The Other Korean Crisis

While Kim Jong Il blusters, the North's economy edges closer to collapse. That's just what scares Seoul most.

Scenes from inside North Korea, the same North Korea that's threatening Asia--and the world--with its nukes:

-- Pyongyang at rush hour--or what passes for it. Everyone is shuffling home, but not to a plentiful dinner or to freshen up before a night on the town. Residents just want to use the elevators in their high-rises before another power outage forces them to walk up 10, 20, 30 flights or more.

-- An orphanage located an hour outside of the capital. Evidence of malnutrition is stark. "I saw 6-year-olds who looked like 3-year-olds," says Susan L. Shirk, a political science professor at the University of California at San Diego who recently visited North Korea.

-- Somewhere inside the government's offices. A Western diplomat on a recent visit is talking to North Korean officials about economic reform. But they don't quite get it. "I didn't meet anyone who had even a passing knowledge of market economics," says the diplomat. "They have no money, no sense of how things work, no legal framework."

As Kim Jong Il, the ruler of North Korea, enjoys his latest moment on the world stage, millions of people, from China to Japan to South Korea and the U.S., obsess about him as the great villain, the nuclear psycho. Pundits fret endlessly about how Washington should respond, about exactly how many nukes North Korea has (one? two? five?), and about Seoul's sudden hostility to the U.S. at a perilous moment.

Such obsessions are warranted, for Kim is a dangerous man. Fears that he may someday graduate to selling nukes to the leaders of Iraq or Iran--or, worse, groups such as al Qaeda--are not unfounded. But lost in the discussion is an equally important fact. Kim the nuclear blackmailer is also the master of a failed state, an economy so devastated that its only reliable exports are illegal drugs, weapons, counterfeit currency, and, of course, uranium-enriched extortion. Kim is trying to save that economy--and his regime--with the only tool he has at his disposal. He's threatening Armageddon to get the aid his country desperately needs.

Trouble is, reviving this economy would be the biggest salvage job in Asia today--if it can be done at all. So even if the U.S. and North Korea's neighbors manage to find the right mix of carrot and stick that might resolve the current crisis, Kim is likely to continue popping up every few years waving his nukes. It's a crisis that goes underground, only to resurface when Kim needs more rice, more oil, more sustenance. "North Korea's nuclear program is an economic, not a military, question," says Lim Chae Jung, who heads the transition team of South Korean President-elect Roh Moo Hyun. So the only way to effectively end the threat is to create a viable economy in the North.

Just how bad off is Kim's kingdom? Infant mortality in the North is three times that in the South. The North's foreign trade is 1% that of its neighbor. North Korea is still reeling from the fall of the Soviet bloc, which provided markets for its shoddy steel, machinery, and arms, and gave it cheap oil and gas. The North's economic output plunged 50% from 1993 to 1996, reducing per-capita income to $457 a year. It has since recovered to around $700, according to South Korea's central bank, but output remains 40% below its level in 1990. An acute energy shortage makes it impossible to have normal transportation networks, utilities, and manufacturing. A similar plunge in exports has created a foreign currency squeeze, and without dollars, euros, or yen, the North can't import the tractors and fertilizers needed to close the gap between food production and the needs of the population. There hasn't been a repeat of the widespread famine that killed hundreds of thousands in 1995 and 1996, but North Korea still needs 1.5 million tons of grain aid annually. Life expectancy fell from 66.8 years in 1993 to 60.4 years in 2001, U.N. figures show--even while the military continues to get the bulk of government spending. A prominent refugee puts it starkly. "North Koreans would rather have a war" than put up with the situation much longer, says Cho Myung Chol, an ex-professor at Kim Il Sung University who defected in 1994 and maintains contacts with those who have fled the North.

So how can this disaster be righted? Policymakers in Seoul, Tokyo, Washington, and Beijing have been thinking about this for years. In essence, the Korea watchers see four possible scenarios. Two of them are grim. The other two have semi-happy endings, but they'll take a big dose of luck and skill to pull off. Here they are:

THE NORTH MUDDLES THROUGH. That's how Kim Jong Il has played the game so far, eking out an existence for his state by cajoling enough aid from the Chinese and South Koreans to get by. In this scenario, Kim maintains his grip on power and periodically plays the nuclear card to shake down the outside world. The scary thing is that one of those shakedowns could go wrong, and nuclear war could result. The other scary thing is that Kim may eventually get extra dollops of cash by secretly exporting nukes to the world's bad guys. A variation on this theme is that Kim is toppled by hard-liners, who prove even more aggressive about peddling their weapons and threatening their neighbors.

Yet some wonder just how long this game can go on. "I think North Korea may be reaching the end of its muddling-through period," says Marcus Noland, a senior fellow at the Institute for International Economics in Washington. The strain of feeding the masses, while keeping the military satisfied, could prove intolerable for even a master brinksman such as Kim. "Pyongyang is on permanent emergency relief and falls further and further behind the rest of Asia in everything except nuclear arms and missiles," says Nicholas Eberstadt, a Korea expert at the American Enterprise Institute. Which leads to the second scenario:

OUTRIGHT COLLAPSE. Collapse could come from a variety of causes. Refugees could stampede by the millions out of the North. The military could stage a coup. Or Kim and his circle could end up before a firing squad--like his father's pal, Romanian dictator Nicolae Ceausescu--as the oppressed of Pyongyang rise up. True, all of these are hard to imagine right now. "People have been talking of collapse for 10 years, and there's no sign of it," says a high-ranking U.S. State Dept. official. Then again, the fall of the Berlin Wall was unimaginable until weeks before it happened.

A breakdown could be good news because it would give the U.S., China, and South Korea a chance to go in, stop the starvation, and install some sort of denuked, quasi-market economy--an economy propped up by billions in aid, but still something reformers could work with. It could also be very bad news because there's no guarantee a new leadership in Pyongyang would be any better than Kim.

And a rush to unification could cost the South billions. Seoul has studied the strains that East Germany's collapse put on West Germany, and knows it would fare far worse. The South would have to absorb a population of poverty-shattered, malnourished Northerners at a cost of tens of billions of dollars annually for a decade or more--rolling back the South's standard of living by more than 10%.

Cho and others are hoping that the North will come to its senses and change before it's too late. That's the third scenario:

THE NORTH REFORMS. There are actually some signs of this. In July, North Korea increased the price of food and other once-subsidized commodities, and ended rationing of some items. Other reforms gave state enterprises more flexibility to sell excess goods on the open market, and companies have been pressured to cover their cost of production instead of relying on state handouts. For ordinary citizens, these measures have resulted in little more than rapid inflation. And outside observers can't figure out if Kim Jong Il is just tinkering on the margins or finally heeding the advice of the Chinese and seriously trying to replicate Beijing's success in moving from a planned to a market economy.

If Dear Leader Kim sticks with the reforms, South Korea stands ready to help. The South's state-funded Korea Development Institute (KDI) has a blueprint for coaxing 7% annual growth out of North Korea. The KDI figures that up to $2 billion in foreign aid will be needed annually to lift per capita income in the North to $1,000 by 2008, feed the population, and attract the foreign capital needed to upgrade the North's ports, railroads, and highways.

One question is how the North would handle such assistance. Kim's acolytes have closely studied the Soviet collapse and concluded that the system there failed because of "infiltration" by democratic institutions. Thus, the South Koreans accept that special "islands" of free-market economic activity would remain isolated from the rest of the North to prevent political contamination. "They'll be free-market concentration camps," says William Drennan, a Korea scholar at the U.S. Institute of Peace. China started off with such isolated economic zones, and the strategy has paid off handsomely.

Some of these experiments are already happening. Kim Jong Il has set up special economic zones for foreign companies on the east coast at Mt. Kumgang and on the Russian border, although neither has been particularly successful. Another is in the works for the city of Kaesong, 15 kilometers north of the DMZ near Seoul. South Korean companies could start making labor-intensive products such as clothing and toys there within a year once the current crisis is resolved. By 2010, as many as 1,000 small and midsize companies may set up at Kaesong. Roads and a railway have already been built to the border, leaving just a short hop across the demilitarized zone to be completed.

Still, many South Koreans remain skeptical. "The North can always make a U-turn once it concludes capitalist influenza threatens its regime," says Lee Ju Yeong, president of Taechang Inc., which has invested $20 million in a joint venture that bottles mineral water in the Mt. Kumgang area.

Meanwhile, a fourth economic zone, in the city of Sinuiju on the Chinese border, has turned into a fiasco. The plan hit a snag when Yang Bin, the Chinese-born entrepreneur chosen to run the city, was arrested by Chinese authorities in October and later charged with tax fraud.

Yet if the North steadily developed into a China-like economy, then the fourth scenario might still play out:

GRADUAL MERGER WITH THE SOUTH. This is the plan cherished by Seoul--a steady, decades-long increase in cooperation, with investment inexorably improving life in the North. "We want a soft landing by North Korea that will give it time to make the necessary internal changes and for us to strengthen our ability to deal with integration," notes Cho Han Bum, a fellow at the Seoul-based Institute for National Unification.

Some strategists have proposed a system of incentives--perhaps granting ownership of houses and land--to keep North Koreans in the North, even after the border opens up. Under a plan developed by the Seoul-funded Korea Institute for International Economic Policy, anyone who moves to the South immediately wouldn't enjoy such benefits. "Preventing a sudden integration of labor markets in North and South Korea will minimize unemployment for North Koreans, maximize private-sector investments, and minimize unification costs," says Yoon Deok Ryong, a researcher at the institute.

A reunited Korea: It seems almost impossible to imagine in this season of fear. But somehow the economic catastrophe that is North Korea has to be resolved. Economic reforms are "critical because the North faces dangers of collapse even without any outside attack," says Park Sung Hoon, an adviser to Kim Dae Jung, South Korea's outgoing President.

A lot will depend on the U.S.'s approach to the current crisis. Economic containment may force the North to abandon its nuclear program--but only if the U.S. can get China and Seoul to go along, both big ifs. And even in that scenario, an impoverished, well-armed North would still pose a threat to the region. Negotiations would help, and the Bush Administration is now hinting it may launch direct talks with Pyongyang--clearly the preference of North Korea's neighbors.

And then there's Dear Leader himself. His gift for staging a drama is unmatched. His ability to manage an economy seems minimal at best. Yet he is the main player. "Love him or hate him, Kim Jong Il has been and will be in the foreseeable future the dictator with all the powers," says adviser Park. "You can't exclude him or refuse dialogue with him." That's why the economic salvation of North Korea remains one of Asia's toughest riddles.

By Moon Ihlwan in Seoul and Brian Bremner in Tokyo

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