The Korean peninsula is living through times of great uncertainty, but one thing that appears increasingly likely is that in the relatively near future, the North Korean leaders are going to get some money – maybe even a lot of money.
At the time of writing, the outcome of the expected Trump-Kim summit looks uncertain, but chances are high that this meeting will lead to a significant relaxation of the economic sanctions targeting North Korea.
It is even possible that the U.S. government will provide North Korea with a significant amount of aid – at least, this is what U.S. Secretary of State recently suggested. And even if American taxpayers’ money does not flow to Pyongyang, once sanctions are relaxed the South Korean government will almost certainly use this new situation to initiate a large-scale program of aid and subsidized economic exchanges.
Contrary to what many conservatives claim, such programs are a good thing.
But past experience has demonstrated that there is a high chance that Pyongyang will misdirect a significant part of this financial bonanza. As a result, it is quite important not only to provide the North Korean government with “developmental aid,” but also reduce the chances that this aid will be used on projects which might make political sense from the government’s point of view, but are useless or even damaging to the country’s long-term development prospects.
It is even possible that the U.S. government will provide North Korea with a significant amount of aid
We’ve seen this all before. In the early 1970s, North Korea had remarkably good access to the-then overheated international credit market, which was at the time awash with petrodollars. At the time, bankers saw the DPRK like any other communist bloc country, and as such, it enjoyed a rather high credit rating. It might sound surprising to younger readers, but communist countries, in general, took their credit ratings seriously and lenders loved them.
Therefore, in the 1970s, North Korea heavily borrowed from the international markets. The total amount of loans it received from developed countries in 1971-80 reached USD$1.3 billion – an impressive sum by the standards of the time.
On top of that, at the time, Soviet aid to North Korea was maintained at a high level – some USD$700 million of grants and loans were provided by Moscow in 1971-1980 (essentially, as a reward to Pyongyang for its unwillingness to join Beijing in the then ongoing Sino-Soviet conflict). In other words, North Korea in the 1970s suddenly got access to easy money.
So how did North Korea use this bonanza? It was largely wasted: the money was overwhelmingly used on prestige projects of little practical and economic value.
The most remarkable of these projects was the reconstruction of downtown Pyongyang. The results were impressive, no doubt, and are still much admired by visitors to the North Korean capital. It was a time of the construction of the Monument to the Juche idea, the Grand People’s Study House, as well as the Arch of Triumph, and other classic examples of the North Korean propaganda architecture.
This massive reconstruction of downtown Pyongyang may have massaged the egos of North Korea’s elite, and, to some extent, helped further increase the political prestige of the Kim family. But neither the Monument to the Juche idea nor the Arch of Triumph contributed much to the economic development of the country.
Even when money was used to finance development, it was used on prestigious industrial projects, which, in many cases, were well above the actual technical capabilities of North Korea and generally unrelated to the country’s actual needs.
The 1970s saw North Korea conduct massive imports of tools and industrial equipment from developed countries of Europe as well as Japan.
Money was overwhelmingly used on prestige projects of little practical and economic value
However, this equipment was imported with gross neglect and know-how, since the North Koreans – perhaps influenced by the official rhetoric of self-reliance – showed little interest in training personnel and assumed that they would know how to handle the new equipment themselves.
As a result, most of the production lines and industrial equipment were soon broken, or could not even begin to work properly. And in the late 1970s and early 1980s, North Korea, unable (and, perhaps, unwilling) to pay its debts, defaulted.
The Swedish Volvos, about one thousand of them, which could be seen at the Pyongyang streets until the early 2010s, were a vivid reminder of this fiasco. These cars were at the center of what the Soviet diplomats then privately called the “largest car theft in the human history”: shipped to the North, but never paid for. In the long run, this default and blatant refusal to pay fatally damaged North Korea’s position on the international financial markets and still haunts Pyongyang’s efforts to attract foreign investors.
ONE STEP FORWARD, TWO STEPS BACK
These events constitute a rather worrisome precedent. If North Korea is indeed about to be given a large amount of aid with little or no conditions attached, and without control over how the funds are spent, it is quite likely that the DPRK decision-makers will use this bonanza in ways which, in the long run, make little, if any, contribution to economic development.
Since his rise to power, Kim Jong Un has been implementing a radical program of market-oriented economic reforms which are similar to what the Deng Xiaoping’s government did in China in the late 1970s and early 1980s.
The North Korean government has not merely admitted the social and economic changes which have happened spontaneously since the days of the Arduous March, but also introduced new policies which encourage the further switch to market mechanisms within the North Korean economy.
Kim Jong Un and his advisors are intelligent and well informed enough to understand that the old state-controlled centrally-planned economy has no future
One can mention the “work team responsibility system” in agriculture (“work team” in this case, usually being a nickname for households), the “independent enterprise responsibility system” in industry, as well as some legal changes which make it much easier to attract domestic private investment, while also tacitly encouraging the establishment of de facto private companies.
All these measures, of course, greatly contribute to the ongoing revival of the North Korean economy and improvement of living standards, both in Pyongyang and the countryside, are potentially dangerous for long-term stability. The government had to reluctantly approve, and even encourage, the gradual switch to a market-based economy, but it happens because it sees no alternative.
Kim Jong Un and his advisors are intelligent and well informed enough to understand that the old state-controlled centrally-planned economy has no future and is incapable of generating significant growth. They need this growth in order to stay in power long-term, so they grudgingly and reluctantly accept the political risks associated with reforms.
But what will happen if the North Korean leaders discover that they can rely on a steady supply of funds from the outside world? Unfortunately, from the government’s point of view, it makes perfect sense to use these funds to take a few steps back and restart the grossly inefficient, but politically safe, centrally planned and distribution-based economy.
There is no doubt that such huge step backward would – at least, initially – increase popular support for Kim Jong Un’s government as well as its ability to manage the population: it is easier to maintain control if market activities are downsized and/or banned.
Even if such threats are avoided, we should still worry about the North Korean government’s well-known penchant for mammoth prestige/propaganda projects. Even in the days of chronic shortage, the government was still willing to direct a significant amount of its meager funds to subsidize prestigious construction in Pyongyang.
No doubt, Kim Jong Un’s Pyongyang, which has emerged over the last five-six years, is quite impressive. Nonetheless, one wonders, does a country with North Korea’s GDP and poor infrastructure really need all those high-rises of eccentric, if somewhat kitschy, architecture?
SPEND IT WHERE IT COUNTS
Perhaps, it would be much better if this money were spent on, say, improving North Korea’s highway network, which is in a very sorry state – or its railway network, whose poor conditions were even openly admitted by Kim Jong Un during his talks with President Moon Jae-in in Panmunjom.
If North Korea’s government received even more money, there are chances that this money would be spent on more high-rises in Pyongyang, on constructing some new museums dedicated to the Kim family cult, or perhaps, erecting more mammoth statues of the Kim family members across the entire country. Perhaps, they will be used to buy more BMWs and Porsche – the Volvos, once successfully appropriated from the Swedes, are increasingly difficult to run.
Such a course of action, admittedly, makes some political sense and is not simply a reflection of the elite’s vanity. Indeed, as people have known since time immemorial, pyramids and giant statues of the pharaohs do help increase social cohesion and discipline. However, we are not living in the times of pre-modern economies of ancient Egypt and Mesopotamia. In the long run, not only for the country, but even for its elite (assuming, of course, they will be able to stay in control long enough), it will be much better to spend money on what the country really needs: above all, infrastructure.
How can this problem be solved? I have had enough experience with decision-makers to understand they seldom care about long-term results of their decisions – and this is, sadly, especially applicable to those in democratic countries. Nonetheless, developed nations must make their eventual – and indeed highly welcome – aid to North Korea strictly conditional.
They should ensure that the money they are going to pump into Pyongyang will be used for projects which make economic sense. Better roads, better railways, better power stations will help, as well as, perhaps, a couple more industrial parks, similar to the now defunct but hopefully soon to be revived Kaesong Industrial Zone.
If not, the current deal, which has potential to encourage and speed up North Korea’s evolution, might become yet another handicap on this way.
Edited by Oliver Hotham
Featured image: KCNA
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