Cankor Report #278 -- Special Edition

[cankor at nautilus.org]

WHAT READERS SAY ABOUT THE CANKOR REPORT:

"Cankor is very useful to us."
Stephan Haggard, Krause Professor of Korea-Pacific Studies, Graduate 
School of International Relations and Pacific Studies, University of 
California, San Diego, co-author with Marcus Noland of "Famine in 
North Korea: Markets, Aid, and Reform."

Dear friends,

CanKor is a reader-supported e-publication and website. We believe
that an informed public will draw its own conclusions about what needs
to be done to bring peace and security to the Korean Peninsula, and
that decision-makers will benefit from the debates and analyses of
experts made accessible through the CanKor Report.

We do not charge a subscription fee, but request financial
contributions from those who are able.

We thank readers who have sent donations to CanKor. Those who have not
yet had the time to contribute but wish to do so, please refer to the
bottom of this Report for instructions. We issue receipts for all
donations received.

With best wishes,
The CanKor team.
*************************************************
CANADA-KOREA ELECTRONIC INFORMATION SERVICE

CanKor # 278 -- SPECIAL EDITION

Wednesday, 28 March 2007
*************************************************

The Six Parties are in recess while the Bank of China contemplates the 
implications of transferring 25 million US dollars into DPRK accounts. 
CanKor subscribers may be interested in contemplating the implications 
of a paper written by former World Bank official Bradley Babson and 
published by the Stanley Foundation last December. In this SPECIAL 
EDITION of the CanKor Report we offer substantial excerpts of the 
paper, hoping readers will not be deterred by the length of its title: 
"Economic Perspectives on Future Directions for Engagement with the 
DPRK in a Post-Test World".

Aside from explaining in very clear language why the financial 
sanction issue is so important to the DPRK (even though the moneys 
involved are relatively small), Babson offers intriguing perspectives 
on the forces of change within the DPRK and the regime's 
vulnerabilities in trying to manage these forces. He outlines three 
scenarios for the future that help to explain the fits and starts of 
the Six-Party process, while also pointing to engagement options for 
non-six-party and non-state actors.

To whet your appetite, here are a few provocative insights offered by 
the paper:

"The growth of markets and consequent entrepreneurship among the North 
Korean people is fundamentally changing the social contract in the 
DPRK... The emergence of the farmers' markets as a grassroots, 
bottom-up response to the breakdown of the Public Distribution System 
symbolizes this break in the social contract. The very existence of 
markets, where people exercise the freedom of consumer choice, has 
undermined the socialist social contract and altered the psychology of 
the North Korean people."

"The potential for accumulation of economic power by entrepreneurs, 
traders, and enterprises with joint ventures with foreign companies 
will inevitably strain the political balance between the Workers 
Party, the military, and the interests of the newly economically 
powerful."

"The status quo separation of the economic subsystems that have 
supported the elite, military, and general population is not likely to 
remain stable. In fact, a debate has been taking place internally for 
some time on how to best allocate resources between the needs of the 
military and the interests of the people's economy."

"Kim Jong Il's fundamental challenge is to find a way to move forward 
with a transformative process on three fronts at the same time. The 
first is to achieve an improved external environment that both meets 
the DPRK's security needs and expands opportunities for trade, 
investment, and development assistance. Second, is to design and 
implement economic reforms that work; i.e., result in sustained 
economic growth, a more efficient economy, and a broadly based 
improved standard of living for the North Korean people. And third is 
to manage the domestic social and political consequences of economic 
reform and opening up."

"There are three broad paths that could be taken into the future from 
the perspective of the DPRK leadership. One is continued escalation 
and confrontation. A second path is a choice by the DPRK to delay and 
defer. The third path is one of serious negotiations now toward 
implementation of the 19 September 2005 Joint Statement and removal of 
sanctions imposed by the Security Council."
*************************************************

Contents:

SPECIAL EDITION
1.   FUTURE DIRECTIONS FOR ENGAGEMENT WITH THE DPRK
     http://reports.stanleyfoundation.org

*************************************************

1.   FUTURE DIRECTIONS FOR ENGAGEMENT WITH THE DPRK
     Bradley O. Babson, Stanley Foundation Policy Briefs, December 
2006

[Following are excerpts of a paper entitled "Economic Perspectives on 
Future Directions for Engagement With the DPRK in a Post-Test World." 
The Stanley Foundation encourages use of this publication for 
educational purposes. Any part of the material may be duplicated with 
proper acknowledgment. View this publication online at 
http://reports.stanleyfoundation.org. Bradley O. Babson is a former 
World Bank official and expert on Asian affairs with a concentration 
on the North Korean economy and Northeast Asia economic cooperation. 
He now consults for international organizations, foundations, and 
research institutes, and is a member of the National Committee for 
North Korea. He is a graduate of Williams College and the Woodrow 
Wilson School of International and Public Affairs at Princeton 
University.]

INTRODUCTION
The decisions by the DPRK leadership to conduct a missile test on July 
5, 2006, and a nuclear test on October 9, together with Resolutions 
1695 and 1718 adopted by the UN Security Council in response to these 
actions, have fundamentally altered the context for engagement by the 
international community with the DPRK. Governments, multilateral 
organizations, private companies, and NGOs who have been pursuing 
engagement activities of various kinds need to reassess the rationale, 
strategies, and modalities for continuing engagement activities in the 
future.

These adjustments will have to take into account how increased 
sanctions imposed on the DPRK following the adoption of the Security 
Council resolutions are implemented, changing perceptions of the 
benefits and risks of engagement, and growing isolationist tendencies 
within the DPRK. The choices made by governments and other 
stakeholders in the coming months will have profound consequences for 
the possible pathways for the future and the ultimate resolution of 
the security dilemmas on the Korean peninsula. Much also depends on 
the responses of the DPRK leadership to the actions taken by others, 
and on the responses by stakeholders in North Korean society, 
especially households, enterprises, the military, and the Workers 
Party.

At the present time, despite the decision of the DPRK to return to the 
six-party talks process, there is much uncertainty about how the 
dynamics that have been set in motion will unfold, and the longer-term 
consequences of the choices that will be made.

This paper reviews recent developments in the North Korean economy and 
its external and internal vulnerabilities, explores perspectives on 
the economic implications of possible future paths in a post-test 
world, and evaluates alternative scenarios from the point of view of 
the implications of choices made on sanctions and engagement policies 
by major stakeholders. By illuminating critical trade-offs and 
potential impacts of these choices, the paper aims to contribute to 
discussions of how best to achieve a peaceful resolution of the 
multidimensional challenges posed by the situation that now exists on 
the Korean peninsula.

RECENT DEVELOPMENTS IN THE NORTH KOREAN ECONOMY AND CHALLENGES AHEAD
In 2005 and early 2006 it appeared that the DPRK economy was showing 
some signs of improvement and that the leadership was gearing up for a 
new phase of economic reform efforts. Positive developments included a 
good agricultural harvest, growing trade with South Korea and China, 
improvements in organizational and legal arrangements for economic 
management under the leadership of the Cabinet, formation of a 
national economic cooperation committee, reorganization of the legal 
and administrative apparatus for inter-Korean economic cooperation, 
and widely publicized trips to China by Chairman Kim Jong Il and the 
economic leadership team in January and February 2006, with 
expressions of admiration for Chinese economic achievements. In April 
there were also reports that the DPRK was on the brink of moving ahead 
with land reforms that would include long-term leases of land to 
individuals, leasing plots of collective farms to individuals, 
imposing taxes on land used by factories and businesses, making grants 
to build and operate roads to businesses and individuals, and 
recognizing ownership of apartment buildings built by businesses or 
individuals. In addition, labor reforms were being considered for 
introduction later in the year, including moving from a system of 
monthly wages to daily or weekly wages.

Concerns about experiences with earlier reforms and humanitarian 
assistance led to stocktaking and assertions of some new policy 
directions in this period. One was the decision to reinstate mandatory 
use of the Public Distribution System for grains, especially rice, 
which was intended to reduce inflationary pressures and demonstrate 
renewed capacities of the state for managing food security. Another 
was the decision to reduce the presence of foreign humanitarian aid 
workers in the country, press for a shift from humanitarian aid to 
development assistance from the international community, and negotiate 
a reduced level of support from the World Food Programme. These moves 
signaled a change of course that reflects both political motivations 
to tighten control and a desire to find solutions to negative effects 
of the earlier reforms and pursue a homegrown economic reform agenda 
that can be managed. Since the missile test in mid-2006, it appears 
that economic reform efforts have taken a backseat to the military 
initiatives, including curtailment of planned activities such as 
foreign-supported economics training programs.

The willingness of the DPRK to sign the September 19, 2005, Joint 
Statement in the six-party talks bred optimism that the DPRK 
leadership was prepared to proceed down the path of a negotiated 
resolution of not only its nuclear and missile programs but also a 
general improvement of its international relations and cooperation in 
its future economic development. However, the consequences of the 
September 2005 US Treasury decision to issue a notification that the 
Banco Delta Asia in Macau was a "primary money laundering concern" 
overtook this optimism. The notification was based on information that 
transactions involving accounts held by North Korean companies and 
individuals had involved counterfeit US dollars and monies received 
through illegal activities. This led to intervention by the Central 
Bank of Macau, impounding all North Korean accounts pending a full 
investigation of the allegations. The North Korean reaction to these 
actions was to suspend participation in the six-party talks process 
and demand a change in the "hostile policy" of the United States, and 
specifically a relaxation of the "financial sanctions." While there is 
uncertainty about the sincerity of the DPRK's commitment to the 
six-party talks process and the Joint Statement that it signed, there 
is no doubt that the financial sanctions issue has played a critical 
role in the politics of confrontation and escalation over the past 
year. The economic meaning, however, of the financial sanctions and 
related efforts by the United States to discourage banks in other 
countries from opening new accounts for North Korean companies and 
individuals needs to be put in perspective.

NORTH KOREAN EXTERNAL ECONOMIC VULNERABILITIES
The North Korean economy is not (and never has been) self-sufficient, 
despite the aspirations of Kim Il Sung's Juche political philosophy. 
It is particularly vulnerable to shortages of food, energy, and 
foreign exchange. The DPRK has a very low ratio of arable land to 
population, which means that it cannot achieve food security through 
its own domestic production and must import food and fertilizer. While 
the DPRK has significant coal supplies and some hydroelectric 
capacity, it is completely dependent on imported petroleum products 
required for both military and civilian use. The DPRK is also not 
integrated into the world economy and financial system, so its ability 
to earn foreign exchange and engage in normal trade finance is 
severely circumscribed. It is not surprising, therefore, that the 
politics of engagement with the DPRK since the early 1990s have 
focused on these three variables for both carrots and sticks.

Following the collapse of the Soviet Union in 1991, China has 
bargained oil, food, and trade for political and social stability in 
the DPRK, first during the economic crisis of the mid-1990s and more 
recently during the nuclear crisis that has unfolded since 2002. The 
Agreed Framework negotiated between the United States and the DPRK in 
1994 bargained energy (heavy fuel oil and construction of two light 
water reactors) for a freeze in the North Korean plutonium nuclear 
program. This lasted until 2002 when, after the revelation of North 
Korea's secret uranium nuclear program, the carrots turned to sticks 
as first fuel oil shipments were suspended and then the light water 
reactor project cancelled and KEDO disbanded as a cooperation 
framework. The Sunshine Policy pursued by South Korea after the 
election of President Kim Dae-jung bargained inter-Korean 
reconciliation for food aid, trade, and publicly subsidized 
investment. This included large cash payments in foreign exchange as 
gifts to secure concessions from the DPRK leadership, including the 
alleged secret payment of $500 million for the meeting of the two 
leaders in June 2000. A current debate in the South Korean National 
Assembly is what amount of South Korean aid has in fact been provided 
to the DPRK in cash or commodities that could have been diverted to 
military use. Japanese food aid and trade expansion in the wake of the 
economic and humanitarian crisis of the mid-1990s shifted to 
increasingly stringent sanctions affecting food aid, trade, and 
remittances after 2002, reflecting public frustration over the 
abductees issue and the escalation of confrontation over the DPRK's 
nuclear and missile programs.

Japan, in fact, was the first country to link denial of humanitarian 
food aid to the deteriorating security situation and its unhappiness 
with progress on the abductees issue. This was followed by the 
decision of the United States not to contribute to World Food 
Programme appeals unless there was improved monitoring of food 
distributions and a de facto alignment with Japanese policy, despite 
the longstanding US policy of not linking humanitarian assistance to 
security issues. Most recently, the South Korean decision following 
the July 2006 missile tests to withhold its annual provision of 
500,000 tons of rice pending the DPRK's return to the six-party talks 
represents a significant departure from past policies. It is also 
noteworthy that the World Food Programme appeal for 2006 had only met 
10 percent of its target of $102 million for commitments by October, 
with only Australia and Ireland contributing. ["North Korea Weapons 
Tests Reduce Food Aid, UN Says," Reuters, October 23, 2006.] The 
European Union likewise has cut back on food aid and is continuing 
with a humanitarian aid program of about 10 million euros mainly for 
health and water sanitation. Thus the present situation leaves China 
as the primary provider of food assistance to the DPRK, although there 
is speculation that South Korea may soften its position if the 2006 
harvest results in a 2007 food deficit that conjures prospects of 
renewed starvation for parts of North Korean society. South Korea can 
be expected to at least partially lift the ban once the six-party 
talks are under way again.

While trade and aid from South Korea and China have supported their 
national policies of pursuing relaxation of tensions and advancing 
inter-Korean reconciliation for South Korea and maintaining stability 
in the DPRK while encouraging it to adopt more market economy 
mechanisms for China, these pro-engagement economic policies have not 
deterred the DPRK leadership from pursuing its nuclear ambitions and 
continuing missile development programs. Taken together, the policies 
have provided the North Korean regime with a safety net that has 
allowed the leadership to avoid making any major change in the status 
quo security standoff. With food and energy vulnerabilities 
effectively controlled by South Korean and Chinese national policies, 
Japan and the United States turned to the DPRK's foreign exchange 
vulnerability in seeking to pressure the leadership to change course 
in its weapons development programs and illicit moneymaking 
activities. Both the sanctions on specific firms involved in weapons 
business and illegal activities and the actions targeting North Korean 
accounts in foreign-owned banks have been aimed at stifling access to 
foreign exchange for money laundering and military procurement and 
sales.

While cross-border trade with South Korea and China and the growing 
market economy inside the DPRK have not been significantly affected by 
US and Japanese efforts to deny DPRK access to foreign exchange (at 
least up until the adoption of Security Council Resolution 1718), the 
DPRK leadership needs hard foreign currency both to sustain its 
weapons programs and to provide the elites in North Korean society 
with the luxury goods they have come to expect. Thus the impoundment 
of accounts at Banco Delta Asia, although amounting only to about $24 
million, can be understood to have hit at the heart of the DPRK 
leadership's needs for access to hard foreign exchange for these 
purposes. When coupled with the intensified efforts being made to 
curtail the DPRK's ability to open new foreign exchange accounts in 
other countries by the US Treasury and Japan's restrictions on trade 
and remittances, it is not surprising that the DPRK leadership 
interprets the present intentions of the United States and Japan as 
hostile with the aim of undermining the regime itself. From the US 
perspective, the effectiveness of this initiative is reflected both in 
the North Korean leadership reactions and in the fact that denial of 
access to foreign bank accounts has not significantly hurt the North 
Korean people as a whole, but only the elite and military. This 
unusually effective targeting of sanctions has been possible because 
the core of the North Korean "people's economy" depends more on the 
food and energy imports from China and South Korea and cross-border 
barter trade and cash transactions than it does on hard currency 
foreign exchange transactions involving banks. However, it is 
important to note that some of the accounts impounded at the Banco 
Delta Asia were held by legitimate businesses, and there are ongoing 
efforts to deny any North Korean entity from opening overseas bank 
accounts. This means that legitimate businesses involved in trade and 
investment with other countries that require banking services will be 
affected by the financial sanctions initiatives, and this will have a 
distorting effect on the future pattern of trade and investment in the 
people's economy, not just curtailing access to foreign exchange by 
the military and elite economic subsystems in the DPRK. From this 
perspective, the DPRK's insistence that the "financial sanctions" 
issue be taken up as part of the six-party talks agenda is 
understandable, and it is a positive development that the United 
States has agreed that a working group be set up in the six-party 
talks framework to address this issue.

NORTH KOREAN INTERNAL ECONOMIC VULNERABILITIES
Choices made by the DPRK leadership as well as foreign governments, 
multilateral organizations, private investors, and NGOs engaging with 
the DPRK are influenced as well by perceptions of internal forces of 
change within the DPRK and the vulnerabilities of the regime in 
managing these forces. These forces were set in motion by the severe 
economic contraction and famine of the 1990s, the penetration of 
information about the outside world that came with allowing foreign 
organizations to provide humanitarian assistance and educational 
opportunities inside and outside the DPRK, the effort to expand 
diplomatic relations with many countries during the late 1990s 
(particularly with Europe), progress in inter-Korean reconciliation 
that has increased bilateral contacts and cooperation among Koreans, 
and the economic reforms introduced in July 2002 and subsequently. 
Critical issues connected to the DPRK's poverty trap include the 
changing relationship of the state to the people resulting from the 
growing market economy, a changing political economy with new winners 
and new losers in the change process, and increasing corruption.

POVERTY TRAP
There is broad agreement among economists who have studied the North 
Korean economy that it has for many years been caught in a poverty 
trap, where economic growth is insufficient to replace deteriorating 
capital stock or invest in new technologies to increase productivity. 
Foreign aid and trade deficits have kept the economy afloat, but with 
very low levels of foreign investment and no capacity to mobilize 
capital domestically, the country remains in a poverty trap. 
Furthermore, because of the lack of a supply response to the economic 
reforms introduced in 2002 and 2003, inflation has become a major new 
problem for the economy. Without an infusion of investment, it will be 
impossible for the DPRK economy to achieve sustained growth and exit 
the poverty trap. The dilemma that faces the DPRK leadership is that 
this investment needs to come from outside the country, and this will 
require an improvement in the external environment to reduce risk 
perceptions of foreign investors and induce development assistance 
from governments and multilateral organizations. From this 
perspective, the decision of the DPRK leadership to go ahead with the 
missile and nuclear tests, thus creating a worsened external 
environment, risks consigning the country to continued poverty and 
with a population even more vulnerable to the impacts of poverty.

RELATIONSHIP OF THE STATE TO THE PEOPLE
The growth of markets and consequent entrepreneurship among the North 
Korean people is fundamentally changing the social contract in the 
DPRK. At the heart of this socialist contract has been the obligation 
of the state to provide for all basic human needs, including shelter, 
food, education, health care, and social welfare. The economic and 
humanitarian crisis of the mid-1990s was accompanied by a breakdown in 
the capacity of the state to meet this obligation, with the result 
that people were forced to fend for themselves or face starvation, as 
many did. The emergence of the farmers' markets as a grassroots, 
bottom-up response to the breakdown of the Public Distribution System 
symbolizes this break in the social contract. The very existence of 
markets, where people exercise the freedom of consumer choice, has 
undermined the socialist social contract and altered the psychology of 
the North Korean people. Government efforts to reassert the contract 
are only partial and likely to fail, as the markets remain open for 
most consumer goods and producers have price incentives to circumvent 
the system. One example of this is the requirement introduced in 
October 2005 that rice be distributed through the Public Distribution 
System and not through the markets. In today's DPRK, making money 
matters, and how the state makes its money through allowing private 
initiative and then collecting taxes will be an important part of the 
process of redrawing the social contract for the future. This will 
require the development of new institutions, especially in banking and 
public finance. In their absence, the country will remain economically 
weak and socially vulnerable.

CHANGING POLITICAL ECONOMY
Economic reforms already introduced and the changing character of 
cross-border economic relationships, especially with South Korea and 
China, are resulting in new sources of economic power and newly 
vulnerable groups in North Korean society. The potential for 
accumulation of economic power by entrepreneurs, traders, and 
enterprises with joint ventures with foreign companies will inevitably 
strain the political balance between the Workers Party, the military, 
and the interests of the newly economically powerful. It may well be 
that such strains are already a factor in the internal political 
dynamics of Pyongyang.

Also, there is a significant realignment of power taking place between 
central and local levels of government in the DPRK, with local 
communities having more autonomy. While little is known about these 
internal processes and their impact on the decision making of Kim Jong 
Il, the status quo separation of the economic subsystems that have 
supported the elite, military, and general population is not likely to 
remain stable. In fact, a debate has been taking place internally for 
some time on how to best allocate resources between the needs of the 
military and the interests of the people's economy. [For a full 
discussion of the internal debates, see Carlin and Wit, North Korean 
Reform: Politics Economics and Security, International Institute for 
Strategic Studies, Adelphi Paper 382 (Routledge, July 2006).] If new 
forms of economic wealth generation are emerging in the DPRK, then 
there are likely also pressures to reshape the flow of resources 
across these subsystems, and the direction and mechanisms used to make 
those transfers will be an indicator of the emerging realignment of 
power.

There are also new losers in the economic dynamics now active in the 
DPRK. People who cannot participate in the market economy, especially 
the urban unemployed and the disabled and elderly who depend on state 
support, are at risk. Inflation also is a factor in these dynamics as 
it robs purchasing power of people on low or fixed incomes and those 
unable to acquire assets, such as hard currency, that maintain value 
over time. The effort to reassert the role of the Public Distribution 
System for rice in 2005 was in part motivated by a desire to address 
these downside effects of the economic reforms introduced earlier, 
although the pricing policies that were adopted seem to be more intent 
on supporting employees of state enterprises than meeting the social 
welfare needs of the unemployed. The very low level of international 
funding commitments for the World Food Programme appeal for 2006, the 
reduction in humanitarian aid for the DPRK as a result of government 
preferences for development aid, and now the impact of sanctions 
imposed by the United Nations as punishment for the nuclear and 
missile tests will undoubtedly lead to further worsening of the plight 
of the internally vulnerable groups in the period ahead.

CORRUPTION
China, Vietnam, and Russia have all experienced high levels of 
corruption in the transition from socialist- to market-oriented 
economic systems, and the DPRK can be expected to face the same 
problems for the same reasons. But corruption in the DPRK is likely to 
be exceptionally problematic. The DPRK is already perceived as a 
corrupt system, with a history of state-sponsored criminal activities 
seeking payoffs for political concessions and reneging on agreements, 
as has been amply demonstrated in inter-Korean relations and 
experiences of foreign investors. This complicity of the state also 
enables a culture of tolerance for corrupt acts of individuals. Since 
the economic crisis of the 1990s there has been a growth in the 
practices of asset stripping and bribery linked to the emergence of 
markets, cross-border smuggling, and refugee traffic. Thus corruption 
in the DPRK is likely to become increasingly widespread and endemic 
and therefore a challenge to the political order. Any future strategy 
of engagement will need to take the corruption factor into account, 
which will need to be addressed as a systemic issue and not just a 
moral one.

THE FUNDAMENTAL CHALLENGES IN NORTH KOREAN ECONOMIC TRANSFORMATION
The DPRK leadership faces very difficult dilemmas and trade-off 
choices in pursuing its primary aim of regime survival while reforming 
its economy and pursuing economic development. Kim Jong Il's 
fundamental challenge is to find a way to move forward with a 
transformative process on three fronts at the same time. The first is 
to achieve an improved external environment that both meets the DPRK's 
security needs and expands opportunities for trade, investment, and 
development assistance. Second, is to design and implement economic 
reforms that work; i.e., result in sustained economic growth, a more 
efficient economy, and a broadly based improved standard of living for 
the North Korean people. And third is to manage the domestic social 
and political consequences of economic reform and opening up. All of 
the external and internal vulnerabilities discussed above are issues 
that will need to be addressed in finding a workable path forward. The 
multidimensional nature and complexity of the task is formidable.

At the present time there does not seem to be any consensus on the 
formula that would succeed in permitting these three transformations 
to take place in a coherent way. There is neither consensus internally 
in the DPRK nor externally among the governments participating in the 
six-party talks process. In the absence of this consensus, the 
six-party talks are not likely to make headway in reaching agreements 
on practical measures, even if they recommence in a serious way. 
Viewed from this perspective, the decision by the DPRK leadership to 
put its military ambitions ahead of its economic aspirations seems to 
represent a major gamble.

Can the DPRK retain a nuclear threat capability and develop an economy 
that can sustain the welfare of the North Korean people and long-term 
political stability? The choices made by governments and other 
stakeholders in the coming weeks and months will determine the 
ultimate answer to this question.

(...)

ASSESSING ALTERNATIVE FUTURES
There are a number of possible paths for the future of the DPRK 
economy. The earlier analysis suggests that the choices made by 
governments and the ways that other stakeholders pursue their 
interests and respond to a changed environment of opportunities, 
constraints, incentives, and disincentives will determine the future 
course of history on the Korean peninsula. This section explores the 
economic implications of alternative futures based on key choices that 
will have to be made by major players.

There are three broad paths that could be taken into the future from 
the perspective of the DPRK leadership.

1. One is continued escalation and confrontation. Under this scenario, 
the DPRK's decision to return to the six-party talks could result in a 
failure to reach agreements through negotiations and a further process 
of escalation with the DPRK claiming that the failure was not their 
fault, and taking further steps to try to convince the international 
community to accept the present regime remaining a nuclear power 
indefinitely.

2. A second path is a choice by the DPRK to delay and defer. Under 
this scenario, the DPRK could use the six-party talks process to 
engage in extended discussions at the working group level. These 
discussions could address technical issues involved in reaching 
agreements on a verification mechanism for dismantling its nuclear 
weapons programs, on other military programs sanctioned by the United 
Nations, and on an economic aid package to bridge time to negotiate 
with a new US administration following the 2008 elections. In this 
case it can be expected that no substantial progress would be made, 
but the DPRK could choose to continue to participate in the 
negotiations process in the hope of eroding the consensus in the 
Security Council on the sanctions and their implementation, exploiting 
differences in positions of other parties, and improving the DPRK's 
bargaining position for more serious negotiations later on. Ambiguity 
is likely about whether the DPRK's ultimate objective is to secure 
acceptance as a nuclear state or to secure a better bargain in giving 
up its nuclear and other military programs; dealing with this 
ambiguity can be expected to be a major issue for the other parties in 
this scenario.

3. The third path is one of serious negotiations now toward 
implementation of the September 19, 2005, Joint Statement and removal 
of sanctions imposed by the Security Council. Under this scenario, the 
DPRK leadership would have come to the conclusion that now is the time 
to strike a bargain for a different future, both because of the 
pressures being brought to bear under the UN sanctions and the belief 
that it is possible to obtain security guarantees and economic 
assistance that will meet the DPRK leadership's fundamental 
requirements for regime recognition and a process of transformation on 
multiple dimensions that will be politically manageable.

It is also possible to imagine other post-test scenarios that would 
not be driven by the choices of the DPRK leadership, but by other 
factors. These include the various scenarios of an internal political 
breakdown that could be triggered by a coup, social unrest, or 
unforeseen incapacitation of Kim Jong Il's leadership. They also 
include the possibility of military conflict that could arise from 
miscalculations in an escalation of confrontation scenario, or a 
nuclear accident, or other development that triggers new forms of 
engagement and actions altogether. These scenarios are not explored in 
this paper, but need to be recognized as having potentially very 
significant negative economic consequences for the DPRK as well as 
transformational political and security consequences.

(...)

[Here follow more details as to how the three scenarios might play out 
in terms of External Economic Considerations (Trade, Aid, Investment, 
Access to Financial Services), Internal Economic Considerations 
(Growth, Allocation Efficiency, Equity, Reforms, Corruption) and 
Implications for Policy. We encourage readers to consult the full 
paper at www.stanleyfoundation.org. -- CanKor.]

CONCLUSION
For both the DPRK and the international community, the stakes are high 
in the post-test world. Depending on the choices made by stakeholders 
both inside and outside the DPRK, the future path could be highly 
destabilizing or highly transformational with positive outcomes for 
regional security and economic prosperity for the North Korean people. 
Viewed from an economic perspective, the implementation of UN 
Resolutions 1695 and 1718 will be both difficult and problematic. But 
the potential impact on the North Korean economy of a well-managed 
sanctions regime on military programs and military industries, 
combined with a well-designed economic development strategy and 
support packages for reforms and investment, could be huge.

Such a transformational security and economic process would require 
political dexterity among the major stakeholder countries and 
understanding of the difficulties that the DPRK would face in making 
internal adjustments required.

Facilitation and support will thus be needed both in the realignment 
of the external environment and the management of domestic change. 
While the six-party talks framework is an important tool in this 
process, the active involvement of the Security Council is also now a 
factor. Because the challenges involve interests at the global, 
regional, and national levels, balanced and thoughtful statesmanship 
will be needed in the period ahead. The advent of a new 
secretary-general at the United Nations provides an opportunity to 
reshape the future role of the United Nations in providing a neutral 
facilitating contribution to the diplomacy that will be needed in the 
coming months and years. Engagement strategies will need to be 
coordinated and linked in meaningful ways to the diplomacy.
*************************************************

End CanKor # 278

*************************************************

PLEASE NOTE: Until we are able to update the www.CanKor.ca website, 
readers are advised that this and previous issues of the CanKor Report 
may be found at http://www.nautilus.org/pipermail/cankor/.

To subscribe or unsubscribe, please go to the following web address: 
http://www.nautilus.org/mailman/listinfo/cankor.

CanKor is a reader-supported e-publication and website. We issue a 
receipt for all donations received. Contributions may be made in the 
following ways:

BY CREDIT CARD: Visit our website www.CanKor.ca, and click on the 
"Make a Donation" button. That will connect you to PayPal, a site with 
"military-strength encryption", where you will be able to pay in 
Canadian, US or Australian Dollars, as well as Euros, Pound Sterling 
and Yen.

BY CHEQUE: Please make cheques payable to "Weingartner Consulting" 
(NOT/not "CanKor", please) and mail to: Weingartner Consulting, 13 
Westview Dr., Callander, ON, Canada, P0H 1H0.

FOR INSTITUTIONAL SUBSCRIBERS: Please let us know if you wish to 
receive an invoice prior to sending us money.

CanKor is an electronic information service for readers interested in 
the issues of peace and security on the Korean peninsula, published by 
Weingartner Consulting. Views expressed on the CanKor website or 
weekly digest are those of the respective authors, and do not 
necessarily reflect the official policies or positions of CanKor or 
Weingartner Consulting. CanKor accepts no liability for inaccuracies, 
errors or omissions.  Copyright of all items listed or reprinted rests 
with the original publishers.  CanKor provides links to originals when 
available.
Editor: Erich Weingartner; Managing Editor: Miranda Weingartner; 
Research: Marion Current, Ilene Solomon, Danielle Goldfinger; Web 
developer: David Seguin. Our website (www.CanKor.ca) is hosted free of 
charge courtesy of Kaizen Denki Incorporated 
(http://www.kaizendenki.com).