Could it be that domestic pressures in the DPRK — in consequence of a costly stumble backwards along the tortuous North Korea road to economic reform — and coordinated negotiating pressure from the other parties to the six-party talks are opening the opportunity for progress towards a settlement with North Korea? Some are now arguing that the time to move forward again may have come. And a number of analysts are now focused on the retreat on retrogressive economic policies and the prospect of a North Korean leadership visit to China as signs that a moment of decision may be bearing down on Pyongyang. It is difficult to know what all this means, as Scott Snyder suggests.

We have gathered the best of the latest analysis to try to get a handle on what’s been going on and what it might mean. The consensus seems to be that there’ll be no breakthrough soon. But there’s also a sense that we might have reached a turning point, or at least a fork in the road. Today is the ides of March!

There is no more difficult and apparently intractable security problem in Northeast Asia than that of North Korea. The Obama Administration has been reluctant to deal with the regime until there is assurance that the ultimate objective of denuclearisation is really on the table: it is adamant that there will be no more concessions until the previously negotiated progress on verifiable denuclearisation is delivered. Pyongyang has been digging in but over recent months has shown signs of an interest in re-engaging. Without what President Lee Myung Bak calls a comprehensive settlement (denuclearisation as well as engaging on the economy, and a peace treaty with the United States) there will be insufficient basis of trust all round for a breakthrough.

A critical interest in recent developments is what has been happening in the North Korean economy. In this week’s lead, Rudiger Frank offers an informed interpretation of where things are at with the botched currency reform. The North Korean leadership’s unprecedented back-down is an important signal of how far the economic reforms that were put in place from the beginning of this decade have taken the economy away from its old Soviet mould, perhaps to the point of no return. This doesn’t mean that the damaging effects of the recent currency reform will be willingly or readily removed. Nor does it mean that very imperfect markets in North Korea (largely cut off from the rest of the world) can alone solve North Korea’s economic problems. For one thing, North Korea (as the devastating famine of the 1990s established even in the North Korean official mind) is an economy that needs international trade to feed itself at barest subsistence levels. It always has in modern times, and it always will even if it had the most efficient agricultural sector in the world. But letting markets begin work is the first step in preparing for more openness.

Pity this wasn’t understood in Washington a decade ago. Also a pity that Canberra, which had the opportunity for better intelligence on these economic developments than most places, sat on its patsy, and still is. But for the future, let’s see if the present stirrings mean anything new.

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There are rumours that Kim Jong-il will visit China late-March. If the visit takes place, it must be after the 18 March when the joint US-ROK military training ends, which is regarded by North Korea as a prelude to war. The supreme commander can’t be seen to leave the country during that period. Alternately, the visit might be made by a top official in the North Korean system, such as Kim Young-nam. So, what should we expect from this meeting?

Broadly speaking, our expectations can be framed around Kim Jong-il’s promise to his people.

Kim has promised to the North Korean people to make the country strong and prosperous by 2012, the centenary of the birthday of his father, Kim Il-sung’s. On the face of it, this promise is illusory. The North Korean leadership is probably the least accountable leadership in the world. It was casual about the plight of its people during the famine of the mid-1990’s, and on numerous other occasions.

Kim’s deadline of 2012 is important during a time when his succession remains to be settled. Recently, the North Korean economy has been given higher priority. This was highlighted by the North Korean leadership’s unusual apology for the disastrous currency reform, and acknowledgment of the regime’s failure to provide basic material comfort. For the North Korean leadership, there will have to be some practical results as we move toward 2012. These practical results will be what Kim is looking for out of China. Could they be in the arena of economics, or will they take the form of progress on the nuclear question?

As for the nuclear question, the Six Party Talks are still in official hibernation, with a flurry of bilateral consultations taking their place. Recent Chinese statements that the talks could restart in the first half of this year are promising. The renewal of talks would place China back in its preferred position as mediator. Outside of these negotiations, North Korea is often portrayed as China’s headache. When North Korea is anchored in the negotiation room, it becomes the US’s headache. Getting negotiations started is therefore clearly in China’s interests. It could also help China on another nuclear case, namely Iran. Getting North Korea back to the table could demonstrate the value of negotiations instead of sanctions.

But restarting these talks will require China to employ some deft diplomatic manoeuvring. The US and its allies have demanded progress on North Korean denuclearisation before starting talks on other issues. North Korea has demanded bilateral talks with the US, and an abolition of the US’ hostile policies, including sanctions.

This looks like a possible re-run of the Banco Delta Asia-affair in 2005, where North Korea demanded bilateral negotiations with the US. But, unlike Banco Delta-Asia, these current sanctions can’t be separated in a bilateral way – they are based on UN resolution 1874. Besides, China has also stated that the sanctions are a separate issue.

A further issue is that the US is more constrained by the continuation of bilateral negotiations. Bilateral negotiations could sideline US allies like Japan and South Korea. They could also reaffirm to North Korea that there is a reward for abandoning the Six Party Talks.

Despite all of this there remains a possibility that the Six Party Talks could be restarted. A possibility which would satisfy North Korea on bilateral talks, and the US, Japan and South Korea on Six Party talks, could be for the Chinese to restart Six Party talks and the sub-working groups simultaneously. One of these sub-groups could deal with bilateral US-DPRK relations including diplomatic recognition. The US and DPRK might then meet bilaterally in this Six Party talks sanctioned format. Or the Chinese might have other similar diplomatic tactics to secure face-saving for both parties.

For China, a visit by Kim could and would be employed to confirm North Korean willingness to reengage in talks. Kim will want something in exchange from the Chinese. Most likely, this will take the form of investment, and this is where the economic side comes in.

Every time Kim goes to China the question is posed about whether North Korea will copy China’s economic reforms. The simple answer is that, for North Korea, this is not really possible. North Korea’s leaders realised early on that full-blown economic reforms would blow the current regime away. Regime survival trumps the economic benefits of following the path of China and Vietnam’s economic reforms. And ever since North Korea started timid economic reforms in 2002 there have been successive efforts to rein in market forces; currency reform in 2009 being the latest attempt to stamp out middle class traders selling Chinese goods in local markets.

Yet despite its reluctance to embrace economic reform, North Korea still needs foreign cash to survive, and particularly it needs cash from China. There is talk about signing an investment agreement in March between Chinese companies through the Taepung group, and the North Korean State Development Bank, with investments expected to total more than $10 billion. This level of investment sounds unrealistically high for North Korea to absorb in a short period of time yet a lower number would also be welcomed.  Demonstrating the importance of the agreement, Kim Jong Il, or another high-level dignitary, is expected to attend the signing ceremony.  An agreement like this would provide Kim with some desperately needed foreign currency, as well as providing the leadership with a concrete economic achievement.

Even Chinese investment will not be enough to reverse North Korea’s dismal economy. North Korea will not be prosperous in 2012 by any standards. So Kim cannot easily make North Korea both strong and prosperous – although he may make it strong by sticking with the nuclear weapons.

The nuclear arsenal, then, is both a bargaining tool, and the regime’s insurance policy. North Korea, without nuclear capacity and missile technology; would be a poor Communist country in a remote area in Asia likely to attract about as much news coverage and international attention as Laos.

Kim has little room for manoeuvre. By 2012, he has promised to make North Korea both strong and prosperous; a deadline that will be very difficult to meet no matter how successful his diplomacy. He also faces the vexed issue of succession. Notwithstanding possible new investments and renewed momentum in relation to the Six Party Talks, a visit to China will only serve to highlight these problems.

Jonas Parello-Plesner is Executive Director of a Danish NGO. He used to work as senior advisor with the Danish government on Asian affairs. He is on the board of editors of the Danish magazine Raeson and regular columnist on Asian affairs.

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Over the past year or so, something strange has begun to happen in Pyongyang. The North Korean leadership has taken some actions that have clearly damaged the interests of the ruling clique.

The recent currency reform is the best example of self-defeating policy decisions. For years, the Pyongyang government has waged campaigns against the unofficial and semi-official markets that have played a decisive role in North Korea’s economic life since the collapse of the state-run economy in the 1990s. As another move in this ongoing (and, perhaps, unwinnable) struggle, last November the government initiated currency reform that was meant to undermine the power of black-market merchants.

The reform was modeled on confiscation-oriented currency reforms once used in the Soviet Union and other communist countries. The populace suddenly learned that old bank notes were null and void and had to be changed for new ones within a week. The exchange rate was set as 1:100, so, for example, 1,000 ‘old’ won should be exchanged for 10 ‘new’ won. All retail prices and fees were also reduced one hundred times. Harsh exchange limits were introduced: only the equivalent of US$30 in cash could be changed by one person. The use of foreign currency, which had become very common in North Korea’s retail economy, was banned.

The measures are standard for communist-style currency reform, since such reform usually pursues the double goal of fighting inflation and reducing the power and influence of the unofficial black economy.

North Korea’s planners also did something unexpected: they claimed that nominal wages and salaries would not change. In other words, a person who prior to the reform received a monthly salary of 3,000 won, would still receive 3,000 won, but paid in the new currency. Effectively, it meant that all wages in the country suddenly increased 100 times. To re-assure consumers, the government issued stern warnings against profiteers who dared to raise prices of goods and services.

For a brief while in December and early January, North Korean consumers felt rich and expected that even such luxuries as, say, Chinese bikes (a North Korean equivalent to a Porsche) were now within their reach.

The result was less impressive. The dramatic increase in salaries launched an equally dramatic round of inflation, so in the past three months the price of rice (and the black market exchange rate) has increased 50 times, from the official required 20 ‘new’ won per kilogram to 1,000 ‘new’ won. The government’s ‘stern warnings’ were ignored. Prices are soon likely to return to pre-reform levels. The reform has failed completely. It only succeeded in making people irritated and in demonstrating the government’s inability to control a situation.

The unprecedented decision to raise wages doomed the entire affair from the start. But why was it done? Why was an otherwise standard package of well-tested measures saddled with this self-defeating (and frankly, stupid) addition?

In the realm of diplomacy, North Korea is not faring much better. For decades, Pyongyang has demonstrated uncanny skills in manipulating its neighbours from whom it squeezed unconditional aid and unilateral concessions. The usual tactics consisted of three stages. In the first stage, the North Koreans raise tensions. In the second, they launch missiles, test nuclear devices and make threatening statements. Finally, once tensions are sufficiently high for the world to feel uneasy, there are negotiations in which Pyongyang extracts aid that is essentially a reward for calming a crisis the North itself manufactured.

This time, both stage one and stage two were seriously mishandled. First, the North Koreans used both their trump blackmail cards — a nuclear test and a missile launch — almost simultaneously (analysts expected space of at least a few months before these two events). They also showered Washington with especially bellicose rhetoric, even though the Barack Obama administration was initially relatively soft on the North Korean issue.

The North Korean strategy backfired: the US foreign policy establishment finally realised that North Korea would not surrender its nuclear program under whatever circumstances. This reassessment of the situation meant that the US was now far less willing to shower Pyongyang with concessions. In the past, gifts were presented as incentives to surrender nuclear weapons, and since such surrender is now seen as unlikely, such generosity is not necessary.

The North Koreans are now beginning to realise that the old trick is not working. They have only themselves to blame. Had they been more careful last year, a significant part of the US establishment would still have nurtured the illusionary dream of ‘denuclearisation through negotiation’.

The third stage of asking for aid was also handled badly. The unnecessarily aggressive rhetoric of the past was replaced by unusual softness in a short time – previously, the switch took months. Since August, North Korea has essentially begged to restart negotiations with the US and, especially, South Korea.

Pyongyang is demanding to restart cooperation projects. This is a quite remarkable turnaround, since two of the three major projects – tours of Keumgang Mountain and Kaesong city tours – were abruptly stopped by North Korean authorities a year ago. Needless to say, the South Korean government is not too eager to restart negotiations. So-called intra-Korean cooperation is essentially unilateral South Korean aid and Seoul sees no reason why it should hurry with the resumption of money transfers to Pyongyang. North Korean softness is (wrongly) seen by Seoul hardliners as a victory of the hard line they are advocating, so they say that an even harder approach will probably bring greater success.

Meanwhile, the North Korean government also did something it has never done before: it said ‘sorry’ to the people. In January, Nodong Sinmun, a government mouthpiece, reported that Dear Leader Kim Jong-il felt bad for being unable to provide his subjects with the level of material affluence they were once promised.

The promise was moderate, to be sure. In the 1960s, Kim Il-sung, father of the current dictator and founding father of the country, promised that eventually all Koreans would eat rice (not corn or barley) and meat soup, live in houses with tiled roofs (not thatched), and wear silk clothes.

Every North Korean knows that even this moderate paradise has failed to materialise. However, the fact has never been admitted openly. In the past, economic difficulties and hardships, if mentioned at all, were always explained as they should be explained in a solid dictatorship, that is, by references to scheming enemies, above all US imperialists.

This time, Kim’s remark indicated that the system itself might bear some responsibility for economic problems.

In accordance with the new mood, a high-level official expressed his regret about the chaos created by the currency reform while addressing a large group of the party faithful. This might appear normal behaviour in other countries, but in a dictatorship that claims the possession of absolute truth and an infallible leader, such statements are very unusual — and, indeed, dangerous. They are likely to be seen as signs of fallibility and weakness, and every dictator knows that such signs should not be shown.

In other words, something has changed in Pyongyang recently – seemingly, after Kim’s illness in late 2008, when he reportedly suffered a stroke. The most likely explanation seems to be biological: the increasing inability of the ailing dictator to pass reasonable judgments and control people around him.

One can easily imagine how the Dear Leader (perhaps even driven by genuine sympathy to his long-suffering people) would look through a currency reform plan and say: ‘And what about poor wage-earners? Should we not reward the people who remained loyal to the socialist industry and did not go for black markets? Why not increase their salaries, so they will become affluent, more affluent than those anti-socialist profiteers of the black market?’ Few, if any, officials would dare to explain the dire economic consequences of such generosity.

It is also possible that the deteriorating health condition of Kim has led to growing rivalry between factions so the North Korean leadership is now increasingly disunited, with rival groups pushing through their own agendas.

At any rate, something unusual seems to be happening in Pyongyang and it’s probably time to think about the future a bit more seriously. We are heading towards serious changes, and nobody seems prepared.

This article was first published here at the Asia Times Online.

Andrei Lankov is an associate professor at Kookmin University in Seoul, and adjunct research fellow at the Research School of Pacific and Asian Studies at the Australian National University.

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I’ve been watching North Korea ramp up efforts to attract foreign investment since Jack Pritchard and I heard last November in Pyongyang from the chairman of Pyongyang’s Foreign Investment Advisory Board a presentation of new laws that provide for repatriation of investments, tax benefits, and wages of 30 Euros/month that undercut the $57/month wage rate at the Kaesong Industrial Zone.

Although catastrophic failure of currency revaluation implemented from late November of last year has severely eroded the credibility of the government’s economic policies, there are serious efforts underway to realise new foreign investment at Rajin-Sonbong port at the northeastern tip of North Korea. The location is significant because Rajin-Sonbong has been the focus of similar past failed efforts in 1991 (when the area was first announced as a free trade zone at the time of the launch of the UN-sponsored Tumen River Area Development Project) and 1996 (when North Korea held an international investment forum that was subsequently eclipsed by the famine).

Following a rare visit by Kim Jong Il to Rajin-Sonbong in January, the local leadership has been replaced with cadres who have prior international experience at the central government level, led by former minister of foreign trade Rim Kyung-man. Reported investments include a 50-year lease of one pier to the Russians and a 10-year lease of a second pier to the Chinese. The pro-North Korean Chosun Sinbo reports that a new company, Taepung International Investment Group, has been set up with initial capital of $10 billion to finance investments in sectors including food supply, railways, roads, harbors, electricity, and other energy supplies. North Korea has also set up a new State Development Bank to support this effort. Given the strategic importance of Rajin port as a year-round ice-free port with the capacity to service both the landlocked Jilin province and the Russian Far East, the North Koreans are offering opportunities at Rajin that the Chinese and Russians have long coveted.

Although there were false reports in late 2005 that the dirt road inside North Korea between Quanhe-Wonjong border crossing and Rajin might be paved in a deal with the Hunchun local government, preparations to improve the road are now underway and the North Koreans have built a large customs facility at Wonjong designed to handle goods coming to and from Rajin port to China.

All these activities beg the question of why now? North Korea’s internal economic policies in recent years have focused on reassertion of state control over economic activities. Marcus Noland and Stephan Haggard describe the November 2009 currency revaluation as a confiscatory measure designed to attack the markets. North Korea faces stricter international economic sanctions on suspected shipments of fissile materials under UN Security Council Resolution 1874.

Is the effort to attract new foreign investment a measure designed to circumvent the pressure from international economic sanctions? Could the promise of new investment by the Chinese be part of a deal whereby China provides cash necessary for the stability and survival of North Korea’s leadership in exchange for a return to the Six Party Talks and to denuclearisation? Was North Korea’s currency revaluation such a big failure that Kim Jong Il has finally realised he has no choice but to follow the Chinese model? Is the push for foreign investment just another phase following previous phases of apparent economic opening in the 1970s and 1980s through which the North induces foreign investment, but international investors are left holding the bag? Or is the Kim regime selling off rights to a part of the family estate in order to earn the cash flow necessary to survive?

This article was first published here by the Council on Foreign Relations’ Asia Unbound blog.

Scott A. Snyder is Adjunct Senior Fellow for Korea Studies at the Council on Foreign Relations (CFR), as well as Director of the Center for U.S.-Korea Policy at the Asia Foundation and a Senior Associate at Pacific Forum CSIS.

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The past month saw both Chairman and Premier Kim doing something almost unheard of in Pyongyang. Apparently they both said sorry, although some reports got the two muddled up.

On February 1, Rodong Sinmun, daily paper of the ruling Workers’ Party of Korea (WPK), reported Kim Jong-il as lamenting his failure to fulfil his late father Kim Il-sung’s pledge, to which he had also alluded shortly before on January 9, that all North Koreans would eat rice and meat soup (everyday fare for even the poorest South Korean, be it noted). This time Kim said: ‘What I should do now is feed the world’s greatest people with rice and let them eat their fill of bread and noodles. Let us all honour the oath we made before the Leader and help our people feed themselves without having to know broken rice [an inferior version]’.

Given Kim Jong-il’s own notoriety as gourmet and gourmand, his professed ‘compassion’ for his less fortunate subjects’ deprivation may induce queasiness. Yet even this not-quite-apology glosses over the truth. Broken rice? They should be so lucky. As readers of Barbara Demick’s excellent and heartbreaking new book Nothing to Envy will know, rice of any kind – whole or broken – is a rare luxury for most North Koreans. In the late 1990s a million or so starved to death; even today most remain malnourished. One refugee who fled to China saw her first rice in years in the first house she came to – in a dog’s bowl. That is the true reality.

Worse, all this was and is avoidable: the result of stupid and vicious policies, not the natural disasters that the regime blames. The real cause was the government’s failure to adapt in the 1990s after Moscow abruptly pulled the plug on aid. This hurt other ex-Soviet client states too. Cuba went for tourism; Vietnam tried cautious reform; Mongolia sold minerals. North Korea, bizarrely, did nothing – except watch its old system break down and growth plunge.

In a speech at Kim Il-sung University in December 1996, when famine was seriously biting, Kim Jong-il lashed out at the WPK and uttered this petulant but very revealing whinge:

In this complex situation, I cannot solve all the problems while I have the duty of being in charge of practical economic projects as well as the overall economy, since I have to control important sectors such as the military and the party as well. If I concentrated only on the economy there would be irrecoverable damage to the revolution. The great leader told me when he was alive never to be involved in economic projects, just concentrate on the military and the party and leave economics to party functionaries. If I do delve into economics then I cannot run the party and the military effectively.

Evidently Bill Clinton’s famously apt watchword, which helped him win the presidency in 1992, had not breached North Korea’s thick walls and heads. It’s the economy, stupid! The paternal advice was dead wrong. (The full speech can be read on the much-missed Kimsoft website. Unsurprisingly it is not part of the DPRK’s official canon of the dear leader’s works, but the scholarly consensus is that it is genuine. A slightly different version appears here.)

Mass starvation, you might hope, would prompt some soul-searching and fresh thinking. From mid-2002 North Korea did essay cautious market reforms, but recently it has tried to squash Pandora back in her box. The latest such crass effort is a currency redenomination that deliberately wiped out most people’s meagre savings.

By all accounts this has backfired badly, sparking runaway inflation (which it was supposed to stanch) and even riots. Forced on the defensive, the regime has issued an unprecedented apology. This being North Korea, it has not done so publicly; there are limits. Nor, in 2010 as in 1996, is Kim Jong-il about to take the rap, despite some newswires confusing J with Y.

But reliable intelligence claims that on February 5 Premier Kim Yong-il called all leaders of neigbourhood groups (inminban) to Pyongyang. The lowest unit in the DPRK’s still tight system of socio-political control, each comprises 20-40 households. This suggests that over 10,000 people heard the premier say what no leader had ever said to them before – ‘sorry’. In his words: ‘I offer a sincere apology about the currency reform, as we pushed ahead with it without sufficient preparation and it caused a great pain to the people… We will do our best to stabilise people’s lives.’ The audience’s reaction is not recorded.

The situation on the ground remains confused, but markets appear to be functioning again unhindered. Good Friends, a seemingly well-informed South Korean Buddhist NGO, said on February 18 that after examining a report on food shortages and conditions nationwide by the Office of Economic Policy Review, the WPK Central Committee issued an ‘Order for Absolutely No Regulation Regarding Foodstuffs’. All markets are to reopen as they were before recent government crackdowns, and under no circumstances must local authorities try to regulate food sales – ‘until central distribution is running smoothly.’ There may be a sting in that tail, but for now this is a complete, humiliating government U-turn and climbdown.

This is an astonishing episode, which history may record as pivotal. If the leadership learns its lesson and finally accepts that the market economy is as ineluctable as gravity, then the DPRK might conceivably survive on a reconstituted economic base and social contract, like today’s China or Vietnam. But if Kim Jong-il (or whoever) keeps trying to square the circle, under the delusion that correct politics is a substitute for sound economics, there is no hope.

This is an adapted version of an article first published by NewNations.com as the March monthly update on North Korea. A full version can be found here at Nautilus.

Aidan Foster-Carter is Honorary Senior Research Fellow in Sociology & Modern Korea at Leeds University.

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It is routine in US foreign policy for a pot not boiling over to be moved to the back burner. But precisely because the North Korean issue is not boiling, it might offer an all-too-rare chance to make progress with Pyongyang. Over the past several months, the North has signalled publicly and privately that it is in engagement mode. In Washington, arguments abound about whether or not this is a stall tactic or a trick, but we will never know if we do not move ahead with serious and sustained probing of the North’s position. So long as our government sticks to an all-or-nothing approach in terms of Pyongyang, the opportunity to advance vital US security interests in northeast Asia could be lost.

Underlying Washington’s current position are two beliefs, so firmly held that they approach dogma. The first is that we should wait until the situation with North Korea breaks in our favour or sanctions force North Korean leadership to reassess its attachment to nuclear weapons. A year into the Obama administration, this waiting borders on self-imposed paralysis, even though North Korea remains capable of badly damaging regional stability as well as US non-proliferation goals. So instead of positively defining and shaping the realities on the ground, we have taken shelter behind fixed positions: enforcing UN. Security Council sanctions and demanding that the North make progress on denuclearisation at the Six-Party Talks. These may be useful parts of an overall policy, but they cannot be effective by themselves and must be handled carefully.

Sanctions will inevitably get in the way of diplomatic progress, and there needs to be a way to use their loosening, as much as their tightening, in support of negotiations. Moreover, Washington’s single-minded insistence that the North return to the Six-Party Talks actually has ceded to Pyongyang a great deal of tactical initiative. There is nothing the North Koreans love more than leaping over our heads to a new position just as we think we have them cornered. As such, in mid-January, they reversed their opposition to talks in the framework of the September 2005 Six-Party joint statement and have proposed that talks proceed on all fronts simultaneously.

The second part of Washington’s dogma is that there is no sense in negotiating with Pyongyang because history shows that agreements with North Korea always fail and the United States ends up snookered. But the idea that our deals with the North have all been useless is based on a flawed reading of the record, a lingering misrepresentation of the accomplishments of the 1994 US-North Korea Agreed Framework. In fact, the utility of that agreement (which lasted from 1994 until 2002) is still evident. Without it, North Korea would have produced far more fissile material and a significantly larger arsenal of nuclear weapons. Two hulking, unfinished North Korean nuclear reactors testify to its lasting legacy.

Reinforcing the belief that we don’t need to, or shouldn’t, pursue an active policy toward North Korea is the Obama administration’s apparent concern that it will be vulnerable to charges of being ‘weak’ if it approaches Pyongyang from anything but the toughest position possible. Thus, on the grounds that the September 2005 joint statement calls for progress on the North’s denuclearisation before talks can begin on replacing the 1953 Korean Armistice with permanent peace arrangements, Washington rejected out of hand Pyongyang’s recent proposals to move on both issues simultaneously. We may find it difficult to hold that position because it is neither what the joint statement actually says nor what some of the other parties (especially the Chinese) intended.

The fundamental US goal is exactly right: We want North Korea to denuclearise and to return to the international nuclear non-proliferation regime. But stating the goal isn’t the same as moving closer to it. To do so, we must accomplish things that can help stabilise the situation, make it less likely that the strategic threat from the North will get worse, and begin exploring with Pyongyang a range of ideas for reducing tensions on the Korean Peninsula and in the region. A couple of mid-term steps could include a halt in nuclear testing and long-range ballistic missile launches, along with a complete freeze of the Yongbyon nuclear centre, which would involve further decommissioning and a return of international inspectors.

These interim steps won’t ‘solve’ the nuclear problem, but they aren’t beyond what we can accomplish. They will do considerably more to protect our interests and those of our allies than the current all-or-nothing policy, which is going nowhere fast.

This piece was first published here at the Center for International Security and Cooperation and here by the Bulletin of Atomic Scientists.

John W. Lewis is Professor Emeritus at Stanford University and Robert Carlin is Visiting Scholar at the Center for International Security and Cooperation at Stanford University.

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One thing is apparent: the great love affair between Europe and China is over.

Here in London and throughout the other major capitals of Europe, Copenhagen was the final straw for European policy-makers who advocated engagement with China, with their ideal of building China into the global order on ice. As Francois Gotement of the European Council on Foreign Relations notes, before Copenhagen, European thinkers still believed that they could use soft power to influence China on a host of issues that Europe believed were mutual to both. After Copenhagen, European attitudes have hardened and governments are reconsidering their approach to China.

Were European expectations of China too high? After all, China has never really followed US or European policy leads. Consider the value-based foreign policy put forward by post-Cold War Europe in the 1990s, ‘the responsibility to protect’ which sought to proscribe state behaviour, compared with China’s position on Kosovo. By emphasising Serbian sovereignty over its treatment of the Kosovars, China appeared to be the conservative power, defending a traditional order of state rights, whereas Europeans seemed to be trying to reshape the international order, making the concept of sovereignty conditional on good governance. The depth of the Chinese victory was not realised at the time, but in essence, China denied proponents of good governance the authority and legitimacy of the UN Security Council.

Over the last ten years, China has deliberately countered European efforts to promote good governance. In Darfur in 2003-9, and in Burma in 2007, China put itself squarely on the side of states who were violently suppressing their citizens, while critics say that its record in sub-Saharan Africa has broadly followed this trend. Europe was ready to embrace the future it seemed, while China was only too happy to wave the old Westphalian banner.

By 2007, European policy-makers appeared to wake up this reality and changed tact. If China would not cooperate on value-based issues, surely it would be willing to work with Europe on more core security issues, like sea lane security, climate change, and nuclear non-proliferation. Indeed, Iran and North Korea appeared to provide examples where China was willing to cooperate, but often as not, China has proven to be the stumbling block over efforts to impose sanctions on Tehran. Similarly, China appeared earnest about dealing with North Korea’s nuclear weapons programme, and actually did approve UN sanctions of North Korea after the nuclear test of 2006. But as of writing, there are rumours that China is considering a US$10billion financial package to Pyongyang which would completely undermine the sanctions regime.

The tension for the US and Europe has always been between binding China into the current framework while ensuring that China does not use this new leverage to undermine the order. There is another interpretation, which says that China may simply not be ready to act according to its size. Andrew Small, a China expert from German Marshall Fund has said that in many ways China is behaving like a ‘global free rider’, using the international system to maximise its freedom of action, and backing policies which stem from very narrow domestic concerns or national strategy considerations.

Whatever the case, Copenhagen has been a resounding, and disappointing, lesson: Europe will have to learn to work around China.

This is not impossible. The EU can do this in a number of small but vital ways: by developing and maintaining common positions vis-à-vis China. While this is easier said than done, it should become an aim of foreign ministries in Brussels. European states can also continue to develop strong trade ties with other rising powers. Brazil and India are two members of the BRIC with which Europeans have historical links and values. That is not to say that China should npt be important to Europe, but that it should not become the mainstay of EU policy on Asia. Indeed, the EU has almost no political presence in Japan or South Korea, two major players in Asia with similar political values. This is lamentable since in Japan’s case, it remains the world’s largest creditor nation and has a GDP equivalent to China’s. The EU would do well to cultivate relations with these states, as well as with ASEAN, the regional body in South Asia.

In a policy brief for German Marshall Fund, Michael Green recently suggested that US-China relations would improve when the US re-energised its relationship with Japan. Similarly, it is highly likely that EU-China relations would also improve significantly if the EU developed strong ties with other major players in the region. Indeed, Brussels would find many doors in the region already open.

John Hemmings is Studies Co-ordinator at the Royal United Services Institute for Defence and Security Studies (RUSI)

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Politics and economics are deeply entwined in North Korea. Thus, interpretation of the intentions and implications of North Korean actions must be assessed through both lenses. As it tries to address economic development and security challenges, North Korea has to find a way to make internal changes that will yield results while maintaining political control and regime legitimacy.

At the same time, Pyongyang has to improve its external relations in ways that enhance its economy and security, but this will require more openness and commitment to compliance with international norms. The leadership understands only too well what threats and opportunities it faces. But the gap between its political desires and the realities of charting a successful economic course is already demonstrating how tenuous its ability to manage change has become.

Official rhetoric has set a number of markers. The goal of becoming a ‘Strong and Prosperous Nation by 2012’ to honour the 100th birthday of the founding father Kim Il Sung has fixed a hard deadline for meaningful accomplishment. Both domestic and international perceptions of the regime’s competency as it prepares for a second leadership transition are now tied to demonstrable progress towards these goals. While analysts may offer various measures of such progress, the ultimate test will be the sense of hopefulness or disillusionment about the future in the hearts and minds of the North Korean people.

It is thus not surprising that the 2010 New Year’s Editorial was entitled ‘Bring about a radical turn in the people’s standard of living by accelerating the development of light industry and agriculture once again this year that marks the 65th Anniversary of the founding of the Worker’s Party of Korea.’ By emphasising the historical identity of the Party as providers of basic welfare to the North Korean people, the editorial signals that bringing broad-based economic benefits to society, and associating this effort with the current leadership are essential policy goals. The significance of this public commitment should not be underestimated, since the editorial is circulated widely. Delivering on these expectations is now an imperative. It is also a standard by which domestic economic policies and management of international relations will be judged. Other priorities for the leadership must include protecting the economic privileges of the ruling elite and ensuring sufficient military spending to maintain national security. But achieving these goals without delivering on this newly-created expectation for improved standard of living will not assure a successful leadership transition.

But despite the clear delineation of policy objectives, the editorial outlines a mixed bag of prescriptions for how to achieve these goals, perhaps revealing internal disagreement over which course of action would best satisfy both political and economic considerations. There are few either within North Korea or the international community who would disagree with the importance of increasing agricultural productivity and investment in light industry. Improvements in food security and job creation in small and medium-sized enterprises are important for any economic development strategy. Other statements in the editorial endorse the idea that expanding foreign trade and investment as well as harnessing advances in science and technology are necessary to achieve growth. During 2009, the North made efforts to promote foreign trade and investment even while facing international sanctions. It also reorganised the Cabinet in order to better coordinate management of science and technology, signifying a broad commitment to this agenda.

At the same time, the editorial makes explicit a reassertion of traditional socialist economic management principles and a rejection of experimentation with markets. For example, it states: ‘A strict discipline should be established in planning, financial management, and labor administration, so as to give full play to the superiority of the highly-organised socialist planned economy.’ Its continuing deference to the primacy of heavy industry and the anti-market sentiment demonstrate a predilection for remaining wedded to socialist economic management rather than for a pragmatic adaptation to the realities of the mixed economy that has evolved in North Korea in recent years. This stance implies rejection of both the Chinese and Vietnamese models, where Party ideology was adapted to accommodate the growth of market mechanisms.

Indeed, domestic economic policy has remained tepid on the role of markets for a number of years. They were believed necessary to offset the failures of the Public Distribution System, but the markets were never embraced nor integrated effectively into the banking and public finance systems, which have lagged behind the evolution of the role of markets in the economy. While anti-market measures have been undertaken sporadically in recent years, the government now seems to be reasserting a state-managed economic system more aggressively. This shift was clearly seen during the currency reform and market curtailment measures which began late last year.

The government in Pyongyang appears to have had a wide variety of objectives in mind when undertaking these measures. They include: reducing currency in circulation to reduce inflationary pressures; re-establishing the centrality of the state pricing system; providing state workers with a boost of purchasing power; reducing private wealth of traders large and small; reasserting socialist values of mass mobilisation for public good over incentives for personal gain nurtured by the markets; and adding foreign exchange to government coffers.

While the North has mobilised both propaganda and security services to reinforce implementation of these steps, it seems that neither economic nor political goals are being achieved. The initial public response to the currency reform was decidedly antagonistic, especially among traders who stood to lose accumulated savings in both local and foreign currencies. This antagonism later spread to the general public. Prices, rather than stabilising, rose dramatically and were accompanied by rapid depreciation of the won against foreign currencies in the black market. This added incentives to hoard and flee into assets that can retain value. Growing  confusion about prices has also led to the re-emergence of bartering for market transactions.

Recognising the public response, the government loosened the initial rules for converting the old currency to the new one. It then proceeded in January to ban possession and use of foreign currencies as well as to initiate a propaganda campaign and a 40-Day Battle to enforce market closures. This resulted in efforts to circumvent the new restrictions through ‘grasshopper’ and ‘alley’ trading in different places for short times.

Whether these efforts by the government will succeed remains to be seen. But the experience to date has worsened, not enhanced, the welfare of ordinary people. It has also precipitated expressions of anger and resistance that appear unprecedented in recent North Korean history. Rather than being seen as a supplier of basic necessities, the Party may now be seen by many as a destroyer of personal wealth and opportunity, as well as an oppressive enforcer of ideological dictates. The picture of a youthful Kim Il Sung on all those worthless notes of old currency is a stark reminder of how far removed he is from the realities of present day life in North Korea as the Party prepares to honor his 100th Birthday.

Instead of starting off the New Year with a well-orchestrated monetary stabilisation and instant welfare boost for the public, the North Korean leadership has unleashed a potential hyper-inflationary spiral, disrupted the distribution mechanisms that have been supplying the markets, failed to stimulate a supply response from the state-directed economy to replace the incentives to produce for the markets, and fostered a decidedly negative psychological impact in the social contract between the state and the people. As doubts grow about the efficacy of the reform strategy, reports are emerging that leading figures in the effort have been dismissed — notably Worker’s Party Finance Director Pak Nam-gi — markets have been reopened and public apologies have been issued.

This is a critical moment for North Korea. It is hard to imagine how the negative aspects of the reform drive can be reversed without a major, not incremental, shift in strategy. There are a number of questions about how the government will try to reconcile its policy amid popular resentment and growing distrust with more economically rational approaches. One key question that arises from these efforts is whether Kim Jong Il will publicly embrace a reversal of policy and move to develop a market-friendly economic system with the help of foreigners? The announcement of the formation of the Taepung International Investment Group and plans to establish a State Development Bank, at his instruction and under the auspices of the National Defense Commission, seems to be a significant step in this direction.

In addition, recent reports suggest that China is pursuing discussions with the new investment group about modalities for providing a multi-billion dollar investment package linked to resumption of the Six Party Talks. This move may indicate that North Korea is in fact gearing up for a serious process of mobilising external finances to meet its economic development goals in tandem with its security goals. But whether political or economic factors will ultimately govern decisions about the best use of these funds remains to be seen, as will any potential future impact on the economic system. Further developments in the coming weeks and months will be important indicators of the North Korean leadership’s readiness to find a solution for the economy that will work.

A version of this piece first appeared in a bulletin by 38 North, a web-based initiative sponsored by the US-Korea Institute at the Johns Hopkins School of Advanced International Studies.

Bradley O. Babson is a Steering Committee Member and Membership Committee Co-Chair at the National Committee on North Korea, Washington

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The Australia-Japan International Commission on Nuclear Non-proliferation and Disarmament released its initial report on December 15, 2009. While the reaction, in Australia at least, has been subdued, The Australian newspaper has run two substantive reactions – both somewhat disdainful. One contended that that the report consisted of little more than naive noble sentiments thrown at intractable realities while the other insisted that the report dangerously discounts essential security functions performed by a credible U.S. nuclear deterrent.

Both reactions have merit, but neither engages the real issue. Both essentially contend that we should leave Washington alone to determine the nuclear forces it needs in order to continue doing what it has done so successfully for more than 60 years. The trouble is that there is a significant body of opinion in the U.S. (including President Obama) that believes business as usual in the strategic nuclear arena may no longer be the smart choice. Obama has acknowledged that the U.S. may have no choice but to continue business as usual but he seems to want to shake the tree and see if a different road emerges as viable.

This apparent change in the balance of opinion in Washington will become more clear when either the new U.S.-Russia strategic arms reduction treaty or the nuclear test ban treaty goes to the Senate for ratification. The apparent change has nothing to do with the Australia-Japan commission — but the report addresses issues that the U.S. is beginning to look at from a fresh perspective.

The two biggest factors behind the shift in the U.S. are, first, that the circumstances (and the imaginable contingencies) in which robust nuclear deterrent capabilities seemed so indispensible and effective are declining in prominence while the growing challenges (notably, of course, terrorism) seem relatively immune to the restraint and discipline that nuclear deterrence can help to foster. The second factor has been (belated) acceptance that continuing to indulge the instinct that peerless nuclear capabilities are of irreducible importance will almost certainly mean a continuous trickle of new nuclear weapon states and that this will compound the difficulty of sustaining the non-use of nuclear weapons.

The international community’s determination to put resistance to the proliferation of nuclear weapons ahead of other interests has never been unqualified. But it has weakened since the end of the Cold War. And a key part of the explanation is widely considered to be perceptions that nuclear powers have been reluctant to live up to promises to negotiate in good faith toward nuclear disarmament.

Nuclear disarmament, in my view, is unimaginable from our vantage point. There are hugely difficult and interdependent issues that have to be resolved or transformed before the process of nuclear diminution can be expected to proceed to the next stage. The Australia-Japan commission wisely stopped short of advocating relentless progress to zero in favor of imaging a new plateau at 5-10 per cent of the number of nuclear weapons estimated to exist. From such a vantage point, one could think more credibly about what complete abolition might involve. In arriving at this recommendation the Commission worked through many ideas on how the major nuclear states can signal their commitment to de-legitimising nuclear weapons and building a foundation that will support minimal nuclear forces performing limited functions. The Commission recommends that the nuclear weapon states seek to confine the role of nuclear weapons to deterring their use by others, to adopt unequivocal declaratory policies of “no first use,” and to work toward operational arrangements that make these weapons slow to react rather than on high alert and available at a moment’s notice.

The Commission report places primary responsibility for transformative change on the United States. This is appropriate: the U.S. has asked the most of, or leaned more heavily on, nuclear deterrence than any other state. Significantly, however, the report stresses the importance of early and sustained substantive support from other nuclear weapon states Whatever consensus emerges in the U.S. to explore new thinking on the bomb can readily be crushed by the contention that other states are holding back in the hope of securing some advantage. Deciding what can reasonably be expected of other states, finding creative ways for them to meet these expectations, and remaining resolute in requiring that they do so will be an important responsibility for all states but especially, perhaps, for America’s allies and friends.

To regard nuclear disarmament as unimaginable is not the counsel of despair. Nuclear deterrence is an art, not a science. Strategic nuclear deterrence has relied on the sensation that crossing the nuclear threshold would take states into an abyss where logic, strategy, tactics, winning, and losing become irrelevant. This sensation inclines states to not even begin to go down paths that might lead to someone thinking about nuclear use. When observers say that nuclear weapons are uniquely effective in generating deterrence they are referring to things that may well have led to confrontation and the risk of war but did not and would not because the Bomb sat at the end of the road.

But how many nuclear weapons equal an abyss? Insider accounts of nuclear crises – the biggest one being the Cuban crisis in October 1962 – suggest that political actors regard the risk of a single nuclear detonation on their soil as utterly compelling. So there is a lot of scope to play with numbers. We might also ask whether we should, as a community of states, be content to live with the threat of a nuclear abyss as the only reliable means of ensuring that states behave responsibly.

Hard-headed realists in Australia, and in the other 30-odd countries that ‘consume’ U.S. assurances of extended nuclear deterrence may counsel gravely that Washington should not and could not do other than to stay with what seems to have worked for so long. But the U.S. may be getting to a point where the balance of its interests will incline it to invite its allies and friends to think hard about how to get along with a U.S. nuclear arsenal that looks and feels very different, both in absolute terms and relative to those of Russia and China. That, it seems to me, is the real issue.

This piece was first published by Pacific Forum CSIS in PacNet Newsletter #3, 2010.

Ron Huisken is Senior Fellow, Strategic & Defence Studies Centre at the Australian National University.

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Free elections are not part of North Korea’s political fabric, but Kim Jong-Il and his advisors are undoubtedly aware that the regime’s legitimacy will be challenged if it fails to meet its promise of achieving a strong and prosperous nation by 2012, particularly if it faces a leadership transition. The November 30 announcement of currency reform, entailing redenomination of the North Korean won such that 100 old won = 1 new won, appears to be a gamble that it can achieve that objective in an ideologically acceptable manner. It is a huge bet.

As clarified and adjusted over the course of the subsequent weeks (according to press reports, as official announcements remain lacking) the measures required residents to exchange old won for new won currency up to a limit of 500,000 old won per individual—equivalent to US$200 or less at unofficial market rates. Amounts in excess of the limit could be exchanged if deposited in a bank account, although amounts in excess of 1,000,000 old won could be so deposited only if a legitimate means of accumulation was shown. Some reports indicated that a subsidized exchange rate of 10 old won for 1 new won was available for small amounts deposited in a bank rather than exchanged for new currency.

The subsequent move to ban possession of foreign currency appears to be aimed at reinforcing the currency reform, or at least at dealing with the perception that the elite and the more successful traders were able to escape the financial losses that smaller traders suffered.

Why, and Why Now?

A currency redenomination entails some direct costs for the government but can serve legitimate purposes, particularly if inflation is rampant or has been higher than desirable for a long period of time. Apart from reducing the inconvenience of dealing with large numbers, a redenomination can help reinforce the effectiveness of a rigorous anti-inflationary policy. However, North Korea’s motivation appears to be only loosely connected with the usual notion of such policy.

In an interview with the Chosun Shinbo, a Japanese newspaper sympathetic to the DPRK, an official of the DPRK’s central bank suggested that inflation had undermined the government’s efforts to cope with the challenges created by natural disasters and the collapse of the Soviet Union, and that the currency reform was a key part of those efforts, all geared to achieve the goal of becoming a strong and prosperous nation by 2012. Of course, this official statement cannot be taken as a transparent and truthful rendition of the regime’s thinking.

Most observers see the measures as aimed at curbing the role of markets, which came to play a significant role in North Korea’s economy after the reforms of July 2002, and forcing economic activity back into the planned economy. Some expansion of market activity was expected and even intended by these reforms, but their progenitors must have been surprised and increasingly dismayed by the scale and speed of the expansion, and by its revelation of the true worth of the local currency. Writing in The Korea Herald on December 3, Ruediger Frank said that ‘the most dangerous result of these reforms was the emergence of a new group of people who became wealthy enough to develop individual ambitions and to break out of the state-imposed collectivism.’ In his view, the situation threatens to undermine domestic order as ‘reality increasingly deviates from ideological claims to a degree that makes propaganda just ridiculous in the eyes of the population. People may still fear and obey their government, but they don’t trust it anymore.’

The New Year’s Joint Editorial that lays out the DPRK’s policy vision places great emphasis on raising living standards. Mentioning this goal on multiple occasions, the Editorial makes clear that it is to be achieved through the planned economy, not the market, even though the focus is to be on light industry and agriculture, where markets would normally be expected to play a comparatively greater role. This appears to be at least a partial disavowal of the decentralisation theme of the 2002 reforms.

The Strategy

The decision-making process in Pyongyang is anything but transparent, so discerning a strategy is little better than speculation. Nevertheless, a number of developments are consistent with the hypothesis that Kim Jong-Il decided in the course of 2009 that more drastic measures were required to halt the dangerous trend of the rise of the market economy at the expense of the planned economy. One report suggests that in September he issued a directive that the two could not coexist and concludes that the currency reform was the consequence of that directive.

But Kim probably recognised the need to cushion the adverse impact of squeezing the market economy. This could explain the DPRK’s move in August to reverse its antagonistic policy toward South Korean President Lee Myung-Bak and to move to restore North-South cooperation on projects that earned substantial revenue for the North. The visit of China’s Premier Wen Jiabao in late October may have been the occasion of bargaining to obtain promises of economic assistance.

Other possibly related measures include:

• - the announcement on December 16 of a number of new economic laws and regulations affecting commodities, real estate, and import of capital goods;
• - indications of an effort to attract foreign direct investment, as indicated inter alia in comments to visiting U.S. experts in late November about the availability to foreign investors of reliable, inexpensive labor and in questions—posed during a tour of industrial parks in the Northeast Asia region by a joint team of ROK and DPRK officials—about wages, operating systems, and insurance and accounting systems; and
• - indications that Kim Jong-Il had expressed interest in resurrecting the Rajin-Songbong free trade zone.

It is also possible that the authorities expected and welcomed the prospect of depreciation of the North Korean won against foreign currencies, after taking into account the redenomination, in private markets. There are reports that it has depreciated significantly against the Chinese yuan—if so, there could be a substantial boost of exports to China in informal trade, and a decline in imports from China.

It may be unrealistic to speculate that the DPRK would go so far as to move toward an agreement to give up its nuclear program in order to obtain removal of the sanctions imposed under UN Resolution 1874, but their removal was reportedly avidly sought by North Korean officials during the visit of Stephen Bosworth, U.S. special representative for North Korea policy, in early December.

The Future

Few western observers would predict success for this shift of course of North Korea’s economic policy. In the short run, success may be possible if it is defined as shrinking the relative size of the market economy compared to the planned economy. Improvement of living standards may be possible if harvests hold up, assistance from China increases, and revenue from Gaeseong and other industrial parks can be sharply expanded. But long-term growth requires rational investment and productive use of labor. There is no reason to expect that either attribute will emerge in a recentralised economy, particularly after so many have tasted the forbidden fruit.

This article first appeared here in Korea Insight on 7th January, 2010.

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