Korean leadership to weaken its grip on foreign economic activity. They argue that inducements have limited effect on the regime, and instead urge policymakers to think in terms of gradual strategies. Hard Target connects economic statecraft to the marketization process to understand North Korea and addresses a larger debate over the merits and demerits of "engagement" with adversaries.

1

Introduction

The Political Economy of Engagement

North Korea is routinely ranked among the most economically distorted, closed, and politically anachronistic authoritarian systems in the world. If it were located elsewhere, interest in the country would be limited to its chronic humanitarian problems: its pervasive human rights abuses, food shortages, and even outright famine. But North Korea’s geographic position and nuclear ambitions have forced the major powers in Northeast Asia—China, Japan, South Korea, Russia, and the United States—to pay attention.

Most analysis of the extended nuclear crisis that first broke in 2002 has focused, quite legitimately, on high politics: the diplomatic and military strategies of the contending parties and their consequences (for example, Cha and Kang 2003; Funabashi 2007; Pritchard 2007; Chinoy 2008; Bechtol 2010; Pollack 2011; Cha 2012). What has driven North Korea to acquire nuclear weapons? What role do security concerns play in the regime’s calculations? What military or political pressures might be brought to bear on it? What are the risks of war?

However, the course of the crisis and the prospects for reaching a durable settlement have rested in no small measure on economic issues. Could economic engagement and side payments moderate North Korean behavior? Are sanctions a more effective way to capture North Korea’s attention? To what extent do economic inducements or constraints affect the North Korean leadership one way or another?

These questions are ultimately tied to a host of important domestic political economy issues that have received far less attention than they should. How willing is the North Korean leadership to continue to pay the tremendous opportunity costs of autarky? Can the regime be induced onto a reform path that would also push the country toward a settlement of the nuclear issue? Or is a settlement of outstanding security issues a political precondition for coaxing North Korea out of its economic shell?

In Famine in North Korea (Haggard and Noland 2007a), we took a first cut at the political economy of the post-1990 period, focusing on the economic and humanitarian consequences of North Korea’s isolation. Highly dependent on support from Moscow, claims of self-reliance notwithstanding, the North Korean economy experienced a full-blown collapse following the demise of the Soviet Union. The country experienced one of the great famines of the twentieth century, a tragedy in which, we estimate, between 600,000 and 1 million people died. Although external shocks and adverse weather played a role in the calamity, at root it was the manifestation of profound state failures that included not only lack of accountability and unequal distribution of food but also the unwillingness of the regime to tap foreign sources of food supply. We showed that with relatively minor adjustments to its economic strategy, the regime could have largely avoided catastrophe.

The famine had wide-ranging economic and social consequences; we focused on two. First, the central planning system effectively collapsed, causing the North Korean economy to undergo a largely unplanned and unintended process of marketization and privatization from below. Small-scale social units—households, work units, local government and party offices, and even military units—adopted entrepreneurial coping strategies to secure food and survive. Farmers took advantage of the dramatic shift in relative prices to work on private plots and engage in market-related activities as well.

As we show in Chapter 2, the regime’s reaction to these new economic and social forces was ambivalent at best. The leadership initially acquiesced in the marketization process, decriminalizing coping behaviors, ratifying the changes taking place on the ground, and even initiating tentative reforms in 2002. Following the onset of the second nuclear crisis in October 2002, the government oscillated between stricter controls on market forces and periods of relaxation and pilot reforms. At no point, however, did it openly signal a willingness to undertake the types of reforms that China had pioneered in the Deng era.

The second effect of the economic crisis of the 1990s was a fundamental change in North Korea’s foreign economic relations. Throughout the Cold War, the country’s trade, investment, and aid ties centered largely on the socialist countries. Tentative forays into Western product and capital markets were limited in part by sanctions but more fundamentally by North Korea’s autarkic economic strategy. Many contacts ended in mutual disappointment and recrimination (Cornell 2002).

The crisis of the mid-1990s did not result in a liberalizing shift in foreign economic policy, but the country did see substantial changes in its foreign economic relations. The famine triggered a massive international aid effort, at its peak feeding more than one-third of the population (Haggard and Noland 2007a). In addition, the famine triggered slow but steady growth in foreign trade and an effort to diversify trading partners and exports. These developments sprang in part from new diplomatic initiatives and in part from efforts to secure foreign exchange through both licit and illicit means. But this growth, particularly in ties with China, also reflected spillover from the process of de facto marketization triggered by the famine. An array of actors sought out commercial opportunities—and foreign exchange—in the interstices of the great wall that the regime had constructed around the country. Cross-border exchange, in turn, further fed the domestic marketization process.

In this volume, we draw on a growing theoretical and empirical literature on economic statecraft to connect marketization processes, changing foreign economic relations, and the strategic interplay around North Korea’s nuclear program. The ultimate objective is not only to understand North Korea but to address the debate about sanctions and the merits and demerits of “engagement” with adversaries.

As we show in Chapter 3, it is no simple matter to document North Korea’s external economic relations; even the simplest national accounts information is treated as a state secret, and information on foreign trade and investment is similarly controlled. Moreover, the country has been engaged in a variety of illicit activities, from drug smuggling to counterfeiting. Export revenue derived from the sale of weapons and associated consulting services has also played a critical role in the economy.

However, North Korea’s external relations leave at least some traces with foreign partners. Economic forensics allow us to reconstruct its growing economic relations with major trading partners, particularly South Korea and China, and a broader balance-of-payments accounting as well. We assess the extent to which North Korea is becoming more open, and we identify the public and quasi-private North Korean entities engaged in cross-border trade and investment and the nature of their activities, both and illicit and legitimate. In Chapter 5, we explore these issues at the firm level by drawing on two original surveys of Chinese and South Korean firms doing business in North Korea.

This book is not simply about North Korea. It also seeks to address the broader theoretical and empirical question of how and whether “engagement” with adversaries—and economic engagement in particular—can mitigate security dilemmas, induce cooperation, and even transform recalcitrant states. The question first became salient in US foreign policy with the efforts of the Nixon administration to reach détente with the Soviet Union, building on ideas pioneered by West Germany’s Ostpolitik. These same ideas were subsequently appropriated by Kim Dae-jung’s “Sunshine Policy,” by Roh Moo-hyun and by Park Geun-hye’s Trustpolitik as well. The debate with respect to US foreign policy has continued in discussions about China (for example, Shinn 1996) and the other so-called rogue regimes with which the United States has had to deal, including Cuba, Iraq, Libya, Iran, and Myanmar (Littwak 2000; Rotberg 2007; Nincic 2005, 2011; Solingen 2012a).

The issues debated are nested in the larger question of how economic statecraft, including both sanctions and engagement, work. As David Baldwin (1985) notes in his classic work on the topic, sanctions have multiple objectives that range from outright denial of economic gains to controls on prescribed and illicit trade to signaling third parties of intent. Yet they are typically undertaken with the strategic objective of linkage: changing the behavior of the target state.

In contrast to the voluminous literature on sanctions, less has been written on the political logic of positive inducements or “engagement” (exceptions include Baldwin 1971, 1985; Crumm 1995; Long 1996; Drezner 1999, 2000; Brooks 2002; Kahler and Kastner 2006; Solingen 1994, 2007, 2012b; Nincic 2010, 2011; Verdier and Woo 2011). Clearly the logic of engagement is by no means limited to the economic sphere (Haass and O’Sullivan 2000). For example, engagement entails the commitment to talk and negotiate in the first place, and this theme comes up repeatedly in the North Korean case. Yet economic inducements play a central role in engagement strategies. We thus define engagement as the promise or extension of economic exchanges—including trade, investment, aid, and other transfers—as an instrument of foreign policy.¹ How and to what extent might such engagement work, both in general and with respect to North Korea and other nuclear proliferators in particular?

We begin in this Introduction with an outline of the core theoretical issues before turning to the complications posed by humanitarian considerations for economic statecraft, including both sanctions and inducements. We then set the stage for the chapters that follow with a brief political history of the post–Cold War period on the Korean peninsula, focusing on the so-called second nuclear crisis that starts in 2002; we conclude our story in 2016. We close with an outline of our empirical strategy and a description of the contours of the book.

The Political Economy of Sanctions and Engagement I: Economic Statecraft as Linkage

There are two distinct conceptions of how engagement affects the behavior of a target state (Nincic 2010, 2011). First, engagement can be modeled as a chip in a bargaining game in which inducements are offered in exchange for policy quid pro quos. Keohane (1984) has called such exchanges narrow or specific reciprocity. In this model, engagement, like sanctions, “works” by changing the cost-benefit calculus of the leadership of the target state. But economic engagement has also been theorized to have broader transformative effects (Solingen 2007), such as strengthening political coalitions with more moderate foreign policy preferences or socializing the target’s political leadership to new opportunities and norms. At the extreme, engagement may result in fundamental changes in domestic politics, a stated objective of Kim Dae-jung’s Sunshine Policy. We take up each of these models in turn.

Theoretically, the logic of inducements as a quid pro quo should not differ fundamentally from the logic of sanctions. Both involve the manipulation of costs and benefits in the context of a bargaining game. In fact, however, there are a number of potential differences between the logic of imposing constraints and that of extending rewards. These include psychological differences in how individuals—and presumably countries—view the prospects of gains versus losses (Kahneman and Tversky 1984; Levy 1997). Sanctions and inducements also have quite different signaling effects: sanctions are more hostile and threatening than rewards.

At the same time, there are a number of similarities in the use of economic inducements and sanctions that have been overlooked in the highly polarized policy debate over the merits of engagement. For example, inducements no less than sanctions can be undermined by coordination and bargaining problems. And while it is widely noted that sanctions are much less likely to have their desired effect if leaders can impose their costs on the citizenry with relative impunity, domestic political factors may also influence the efficacy of inducements. Imagine, for example, the efficacy of promises of greater trade and investment with a state that is wary of economic engagement to begin with.²

As the sanctions literature shows, it is highly doubtful that we can reach a blanket judgment on the efficacy of sanctions and inducements. The early debate on whether or not sanctions worked (for example, Pape 1997; Elliott 1998; Baldwin and Pape 1998) has rightly given way to a more nuanced discussion of the conditions for success, and more careful consideration of what “success” even means. We follow a similar line here, focusing on three central parameters that have been shown to influence the efficacy of sanctions but which we show can also affect engagement strategies. These are the domestic political economy of the target state, problems of coordination, and credible commitment problems that emerge in quid pro quo negotiations. We take up the first issue in more detail in Chapter 2 and the other two in Chapters 3, 6, and 7.

North Korea as a Hard Target

Early theoretical papers modeled sanctions as a bargaining game between sender and target (Eaton and Engers 1992), but such models quickly gave way to a consideration of the domestic political economy of the target (particularly Kirshner 1997; Kaempfer and Lowenberg 1988, 1992). Sanctions can work via direct economic costs on the leadership of the target state—for example, by freezing government or personal assets—or indirect political costs that affect the welfare of constituent groups or broader publics, such as through trade embargoes. These costs are in turn presumed to induce political leaders to cooperate.

One of the more robust findings in the literature is that the target’s regime type is an important determinant of sanction success (Brooks 2002; Kahler and Kastner 2006; Allen 2005, 2008a, 2008b; Letzkian and Souva 2007; Hufbauer et al. 2007; Escriba-Folch 2012). Because authoritarian regimes can repress and impose costs on their populations—and may even be incentivized to do so by sanctions (Allen 2008a, 2008b; Wood 2008; Escriba-Folch and Wright 2010; Escriba-Folch 2012; Major 2012)—they constitute “hard targets,” vulnerable only under highly specific circumstances. Needless to say, this observation is highly germane to North Korea. The North Korean regime survived a famine that likely killed between 3 and 5 percent of the population in the mid-1990s. It is doubtful that the major parties could coordinate actions that would be nearly as consequential or, if they could, that the North Korean government would necessarily respond. Sanctions are only likely to work in such a setting if they can be targeted quite narrowly at the leadership, a recurrent preoccupation in the broader sanctions literature (e.g., Cortright and Lopez 2002).

However, we must consider whether the domestic political characteristics of the target state also constrain the efficacy of inducements. Sanctions have impact through their adverse welfare effects; inducements operate by providing welfare gains. Advocates of engagement argue that inducements influence internal decision making in favor of “doves” (for example, Harrison 2001; Moon and Bae 2003 on North Korea). But it is by no means clear that authoritarian decision making can be modeled as the result of interest group politics (although a number of accounts have tried; see, for example, McEachern 2010 on North Korea). The stylized quid pro quo envisions prospective economic benefits flowing to reformers, enterprises, and individuals that stand to gain from greater openness. The political leadership reaps some political gain from the welfare gains of these groups and is thus either induced or constrained to behave in a cooperative way. Concessions are made by those opposed to cooperation, presumably including some portions of the military.

Yet as we show in Chapter 2, the evidence that Kim Jong-il and Kim Jong-un saw major economic or political gains from expanded trade and investment relations is mixed at best. The hesitancy of the government with respect to “reform and opening” is clear and, at least to date, stands in contrast with the more openly reformist paths taken by the communist parties of China and Vietnam. Moreover, the forms that North Korea’s “engagement” with the world economy has taken include illicit activities, money laundering and weapons sales, hardly the type of activities that would have transformative political and social effects of the desired type.

Indeed, the main lesson that Kim Il-sung, Kim Jong-il, and Kim Jong-un appear to have learned from the collapse of European communism is that it resulted from political and economic opening. Following the collapse of the Soviet Union, the regime redoubled its emphasis on ideology and leadership, particularly the latter’s dynastic features (Quinones 2002). Kim Jong-il’s main ideological innovation after taking office from his father in 1994 was “military first” (songun) politics, which sees the military as the exemplary institution of the revolution and by implication a key pillar of the regime’s support. Military and national security tropes continued to play a central role in governance under Kim Jong-un, most notably in the articulation of the so-called byungjin line of 2013, which emphasizes the simultaneous pursuit of economic development and nuclear weapons. To the extent that Kim Jong-un relies on the military or is constrained by it, marginal inducements are unlikely to result in a wholesale shift in political alignments or public policies in favor of reform.

Paradoxically for advocates of engagement, positi...