North Korean Economy Watch

Below are excerpts from an article by Stephan Haggard and Marcus Noland on the complexities of North Korea sanctions.  The full article is worth reading.

According to Haggard and Noland in the Oriental Economist:

On June 12, 2009, in response to North Korea’s second nuclear test, the United Nations Security Council (UNSC) imposed additional economic sanctions via UNSC Resolution 1874. This measure is politically significant, particularly in signaling the changing attitude of Beijing. However, it is highly unlikely that the sanctions by themselves will have any immediate effect on North Korea’s nuclear program or on the increasing threat of proliferation. Sanctions need to be coupled with a nuanced policy that includes a strongly stated preference for a negotiated solution as well as defensive measures, of which the sanctions are only one part. Proliferation can be impeded. However, elimination of the North Korean nuclear weapons capability is likely to require a regime change in Pyongyang.

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The most interesting features of the resolution have to do with means of enforcement. In 2003 President Bush launched the Proliferation Security Initiative (PSI), a loose effort to secure international cooperation in monitoring and interdicting ships that might be trafficking in WMDs or WMD-related materials. The new Security Council Resolution comes close to making the PSI a formal multilateral effort. The resolution calls upon member states to inspect vessels on the high seas or escort them to port if they have reasonable grounds to believe that they are carrying prohibited cargo. South Korea, which sat on the fence under the previous government of Roh Moo-hyun, has now formally joined the PSI effort.

An important loophole is that such interdiction must have the assent of the country under which the vessel is flagged. This provision could provide incentives for North Korea to do more shipping under its own flag. But there are clear constraints on doing so because of the country’s pariah status, and the major flags of convenience, such as Panama and Liberia, would come under strong pressure to comply. This obligation will almost certainly generate a confrontation at some point, given that North Korea has stated unambiguously that it would view such action as an act of war.

In addition to interdiction, the UNSC resolution explicitly provides for the use of financial means for stopping the flow of WMD-related trade. These measures are potentially more sweeping than those related to trade sanctions per se, since the resolution permits the blocking of transfers and even the freezing of any assets that “could contribute” to North Korea’s weapons programs or activities. Such a provision is similarly open to quite broad interpretation.

Finally, the new resolution establishes a new enforcement process by creating a panel of experts that will monitor efforts and provide recommendations to the Security Council.

Will Sanctions Work?

Despite these steps forward, the sanctions effort is not likely to yield immediate results and could even appear to backfire in the short run.

First, the North Koreans have typically responded to pressure not by complying but by escalating. The most recent cycle of escalation, culminating in the nuclear test, was in fact triggered by the sequence of UN actions described above.

Second, those favoring engagement had hoped that expanded trade, investment, and aid would encourage North Korea toward a more reformist path by demonstrating the gains from economic integration and by tilting the internal debate in favor of liberalizers. Economic inducements were probably never as powerful carrots as some believed. However, in 2005, the risk-averse North Korean leadership began reversing its limited economic reforms anyway. Kim Jong Il’s stroke in August 2008 has only exacerbated such tendencies; In the succession process, no one wants to be vulnerable to charges of apostasy. The influence of the military, a conservative, antireform institution is on the rise. In today’s environment, sanctions may be welcomed by reactionary elements as a justification for circling the wagons.

Finally, those countries most inclined to sanction North Korea no longer have much economic interaction with it anyway. Japan, once an important mainstay of the North Korean economy through transfers, has imposed an embargo (though circumvention via third countries is reputedly easy). Aid from South Korea has dropped to a trickle, and commercial relations through the collaborative Kaesong industrial park in North Korea have also been held hostage by new North Korean demands to renegotiate contracts. US economic exchanges with North Korea are miniscule. Indeed, the North Koreans even rejected the last important economic link to the United States by declining to continue a generous food aid program negotiated last year.

Thus an unintended consequence of the crisis has been to dramatically raise the share of North Korea’s trade with China, and with Iran Syria, and Egypt, countries with which it shares nuclear and/or missile interests. These latter partners show little interest in political quid-pro-quos, let alone sanctions. This geographical shift in trade makes traditional sanctions even less potent.

Consequently China has become even more central to any effective sanctions effort. China is North Korea’s largest trading partner, accounting for about one-third of its trade, and is the country’s most generous aid donor. A cut-off of critical Chinese oil shipments, much less a complete trade embargo, would bring the country to its knees.

But China has ambivalent, conflicting interests in North Korea. It values having a fraternally allied buffer state on its border and regards the country as a useful pawn in its rivalries with the United States and India, acting as its proxy in dealings with Iran and Pakistan. Yet North Korean provocations push South Korea, Japan, and the United States closer together, and ultimately could trigger a major arms race in Northeast Asia, which would not be to China’s benefit. Finally, China has concerns that excessive pressure on the regime could provoke its collapse, in the worst case sending millions of North Korean refugees into China and ending with US troops on the Yalu River. For China, a stable, nuclear-armed North Korea is preferable to an unstable one, nuclear or not, and this consideration ultimately limits the degree of pressure that Beijing is willing to bring to bear.

Financial Levers

This does not mean that the United States and its allies are without economic options, however. Even in the absence of complete multilateral coordination, the United States can still exercise leverage if it can identify how and where North Korea finances its international trade and goes aggressively after financial intermediaries. This particular form of sanction does not require multilateral coordination, since foreign banking institutions that conduct significant business in the United States have a strong interest in avoiding institutions that the US Treasury has identified as engaged in illicit finance.

In 2005 the US Treasury signaled that a small Macau bank, Banco Delta Asia, was possibly engaged in money laundering activities on North Korea’s behalf. Without any further action, the bank immediately suffered a run on its deposits and was forced into receivership, freezing $25 million of North Korean funds. The issue became a major sticking point in the Six Party talks but also appeared to motivate the North Koreans to return to them, setting the stage for the agreements reached in 2007. Undoubtedly the North Koreans have attempted to diversify their financial linkages since then.

In sum, the world appears capable of hurting North Korea economically, but given the extreme priority that the regime places on its military capacity, it is unlikely that the pain that the world can bring to bear will be sufficient to induce North Korea to abandon core political goals. However, holding out the possibility of removing these measures could constitute one incentive for a successor government to reassess the country’s diplomatic situation and to terminate its nuclear weapons program.

Read the full articles here:
Sanctions harden the lives of ordinary North Koreans
Oriental Economist
Haggard, Noland
7/3/2009