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Online Extra: Lots of Possibilities, None Good


As North Korea keeps the world on edge with its latest nuclear threats, it has become clear that a key reason for the brinkmanship is the desperate condition of the country's economy. "Dear Leader" Kim Jong Il is using his nukes to get the aid his country needs -- and until North Korea's economy is fixed, there's little hope of a lasting resolution to the nuclear standoff. BusinessWeek Asia Editor David Rocks spoke about the Korean crisis with Nicholas Eberstadt, a researcher and Korea expert at the American Enterprise Institute, a conservative think tank. Edited excerpts of their conversation follow:

Q: What would South Korea like to see happen in the North?

A: The current South Korean government stakes its rationale on avoiding the fall of the North. [Outgoing President] Kim Dae Jung and [President-elect] Roh Moo Hyun believe that a North Korean collapse would be financially devastating for the South.

Part of this is based on half-learned or mislearned lessons from German unification. That involved a lot of taxpayer expense for West Germans, but the reason is that the West German welfare state was extended east. If you increase your population by a third and all of those people who are added are below the existing poverty level, you're going to have budget problems. South Korea doesn't have what you might call a welfare state, so the comparison doesn't really work.

Q: What other lessons that can be learned from the unification of Germany?

A: The South Korean government and intellectual circles are way overestimating the budgetary burdens of a Korean unification and underestimating other parts of the challenge. For example, when East Germany was absorbed, its people were relatively unhealthy but not starving. In North Korea, prolonged famine could be a final wild card.

There's nothing really worth having in the North except the population -- as far as physical assets go, just because there's a building or a factory doesn't mean there's anything of any real value. But the capacity of the people may have been severely affected by famine. A 1998 nutrition survey by the World Food Program found that 7-year-old boys in the North were 20 centimeters (eight inches) shorter than 7-year-old boys in the South. That doesn't necessarily prove anything, but it's very suggestive of some big problems.

Q: What's South Korea doing to plan for a possible collapse of the North?

A: Right now, there's not much detailed policy planning apart from trying to encourage North-South cooperation, such as railway links and industrial parks in the North. In the past, there have been contingency plans in the South, in various ministries and different units within the government, but it hasn't been systematic.

Much of the planning that was being done stopped in 1998, when Kim Dae Jung launched the "Sunshine Policy" of engagement with the North. Some leading figures in the government would argue that such planning is disrespectful of their peace partner in the North. Many in South Korea want to see a slow integration of the North, but that's a complete fantasy view of the world. It's a win-the-lottery approach to international policy. I suppose it could happen, but it seems really unlikely.

Q: So what's likely to happen?

A: The North's economy will continue to deteriorate, as it has been doing for 20 years. The North's preferred option is international military extortion. Even if it's as successful as it could possibly hope, the rents from extortion aren't enough to revitalize its economy. Every day, the North is trying to wheedle enough cash to keep going another day, but it's a dead-end strategy.

As far as I can tell, there isn't any plan B. The only thing you can conclude is that if things go badly, there [will be] a catastrophic crisis of some sort or another -- but if things go well by the North's standards, it doesn't look so great either. Pyongyang is on permanent emergency relief and grows farther and farther behind the rest of Asia in everything except nuclear arms and missiles.

Q: What about the recent reform measures in the North?

A: The economic reform of last summer has been a flaming failure so far. In effect it remonetized a portion of the economy but didn't introduce any new goods to sop up the monetized demand. The North revalued the won but didn't soak up the money with any goods. So now you have the broken socialist economy, plus you have inflation.

Q: Some would argue that the North has bottomed out.

A: I'm not convinced. North Korea's exports haven't increased. The budget suggests stagnation or worse. Energy problems seem to be rife, and the place seems to be just a couple of international welfare checks away from famine.

Q: So is there any real hope for reform?

A: Not really. North Korea's government has spent a lot of time examining the downfall of the Eastern European socialist system, and the conclusion that they always come back to is that the collapse in Eastern Europe was due to ideological and cultural infiltration: International trade, joint ventures, technology transfer -- everything that has to do with international contact.

Q: Is the North really as monolithic as it seems?

A: It's a very tightly controlled political system, and if anyone were a likely candidate for a coup leader, they would already be six feet under. If there's ever a coup, it's likely that the person who leads it will seem like the biggest cheerleader for Kim until 30 seconds before the coup.

So does Kim Jong Il live until a ripe old age and bequeath his position to the next in line? Does it all end with a bullet in the head from his most loyal lieutenant? There all sorts of different ways it could, end but none of them are good -- and it's impossible to say which one it will be.

I don't see how the North Korean nuclear problem is fixed without fixing the North Korean government problem. And how do you do that when that government has 11,000 artillery shells within shooting distance of the South?


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