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North Korean Paradoxes

Rand Corporation

Chapter One

The principal aim of this research is to analyze some of the central issues associated with Korean reunification-and especially its attendant costs. As essential background for the analysis, we begin in Chapters Two and Three with a brief examination of the structure and functioning of the North Korean system-what is known and not known about its various dimensions and particularly about its economy.

Chapter Four briefly summarizes how the system might unravel.

Chapter Five describes the simulations we have done to estimate the capital costs of reunification. The costs of reunification as estimated in this analysis are narrowly defined, focusing on the incremental capital requirements to double North Korea's GDP in a fouror five-year period. Our estimates include the costs of new plant and equipment, replacing existing but unproductive capital, and building infrastructure necessary to reach the specified macroeconomic growth targets. The estimates do not cover humanitarian, cultural, reeducational, and other social costs that would accompany reunification. Attempting to estimate these costs would be both difficult and elusive. Moreover, it can be argued that many and perhaps most of these burdens can be construed as appropriate priority tasks for a unifiedKorean government to discharge, rather than tasks to be accomplished before unification.

Notwithstanding the narrow definition of the covered costs, our estimates span a wide range reflecting the major uncertainties attached to the estimates. The simulation methodology is explained in Chapter Five and in the appendix.

Chapter Six summarizes estimates of unification costs that have been made in other studies, some of which employ differing definitions of costs as well as different methodologies from those described in Chapter Five.

Chapter Seven considers the relevance and nonrelevance of Germany's unification experience to possible Korean unification.

Finally, Chapter Eight concludes with brief observations about the effects of unification on some of the security policies and problems that would confront a postunification Korea.

Chapter Two

Obscurities

North Korea is conspicuous if not unique among the 190 other members of the United Nations in the paucity of reliable information about it. The North Korean government has never published a statistical yearbook, and it essentially ceased publishing even fragmentary economic statistics in the early 1960s. Limited information and data and the unreliability of what is available result in obscurity and conjecture rather than knowledge about the political, economic, and military circumstances actually prevailing in North Korea.

Its political obscurities are pervasive. They include the bizarre, volatile, and perhaps calculating character and behavior of its leadership; the content and meaning of its juche (self-reliance) ideology; the mind-shaping role of the "Great Leader" legacy of Kim Il Sung and its interpretation and application by the "Dear Leader" incumbency of Kim Jong Il; the relationship and interaction between the Kim dynastic leadership and the next levels in the North Korean hierarchy-namely, the military, technical, and managerial elites; and the respective roles and relative influence of these elites as well as those of the North Korean People's Workers' Party in the country's decisionmaking.

To be sure, some of these obscurities can be explained and rationalized within the North Korean context. For example, the juche ideology and apotheosizing of the dynastic leadership can perhaps be understood and explained as abetting North Korea's internal control mechanisms and as manifestations of Korean nationalism. Whether such explanations attenuate or accentuate the obscure and bizarre character of North Korea's polity is debatable.

In sum, what we know about the polity and politics of North Korea is exceeded by what we do not know. When the North Korean regime first denied, then subsequently admitted, and then still later denied existence of its uranium enrichment program; and when it halted, and then (perhaps) resumed its nuclear weapons program by extracting plutonium from spent nuclear fuel as well as by enriching uranium, this shifting behavior as well as the truth content associated with it remained obscure. It is not surprising that multiple and uncorroborated conjectures have been advanced by putative experts to account for this behavior.

When the "Dear Leader" first welcomed Kim Dae Jung's "Sunshine Policy" in the Pyongyang summit meeting of 2000 and then subsequently repudiated it, another enigma emerged. Perhaps a plausible explanation was North Korea's initial acceptance of a $100,000,000 compliance fee from the South, which the North may have presumed would be a recurring subvention, although the South did not so intend it and did not renew it.

When North Korea asserted that any attempt by the United States and collaborating nations in the Proliferation Security Initiative (PSI) to enforce sanctions against North Korea's current or prospective weapons exports would constitute an "act of war" to which the North would respond aggressively, the precise meaning of the threat itself was obscure and the question of how best to respond to it baffling. The puzzle was not diminished by the fact that North Korea had made similar threats in the past.

The North Korean economy, with which this report is more directly concerned than with its politics, is no less shrouded in obscurity. Among the economic obscurities, for example, are such questions as whether the size of the North Korean economy is 3 percent or 6 percent that of South Korea, and whether the North's gross domestic product (GDP) per capita is 6 percent or 12 percent of South Korea's-or instead is outside these limits entirely. No less obscure and equally puzzling are conflicting data suggesting that over the past six or seven years annual GDP growth in the North has ranged between -6 and +6 percent-averaging over the past dozen years about -2 percent-or, instead, has stagnated for most of this period.

Less obscure but still puzzling is North Korea's ability to maintain a huge military establishment-which includes a consequential weapons development program and a relatively overdeveloped defense industrial base in the midst of the pervasive poverty and weak performance of its economy. The North Korean military establishment absorbs between 20 percent and over 30 percent of the economy's Gross National Income (GNI), and its ability to sustain such a large military effort recalls the plight of and constraints on the Soviet Union's economy in sustaining the Soviet military establishment in the 1970s and 1980s. Indeed, the North Korean economy displays many structural characteristics associated with those of its Soviet antecedent, with one major exception. North Korea has placed heavy reliance upon acquiring large unrequited subventions and rents from abroad. In contrast, the Soviet economy was remarkably and self-destructively autarchic, while it transmitted large resource transfers abroad. Subventions were not provided to the Soviet Union, but by the Soviet Union to Eastern Europe, North Korea, Cuba, and other extensions of the then-Soviet empire.

Paradoxes

The North Korean system is not only shrouded in obscurity, it is also immersed in paradoxes. The political philosophy proclaimed by the "Great Leader," Kim Il Sung, to guide the state from its inception, and reiterated frequently since then by Kim Jong Il and the North Korean media is that of juche. Ostensibly, juche exalts self-reliance and the independence of the North Korean state and its leadership from the influence of other states and other external forces. The paradox is that, unlike the autarchic economic course endorsed and actually pursued by the Soviet state, North Korea's "self-reliance" has meant its perennial reliance on wealth transfers from abroad in almost all the 55 years of its existence. This is reflected (although probably understated) by annual current account deficits between 3 percent and 7 percent of North Korea's GDP throughout this period.

The file of paradoxes is replete. Another one is the sharp antinomy between North Korean self-characterization as a "socialist paradise" at the same time as it pursues and persecutes anyone who tries to escape. It reported a bumper crop in 2001, but famine conditions were acknowledged in 2002. In the midst of pervasive national poverty, military spending continues to be large and is perhaps increasing, focusing not only on force maintenance but also on development of weapons of mass destruction.

To be sure, some of these paradoxes can be attributed to a combination of apocryphal data and deceptive propaganda from the North Korean state. Yet the bottom line remains: The North Korean system is baffling because of the obscurities and paradoxes in which it abounds.

Chapter Three

Data Problems

Estimates of North Korea's Gross Domestic Product or Gross National Income vary widely for many reasons. They include the absence of reliable data for many components of the national accounts, secrecy surrounding data that may be available internally but are not available externally, and a possible temptation by some analysts to invent data in the process of trying to make the best of the bad data that are available.

Another problem associated with North Korean data stems from the legacy of Soviet accounting practices, which excluded "intermediate services" (for example, transportation, housing, health care, and

education), from national accounts data. To the extent that this practice is replicated in North Korea's accounts, the result is underestimation of the economy's size. This source of underestimation is probably more than offset by another anomaly in North Korea as with other communist economic systems-namely, the tendency to generate negative "value added" in processing material inputs. That is, the market value of the final output may be less than the value of the inputs used in producing it, resulting in hidden inflation and deteriorated quality, especially of consumer goods.

The North Korean GDP

Estimates of the size of the North Korean economy are usually scaled to data on the South Korean GDP (see Table 3.1). South Korea's Statistical Office estimated South Korea's GDP as 22 times that of the North in 1995, and between 25 and 27 times that of the North in the period from 1996 to 2002.5 Other estimates have scaled South Korea's GDP as high as 40 times or even 50 times that of the North. In the simulations to be discussed later, we vary the relative size of North Korea's GDP between 3 percent, 4 percent, and 5 percent of that of South Korea.

Table 3.2 summarizes estimates made by the South Korean National Security Office of comparative rates of growth in North and South Korea during the 1990-2002 period.

The nearly 12 percent reversal shown in Table 3.2 in South Korea's growth between 1997 and 1998 (from +5 percent to -6.7 percent), reflects the East Asian financial crisis of that period. It is difficult to explain and reconcile North Korea's reported (and perhaps bogus) high growth and bumper crops in 1999 with famine and acute poverty in 2000.

Structural Characteristics of North Korea's Economy

North Korea's economy has been described in terms of three sectors: the primary sector, comprising agriculture (employing about 40 percent of the population), mining, and state factories; the defense sector; and the "court economy," which provides goods and services for North Korea's elites and largely functions apart from the rest of the economy. The court economy has been characterized as "able to secure state resources but unaccountable to the economic bureaucracy."

From the standpoint of North Korea's limited economic relations with the outside world, this court economy is an aspect of what can be described technically as a rent-seeking economic system. The rents realized by and for North Korea's political, military, and technical elites provide resources crucial for the leadership's maintenance of control and loyalty of the approximately 3 million beneficiaries at the top, and for perpetuation of the system.

A central part of the economy's structure is its overdeveloped military sector. This includes the million-plus armed forces, defense research and development of nuclear and other weapons of mass destruction, 12 and industrial production of conventional and unconventional weapons. In relation to the size of its population, North Korea's armed forces are the largest in Asia. In both respects-military production and military forces-overdevelopment of the military sector emulates North Korea's Soviet antecedent while exceeding the latter in relative terms.

Taken together, reported budgetary military spending and production by military industry (to the extent the latter is not already included in budgeted military spending) represent between 25 percent and over 30 percent of North Korea's GDP, a range reflecting the uncertainties of the estimate. The actual size of the military sector as a share of the North Korean economy is probably closer to the upper end of this range because of what is not included in the data on which the estimates are based. For example, unrequited capital transfers and other rents extracted from other countries probably redound in considerable measure to the benefit of the military sector. Furthermore, priorities in resource allocation to the military and preferential treatment of its leadership and personnel are not reflected in these estimates of the military share of GDP, just as they were not adequately reflected in Soviet practices of bygone days.

Another way of expressing the military's dominance in the North Korean economy is by comparing military outlays per active military personnel with nonmilitary outlays per nonmilitary persons in all of North Korea. Military spending per active North Korean military personnel is between $3,900 and $5,500, depending on whether the dollar conversions are made at nominal foreign exchange rates or purchasing power parity rates, respectively. The corresponding range for nonmilitary national product per nonmilitary personnel is between $509 and $707. Although military outlays in other countries are typically capital intensive, the 8:1 ratio between per-capita outlays for the military and nonmilitary population in North Korea is extraordinarily high: For the United States the roughly comparable figure is about 5:1.

One characteristic of North Korea's economy is unique. This is what we have labeled North Korea's "rent-seeking" economic system. This means that the North Korean system is focused and relies on extracting some form of quasi-monopoly profits (i.e., rents) from its dealings with the rest of the world.

Rent-seeking behavior refers not only to the use of productive resources to extracting rents but also to the deliberate use of declaratory policies, threats, and negotiatory stances by the government to acquire such rents. In the North Korean context, rent-seeking behavior also encompasses "protective services" extended in the form of promises to refrain from aggressive actions-such as development of nuclear weapons, missile delivery systems, and other weapons of mass destruction-in exchange for payments, whether through foreign aid in currency or in kind, as fuel or food, as loans understood as unlikely to be repaid, or as resources provided under the 1994 Framework agreement to North Korea by "protected" signatories.

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Excerpted from North Korean Paradoxes by Charles Wolf Jr. Kamil Akramov Copyright © 2005 by RAND Corporation. Excerpted by permission.
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