How North Korea Can Strike It Rich

Pyongyang's path to prosperity starts in Singapore.

A coin for the upcoming US-North Korea summit is seen in Washington, DC, on May 21, 2018. (STR/AFP/Getty Images)
A coin for the upcoming US-North Korea summit is seen in Washington, DC, on May 21, 2018. (STR/AFP/Getty Images)

One of Donald Trump’s strategies for enticing North Korean leader Kim Jong Un into sweeping talks about scrapping his country’s nuclear arsenal has been to dangle an apparently unlikely promise of future prosperity. Kim’s poverty-stricken country, Trump said at a White House meeting last month, could end up “very rich.” Is this just more Trumpian hyperbole, or is the president on to something?

The Korean Peninsula offers about as close to a natural experiment for answering that question as you can get. One half of the peninsula took an authoritarian state-capitalist path and is now an advanced industrial democracy. The other opted for state socialism and is now poor and isolated. The conclusion: There’s nothing to stop North Korea — sharing similar geography and human capital — from following in the footsteps of South Korea and other countries in the region.

The question is, how? History suggests several possible paths — and a few roadblocks worth keeping in mind.

The Route to Reform I: The Domestic Economy

First and foremost, the regime would have to undertake the “strategic shift” that U.S. Secretary of State Mike Pompeo has repeatedly referenced, which would require Pyongyang to recognize that pursuit of nuclear weapons at the expense of economic development is a hindrance, not a help, to the regime’s survival.

The main purpose of the summit is to find out whether such a change in thinking has in fact occurred, but there is some evidence that it may have. In addition to making a number of small concessions to secure the summit, Kim openly spoke before a Central Committee plenum in late April about the end of the so-called byungjin line: the idea that North Korea would pursue its nuclear and missile programs simultaneously alongside economic development. Now, Kim seemed to suggest, the focus should be on plowshares, not swords.

Full denuclearization will take years. Nonetheless, just moving in that direction would likely lift some sanctions pressure and provide opportunities for economic integration with the region. In 2006, before Western sanctions began to bite, North Korea had trade ties with many neighbors, unlike the current near-total reliance on trade with China.

Domestic reforms will also be necessary, although some of these have already been in train for some time. The process that Marcus Noland and I have called “marketization from below” began during the great famine of the early 1990s, when households were forced to scramble for their livelihoods. It appears that Kim Jong Un has allowed the development of formal and informal markets to move along, even if top-down reforms have been harder to see. Indeed, sanctions may have even pushed this process along, forcing local substitution for imports.

Ultimately, North Korea will need a three-pronged reform effort, one that overhauls its agricultural sector, seeks to exploit its potential in industry and services, and can attract much-needed foreign investment and trade.

In agriculture — the first prong of the reforms — North Korea should broadly follow the Chinese model of providing greater incentives to cultivators, shrinking the size of work teams on cooperatives and state farms, allowing households to plant as they see fit and keep more of their output, and permitting larger private plots and direct sales. Such reforms would increase desperately needed supplies of food and, ultimately, free surplus labor for other activities.

However, the reform process in North Korea is not likely to be led by agriculture, as it was in China and Vietnam. The agriculture sector is smaller, accounting for less than half of the workforce, and terrain and weather are not propitious.

The flip side of the smaller agricultural sector is a sprawling state-owned enterprise sector ripe for reform, the second prong of the program. Much of the capital stock in state enterprises is probably worthless, foreshadowing the difficult transitions seen in Russia and industry-heavy countries such as Romania in Eastern Europe. But that could be just as well.

The decline in the industrial sector in North Korea has been so substantial, and the social benefits provided by formal employment so eroded, that tremendous gains could arise from simply letting managers do business as they see fit. Exactly such a process appears to be in the works; as Andrei Lankov and his colleagues have demonstrated, state-owned companies are already behaving more like capitalist firms. A common pattern: State-owned enterprise managers partner with entrepreneurs to maximize the return on assets such as land.

One golden opportunity for transformation: North Korea is exemplary of the tendency for socialist economies to ignore the service sector. Already, small-scale activities such as restaurants, hauling and transportation services, and small shops are mushrooming. With deeper reforms — or simply a more laissez faire government approach to the state sector — the country could spur the growth of larger-scale commercial enterprises in such areas as construction, transportation, and even finance and telecommunications.

The Route to Reform II: Foreign Trade and Investment

Given North Korea’s small size and geographical position, it is clear that the foreign sector is the third crucial prong of the reform process and will need to play an even larger role than it played in China and Vietnam. Interestingly, the regime’s stalled effort to attract foreign direct investment and its continual complaints about the sanctions regime are a tacit recognition of this fact.

In addition to the extraordinary demand for investment, foreign firms, whether traders or investors, represent the connective tissue between North Korea’s potential and the world economy. Foreign firms have the blueprints for the products that the rest of the world wants to buy and the global marketing channels to bring those products to markets. North Korea has a literate and numerate work force.

A first step would no doubt be more exports of minerals such as coal and iron that are currently banned. But light and medium technology, labor-intensive manufactures — starting in sectors such as textiles, apparel, and electronics — would probably lead the growth process, as they did in other East Asian miracle economies. Millions of North Korean workers could change jobs. Some existing industrial towns could be depopulated if labor movement were freed up, but those near ports, near China, or near the road and rail links with South Korea and Russia could expand dramatically.

Again, evidence is on the table. Before it was shuttered in 2016, the Kaesong Industrial Complex highlighted the potential of marrying foreign capital with North Korean labor. Likewise, witness the ongoing efforts of the Rason economic zone, a rare window of openness to the outside world, to survive the tightening sanctions regime.

Trump has made clear that the United States will not pay for North Korea’s denuclearization, at least not financially. The main U.S. concessions will come through sanctions relief and by offering security assurances. The United States does not need to lead the aid process, though. Multilateral institutions such as the Asian Development Bank, and ultimately the World Bank, have the technical expertise that North Korea needs. China is poised to open the spigot of trade and investment, and South Korean President Moon Jae-in is clearly anxious to reopen not only North-South talks, but also channels of trade and aid as well. An early focus: the massive infrastructure investment needs that North Korea has, including basics such as road-building, rail links, and the failing electrical grid.

Downside Risks

None of this will be easy, and clearly countries do not get rich overnight. What’s needed is not an immediate makeover but a steady diet that adds up to improved livelihoods over time. Plenty can go wrong, though, and it is worth outlining possible bad outcomes and downside risks.

First, it is quite possible that Kim Jong Un is just playing for time, seeking to keep his missiles and nuclear weapons while hoping that the sanctions regime will gradually fray. In this case, reforms are less likely to work, because conflicts with China over sanctions-busting will escalate, and most investors — even larger Chinese firms — will calculate the risks and stay away.

Second, the regime could easily get cold feet. The Chinese Communist Party had the confidence — and acumen — to engineer a reformist path. By unleashing a reform process, Kim could get vertigo, watching the ground underneath his feet shifting too quickly and fearing loss of control.

Finally, it is worth closing with an unintended outcome, even if everything else comes to pass. The core premise, explicitly stated by Trump, is that Kim keeps his job. We need to be honest: The United States is not assuring North Korea’s security — it is assuring Kim’s security.

It’s easy to believe that all good things go together and a transition to the market will be accompanied by ineluctable social and political pressures from below. But China shows that is simply not true. A North Korea with a more vibrant economy could even strengthen Kim’s hand; why else would he place the bet? Yet if changing the regime is not something in America’s power to do, working toward a nuclear-free, reformist North Korea is not a bad second best.

Stephan Haggard is the Krause Distinguished Professor at the University of California and the author with Marcus Noland of Hard Target: Sanctions, Inducements and the Case of North Korea (Stanford University Press, 2017).

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