Time to Lift North Korea’s Quarantine

Posted January 2, 2006

Categories: Articles, Korea

The US has put North Korea under quarantine. Pyongyang stands accused of a multitude of crimes, from missile exports and drug smuggling to counterfeiting and money laundering. North Korea has long relied on illicit activities to acquire what it has had difficulty obtaining through legitimate means. Yet isolating Pyongyang from the global economy could prove counterproductive.

The Bush administration began tightening the noose around North Korea in 2002 in the wake of allegations that Kim Jong Il pursued a secret nuclear program. The first step was the military containment of the Proliferation Security Initiative. PSI targets not only potential weapons of mass destruction going in or out of North Korea, but also “dual use” products that can be used for civilian or military purposes. The US Treasury Department has sanctioned several firms, most recently Kohas AG of Switzerland, for ties to the North Korean military.

Overshadowing this military containment has been a tough new financial cordon. In September 2005, Washington charged Macao’s second largest bank, Banco Delta Asia, with helping North Korea with its illicit financial dealings. The US also blacklisted eight North Korean companies suspected of nefarious activities. The US Secret Service says it has already seized $50 million worth of counterfeit US bills coming from North Korea. Then in April, Washington began prohibiting its citizens and companies from using North Korean-flagged ships for any reason. Japan, meanwhile, has gone a step further by expanding its ban on cooperative ventures to encompass a wider swath of North Korean institutions such as hospitals and universities.

The first casualty of the financial quarantine has been the negotiations over North Korea’s nuclear program. Pyongyang wants sanctions lifted before it returns to the Six Party Talks. While it is difficult to assess the extent of the country’s drug and counterfeiting operations – whether they are on the wax or wane – these troubling activities pale in comparison to nuclear proliferation.

The quarantine proves more self-defeating at an economic level by discouraging North Korea’s legitimate economic activities and overall reform project. Although journalists routinely refer to North Korea as communist, the country dispensed with Marxism-Leninism some time ago. It now aspires to become a Market-Leninist system, much like neighboring China. It altered its constitution in 1998 to emphasize the role of profit in the economy, approved the expansion of farmers’ markets, and implemented wage and price reforms in 2002. These reforms do not add up to capitalism, as North Koreans hasten to clarify. But they are far from communism.

The financial sanctions directly affect the lifeblood of North Korea’s new economy: its legitimate banking system. “The result of these actions against banks doing business with the DPRK [is] that criminal activities go underground and [are] harder to trace,” explains Nigel Cowie, general manager of the Daedong Credit Bank in Pyongyang, “and legitimate businesses either give up, or end up appearing suspicious by being forced to use clandestine methods.”

On a larger scale, the financial quarantine stifles a remarkable but under-reported campaign to help North Korea legitimately transform its economy. Over the last six years, European and Asian institutions have increased the official information flow into North Korea through exchanges, academic programs, and other educational resources. Since 1998 and increasingly after 2000, North Koreans have traveled abroad to learn more about global economics: to study in Australia and Singapore, to attend seminars throughout Europe, even to visit the New York Stock Exchange.

Masters of reverse engineering, the North Koreans returned home with their knowledge and set up their own institutions. In 2000, the Ministry of Foreign Trade established the Center for the Study of the Capitalist System. North Korea also established two business schools. The Rajin Business School and Information Centre opened in September 1998. The Pyongyang Business School, set up with money from the Swiss government’s Development Cooperation Agency, graduated its first 30 students in 2005.

The exchange of economic knowledge did not stop when George W. Bush took office in 2001 and reversed the Clinton policy of engagement. Nor did it end when the US confronted North Korea in October 2002 with allegations of a secret uranium enrichment program.

Indeed, even as the Bush administration prepared its case for financial sanctions, a number of European institutions had sensitive exchanges underway. In June 2005, Germany’s Hans Seidel Foundation conducted its second workshop on economics in Pyongyang for 58 participants on the topic of inflation. In September, the Friedrich Naumann Foundation invited a North Korean delegation to tour German banks, ministries and statistical offices. So eager for this information, the North Koreans uncharacteristically agreed to cover travel costs to Germany. The following month, the Naumann Foundation held the latest in a series of discussions in Pyongyang, this time on the experiences of transitional economies of Eastern Europe. Also in the fall of 2005, the Centre for Applied Studies in International Negotiations in Switzerland held its eighth consecutive year of programs for North Korean officials on international economics and trade.

The Hans Seidel Foundation, the Friedrich Naumann Foundation and CASIN are not Marxist-Leninist institutions. Rather, they are classically liberal institutions committed to disseminating information on the global economy, even to the most unlikely of places.

When it comes to advice on economic reform, North Korea has generally avoided turning to South Korea. But that hasn’t stopped Seoul from breaking the intensifying economic quarantine. Early attempts to take advantage of North Korea’s literate, skilled and cheap workforce included assembly plants built by Samsung, Daewoo and even the Unification Church. More recently, the South Korean government set aside money for economics trainings for North Koreans through other organizations. The UN Economic and Social Commission received $378,000 for such trainings in July 2005 and $125,000 in December 2005 for technical support.

The real quarantine-breaker, however, is Kaesong. This industrial zone located just north of the DMZ consists today of only eleven factories employing a couple thousand North Koreans. But Kaesong is projected to employ nearly a million North and South Koreans by 2012. Kaesong is not just about cheap labor. South Korea provides technical and managerial resources that are at least as valuable as what North Koreans learn in the world’s classrooms.

The Bush administration has never expressed much enthusiasm for Kaesong – and initially held up some of the technology transfer for fear that South Korea was inadvertently helping its northern neighbor make better weapons of mass destruction. Now the administration balks at South Korean attempts to slip Kaesong products into the reduced tariff categories of the proposed Free Trade Agreement with the US.

It is a remarkable irony that an administration so wedded, at least rhetorically, to market economics and globalization has been so hostile to any steps North Korea takes in that direction. From the hardliner point of view, though, engaging North Korea sustains the regime. Any successful economic activity, illegitimate or legitimate, further delays the regime collapse that hardliners have anticipated for nearly two decades.

A country systematically discouraged from expanding its legitimate economic enterprises – by high tariff barriers, shipping bans and the like – will see little point in engaging with the official global economy. More critically, North Korea will continue to quarantine its own population from what it perceives as the malign influences of globalism. Such a policy of mutually assured quarantines will do little to heal what afflicts North Korea.

Yale Global Online, June 8, 2006

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