This essay is part of a series, Pursuing Peaceful Coexistence with North Korea, that explores how the United States and South Korea can peacefully coexist with a nuclear North Korea. 

North Korea has faced enormous challenges in providing health and food security for its population since its economic collapse and famine of the 1990s. A principal reason was prioritizing state security in the military-first policy under Kim Jong Il and later advancing nuclear and missile programs under Kim Jong Un. Self-reliance ideology was another important factor. In addition, the unresolved Korean War and underlying North Korean perceptions of U.S. and international hostility cast a cold shadow over diplomatic and economic cooperation.

North Korean workers at an apparel factory in the Kaesong industrial park in North Korea on Dec. 19, 2013. South Korea shut down the complex in 2016 in retaliation for North Korea’s rocket launch and nuclear test. (Park Jin-Hee/Pool via The New York Times)
North Korean workers at an apparel factory in the Kaesong industrial park in North Korea on Dec. 19, 2013. South Korea shut down the complex in 2016 in retaliation for North Korea’s rocket launch and nuclear test. (Park Jin-Hee/Pool via The New York Times

Despite these realities, North Korea today is not the same as 25 years ago. The growth of North Korean markets and tolerance for private entrepreneurship and trading have altered the underlying social contract between state and society and the shape of the economy. By 2016, the private share of the economy grew to about a third of gross domestic product from essentially no role in the 1990s before the emergence of farmers markets. Since 2017, increased sanctions affecting the civilian economy and the border closure with China due to COVID have increased North Korea’s dilemma of meeting both human security and military security needs. While recent trade has increased with the weakening of COVID concerns and reduced implementation of sanctions by Russia and China, the overall amounts are small and not meaningful in meeting North Korea’s needs for human security and capital goods required for sustainable economic growth. A strategic decision by the United States and the international community to engage economically with North Korea could help address this dilemma and be instrumental in finding a new path forward for North Korea and its foreign relations.

Historical Context

When its economy collapsed in the 1990s, North Korea appealed to the international community for humanitarian assistance and normalization of relations. United Nations agencies, foreign governments and nongovernmental organizations provided significant aid, which helped stabilize the economy and address social distress. Also, North Korea adopted economic reforms, including enabling state-owned enterprises to make profits in 1997, reforming wages and prices in 2002, and legalizing markets in 2003.

However, international aid decreased as North Korea continued pursuing a weapons of mass destruction (WMD) program. Initially, the collapse of the U.S.-North Korea Agreed Framework deal in 2002, due to North Korea’s covert uranium enrichment activities, led to reductions in aid. Later, North Korea’s first nuclear test in 2006 brought most foreign aid to a grinding halt as well as the imposition of multilateral sanctions by the United Nations Security Council (UNSC) and increased national sanctions by the United States in particular. While these developments did not foreclose humanitarian aid or limited inter-Korean economic cooperation, they did hamper significant international support for addressing fundamental structural issues in the North Korean economy, especially regarding energy, agriculture and the financial system.

North Korea’s WMD program fundamentally shifted the country’s economic engagement with the outside world. After 2006, the United States and the international community used greater economic pressure rather than foreign assistance to influence North Korea’s behavior. This shift was accompanied by North Korea’s growing economic dependency on China despite China’s support for UNSC sanctions. However, the growth in Chinese trade and investments in North Korea, along with North Korea’s increasing economic marketization, domestic productivity and sanctions evasion measures, helped Pyongyang withstand the international pressure campaign.

Even after the COVID border closing swept away most Chinese economic support, North Korea has been able to cope through illicit sanctions evasion measures, like ship-to-ship transfers and cryptocurrency theft estimated at $1.7 billion in 2022. Still, these developments, including North Korea’s reinvigorated policy of self-reliance, have significantly degraded its civilian sector economy. This situation may be tolerable for the North Korean regime in the short term but is an unsustainable condition for the country in the longer term.

Current Situation

Today, North Korea’s supreme leader, Kim Jong Un, still faces the fundamental dilemma of protecting regime security from external threats while shoring up regime legitimacy among a population experiencing distress. Upon assuming power in 2012, Kim promised the people they would “never have to tighten their belt again,” which effectively tied the legitimacy of his rule to delivering improved livelihoods and economic development. Yet, despite his efforts, the government told its people in 2021 that they would have to tighten their belts again and submit to oppressive policies. Kim thus faces both domestic and external risks to regime security. Furthermore, North Korea’s present strategy of aligning its political and economic security with China and Russia could backfire due to the internal geopolitical and economic challenges facing both countries.

Within this reality, the question now for both Kim and the international community is how to chart a new path forward that can alter strategic calculations toward enhancing peace and stability in the region while enabling a more sustainable and secure future for North Korea. A reorientation of U.S. and international economic engagement policy toward North Korea may contribute to this goal.

Considerations for Proceeding on Economic Engagement

In the past, North Korea has been willing to engage on economic training and projects, both multilaterally and bilaterally, with the UN, foreign governments and NGOs. Many of these projects addressed North Korea’s economic development needs, such as the Kaesong Industrial Complex and Mount Kumgang tourism, and at a small scale (e.g., agriculture, water supply and sanitation, energy and reforestation) prior to the impact of sanctions and COVID. North Korea also prepared its own national plan for improving the Sustainable Development Goals in cooperation with the UN.

However, these experiences also reveal the political difficulties of addressing North Korea’s economic development and the reluctance of donors to provide funding while North Korea prioritizes military programs. Thus, it will be important to conduct negotiations with both political authorities and economic technocrats to agree on acceptable and practical ways to proceed with economic engagement in a manner that is very different from past experiences. This can include controls over how economic funds are used for the purposes intended and agreed restrictions on military expenditures in phased threat reduction negotiations.

To be successful, economic engagement requires mutual cooperation aimed at results that reflect both North Korean and donor partner priorities. While North Korea has substantial experience in administering humanitarian aid, it has limited experience with development assistance that involves policy dialogue, technical assistance and project implementation. An important early task will be reaching agreement on the modes and transparency requirements for expanded economic cooperation.

Shifting to Economic Engagement with North Korea

Shifting from a pressure policy to careful economic engagement would be a dramatic change that requires support from not only the U.S. national security establishment, but also the U.S. Congress and, more widely, key partners in East Asia. There are several reasons why such a shift would be in U.S. interests:

  • Sanctions, even augmented by the COVID-induced border closure with China, have not accomplished their intended purposes. They are being undermined by North Korean sanctions evasion and loss of support from China and Russia. Positive inducements need to be introduced into the policy mix to respond to current realities and to encourage new relations, trust building and cooperative threat reduction.
  • While geopolitical balance-of-power considerations currently dominate U.S. foreign policy in East Asia, these can be supplemented by building security communities of mutual benefits through nonmilitary, human and economic security cooperation to reduce the risks of armed conflict.
  • A recalibration of U.S.-North Korea relations that gradually expands economic engagement while maintaining necessary deterrence and adopting a cooperative threat reduction approach to future WMD negotiations would provide incentives for North Korea to reduce risks and reliance on sanctions evasion and for the United States eventually to consider redeploying military resources to meet other global and regional challenges.

Principles for a Future Economic Engagement Strategy

A future economic engagement strategy with North Korea should abide by the following principles:

  • A comprehensive framework for national security dialogue between the United States and North Korea should incorporate the latter’s human and economic security needs, especially food and health, with military security considerations.
  • U.S. and international financial and technical support for human security and economic infrastructure should be aligned with a parallel cooperative threat reduction program that enables a realistic phased approach to WMD negotiations.
  • Multiple donor partners with aligned pragmatic cooperative policies and objectives in support of future economic engagement should participate, starting with the United States, South Korea and Japan, but also including other like-minded countries and, ideally, at least China and possibly Russia.
  • Supported projects should be pragmatic and correspond to North Korean priorities as well as politically acceptable donor priorities.
  • If warranted, appropriate targeted sanctions relief linked to program objectives with snap-back provisions should be provided.
  • Clear mechanisms for financial administration and implementation cooperation and supervision, including guardrails for ensuring success and meeting indicators of progress in the threat reduction program, should be established. These should embody best practices of development assistance management and provide a basis for establishing effective working relations with counterpart government officials.
  • The program should begin modestly and expand as trust and practical considerations evolve.

Start with a Multi-Donor Trust Fund Administered by the World Bank

One potential approach is establishing a World Bank-administered Multi-Donor Trust Fund to support North Korea’s economic development. Under this mechanism, the World Bank would receive and administer funds provided by multiple donors to support development projects in North Korea. Trust Funds also finance technical assistance managed by World Bank staff and are implemented by the recipient country under World Bank policies and procedures. Both China and Russia are members of the World Bank and could participate as donors to the fund or, in the case of the Asia Infrastructure Investment Bank, as co-financing partners. This idea is not new, but it has never been given serious consideration by the U.S. government and other donors because of political concerns about North Korea’s WMD program. There is, however, ample experience for establishing Trust Funds for non-World Bank member states with the approval of existing members (e.g., the Palestinian Partnership for Infrastructure Development Multi-Donor Trust Fund). Linking the Trust Fund to an agreed comprehensive threat reduction program would create incentives for cooperation on the part of all participant countries.

If approved, a World Bank role would be established that fits the goals of the Trust Fund and scale of funding as agreed to by the donors and North Korea. The World Bank’s Board of Directors must approve the creation of a Trust Fund for North Korea as a nonmember state, which will need the support of at least the United States and Japan as the two largest shareholders as well as South Korea as a key stakeholder.

There are advantages to pursuing this approach:

  • The legal framing and scale of funding of the Trust Fund can be flexibly designed to fit the circumstances of North Korea and include appropriate guardrails to ensure alignment with the goals and concerns of the donors.
  • Financial burden sharing among the donors can reflect the political realities of funding approval in participating countries.
  • An oversight body can be established to include both donor and North Korean representatives.
  • Coordination with other programs, such as humanitarian assistance and the economic aspects of human rights advancement, could be facilitated.
  • Well-established World Bank procedures would be applied for project preparation and implementation as well as transparent accountability.
  • Trust building through the Trust Fund project could form a foundation for the evolution of North Korea’s relationship with international financial institutions and increase political support for expanding development assistance from member states.

Conclusion

A multilateral framework for advancing economic engagement with North Korea can address that country’s human security and economic interests while creating incentives to reduce tensions and increase international cooperation.

Brad Babson is a former World Bank official who has followed and written extensively on the North Korean economy since 1997. He currently serves on the advisory committee of the National Committee for North Korea and advisory council of the Korea Economic Institute of America.

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