North Korea could begin to open its domestic market incrementally by setting up a limited number of special economic zones (SEZs), long-time North Korea watcher and economist Chan Young Bang said in a recent interview with NK News.
That, he argued, would allow the country to kickstart critical economic development without the jeopardizing regime security.
April saw North Korean leader Kim Jong Un declare a “new strategic line” for the country: with the nuclear program complete, he said, the DPRK could now focus on building its “socialist economic system.”
This comes, too, amid repeated insistence by top U.S. officials that North Korea could enjoy economic benefits in return for major concessions on its nuclear program at an upcoming summit, with President Trump saying the country has “brilliant potential” and Secretary of State Mike Pompeo saying that the DPRK leader is hoping to attract private investment.
But Dr. Bang — who advised Kazakhstan President Nursultan Nazarbayev during that country’s transition to a market economy and now serves as the president of Almaty’s KIMEP University and Principal Investigator at the DPRK Strategic Research Center — told NK News a crucial issue has been ignored.
Despite Seoul and Washington’s suggestions of potential investment in the North in exchange for the complete denuclearization of the Korean peninsula, he said, it’s still unclear how Pyongyang could undergo marketization without prompting regime collapse.
Kim Jong Un needs to secure “a new source of legitimacy as Supreme Leader” through a rapid economic development, Bang continued, but won’t be able to achieve this goal without a major shift in the way the country sees itself.
“Successful economic development, though, must be accompanied by genuine political reform and transformation of the fundamental characteristics of the regime,” he said.
In an extended interview with NK News over email and phone, Bang – who has also served as an advisor to former USSR President Mikhail Gorbachev and the late DPRK official Kim Yong Sun – also shared his thoughts on prospects for inter-Korean economic cooperation, sectors for potential high-level investment in the North, and whether North Korea can really be convinced to denuclearize.
This interview has been translated as well as edited and condensed for clarity and readability
NK News: North Korean leader proposed a “new strategic line” at the 3rd Plenary Meeting of the 7th Central Committee of the Workers’ Party of Korea (WPK) in April. How much should Kim Jong Un’s regime develop its national economy so as to maintain its legitimacy without nuclear weapons, which is an integral part of the “byungjin” line?
Chan Young Bang: Once North Korea accepts denuclearization, they will lose not only a deterrence measure against both real and perceived military threats but also their primary means of preserving internal solidarity. The byungjin line has played an integral role in maintaining the regime’s absolute power, so once nuclear weapons are relinquished, a new justification for this power must be identified.
As bureaucratic controlling mechanisms are already eroding due to the expansion of unofficial markets and collapse of the central rationing system, Chairman Kim Jong Un desperately needs to reassert the legitimacy of his regime through sustained and dynamic economic growth.
Upon careful assessment, I have come to the conclusion that in order to preserve the integrity of the regime, market-oriented reform and opening, accompanied by an annual minimum GDP growth rate of 10% for the next ten years, will be necessary to mitigate the destabilizing effects of denuclearization. Such a growth rate would not be hard to achieve if North Korea develops a viable blueprint for economic reform.
“Chairman Kim Jong Un desperately needs to reassert the legitimacy of his regime through sustained and dynamic economic growth”
The nation is abundant with highly-skilled laborers, mineral resources, agricultural land, and coal, and it has rich oceans for fishing. Socialist mismanagement and an inability to integrate with the world economy and tap into modern technological innovation has kept their country from fully and adequately utilizing their resources. There is enormous potential for growth if they are provided the necessary means—financial assistance for electricity, infrastructural development, modern technology, education, professional training—and if they succeed in enacting market reform and opening.
NK News: What conditions need to be met in order for Kim Jong Un to accept market-oriented reform and successfully implement rapid economic modernization?
Chan Young Bang: Any plan for the introduction of radical economic reform in exchange for denuclearization must include a package deal within the framework of the Six-Party Talks. It will be necessary for North Korea to establish normalized diplomatic relations with the U.S. and Japan, sign a peace treaty with South Korea and guarantee to not pursue integration of the two nations, and reconfirm existing alliances with China and Russia.
To provide Kim Jong Un with the development funds necessary for rapid economic growth, the stakeholder nations will need to collectively utilize their resources. South Korea, as the country to benefit the most from North Korea’s economic modernization, should provide the bulk of a sufficient development fund— USD$30 billion annually for a minimum of 10 years—supplemented by credit from the U.S. and additional loans available through the IMF.
Japan, as well, should offer war reparations in the amount of USD$20-30 billion. A detailed blueprint which prioritizes synergistic projects for the development of leading sectors should be designed with the goal of integrating North Korea into the world economy.
Successful economic development, though, must be accompanied by genuine political reform and transformation of the fundamental characteristics of the regime. A development plan which does not entail both financial transaction and ideological transformation will fail to create sustained, dynamic growth and a new source of legitimacy for the regime.
“South Korea, as the country to benefit the most from North Korea’s economic modernization, should provide the bulk of a sufficient development fund”
NK News: Could you elaborate on your view that economic openness can’t be achieved without political reform?
Chan Young Bang: I believe that North Korea is at a very significant turning point. The North should change its ideology and paradigm if it hopes to get on the track of becoming a normal state through reform and openness. The abandonment of the byungjin line isn’t enough if there is no change in paradigm or development strategy.
Reform and openness can’t be achieved without political reform. For instance, the communist state possesses all means of production and pushes ahead with centralized economic planning as well as bureaucratic control, totalitarianism, and dictatorship. The country can’t implement reform and openness policy without changing these characteristics. To achieve economic reform radically at a fast speed, political reform is needed.
The North can’t fulfill national economic development based on the Juche ideology: under the policy of prohibiting ideological contamination by capitalism, openness can’t be achieved.
“The abandonment of the byungjin line isn’t sufficient if there is no change in paradigm and development strategy”
NK News: You have mentioned that undergoing economic modernization would cause acute instability in North Korea. How do you expect Kim Jong Un to mitigate the destabilizing effects of market reform and opening?
Chan Young Bang: North Korea will be unable to maintain the status quo in the wake of rapid modernization, opening, and foreign investment. Economic reform and openness can cause regime instability: state-run enterprises — which won’t be able to develop a competitive edge overnight — will go bankrupt in the process of the reformation and privatization.
The most effective way to control the destabilizing effects will be to introduce economic reform in a similar manner to the approach of former Chinese leader Deng Xiaoping, who selectively opened the four special economic zones (SEZs) along south China’s coast in the 1970s.
Through the gradual introduction and expansion of a handful of carefully selected special SEZs, North Korea can minimize the destabilizing impact of economic reform and opening by gauging the success of the SEZs and controlling their side effects on the new market economy.
In other words, it is incidental to the North whether it follows the example of China model. But North Korea should focus on fostering four or five SEZs as Beijing did to minimize detrimental effects, instead of managing 16 SEZs. The SEZ should be the center of capitalism. To this end, freedom of economic activities and privatization should be acknowledged. Investment law should be established based on a western market economy, so private domestic companies can make joint investments with foreign corporations and set up joint ventures.
Large capital expenditure is required to develop SEZs as infrastructure including electricity, water supply, and communication system, railroads, airfields, and roads should be established. In a nutshell, the North should establish four or five SEZs and make an intensive investment.
More radical reforms, like shock therapy, would undermine the safety and integrity of the regime, instigating chaos in the region and, more than likely, mass defections from the North.
Support and investment from South Korea will be crucial in the implementation of such initial measures such as SEZs to ensure a rapid but peaceful transition to market-oriented principles.
NK News: How will North and South Korea be able to resume economic cooperation without breaching the current international sanctions framework?
Chan Young Bang: Without violating international sanctions, there are limited areas in which the North and South can cooperate. Sanctions prohibit any tangible transfer of money, but some space for cooperation remains. For instance, both humanitarian aid and human resource development focused on educational and training programs for North Korean students and workers would be viable options for collective development.
The immediate need is for North and South Korea to jointly develop a coherent economic plan to move forward with reform and opening under the current sanctions. They cannot currently open any industrial complexes, and they are unable to begin developing their tourism sector. For now, human resources development and technical assistance will be critical for developing the framework needed for future economic growth.
Once sanctions have been lifted, North Korea will be able to drastically expand its economic modernization efforts, by securing comprehensive bilateral or multilateral arrangements with stakeholder nations.
“The logistics industry is especially appealing because it can work synergistically with other areas of business, and it will contribute to the economic vitality of South Korea and other neighboring countries”
NK News: Despite many expecting that economic projects wouldn’t be included in the joint inter-Korean declaration, the two Koreas agreed to “actively implement the projects previously agreed in the 2007 October 4 Declaration” in the Panmunjom Declaration to “promote balanced economic growth and co-prosperity of the nation.”
Which project do you recommend both Koreas prioritize?
Chan Young Bang: In addition to the development of transportation systems, which were addressed in the October 4 Declaration, North Korea needs to focus on generating and providing sufficient electricity to support growing sectors, such as logistics, tourism, construction, and real estate — an effort that could be supported by South Korea through the construction of power plants.
The logistics industry is especially appealing because it can work synergistically with other areas of business, and it will contribute to the economic vitality of South Korea and other neighboring countries, as well, making it an ideal initial project for both Koreas.
Roads are poorly built and increasingly inaccessible, while their trains and railroad systems are nearly obsolete. Therefore, the “connection and modernization of the railways and roads on the eastern transportation corridor as well as between Seoul and Sinuiju” in the Panmunjom Declaration has very serious implications for economic integration, and it will be a necessary step toward developing North Korea’s transportation and logistics sectors.
NK News: Taking the current North Korean economic structure into account, which economic sectors will have the greatest synergy effect and be the most lucrative when the two Koreas work together?
Chan Young Bang: A number of sectors have demonstrated the potential for lucrative development in the North. Tourism, for example, is poised to play a significant role in the newly-opened nation due to its strategic location and historically significant demilitarized zone. Such a large, undeveloped area which has existed without a trace of human activity for the last 65 years would prove to be a considerable draw for tourism.
Logistics is a very promising industry, while fisheries and the production of labor-intensive goods would also flourish. North Korea should take advantage of its abundance of low-wage human resources to catalyze cost-effective production under the auspices of South Korean companies and brand names.
Additionally, the northern region is abundant with mineral resources, in particular, rare earth, which is in high demand and begging for investment. Electricity, excavating machines, and other instruments for water pumping, as well as the means to transport them, are direly needed to launch this industry.
North Korea alone does not possess the funds needed for modernization and expansion of these systems of transportation. Realizing the full potential of such cooperation will require South Korea to make a significant investment in the development and maintenance of North Korea’s infrastructure.
An influx of foreign investment will be necessary to secure capital, modernize facilities, improve managerial expertise, and develop technologies to enhance productivity in all sectors across the board. Therefore, it is paramount that comprehensive foreign investment law, enacted on market principles, be drafted proactively to address these concerns and protect North Korean assets.
NK News: Some suggest Pyongyang focus on developing labor-intensive industries based on cheap human resource when resuming trade with foreign countries, and that that strategy could contribute to the short-term economic development. But it would also lead to vertical specialization and impede long-term economic growth. How can Pyongyang overcome the issue?
Chan Young Bang: The country should push ahead with two tracks simultaneously. The first is to develop leading sectors such as logistics, seafood industry (canned goods) and tourism, construction, and mining.
The other track is to focus on labor-intensive industries and produce shoes and other goods at the early stage while combining the country’s cheap labor with the capital and technology of foreign companies. The North also should foster the domestic enterprises independently in the process of mastering advanced techniques. China underwent the same process.
“The United States, collectively with the other stakeholder nations, will need to present [Kim Jong Un] with a security arrangement that provides both external and internal security”
NK News: What is your overall assessment of the Panmunjom Declaration, adopted as an outcome of the inter-Korean summit?
Chan Young Bang: This an extraordinary achievement. Successfully achieving the complete, verifiable and irreversible dismantlement (CVID) of the Korean peninsula will require convincing Chairman Kim that he has a viable survival chance after forfeiting his weapons.
To do so, the United States, collectively with the other stakeholder nations, will need to present him with a security arrangement that provides both external and internal security. External security must be ensured by normalizing relations with the United States and Japan, signing a peace treaty with South Korea, and reaffirming alliances with China and Russia.
Internal security will need to be guaranteed by rapid, sustained economic growth via market-oriented reform and opening, supported by the provision of a development fund by the five stakeholder nations, to mitigate social unrest and provide Chairman Kim with a new source of legitimacy as the Supreme Leader.
NK News: President Trump has said he prefers a Libya model for North Korean denuclearization. Do you think that the U.S. will agree to compensate North Korea for the denuclearization? If so, what kind of compensations do you think the U.S. can offer?
Chan Young Bang: When President Trump meets with Chairman Kim, he must come bearing a clearly defined package plan for the provision of both security guarantees and economic reward, otherwise the meeting will be a disaster.
In principle, the collective stakeholder states may agree to provide compensation, but it will take time to agree on the details. Nuclear dismantlement, creating a comprehensive, detailed account of atomic material, and IAEA verification will also require time.
I do not believe that there is enough time to draft a detailed agreement before the meeting between President Trump and Chairman Kim. Rather, the meeting will be essential to determine whether North Korea is truly committed to denuclearization. If the U.S. can verify the true intentions of North Korea, that will a tremendous step.
President Trump will have to be equally generous, by offering a security arrangement and development fund, provided that the North genuinely decides to relinquish nuclear weapons and become an internationally law-abiding country.
NK News: What will be the most desirable economic incentive North Korea could seek from the U.S.?
Chan Young Bang: The U.S. can provide earmarked grants, to be sought by U.S. industries, in particular, electrical, agricultural, medical, communications, and steel. The U.S. also has a lot to offer in terms of education and medical care.
Universities can expect large returns on investments by establishing businesses, accounting, financing, marketing, and medical programs in North Korea. Additionally, once a trade partnership between the U.S. and North Korea is established, North Korea can take advantage of Most Favored Nations (MFN) treatment in trading with other countries, and the U.S. can support in the acquisition of additional.
“The biggest challenge, however, will be the development and fostering of a new North Korean mindset capable of adapting to the new, market-oriented system. loans from the IMF”
NK News: Seoul considers DPRK-U.S. economic cooperation to be an integral part of seeking a peace settlement on the Korean peninsula. In what areas can bilateral cooperation be promoted when considering the economic structure of the two countries?
Chan Young Bang: The most important contribution the U.S. can make is to open their markets to North Korea for joint investment. There are many potential areas for U.S. investment, the most important being infrastructure. Without functioning airports, ports, railroads, roads, and electricity, the country simply cannot develop.
Communication is another prospective sector for U.S. investment, as previous joint ventures with foreign companies, like the Egyptian firm Orascom, have been obstructed by a lack of protections for foreign investments and a closed economy unfavorable to market activity.
As previously discussed, labor-intensive industries would be profitable, provided that the companies could export their goods to the U.S. The contribution of development funds from the stakeholder nations must be contingent upon the serious intention of North Korean leadership to introduce market-oriented reform and opening, without which any form of economic aid or investment would be useless. The biggest challenge, however, will be the development and fostering of a new North Korean mindset capable of adapting to the new, market-oriented system.
Edited by Oliver Hotham
Featured Image: Korean Central News Agency (KCNA)
Join the influential community of members who rely on NK News original news and in-depth reporting.
Subscribe to read the remaining 3232 words of this article.