A More Realistic Approach to the Economic Side of Nuclear Negotiations with North Korea

As the US and North Korea prepare to resume working-level negotiations, it is hoped that both sides have been able to internalize a much-needed dose of realism regarding how to proceed. While considerable attention has been given to what this means for the technical side of denuclearization, less attention seems to have been given to the economic side, apart from finding mutual ground on the scale and timing of sanctions relief. However, economic security means more than just lifting sanctions and should be recognized as an integral part of the North’s overall national security equation. A more robust and realistic approach to the economic aspect of the negotiations would strengthen the viability and sustainability of progress on denuclearization and help anticipate the practical challenges of future economic engagement.

Getting Past Assumptions

US thinking about what North Korea wants from negotiations with the United States tends to oversimplify Pyongyang’s goals. There is a general belief that the North’s goal is strictly to obtain sanctions relief and relieve “maximum pressure.” As such, meaningful engagement on economic incentives for North Korea usually begins by wrestling over where to allow flexibility on United Nations Security Council and US unilateral sanctions, while still trying to limit significant transfers of resources for anything other than humanitarian purposes until there is credible progress on the denuclearization agenda. The underlying assumption is that if a deal is successfully negotiated and sanctions are lifted, the US will lose leverage for further negotiations as expanded trade and investment will flood into North Korea from multiple sources, both official and private, which the regime would welcome with open arms.

However, this may not be the case. Sanctions relief is certainly part of Pyongyang’s strategic calculations, but while the regime works to create conditions conducive to its larger goal of increased economic development, being able to control how that takes hold is just as important of a priority. Last year, for instance, Kim Jong Un made clear a shift from his byungjin policy of dual nuclear and economic development to a policy that puts the economy first, although with caveats. Kim’s speeches about this new direction emphasize the need to pursue economic development and management “in our own style.”[1] What exactly “in our own style” means is unclear, although the 2019 New Year’s Editorial gives some insight into North Korean economic management goals in the current environment. Despite this notable strategic shift, there has not been any engagement between US and North Korean economic officials to try to gain understanding of this concept. In fact, there has not been any significant interaction between the two on economic issues since the technical working group was established to resolve the Banco Delta Asia impoundment of DPRK funds in 2005 that disrupted the Six Party Talks for many months.

In order to get beyond assumptions about how the economy plays into Pyongyang’s strategic vision, it would seem increasingly important to meet directly with high-level North Korean economic officials to learn about their development aspirations and current economic management policies and challenges and to discuss ways that future economic cooperation could support desirable reforms and mutually beneficial opportunities. Such dialogue would contribute to trust building and may help identify meaningful measures beyond limited sanctions relief that could be included as part of a nuclear deal, while helping set the stage for future economic relations.

Implications for Future Economic Engagement

In order to truly feel “secure,” the Kim regime will need to believe that its economic future will not be compromised by economic engagement if concessions are made on the security front. At the same time, North Korea will want to avoid being railroaded by future economic partners who will seek to advance their own interests at the expense of the North’s. The history of Japanese, Chinese and South Korean economic policies towards North Korea is marked by self-interest and a lack of coherence. Exploitation of North Korea’s natural resources and labor was a significant motivator of Japanese colonial policies; recent Chinese investment and trade in iron ore and coal has resulted in little domestic value-added for the North; and South Korea has exploited North Korea’s labor productivity and low wages in efforts to pursue economic integration with their business acumen and access to global markets. Looking ahead, it can be expected that Pyongyang will want to remain in the driver’s seat in meeting their economic development interests while expanding cooperative economic relations and adopting reforms to improve economic performance and come into closer alignment with international norms and expectations.

While no deal with the US could ever fully provide economic security guarantees for the regime or the country, it can create conditions that better support the North’s economic development and transition towards a more efficient economic system. This must include assistance for shifting from non-transparent and illegal business practices to norms widely shared in the international community, encouraging policies and institution building that can enhance mobilization of both international and domestic savings for investment and supporting broad distribution of the benefits of economic development in the North Korean population.

In addition to the adjustments needed to prepare for a different external economic environment should nuclear negotiations prove successful, the dynamics of changes to the economic system taking place pose significant domestic challenges. North Korea has evolved into a mixed economy with market-based activities now accounting for about a third of GDP. Despite the implicit support for this expanding role of markets, formal North Korean policy statements and political rhetoric ignore the role of markets and implications for managing a mixed economy with private actors, private accumulation of savings and investment decision making and illegal, but allowed, private trading rights for assets such as housing. The North’s financial system, legal system and macroeconomic management are behind the curve of these developments and a recalibration of policies and institutions is needed for a successful economic development process.

More importantly, the social contract in the relationship of the state to the people has been dramatically challenged by the growing role of markets. As self-reliance takes on a more personal character than a corporate societal one at the household level, the North Korean foundational values of reciprocal obligations of the leader and the people and of personal interests being subordinated to those of the collective society are losing internal salience. Kim Jong Un has made promises to the people not to have to “tighten their belts again” and has tethered his legitimacy as a leader to broadly based economic development. To fulfill this promise, he needs to revise the overall social contract as the traditional economic system evolves to enable sustained economic growth amid changing external economic relations. This is a formidable domestic challenge for Kim and one that early involvement of trusted dialogue partners could help provide substantive advice and legitimacy for in order to encourage him to enact the reforms needed to navigate these transitions.

Additionally, if negotiations are successful, an important issue will be the coordination of future economic engagement with both multilateral and bilateral donors and private investors. As in the case of Vietnam in the early years and Myanmar more recently, North Korea does not presently have the knowledge and capacity to manage a significantly enlarged scale and composition of economic relations without internal and external confusion and complications. Helping the government prepare for an investor coordination role that is integrated with its own economic planning and policy-making apparatus would benefit from neutral multilateral advice and technical assistance in advance as both a confidence building measure and a practical one to forestall misunderstandings and minimize implementation challenges.

Considerations for Future Planning

Given the dynamics of North Korea’s economic development goals, the following are some practical steps that might be taken to bring more realism into shaping the economic side of current or future nuclear negotiations.

First, mutual learning and dialogue between economic officials and experts in the form of both official and Track 2 meetings could provide useful inputs to the negotiations process. This is already happening to a limited extent in North Korean meetings with Russian and Chinese officials and inter-Korean discussions, but could be expanded and more formally linked to the negotiations process. To encourage multilateral coordination of economic engagement as denuclearization proceeds, Track 2 discussions among economics experts and officials from all the Six Party Talks countries would also be useful.

Second, consideration should be given to bringing the International Monetary Fund (IMF), World Bank and Asian Development Bank into non-financial engagement with North Korea sooner rather than later. Adjusting to the relaxation of sanctions and moving towards a much more transparent and legally based system of external economic relations will be a major challenge. These international financial institutions (IFIs) are well-placed to provide advice, training and technical assistance to build North Korean capacity and confidence in navigating these transitions. It will be especially important for the IMF to support North Korea in preparing and publishing national income and balance of payments statistics that will need to underpin an opening to the international community. The transformational experience of Vietnam and Myanmar was significantly enhanced by the early involvement of the IFIs, both substantively and to give legitimacy to the realism of the economic policy and management commitments being made in the eyes of international and domestic stakeholders. It also gave investors and foreign donors a transparent accountability framework that helped motivate financial commitments when the timing became politically acceptable.

Third, planning for relaxation and removal of sanctions should be made explicit and accompanied by realistic expectations of investor and donor responses. The experience of relaxing and removing sanctions placed on Myanmar was partial, protracted and confusing. While most European and Asian sanctions were removed after the democratic transition, US sanctions remained in place initially to maintain leverage for further reforms and were gradually relaxed by granting a series of exceptions with an expanding scope for investment and trade until they were largely removed in 2017. As a result, investment from US companies was highly restrained due to uncertainty about legal and financial implications and administrative complications, while Asian investment soared. In the early years of the transition, seven of the top ten investors were from Asia. China, Thailand, Singapore and Hong Kong accounted for 75 percent of foreign direct investment commitments.

Compared with Myanmar, the sanctions placed on North Korea are much more complex and relaxation or full lifting will involve both executive and statutory actions from the UN Security Council and the US government. Like Myanmar, it is highly unlikely that US companies will be ready to invest in North Korea even after a successful nuclear negotiation; whatever investment and trade increases that follow are most likely to be from Asian countries, with China and South Korea being the most significant.

Fourth, attention should be given to improving coordination of economic engagement policies among North Korea’s major future economic partners. China, by prioritizing enterprise-to-enterprise economic engagement and diversified cross-border trade, has successfully supported the growth of markets and local-level economic initiatives over the past 20 years. Conversely, South Korean policies of economic engagement dominated by the Kaesong Industrial Complex, Mount Kumgang tourism and processing-on-commission trade have largely propped up the status quo system of resources flowing directly to the leadership and top-down patronage through the state-managed public distribution system without any discernible impact on the growing marketization of the economy. After the shutdown of most inter-Korean economic relations in 2010 and closure of the Kaesong Industrial Complex in 2016, South Korea has the opportunity to recalibrate its future economic relations to be more directly supportive of the role and growth of markets and normalize commercial relations between enterprises. China has the opportunity to introduce more transparency and rules-based legal discipline in its future economic relations and support increased domestic value-added in imports from North Korea. Coordination on economic engagement can help set the stage to integrate North Korea in a more coherent and inclusive Northeast Asia economic cooperation framework.

Finally, international concerns about North Korea’s human rights conditions have been, until recently, largely ignored in negotiations on nuclear and other military security-related issues. However, given North Korea’s push for economic development, negotiations could address economic rewards in substantively meaningful ways that go beyond relaxing sanctions. This presents opportunities to promote cooperation on economic management practices that can produce both monetary gains for North Korea and some improvements on the human rights front. For instance, measures that result in positive human rights impacts, such as reduced use of forced labor and clarification of private asset ownership rights, could also help increase international support for the negotiation process.

In conclusion, a successful and sustainable nuclear negotiation will need to incorporate an economic security component that is realistic in responding to North Korea’s challenges and aspirations as well as national pride. Considering the high priority being given to economic development, integrating a robust economic dialogue into the negotiation process that goes beyond sanctions removal and vague promises of future rewards or narrowly defined commitments could prove productive. It can also contribute significantly to building trust and establishing a foundation for economically constructive future relations with international partners to complement the security guarantees needed for denuclearization.

1. [1]

   North Korea has often referred to its desire to pursue economic management “in our own style” in avoiding explicitly embracing market-oriented reforms and reinforcing the commitment to self-reliance. See: Min-kyung Jung, “NK stresses economic policy integrating market-oriented reforms,” Korea Herald, April 23, 2018, http://www.koreaherald.com/view.php?ud=20180423000745.