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While the detonation of a nuclear bomb represents a failure by the West to contain nuclear proliferation, it's important to look at the situation clearly and factually. World markets shrugged off this event because of the perception that this may be a non-event. Compare for example the economic difference between North Korea and South Korea as graphically illustrated in the photograph from space. North Korea, one of the world's most centrally planned and isolated economies, faces desperate economic conditions. Industrial capital stock is nearly beyond repair as a result of years of underinvestment and shortages of spare parts. Industrial and power output have declined in parallel. Despite an increased harvest in 2005 because of more stable weather conditions, fertilizer assistance from South Korea, and an extraordinary mobilization of the population to help with agricultural production, the nation has suffered its 11th year of food shortages because of on-going systemic problems, including a lack of arable land, collective farming practices, and chronic shortages of tractors and fuel. Massive international food aid deliveries have allowed the people of North Korea to escape mass starvation since famine threatened in 1995, but the population continues to suffer from prolonged malnutrition and poor living conditions. Large-scale military spending eats up resources needed for investment and civilian consumption. In 2004, the regime formalized an arrangement whereby private "farmers markets" were allowed to begin selling a wider range of goods. It also permitted some private farming on an experimental basis in an effort to boost agricultural output. In October 2005, the regime reversed some of these policies by forbidding private sales of grains and reinstituting a centralized food rationing system. In December 2005, the regime confirmed that it intended to carry out earlier threats to terminate all international humanitarian assistance operations in the DPRK (calling instead for developmental assistance only) and to restrict the activities of international and non-governmental aid organizations such as the World Food Program. Firm political control remains the Communist government's overriding concern, which will likely inhibit the loosening of economic regulations Since the early 1960s, South Korea has achieved an incredible record of growth and integration into the high-tech modern world economy. Four decades ago, GDP per capita was comparable with levels in the poorer countries of Africa and Asia. In 2004, South Korea joined the trillion dollar club of world economies. Today its GDP per capita is equal to the lesser economies of the EU. This success through the late 1980s was achieved by a system of close government/business ties, including directed credit, import restrictions, sponsorship of specific industries, and a strong labor effort. The government promoted the import of raw materials and technology at the expense of consumer goods and encouraged savings and investment over consumption. The Asian financial crisis of 1997-99 exposed longstanding weaknesses in South Korea's development model, including high debt/equity ratios, massive foreign borrowing, and an undisciplined financial sector. GDP plunged by 6.9% in 1998, then recovered 9.5% in 1999 and 8.5% in 2000. Growth fell back to 3.3% in 2001 because of the slowing global economy, falling exports, and the perception that much-needed corporate and financial reforms had stalled. Led by consumer spending and exports, growth in 2002 was an impressive 7%, despite anemic global growth. Between 2003 and 2005, growth moderated to about 4%. A downturn in consumer spending was offset by rapid export growth. In 2005, the government proposed labor reform legislation and a corporate pension scheme to help make the labor market more flexible, and new real estate policies to cool property speculation. Moderate inflation, low unemployment, an export surplus, and fairly equal distribution of income characterize this solid economy. Because of North Korea's poverty, it may consider selling its weapons for quick cash to terrorists. I think it's unlikely that this will happen, as such deals with the devil have a way of backfiring. But the possibility nevertheless exists. More than twenty years ago, Prentice-Hall published my book on doing business with China. The National Foreign Assessment Center of the Central Intelligence Agency provided much of the information in the book, and it was used in briefings when Ronald Regan visited China. I mention this only to give some context on how to approach negotiations with North Korea. What cannot work is any kind of a cowboy approach, such as ultimatums or military action. They will not only call our bluff, we will fail in what we are trying to achieve. Here is a case where indirection may achieve results. The question is not: how do we influence North Korea? Rather, it should be: as regards to North Korea, what does the People's Republic of China want and fear? What they want is what they've wanted over a millenia-- territorial integrity, freedom from foreign intrusion, and buffer states to facilitates that. What they fear is instability, embarassment, anarchy on their border, and refugees flooding into China. The approach therefore is for us to act so as to arouse the threat of what China fears the most-- vast numbers of refugees voting with their feet as humaniterian aid and other ties are severed. Finesse will be needed so as to encourage tension and thereby the rectification of that tension not between the US and North Korea but China and North Korea. However, what I think will happen is the usual spoor from paper tigers-- a resolution of condemnation from the United Nations while all join hands chanting "All we are saying is give peace a chance." |