Kim Jung-un recently admitted that his ambitious five-year plan from 2016 had “tremendously fallen short of goals in almost every sector”. What are the main causes of such a failed economy in North Korea, and how big of a role did the COVID-19 outbreak contribute to this?
Some experts thought that Kim Jong Un might be rethinking North Korea's economic strategy, but I was disappointed in the materials coming out of the Party Congress. Kim's regime put a lot of the blame for the poor performance of the economy on two things: external factors and the performance of the party and the bureaucracy. The message wasn't that the strategies that he had outlined at the previous party Congress were wrong, but rather the party and the state hadn't responded with adequate vigor to pursue them. In terms of the external side of the equation, pressure on the regime has been slow moving but steady. China decided to impose sanctions on North Korea's commercial exports in 2016 and there are some restraints on China's exports to North Korea as well. The fall off in commercial exports from North Korea has had a tremendous effect on the North Korean economy, which is only partly compensated for by extensive smuggling. North Korea has also had some weather issues, which is a long-standing constraint on North Korea; 2019 was a bad year in terms of agriculture.
And then COVID-19 hit. What is interesting is the North Koreans took it seriously and closed the border. The leadership recognized that given the weaknesses in the healthcare system, COVID-19 could be catastrophic. As a result, they were very aggressive and used their command and control capacity to shut things down.
Yet over the long run, North Korean policy decisions are also important. The regime has been reluctant to fully embrace a reform path and move toward a Chinese-style strategy. I don't see evidence of the kind of commitment to reform that we saw after the death of Mao in China.
Does the Kim regime have any promising solutions to get out of its economic trouble in the short-term?
This goes back to fundamentals and how you diagnose an economy of this sort. China obviously is a very large economy, so it could generate and increase in growth by taking purely domestic measures. But even in China, it took reform and opening. This included not only reforms in the agricultural sector—like the way the cooperatives and collectives operated—but also opening China to trade and foreign capital. The standard belief among economists and political economists is that the smaller an economy is, the more significant role the external sector is going to play in overall performance.
Looking at North Korea, there are some gains from undertaking purely domestic reforms. For example, granting farmers greater autonomy in what they plant and allowing them to sell surpluses, giving industrial managers more autonomy, and allowing local markets to flourish based on demand would make a difference. However, there is a limit to the impact of such measures, and so the external sector matters a lot.
This is where the strategic situation and the economic situation intersect because the North Korean economy is open, but only to China. The real question then becomes how far China is willing to go to effectively circumvent multilateral sanctions? The evidence suggests that China is turning a blind eye to transactions across the border which are in direct contradiction to the U.N. Security Council resolutions. If you read again the materials from the Party Congress, it was really striking that when Kim Jong Un talked about the external environment, the first country he mentioned was China. It’s a little unusual for the regime to start by stating the most important relationship is with China. Kim Jong Un is reaching for a rapprochement with Beijing that's going to be accompanied by de facto sanctions relief. If he can do that, then it's quite possible that the North Korean economy can stumble along, as we saw in both China and the former Soviet Union, as the command economy can divert resources from consumption and the agricultural sector to elites.
What kind of progress has North Korea made in its nuclear and missile programs since the failed diplomatic efforts by Donald Trump two years ago?
There was an interesting observation communicated in a key document that the Korean Central News Agency (KCNA) released following the Congress. After the period of summits, which built on the pause in testing after November 2017, Kim announced that North Korea did not stop developments in the nuclear and missile sphere. The October parade and the subsequent parade following the party Congress revealed new conventional systems and were designed to signal that the weapons program was moving ahead. From the U.S. perspective there is ongoing uncertainty about North Korean capabilities, but a very large system in the parade appeared to have the profile of an intercontinental range missile. That said, it hasn't been tested and we don't know about progress on miniaturization and the capacity to put a warhead on it. From an intelligence community standpoint, however, we have to assume that the North Koreans have that capability. Therefore, the fact that Kim Jong Un has maintained a moratorium on intermediate and long-range missile tests and hasn't tested another nuclear weapon should be seen as tactical. The pause was not related to any serious intention to abandon the nuclear and missile programs. Those who work on North Korea believe that the chances of reaching a full denuclearization agreement, like the one in Iran, are vanishingly small. The best that can be done is to put some caps on the program.
Last week, Pyongyang unveiled plans to expand its nuclear program. How does North Korea plan to fund an expensive program in a crippling economy? Who will pay the price?
One of the features of a command economy is that the state can divert resources from consumption to investment. The regime has the organizational means of doing that. Right now there is, as there often is, a struggle over resources because those who are operating in the informal markets want to keep what they're earning. At the same time, the government is trying to figure out how to tax that activity. But China continues to allow North Korea to earn foreign exchange despite sanctions and continues to export significantly to North Korea. This is often missed: the sanctions affected North Korean exports, but not Chinese exports to North Korea to the same extent. So it's pretty clear where China stands; as recently as December of 2019, China floated a draft U.N. Security Council Resolution which would have partially lifted multilateral sanctions. China itself can achieve that objective, however, by simply failing to enforce them and continuing to export to North Korea. It is important to mention that those exports are not necessarily violations of the letter of U.N. Security Council resolutions, but certainly they are in violation of the spirit of those resolutions.
Biden will face a North Korea that is frustrated about what it sees as failed diplomacy from Trump’s administration and continuing to expand its nuclear and missile arsenal. How do we expect Biden’s approach to be different from his predecessor’s? What are his options?
The North Koreans are self-centered and think that they are the most important problem in the world when they are not; Biden will be absorbed with other issues. If they seek to get attention by testing, we are going to see another cycle of confrontation. As of now, it looks like the North Koreans are signaling restraint, and trying to get Biden's attention by underlining that they are going to continue to develop their nuclear program. But the question is whether they will launch a test, as the North Koreans did in Obama's first year, making it difficult for Obama to ignore them. In that case, the outcome was adverse for both sides; little progress was made on the nuclear issue or improving relations.
From the North Korean perspective, there was a promise from the Trump administration of recognition and moving forward. But the North Koreans overestimated their capacity to extract concessions from Trump. The Hanoi Summit was a shock, because the Singapore Summit had been such a success for Kim Jong Un. He had been effective in crafting a statement that read like it was written by the North Koreans. By contrast, Hanoi was a letdown because he was under the impression that he could secure significant sanctions relief simply by proposing a very general deal. It is unclear whether it was the inadequacy of the North Korean’ offer, whether it was Trump himself, or whether Pompeo and Bolton pressured Trump not to engage. It was clear, moreover, that North Korea was not interested in engaging in detailed lower-level talks, which is the key to moving anything forward. Progress is not just a function of reaching agreement on principles, but of agreement on details.
What the Biden administration is likely to do, and certainly will do if there is a test, is undertake a review. That would take three or four months. It requires an interagency process and contacting outside experts for advice. But Biden has signaled a couple of things pretty clearly: First, he will not do a summit absent significant progress at the working level. The Biden administration is not hostile to working-level talks, so there is going to be a direct or indirect offer to begin talks at the level of designated seconds.
There is also the South Korean piece. One thing that came out of the Bolton memoir, which I find quite unfortunate, is the extent to which the Trump administration was listening to the Japanese on this question and was subtly sidelining Moon Jae-in. South Korea has made very few concessions to the North Koreans outside of the summits themselves, aside from the Comprehensive Military Agreement (CMA). In terms of sanctions relief, the South Koreans have not offered much. One possibility is the Biden administration comes to the negotiating table with the South Koreans with some kind North-South initiative or partial sanctions relief to act as an icebreaker.
We don’t hear a lot about South Korea’s position on dealing with North Korea. Seoul appeared to be very supportive of Trump’s outreach to Pyongyang. Will Seoul play an important role in influencing Biden’s policy toward North Korea? What are the key differences between Seoul’s position and that of Washington?
I slightly disagree with the premise of this question. The reason we don't hear much about what Seoul is saying is because we're not paying attention. Moon's objectives with respect to the North have been very clear from day one. Seoul wants a relationship. Even with an incredibly pessimistic portrayal of North-South relations coming out of the Party Congress, the Moon administration didn't read it as pessimistic at all. The South Koreans’ perspective is fairly clear: they would like to move ahead with some kind of economic engagement, however limited and circumscribed, to break the ice for wider talks and perhaps to serve as a bridge between the North Koreans and the Americans. I'm not saying that Moon's strategy is likely to work, but its ambition is clear. The South Koreans understand it is going to be a bilateral effort to open negotiations on the nuclear question. The North Koreans have always successfully excluded South Korea from playing a central role on those issues, except for a very brief period during the Six-Party Talks in 2007 when the talks were actually yielding concrete progressive steps. It is not impossible that China could be leaned on to try to revive a six-party process, but the North Koreans have not shown much interest. The North Koreans can exercise an effective veto over any institutional arrangements, because if they don't come, a conversation is pointless.
China is North Korea’s biggest political ally and trading partner. Will Biden seek cooperation with China to help deal with the North Korean threat despite rocky relations?
There is absolutely no other option, because you have to face the fact that China is in the position of either sustaining the regime or bringing it back to the table, due to the extensive economic dependence that North Korea has on China. Beijing does not like to admit that because it puts the onus on them to deliver North Korea. All China has to do is cut off oil shipments to get Kim to the table tomorrow. Beijing is not going to do that, though, because it doesn’t have any interest in doing so. China is trying to put the onus on the United States by saying that the only way forward is for the United States to engage in more forward discussions with the North Koreans and make some concessions.
The question then becomes whether both sides are going to continue to play this game or figure out some way out of it? There really are only two choices. The first is to try to figure out a diplomatic process with China that brings North Korea to the probably by making some concessions to North Korea in a partial deal. There are dozens of potential options there that would grow out of a cooperative approach. But there is an alternative, which is for the United States to ramp up secondary sanctions and say the following. “If the Chinese do not cooperate with the United States, the U.S. is going to place its navy in the high seas around the Korean Peninsula to try to interdict shipping and go after Chinese companies to bring them down to the extent possible.” Beijing has said that it completely rejects the use of these secondary sanctions.
It is clear that China plays a crucial role here, but we have yet to see whether Beijing wants to use North Korea as a bargaining chip in the relationship with Biden. I think they Chinese are not particularly interested in doing so because they do not have an interest in seeing North Korea go under. This hope that China is going to completely deliver North Korea without the United States acting is a fantasy because it is too much of a strategic risk for China to have an unstable North Korea on its border.
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