Financial Times
10/13/2006
Anna Fifield
As the countries of the United Nations wrangle over the sanctions to be imposed on North Korea following its nuclear test this week, doubts are being cast on the effectiveness of whatever measures are agreed.
With China and South Korea fearing the collapse of their volatile neighbour, and with a large proportion of North Korea’s income coming from illegal trade, even targeted sanctions would have a limited impact. The regime has already survived the death of its founder and a famine that killed up to 10 per cent of its population.
Rüdiger Frank, a North Korean economy specialist at the University of Vienna, said: “I don’t think there is any more room for more sanctions from the usual suspects. To be effective, China and South Korea have to join.
“But a nuclear North Korea is even more risky in case of collapse than just a humanitarian catastrophe, so why would they increase the chance of a collapse.”
North Korea says its missile launches in July and the nuclear test were “self-defence” in response to US financial sanctions imposed in September last year to curb alleged counterfeiting and money laundering.
Now the US, Europe and Japan are all calling for a tough UN resolution and authorisation for countries to interdict shipments to and from North Korea, both of which China is opposing.
The dispute over the extent of sanctions reflects differences over the purposes of the measure. While the US and perhaps Japan are eyeing regime change, China and South Korea would be happy with a change in behaviour.
Marcus Noland, of Washington’s Institute for International Economics, said economic sanctions were seldom effective in changing behaviour.
“If the sanctions were going to have any shot at working they would have to be comprehensive sanctions, as suggested by Japan,” he said. “That package was big enough to potentially have an impact and it also had the benefit of simplicity, but they would also imply a significant degree of hardship for ordinary people.”
But the suggested targeted sanctions were too weak to be effective and because of their complexity, they almost invited circumvention, Mr Noland said.
“Weak sanctions may be counterproductive because President Bush and President Roh [of South Korea] warn that they will not tolerate a nuclear test but they are not imposing the penalties or incentives to back it up. That might tempt North Korea to push the envelope even further,” he said.
Much of the crisis can be traced back to North Korea’s dire economic situation. The differences between the North and South Korean economies could not be more stark. The mineral-rich north had always been the industrial heartland and the more fertile South was traditionally the rice bowl.
Indeed, the South’s gross domestic product did not overtake the North’s until the early 1970s but now at $700bn (£377bn, €558bn), it is about 40 times larger than that of the North’s.
Economic reforms that Pyongyang begrudgingly introduced in 2002, which liberalised prices and wages, have led to some changes in North Korea’s decrepit economy and trade has grown exponentially.
The South’s Korea Trade Investment Promotion Agency estimates the value of North Korea’s legal foreign trade crossed the $3bn mark last year, the highest since the Soviet Union collapsed in 1991, with trade with China comprising more than half of the total.
But it is North Korea’s sizeable illegal trade that will further dilute any economic sanctions. Analysts suggest North Korea earns about one-third of its revenues from aid, one-third from conventional exports and the remainder from criminal activities.
Crime is such a fundamental part of North Korea’s economy that David Asher, co-ordinator of the US State Department’s North Korea working group from 2003 to 2005, calls the country the “Soprano state”.
“North Korea is perhaps the only country in the world whose embassies and overseas personnel are ex-pected to contribute income to the ‘Party Centre’, not rely on central government funds for their operations,” said Mr Asher in a speech at the Wilson Centre last November.
Several North Korean diplomats have been caught carrying narcotics through eastern European countries in recent years. In 2004, a North Korean ship carrying $150m worth of heroin was seized in Australia.
Pyongyang has also been producing and distributing counterfeit US dollars, cigarettes and pharmaceuticals, especially the erectile dysfunction drugs Viagra and Cialis.
Counterfeit cigarettes are said to depart regularly from the North Korean ports of Rajin and Nampo for shipment through China and South Korea to the rest of the world, and tobacco companies have identified factories producing counterfeit cigarettes in North Korea.
But the international community is now most concerned about the prospect of North Korea trading missile and weapons of mass destruction technology, a concern that is only likely to be heightened with sanctions.
Jon Wolfsthal, of the Centre for Strategic and International Studies in Washington, said: “North Korea is probably going to want to hold on to their precious weapons technology. But if the US squeezes them, that increases the risk that they might sell weapons to ensure their survival.”
