“We Could Have Been a Contender”: North Korea as a Strong and Prosperous Nation

Stephan Haggard (PIIE) and Alex Melton (PIIE)
April 16, 2012 7:00 AM

Last week, Foreign Policy asked us a very interesting speculative question; what would it have taken for North Korea to be a "strong and prosperous country." The short answer is to do what South Korea did, as it is one of the very small number of countries that actually managed the full transition from developing to developed status. But such sweeping advice is not helpful, so we decided to just focus on the last 20 years. The Foreign Policy version is here; following is a longer, wonkish version that shows the counterfactuals we used and walks through some of the turning points in more detail.

In an earlier post, Marc Noland provides a brief overview of the weaknesses in the North Korean economy. April 15, 2012—Kim Il Sung’s 100th birthday and the Day of the Sun--was supposed to be the day when the country was to celebrate becoming a “strong and prosperous nation” (kang song dae guk). This had gotten watered down a bit over time over the last several years to “opening the door” to becoming “strong and prosperous nation.”  More recently, it appears the regime has largely focused on making Pyongyang, the home of the regime’s elite, a “strong and prosperous city” by  spending lavish sums on building apartments and other beautification projects.

Unfortunately, this task faced what economists Thomas Sargent and Neil Wallace once called “some unpleasant arithmetic.” Given that the country’s total output in 2005 was still well below what it was in 1990, the process would have had to begin a while back for things to work out.

Counterfactuals are a fool’s errand but other countries in the Asia-Pacific have sustained economic growth in excess of 8 percent for several decades, with the law of compound interest constituting a powerful accelerator to growth. At 8 percent, total output and income per capita doubles in just over 9 years. Many countries in the region began in equally inauspicious circumstances; South Korea is a natural experiment in this regard; indeed, there is a case to be made that South Korea was worse off in 1948. According to the Bank of Korea, GNI per capita in the South now exceeds that in the North by over 19 times.

But re-running history from 1948 is more than we can get our head around, so we decided to just look at the period since 1990. GDP per capita estimates vary for this starting point from under $1000 to just over; we will be generous and give the country about $1100 in 1990; for comparison purposes, that is roughly equal to Morocco, Paraguay or Swaziland at the time. We then make three assumptions about the subsequent growth path; that the country would indeed experience a marked “transitional recession” in 1991-93 as it adjusted to the collapse of the Soviet Union; it would then rebound at 5% a year for 7 years (1994-2000); and growth would then accelerate to 7% for the remainder of the period, high by world standards but below the high growth episodes of other countries in the region.

The results are displayed in the figure below. Rather than stagnating, the country would be approaching a GDP per capita of $3000, hardly an advanced industrial state but within the lower-middle income range; think Guatemala, the Ukraine or Syria, at least before its current debacle.

But a lot would have had to happen; what would it have taken to be a contender? In trying to answer this question, we eschew a recitation of the Washington Consensus. Asia is a region that shows there are many paths to rapid growth; we do not believe that North Korea would have had to become laisser-faire Hong Kong to succeed; to the contrary. But a lot would have had to be different, and much of it is political and military as well as economic. For a small country, the government’s posture toward economic integration matters as much if not more than domestic reforms.

1991.  The collapse of the Soviet Union hit North Korea particularly hard. Heavily dependent on Soviet oil and other inputs, both the industrial and agricultural sectors went into a steep decline after 1991. In countries as diverse as South Korea and Vietnam, crises have acted as a spur to reforms, but 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. But with limited arable land and lousy weather, North Korea was never likely to get much of a bump from the agricultural reforms that played a crucial role in the Chinese transition. As welcome as reforms of the dysfunctional cooperative system might have been—and still are--North Korean would have had to go global early, aggressively seeking out foreign investment and expanding both manufactured and raw materials exports.

Asking for a rapid rapprochement with the South as a way of getting Korean conglomerates such as LG and Hyundai into the country is asking too much, although the two countries came tantalizing close to détente with a well-crafted North-South agreement in 1991.

Given the regime’s nervousness about the presence of foreign companies, the mode of accomplishing this objective would have been export processing zones and joint ventures with China. Unfortunately, North Korea’s experiments with export processing zones were out of the way (in the Northeast of the country, near the Russian border rather than proximate to South Korea and China) and were never given the priority attention they needed to succeed.  Moreover, the leadership was surprisingly slow in seeing the benefits of proximity to China, reading Beijing’s reforms as a sign of right-wing deviationism.

1992-1994. North Korea has had a hard time understanding that nuclear brinksmanship is not good for business, at least with countries other than China. Given the collapse of its Soviet patron, it is not hard to understand why North Korea toyed with a nuclear option. But to thread the needle of this alternative policy history, the regime would have had to take a much more compliant posture in the nuclear confrontation that broke in 1992.

There is still plenty of room to debate whether the International Atomic Energy Agency’s (IAEA) effort to push invasive inspections was counterproductive. But even if the IAEA—and the US—erred in its strategy, the North Korean leadership would have had to rethink its nuclear ambitions. It could have achieved the same basic objective by honing a more minimalist conventional deterrent, such as the threat of shelling Seoul with artillery or perhaps with a more limited missile program. North Korea paid a high price for the two-year wrangle with the US over the country’s nuclear weapons program.

1993-1996. We allow for the fact that North Korea was going to face some really hard times in the early 1990s, regardless of what it did. The country may well have faced some food shortages regardless of economic strategy.

But North Korea could have almost certainly sidestepped the descent into full-blown famine. As we have shown in Famine in North Korea, a significant share of famine deaths could have been avoided altogether if the country had simply maintained prior levels of commercial food imports and been more aggressive in ringing the alarm bells. The World Food Program provides the international social safety net in this regard, and North Korea subsequently became a surprisingly large recipient of food aid. By waiting until the floods of 1995 to do so, North Korea paid a horrible human price that has resonated through the country ever since.

1998-2002. 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 in these developments, for example by allowing farmers’ and other markets to operate.

The government went further with some legal changes in the 1998 constitution and a major reform package in 2002.  Although flawed in important respects, the reform showed at least some willingness to experiment with a new course.

The reform period had an important external 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 with the US in October 2002. The primary responsibility for the crisis lies with North Korea; in contravention of an agreement reached after the first crisis, the regime sought out the technology to enrich uranium.

Rather than following up on some small steps taken made by the Clinton administration, the Bush administration opted for a long policy review that had the stated objective of scuttling the Agreed Framework. When intelligence surfaced on the HEU program, the strategy was to confront North Korea. The merits of this strategy for disarming North Korea have been debated to death. But the important point to note here is that the nuclear confrontation undermined the prospects for reform and shifted the regime’s priorities away from the “strong and prosperous nation” component of the regime’s ideology—or at least its economic components—toward “military first politics.”

2005-2012.  From 2005 to the present, North Korean economic policy can best be characterized as “reform in reverse”  (More on this here and here). Markets have been 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. Food shortages since 2008 have been as bad as any time since the great famine.

But this period has also highlighted another distressing feature of North Korea’s political economy: the regime’s fascination with technological fixes and Potemkin projects. A common fallacy is that if you are a poor country the way to get rich is to acquire the technological trappings of rich ones. But premature investment in high-tech white elephants and beautifying Pyongyang diverts resources from food, consumer goods and investment in basic health and education. The missile launch is only the most glaring manifestation a desire to “leapfrog” and showcase rather than focusing on the basics.

The only economic bright spot during this period is that China has been patiently expanding its economic ties with the country in the hope that the market will stick. In the end, the transformation of North Korea may owe more to what Chinese state-owned enterprises and traders are doing than to the hectoring of American policy pundits calling for economic reform. But even if policy were to shift on a dime, the uphill arithmetic noted above means it will be a long slog out of the deep hole the regime has dug for itself.

So, is it possible to imagine an alternative North Korea that 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? Just to list these steps suggests how hard it would have been for this regime to tread a different course, Neither Kim Jong Il nor Kim Jong Un appear to be the country’s Deng Xiaoping.  While the Kim dynasty has shown remarkable capacity to maintain power, the goal of being a strong and prosperous nation is likely to remain elusive unless the leadership fundamentally rethinks its grand strategy—or changes altogether. I am not holding my breath.

Comments

Andrew Logie

I'm appreciative and fascinated by all the work you do on this blog. To suggest another counterfactual, I wonder what this post and its conclusions regarding the regime would have looked like had it been written on Myanmar/Burma prior to their recent reforms (recognizing that neither the food plight nor political oppression had been quite as absolute as in NK). But were there any early signs that the junta was considering political reform?

machiko hollifield

hi, steve, this is machiko from Dallas, tx.
I found an interesting article about N. Korean Satelite. Let me know what do you think about this article. It’s a google translation, but I thought it’s not so bad as a translation. If you have hard time understanding, let me know.

http://translate.google.com/translate?hl=en&sl=ja&tl=en&u=http%3A%2F%2Fb...

Basically, it’s actully a success, it’s a test of EMP simulation. very interesting.

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Stephan Haggard Senior Research Staff
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