The Political Economy of Economic Reform: Using Trade to Keep the Debate in Bloom

By | May 27, 2012 | No Comments

South Korea’s president, Lee Myung-bak; China’s president, Hu Jintao; Japan’s prime minister, Yoshihiko Noda, in Beijing, May 14 for initial talks about a China-Korea-Japan FTA | Xinhua

The Political Economy of Economic Reform: Using Trade to Keep the Debate in Bloom

by Steven Denney

Although North Korea may be a thorn in China’s side, it has been duly noted that China does not wish to see political collapse; the twin nightmare scenario of refugees flooding across the border into Northeastern China and US troops marching or being air-dropped in north of the 38th Parallel is something the leadership in Beijing does not wish to see. Despite the South’s constitutionally based “One Korea” policy, economists and pragmatists alike would, under current conditions, likely find political collapse and unification an undesirable situation.

Despite the manifold differences in national interests between Seoul and Beijing, there is one unifying theme: a desire to see economic development in North Korea. The development of North Korea’s isolated and an almost entirely China-dependent economy brings a higher level of stability to the peninsula, thus decreasing the likelihood of a sudden, violent collapse and starting North Korea along the road to economic development, a necessary precondition for a chance at peaceful unification of the divided peninsula.

Regional FTA-Centered Approach | Of the various developmental strategies open to North Korea, one that has received little discussion in the literature is the prospect of regionalism or the use of economic cooperation between regional powers as a conduit through which the North Korean economy can be reformed and set back on the growth and development-track. Although other Communist countries in the region required diplomatic normalization with the United States before economic reforms—and economic reformers—could take center-stage, the likelihood of a US-DPRK détente seems scant, if even fathomable.

Thus, the focus shifts towards the other regional super power and the country with an economy sizable enough to jolt North Korea’s economy out of cardiac arrest: China.

While any regional approach that focuses on economic engagement must necessarily be a China-centered approach, it does not mean that other regional powers—namely South Korea—would play only a minor role. In fact, given the possibility of a strategic-divergence between Seoul and Washington, it may be in the best interest of all regional parties, particularly South Korea, to move ahead without the assumption of preeminent US involvement.

One optimal method through which this could be accomplished is a China-Korea FTA or a China-Korea-Japan FTA, the effects of which could be highly favorable to economic development in North Korea.

This course of action requires three things:

1. That an adequate level of support for a free trade agreement between Korea and China or Korea, China and Japan exists, and an agreement amongst the two or three parties would, unlike the KORUS FTA, not exclude goods produced in North Korea’s joint manufacturing zone at Kaesong;

2. That South Korean businesses, given their proximity to North Korea and likely major post-unification role, must be seen as supporting investment north of the DMZ; and most importantly,

3. That there exists in North Korea a current of support for economic reform policies, particularly from Kim Jong-un himself.

Laying the Groundwork | Although difficult and extraordinarily political, there seem to be support amongst the three major powers in Northeast Asia for more regional integration through a free trade agreement. Despite Leonid Petrov’s pessimism, the fact that an FTA is even being discussed indicates at least nascent interest, which is necessary in laying the groundwork from which more support can build and, given the necessary political conditions, eventually lead to negotiations and an agreement. Besides, most of the issues that impede further negotiation and progress are largely ideational and thus can be overcome by prudent leadership.

The way a bi-lateral or tri-lateral FTA could lead to economic development in North Korea revolves around China pushing for a diversification of the North Korean economy.

Under current economic conditions, North Korea, outside of aid packages, is economically isolated from the South and entirely dependent on China for economic growth. Given Pyongyang’s dependence on economic trade and assistance from its neighbor across the Yalu, China is in the unique position as its only credible ally and nation with the wherewithal to incentivize economic reforms in the isolated North.

If Korean scholars are correct, a China-Korea FTA, or a similar China-Korea-Japan FTA, could be the conduit through which reforms, a la Kim Jong-nam, could be realized.  An article form the Chosun Ilbo, discussing this very issue, reasons:

If China forges closer business ties with South Korea, it could put pressure on the North Korean regime to conduct economic reforms or face even greater isolation. The collapse of Communism in Eastern Europe led to a rough patch for North Korea in the 1990s.

The FTA could play a role in goading North Korea to open up its economy, some experts say — not least because products from the joint Korean Kaesong industrial complex could be included in tariff-free trade with China. That would make Kaesong an attractive place to manufacture goods, because labor is much cheaper than in South Korea.

Choi Jin-wook at the Korea Institute for National Unification said, ‘If China decides to include products made in Kaesong Industrial Complex, which the Korea-U.S. FTA doesn’t do, then the joint manufacturing zone could get a strong boost leading to increased South Korean investments in North Korea and play a role in getting the North to open up.

The FTA could even become an alternative route for South Korean investment into North Korea. Through a regional FTA, it is reasoned that some South Korean businesses would be able to invest in North Korea not just from South Korea—assuming the current commercial trade ban is eventually lifted—but also from China without meeting any other legal requirements that make investment harder when working from the South.

POSCO in Rason? | Image via KEI

Chaebol Support | South Korea’s family-owned, family-run conglomerates are, more or less, responsible for Korea’s economic miracle and the key to its continued export-led economic growth. Having the support of big business in South Korea is necessary when speaking of a regional approach to economic engagement with the North. Without their active participation and support, any economic engagement plan is likely to fail. While lying low for political reasons, the chaebol have indicated interest in investment opportunities in North Korea.

Reporting on South Korean companies’ outlook for greater North-South economic cooperation and the prospects of economic growth in North Korea, a story earlier this year in the Dong-a Ilbo, entitled “64 SK Companies Eyeing Biz Opportunities in North Korea,” made the following statement:

South Korean companies such as POSCO, SK and Daewoo Shipbuilding & Marine Engineering are conducting feasibility tests for entering the North’s Hwanggeumpyong and Rason special economic districts. The two areas are being jointly developed by the North and China. POSCO has been more active, having begun construction on a logistics center in Hunchun, a Chinese city bordering North Korea.

A well-informed source on North Korea said, “Based in Hunchun, POSCO is planning to advance into inland areas of North Korea if the North opens up its economy.” South Korea`s top steel maker is known to be reviewing securing iron ore in Musan County and building a steel mill in Kimchaek, an industrial city in North Hamgyong Province, based on cheap labor at the same time.

As long as the April rocket launch and the more-than-usual vilifying of the South Korean leadership do not spoil the possibility of thawing the ice-cold relations between Seoul and Pyongyang, North Korea may be able to lure a number of willing South Korean companies into making investments from South Korea or from across the border in China.

A Debate Still in Bloom? |  Robert Carlin and Joel Wit, in this long-forgotten piece entitled “A Debate in Bloom,” presented their findings based on a series of close readings of North Korean publications relevant to economic questions.

They found that sometime in 2002, during which a economic reform agenda was being implemented, a debate—or even schism of sorts—had developed between conservatives and reformers, revolving around “new attempts to define the scope and foundation of the military first ideology; and sustained efforts to move ahead with economic reforms.”

Conservatives maintained the old-line that military spending was necessary for a strong economy, whereas reformers were either skeptical of such a claim or suggested that the relationship between the military first policy and economic reform ought to be reconsidered–suggesting an alternative, “economics-first policy,” albeit subtly.

One theme the runs throughout Carlin and Wit’s argument is that North Korea’s external conditions—particularly its relationship with the US—had an impact on the conservative-reformer debate. Stated alternatively: external conditions affected domestic politics. Consider this quote:

When the [James Kelley] visit ended, two days later, it had produced something that those in Pyongyang backing the reforms did not expect and certainly did not need – a showdown with the United States over the American claim that the North was pursuing a secret programme to produce highly enriched uranium for building nuclear weapons. The confrontation may, however, have seemed like manna from heaven to those opposed to reform. A sharp deterioration in US–North Korean relations, leading towards an escalating confrontation that quickly took on military overtones, created precisely the external environment that the conservatives could profit from and that the reformers needed to avoid

Although the idea that serious economic reform was in the process of implementation in the first part of the new millenium may have been squelched with the currency reforms in 2009, the notion that North Korea is not a monolith and that behind its closed-door society exists individuals or groups of individuals privy to reform is important to note–and has been done so by people like Andray Abrahamian. Equally important to note is that the actions and rhetoric of major powers, like the US and China, affect the direction the domestic winds blow in North Korea—something that Leon Panetta and US House Republicans do not quite grasp, but thankfully others like Scott Snyder do.

What Now? |  Has the debate all but died out in the aftermath of the Un-ha 3 rocket launch? Although it may be hard to fathom that reformers in North Korea have any space or clout with which to make claims that North Korea should prioritize the economy over the military, there is evidence that an economics-first policy is something on the minds of Kim Jong-un and others. Consider this story from the Rodong Sinmun entitled “DPRK Official Outlines Investment Environment,” discussed in this article by Abrahamian. The article mentions the importance of “keeping apace with the development of the world economy.” In its efforts to keep apace “the DPRK government has been paying due attention to the expansion of external economic cooperation based on the constant development of the foundations of the self-reliant socialist economy and making active efforts to create favorable environment for investment.”

An economics-first policy may not be the preferred ideology of only the JVIC (the body responsible for overseeing FDI into North Korea), Kim Yong-nam and Ri Kwang-gun. More pivotal figures, like Kim Jong-un himself, have indicated that “the debate” is still very much “in bloom” and may, in fact, be favoring the reformist/economics-first camp. His April 6 public statement to the WKP did not center around the old-conservative line of support and spending on the military as a means to economic development, but instead focused on “the need to improve people’s living conditions” and the importance of “economic rehabilitation.” If viewed together with his “landmark” on-site inspection, wherein Kim Jong-un chastised managers of an amusement park for its poor conditions, an alternative way of thinking can perhaps be discerned in North Korea, albeit in a roundabout way. The amusement park, if viewed as a metaphor for the economy, indicates that the boy-dictator may have reform on the mind. At the very least, these two incidents indicate that there seems to exist in North Korea a current of support for economic reform policies. The announcement by a KCNA spokesperson that North Korea has “ruled out an imminent nuclear weapon test” may be another indication that a debate between conservatives (“military-firsters”) and reformers (“economic-firsters”) is in bloom, with an  edge going to the latter group.

Whither Songun? | If prodding North Korea into adopting economic reform policies, and avoiding a twin nightmare situation, is really a top policy priority for countries like China and South Korea, then pursuing a regional trade-centered approach, via a China-Korea or China-Korea-Japan FTA, may be a viable alternative strategy to other failed approaches at opening-up the North. Not only would it provide North Korea with a way to diversify its trade and encourage FDI from South Korea, it would foster a less-threatening environment and give China the opportunity to skirt its anachronistic Cold War role for a new, a global role. A trade-centered approach may also create the external conditions necessary to give the reformers the upper-hand domestically. Seeing the reformers take the upper hand in the debate, and the emergence of an economics-first policy in North Korea, is in the best interest of all parties involved.

Bullets or FDI?

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