1998 Congressional Hearings
Special Weapons
Nuclear, Chemical, Biological and Missile

Testimony of Nicholas Eberstadt
American Enterprise Institute for Public Policy Research
U.S. Policy Toward North Korea
Committee on International Relations
Hearing on "U.S. Policy Toward North Korea"
September 24, 1998

Mr. Chairman, Members of the Committee, distinguished co-panelists and guests:

It is an honor and a pleasure to appear once again before the Committee on International Relations.

Today I have been asked to discuss the state and prospects for the economy of the Democratic People's Republic of Korea (DPRK, or North Korea). I have requested some of my studies on this subject be entered into the record for this hearing. But before offering my own analysis, I should emphasize that all outside analyses of North Korean economic conditions are severely limited by both a lack of understanding of that system, and a lack of information about it.

The ability of Western specialists and economists to understanding the workings and performance of centrally planned, Soviet-type economies has always been far from perfect. Recall the longstanding effort by the U.S. intelligence community to describe and explain the development of the USSR's economy. With the benefit of hindsight--and post-Cold War revelations--it is now widely agreed, I think, that many of the intelligence community's key estimates of Soviet economic performance were seriously off the mark, perhaps for decades. Yet our intelligence community's quest to describe the Soviet economy absorbed enormous resources and marshalled considerable analytical talent: indeed, it may well have been the largest single social science research project in the history of humanity!

Far less effort, of course, has been focused upon the quest to describe the North Korean economy. By comparison with students of the North Korean economy, moreover, analysts of the closed and secretive Soviet system were virtually awash in facts and figures. For three and a half decades--since the early 1960s--North Korean authorities have endeavored to enforce a "statistical blackout" upon their country. They have been remarkably successful in that endeavor. The world may be in the midst of an "information explosion", but the fact is that the North Korean government today does not regularly release even a single series of data pertaining to any aspect of its economy or society. While some numbers have been cited, and statistics divulged, by the Pyongyang government on an episodic an irregular basis over the past several decades, even these tidbits are problematic, and must be treated with the utmost care. As an official from the DPRK Central Bureau of Statistics cautioned me back in 1990, he and his colleagues refereed to their own output as "rubber statistics"--figures that could be stretched or squeezed as circumstance dictated.

As you will appreciate, all this means that there is a large measure of guesswork in any outside assessment of the North Korean economy. At the moment, the very best we can hope to do is to peer through a glass darkly. Consequently, the conclusions I share with you today should be understood to constitute judgements--and they should hardly be taken as categorical.

With those caveats in mind, I would offer the Committee four observations.

First: while North Korean authorities now acknowledge that their economy is in parlous straits, and admit to both steep declines in output and the emergence of starvation, they insist these crisis are due to factors beyond their control. In particular, they blame their current economic difficulties upon the collapse of the Soviet bloc (which had been bolstering the DPRK with aid and subsidized trade) in 1989-91 and a series of freak natural disasters--floods, tidal waves, and the like--from 1995 onwards. But contrary to protestations by Pyongyang, neither bad weather nor bad luck can explain away the disastrous performance of the contemporary North Korean economic system. In the main, that economic system has been battered--and continues to be battered--by self-inflicted injuries.

By a variety of indications, the North Korean economy was arguably already the world's most highly distorted economic system in the late 1980s: that is to say, before the final crisis of Soviet socialism. Those disfiguring distortions were the consequence--indeed, the intent--of official North Korean policy and practices. Yet those practices and policies were not merely disfiguring: they were positively crippling. For by the late 1980s the North Korean economy appears to have settled into something like stagnation--or worse. Soviet bloc specialists on the North Korean economy, for example, had concluded that the DPRK's output in many sectors had peaked, and was declining, before the "revolutions of 1989".

Indeed: when one reflects upon Pyongyang's distinctive approach to economic affairs--its insistence upon underwriting an astonishing degree of militarization; its penchant for "planning without facts"; its fetish for what it labels "investment", irrespective of the productive returns on such expenditures; its continuing attempt to de-link price relations from resource allocation decisions, and its largely successful attempt to demonetize its domestic distribution of goods and services; its protracted war against its own consumers; its tendency to treat all foreign loans as concessionary donations; and its allergic reaction to generating export earnings--it is not difficult to understand the pattern of economic failures the DPRK has thus far experienced.

The Soviet collapse and adverse weather conditions, to be sure, were negative--not positive--influences on recent North Korean economic performance. But they do not explain the dismal long-term trends that have gripped the North Korean economy, any more than the eruption of the volcano at Pompeii accounted for the decline and fall of the Roman empire.

Since North Korea's food situation has attracted so much international attention and generated so much humanitarian alarm, it is worth noting that how directly North Korean governmental policies are linked to the country's current nutritional distress. By the estimate of various relief agencies and "North Korea watchers", the acute emergency now underway in the DPRK could be substantially relieved by the import of about half a billion dollars a year's worth of grain, energy products, and spare parts. To place that figure in perspective: it would amount to about $25 per person for the population of North Korea. The telling fact is that the foreign trade regimen the North Korean government so doggedly maintains is evidently incapable of generating even this modest sum. At the same time, to judge by international trade data, North Korean authorities are cleaving to a particular policy of food "self reliance": purchasing no more food from aborad than foreigners are buying from North Korea. For the DPRK, such a posture is woefully misguided. Like other urbanized Northeast Asian countries with limited arable land and relatively short growing seasons, North Korea should be a net food importer, paying for those imports with exports of non-agricultural goods and services. Unfortunately, North Korean authorities have stubbornly--indeed, resolutely--rejected any such strategy to date. Given their insistence upon implementing a peculiarly destructive set of trade policies, it was only a matter of time before the North Korean people were visited by nutritional hardship. With such policies and practices, eventual arrival of nutritional hardship itself was an entirely predictable occurrence.

Second: although a variety of changes in rules and practices within the North Korean economy can be identified--some of them dating back to the early 1990s, or even earlier--this corpus of changes cannot accurately be described as constituting a serious movement toward "policy reform"--at least as that term is understood in the West.

"North Korea watchers" have taken note of a number of developments that seem to betoken a measure of economic relaxation, or economic pragmatism, on the part of North Korean authorities in recent years. Since the early 1990s, for example, the North Korean government has promulgated a series of edits and laws explicitly designed to attract private direct investment from abroad. The spread of non-government "farmers' markets" has been tolerated, and strictures about farming techniques have reportedly eased. North Korea's party journals have entertained timid suggestions that aspects of the official economic doctrine might possibly merit re-examination. And just earlier this month, a newly released revision of the DPRK constitution afforded a few more formal protections to the private property of North Korean citizens.

It is one thing to acknowledge that these steps, and others, represent distinct changes in official policy and practice. It is quite another to divine their significance. While these signs of movement may seem noteworthy in a system that outsiders deem to be rigid and unchanging, they beg the question of intent. Should these changes be viewed as the beginnings of a conscious and deliberate redirection of policy, or are they simply concessions to exigence, as a brittle polity sags under the weight of its own troubles?

We cannot answer this question with certainty or absolute confidence. But we can point to a number of considerations that should weigh upon our interpretation of available evidence.

For one thing, if the changes enumerated above were actually intended as efforts to cope with the country's economic challenges, it is self-evident that those measures--which amount to thus far to little more than modest, opportunistic tinkering--have been woefully inadequate for addressing the enormous task at hand.

Second, despite the episodic reshuffling of personalities within the country's formal leadership, North Korea's hierarchy has been marked over the last generation by fundamental continuity--most importantly, in the presence of Kim Jong Il, now head of both party and state. In other Communist systems, by contrast, significant changes in policy have typically been accompanied by significant changeovers in top-level personnel. (We may note, further, what did not occur earlier this month at the DPRK's tenth Supreme People's Assembly: Kim Jong Il may have been officially invested with the top position in the North Korean state, but he neither unveiled nor even hinted at a blueprint for extricating his country from its dire present predicaments.)

Finally, we should note that it is not even clear that the North Korean leadership today would understand how to go about embarking upon an economic re-direction, even if they were so inclined.

Earlier this year an official from the World Bank visited North Korea and met with senior decision makers in the fields of banking, finance, and foreign trade. In the course of his meetings, his interlocutors asked him a number of arresting questions. At one point, a top economic official asked him briefly to explain the difference between "macroeconomics" and "microeconomics"; on another occasion, he had to define the terms "market economy" and "centrally planned economy". This is, of course, only a single anecdote--but I believe it speaks to a much more profound situation. North Korea's current leadership may quite possibly be more economically naive than any other leadership configuration to govern a country in the period since World War II. Such economic innocence tends to encourages resistance to new economic directions in the face of crisis, not least by confounding diagnosis and prescription.

Third: for all the deliberate mystery attendant to North Korean economic strategy, I believe that its fundamental elements can be described, since they have been revealed through action over many long years.

However bizarre North Korea's economic approach may appear to those in the outside world, I would suggest that it is nevertheless governed by an internal logic--albeit a logic with which Westerners are almost entirely unfamiliar. For the DPRK's economic strategy is subordinated to its political strategy, and its political strategy operates according to priorities and imperatives that are not in keeping with contemporary international sensibilities.

An over-arching political priority for the North Korean project, for example, is the quest to unify the Korean peninsula on its own terms: that is to say, under an "independent, socialist state" governed from Pyongyang. (Despite its heavy current troubles, the DPRK has not shown any convincing indications of having abandoned that question or having foresworn that dream.) North Korea's military investment policies, its trade policies, and other aspects of its economic policies devolve directly from that imperative. Similarly, Pyongyang's self-conception as the vehicle of destiny for a long-aggrieved Korean people directly influences that government's approach to international economic relations. In contradistinction to earlier times, when Korea paid tribute to "great powers" like China, North Korea today appears to be intent upon extracting tribute from the international community--not as charity, but as its rightful recognition and reward. That predisposition may help to explain North Korea's continuing concentration upon eliciting aid from the outside world--and its parallel disinterest in developing avenues of mutually beneficial international trade.

Finally: it may be worth observing that severely beleaguered economies can collapse.

An aphorism circulating in certain circles in Washington today has it that "governments collapse; economies don't". That aphorism is disproved by events within living memory. In 1945, the economies of both Germany and Japan collapsed--before, not after the collapse of their wartime regimes.

Though "economic collapse" is an evocative and elastic term, one useful definition involves the breakdown of a country's food system--the dissolution of the rules and arrangements by which people trade their labor for food. Those rules and arrangements broke down in both Germany and Japan before the end of World War II. In consequence, for millions of ordinary people, life became a terrifying daily hunt for food. Since city people are poorly situated for such a hunt, a great de-urbanization commenced. Levels of urbanization in both West Germany and Japan did not re-attain their previous levels until years after the war.

It is too soon to say whether North Korea will eventually suffer an economic collapse of its own. We must note, however, that economic collapse per se is not a theoretical impossibility--and that North Korea's current economic trajectory smacks of a perilous and unabated economic decline that has yet to be seriously addressed by the county's leadership.

Thank you.