Could North Korea Have Struck It Rich?

Kim Jong Il promised that in 2012, North Koreans would witness a new dawn of prosperity. Here's how it could have been done.

Whatever the opposite of the Midas touch is, North Korea's leaders seem to have it. Located in a region where all of its neighbors have experienced remarkable economic growth, the North Korean economy has stagnated for more than two decades. For the last several years, North Korea's leadership has promised a new dawn of prosperity by April 15, 2012, the 100th birthday of the country's founding leader Kim Il Sung. Instead, the country has bounced from an avoidable famine in the mid-1990s to a disastrous currency reform in 2009 to a costly -- and failed -- missile launch earlier this week. The country now has an annual per capita income of about $1,000, roughly the same as Pakistan. Did it have to be this way?

It's not as if the North Koreans haven't thought about development. In 1998, after a famine that killed between 600,000 and a million people, Dear Leader Kim Jong Il rolled out two new concepts that have served as the core ideological and propaganda pillars of the regime ever since: "military first politics" (songun) and the objective of becoming a "strong and prosperous nation" (kang song dae guk). The latter involved achieving ideological and military as well as economic strength. The regime proved its ideological resilience by sticking with socialism and surviving the collapse of communist rule in the Soviet Union and Eastern Europe. Testing nuclear weapons in 2006 and 2009, and a long-run missile this week, was meant to demonstrate military strength.

That left economic growth. North Korea has failed miserably in this area, but we can speculate about what might have been. Other countries in the region, like Japan and China, have sustained economic growth in excess of 8 percent for several decades. Many began in equally inauspicious circumstances: South and North Koreans were on par in the 1950s, but South Korean incomes are now more than 20 times higher.

For North Korea to have succeeded would have required a fundamental change in mindset: greater openness to the international economy, willingness to admit mistakes and seek help, and an earlier recognition of the benefits of trading with China. Above all, the leadership would have had to allow the organic, home-grown market economy more space to develop. If, from the end of the Cold War in 1990, North Korea had started making sensible economic decisions, its per capita income could have tripled from 1990 to the present, putting it in league with Ukraine or Morocco.

That's not, of course, what happened. Heavily dependent on Soviet oil and other inputs, North Korea's industrial and agricultural sectors went into a steep decline after the 1991 collapse of the Soviet Union. Three years later the only ruler the country had ever known was dead. In South Korea and Vietnam, crises have spurred reforms; North Korea would have needed to act with alacrity.

Some, including the Chinese leadership itself, have argued that North Korea should have simply followed the route pioneered by its larger neighbor by providing greater incentives to farmers. Although that would have helped, North Korea's limited arable land and lousy weather mean it wouldn't have gotten the same bump from the agricultural reforms that played a crucial role in the Chinese transition. North Korea should have gone global early, aggressively seeking out foreign investment and expanding exports of manufactured goods and its ample endowment of natural resources.

Such a radical turn in direction seems far-fetched: North Korea derives much of its legitimacy from being the socialist alternative to the South. A rapprochement with Seoul to bring Korean conglomerates such as LG and Hyundai into the country would have looked like capitulation. But the two countries came tantalizing close to détente with a well-crafted North-South political agreement in 1991 that sought to ease tensions on the peninsula. Even a modest and gradual opening to the South would have provided significant gains to the economy in the 1990s when it was hurting the most.

Given the regime's nervousness about the presence of foreign companies, it could have accomplished this objective by establishing export processing zones that were initially isolated from the rest of the economy, like China did in Guangdong in the 1980s, as well as through joint ventures with China, a less threatening partner. Beginning in the early 1990s, North Korea experimented with such zones in the northeast of the country, near the Russian border, but never prioritized them. Moreover, the leadership was surprisingly slow in seeing the benefits of proximity to China, reading Beijing's post-Tiananmen massacre reforms as a sign of right-wing deviationism. China has kept North Korea afloat since 2000, but earlier engagement would have accelerated growth.

North Korea has also had a difficult time understanding that nuclear and missile brinksmanship is not good for business. After the collapse of its Soviet patron, an isolated North Korea toyed with a nuclear option as protection. But instead of funneling scarce capital and manpower into an expensive nuclear option and large conventional forces, it could have achieved the same basic security objective by honing a more minimalist conventional deterrent, like the threat of shelling Seoul. Avoiding the first nuclear crisis of 1992-94 would also have helped jump-start the economy by making North Korea a more appealing investment and trade partner.

Even if all of this had gone right, the early 1990s would have been painful. Like Eastern Europe, North Korea would have suffered from a significant transitional recession. But its famine was avoidable. The World Food Program provides an international social safety net against famine, and North Korea subsequently became a surprisingly large recipient of food aid. Countries, however, have to issue an appeal for humanitarian assistance; North Korea didn't do so until 1995, when disastrous floods provided political cover. If it wanted to remain self-reliant, it could have developed exports to pay for commercial imports of food.

Beginning in 1998, small signs of reform began to appear. In the wake of the famine, the economy had begun to marketize from below as households and work units engaged in trade and barter to secure food. The regime acquiesced, allowing some markets to operate. The government changed the constitution to make at least some room for the market and implemented a major reform package in 2002. These reforms showed some willingness to experiment with a new course, and had an important international dimension as well: The North-South summit of 2000 and rapprochement with Japan and China showed at least some understanding that internal reform and an approach to potential trading partners went hand-in-hand.

This potential breakthrough quickly slammed into the wall of yet another nuclear crisis in October 2002, when the United States discovered that the North was seeking out technology to enrich uranium. Again, a nuclear confrontation diverted attention and resources from economic development, and made North Korea an unappealing location to do business.

From 2005 to the present, North Korean economic policy can best be characterized as "reform in reverse." Markets were opened, then closed, then opened and closed again. A disastrous currency conversion in 2009 confiscated the cash holdings of traders and the savings of households, sending the worst possible signals to those engaged in the market. The missile and nuclear tests of 2009 and the provocations vis-à-vis the South in 2010 all served to underscore the lesson that nuclear brinksmanship is bad for business, except with China. Food shortages since 2008 have been as bad as any time since the great famine.

This period also highlighted another distressing feature of North Korea's economy: the regime's fascination with technological fixes. The regime has channeled resources into missile and nuclear technology and information-technology ventures while remaining unable to feed its population. The problem is the common fallacy that poor countries become rich by acquiring the technological trappings of rich ones. But premature investment in high-tech white elephants diverts from spending on food, consumer goods, and investment in basic health and education. The failed missile launch, meant to signify that North Korea is a "strong and prosperous nation," is only the most glaring manifestation a desire to "leapfrog" rather than focusing on the basics.

North Korea did not have to become laissez-faire Hong Kong in 1990 to succeed. But an alternate North Korea that had adopted a more outward-oriented strategy, avoided nuclear confrontations, rang the famine alarm bells in a timely way, pursued gradual reforms, let private markets work, and avoided the lure of quick fixes would now be celebrating some real successes: not like South Korea, but at least the end of widespread malnutrition and the beginnings of sustained development. 

But that, sadly, is not the North Korea of today.



Backed Into a Corner

Hey America, there's a pretty good reason why Iran doesn't trust you. Maybe it's time for a different approach.

The Obama administration has done more to undermine Iran over the past three years than any U.S. presidency in the 33 years since the Iranian revolution. Under the shadow of a policy of "engagement," the United States and Israel have led a campaign of economic, cyber, and covert war against Iran. Yet this coercive approach, conducted along with sporadic negotiations on nuclear issues between Iran and the P5+1 group of China, France, Germany, Russia, the United Kingdom, and the United States has failed to resolve the future of Iran's nuclear program.

The primary issue is mistrust. American and Western politicians continuously reiterate their mistrust of Tehran but seem not to understand that this mistrust is mutual. Iran has profound reasons to distrust the West. The United States and the Britain orchestrated the 1953 coup that removed Iran's democratically elected prime minister, Mohammed Mossadegh, and installed a dictator, supporting him for a quarter century. Following the Iranian revolution, the West unilaterally withdrew from its contractual commitments and left Iran with billions of dollars of unfinished industrial and nuclear projects. In 1980, Iraqi President Saddam Hussein invaded Iran, sparking an economically ruinous eight-year war in which Iraq used chemical weapons against Iran, and 300,000 Iranians lost their lives. The United States and the West supported the aggressor in that conflict. In 1988, the U.S. Navy shot down an Iranian civilian jetliner, killing 290 innocent civilians, including 66 children.

In 1989, during Ali Akbar Hashemi Rafsanjani's presidency, Iran welcomed a proposal by President George H.W. Bush -- encapsulated by Bush's declaration that "goodwill begets goodwill" -- for hostages in exchange for unfreezing Iranian assets. Iran facilitated the release of American and Western hostages in Lebanon. Instead of goodwill, the United States responded by heightening pressures and hostilities, which convinced Iran's new leader, Ayatollah Ali Khamenei, that the United States could not be trusted to keep its promises. During Mohammad Khatami's presidency, Iran was among the first countries to condemn the 9/11 terrorists attacks and cooperate with the United States in the "war on terror," leading to the removal of the Taliban and al Qaeda from Afghanistan in 2001. In return, the United States rewarded Iran by designating it a member of the "axis of evil."

As recently as 2011, Iran, under President Mahmoud Ahmadinejad, offered to invite the U.S. representative in Afghanistan, Marc Grossman, to Tehran for talks on cooperation in Afghanistan, welcomed the Russian "step-by-step plan" to resolve the nuclear crisis, offered five years of full supervision by the International Atomic Energy Agency (IAEA) over Iran's nuclear program, and proposed halting uranium enrichment to 20 percent and instead limiting it to 5 percent, if Iran was provided with fuel rods for the Tehran Research Reactor. However, the United States and the West responded to all these unprecedented overtures with mounting pressures, sanctioning oil exports and Iran's Central Bank, and advancing U.N. resolutions that condemn Iran on terrorism and human rights.

Recognizing that mistrust is mutual is the first step toward confidence building. A second step is to acknowledge that the international community's "dual track" policy of pressure and diplomacy toward Iran has in fact been mostly a single track of coercion, sanctions, covert war, and isolation -- with no clear, coherent, strategic vision of the kind of relationship the United States can ultimately accept with the Islamic Republic. There has not been a meaningful agenda of specific proposals for practical ways to build confidence through diplomacy.

The third requirement for progress is for the United States to guarantee Iran that if it answers all of the IAEA's outstanding questions, the United States, Israel, and others will not use this information to ratchet up sanctions or other forms of coercion against Iran. The IAEA has frequently confirmed that it has found no evidence of Iran's nuclear materials being diverted for military purposes, but to close the file and end the nuclear crisis a more comprehensive modus vivendi needs to be established with the United States. Therefore bilateral talks between the United States and Iran must grow out of the coming P5+1 negotiations with Iran.

The fourth imperative is to recognize that Iran perceives small "step-by-step" negotiations as a trap. The Iranians have experienced such piecemeal policies for the last three decades with no success and no end to the fundamental conflict with the United States. Iran needs to know the entire game plan, including the end goal, before committing itself to anything. Thus, the next talks between the P5+1 and Iran will fail if the United States and other P5+1 members take a "piecemeal approach," asking Iran for example to reduce uranium enrichment from 20 percent to five percent in exchange for fuel rods. This idea is no longer attractive for Iran, since it has already reached the 20 percent enrichment level and produced fuel rods for the Tehran Research Reactor.

What's the best way to remove the atmosphere of crisis and to create a more stable basis for addressing Iran's relations with its neighbors and the broader international community? World powers must use negotiations on the nuclear crisis to resolve outstanding issues with the IAEA and allow Iran to exercise its right to enrich uranium while guaranteeing that this will not lead to nuclear weapons. "Commitments against rights" is the win-win formula. Iran would gain recognition of its legitimate right to enrich uranium for civilian purposes, the lifting of relevant sanctions, and the normalization of its nuclear file at the United Nations and the IAEA. The P5+1 would gain specific commitments and measures to guarantee that Iran will not make a nuclear weapon, assuring the international community of Tehran's commitment to remain a non-nuclear weapon state.

The current pressures only encourage Iran to be intransigent and a peaceful and reasonable solution to this imminent confrontation is necessary, now. After 30 plus years of mistrust, the stakes are now way too high to risk going about this in a piecemeal fashion.

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