The Bear’s Lair: Is there a win-win with Rocket Man?

The announcement of a possible meeting between “Little Rocket Man” North Korea’s Kim Jong-un and President Trump has startled observers, with much of the American right, especially the neocon variety, worrying that Trump will prove incapable of outmaneuvering Kim. Yet an examination of the economic and political possibilities for North Korea and for Kim himself suggests there may be a deal to be done.

Thirty years ago, it was a fashionable theory that economic development was death to dictatorships, so that any autocrat of the right or left who wished to preserve his rule should maintain the strictest state control of the economy, ensuring that all its “commanding heights” were in state hands or, if the country was nominally non-Communist, in the hands of the ruler himself, his family and his close buddies.

The Soviet bloc appeared to be evidence that this strategy worked, as was Cuba, Albania, China and Vietnam. Of countries that were not technically Communist, Mobuto Sese Seko’s Zaire and Alfredo Strossner’s Paraguay showed that autocrats could maintain themselves in power indefinitely provided economic development was limited, without the economy collapsing altogether as it did in Baby Doc Duvalier’s Haiti. Countries that flirted with capitalism, like Yugoslavia, tended to find that the political control of the rulers dissolved as economic power became more dispersed.

Almost thirty years after the fall of the Soviet bloc, it is now however clear that totalitarian and dictatorial societies can survive economic advance and may even strengthen themselves through it by acquiring popularity among their enriched people. China is the clearest example of this, where the Communist Party retains a monopoly of power, even removing the term limits on President Xi Jinping, while the country has become immensely richer. Vietnam also has become much richer than it was and opened its economy to foreign investment and even considerable domestic entrepreneurial activity, while retaining one-party Communist rule. The Castros in Cuba have prolonged their rule while allowing small-scale entrepreneurship and welcoming tourism. Only in countries like Venezuela, where the dictators have prioritized barmy old-fashioned economics over the perpetuation of their rule, have they looked increasingly vulnerable.

Turning now to the incentives facing Kim, his #1 objective is surely the survival of his regime, and of himself as leader, preferably for several decades, given his youth. It is less clear how he can best achieve this. Outright collapse of the North Korean economy and mass starvation, or nuclear war with the United States, are both bad outcomes from his point of view, because both would destabilize or end his regime.

Complete stasis is the alternative chosen since the 1950s by his father and grandfather. This keeps the North Korean people poor but mostly not in crisis, while the United States and the West make no significant attempts to dislodge him and allow him to acquire the resources his regime needs by various illicit means. With Bill Clinton the Bushes and Obama in power, this worked admirably from the Kims’ point of view. However, with Trump as President the long-term viability of this approach is less certain. Also, the success of other authoritarian regimes in recent decades has opened up other possibilities. From Kim’s point of view, stasis is no longer the only viable option.

At first sight, the ideal role model for a North Korean opening is Vietnam. That country is extremely open to foreign investment, at least by major corporations, and has a functioning stock market with several domestic corporations listed on it, although the largest companies are majority government controlled. However, it relies heavily on foreign investment, most of which is for production exporting to rich-country markets – it is an exceptionally open economy, with exports almost 100% of GDP. Hence, even though its purchasing power parity GDP is $7,300, four times that of North Korea, it is not a model Kim may wish to emulate.

North Korea lacks several characteristics that make Vietnam successful. Its workforce is nowhere near as well educated, and is highly isolationist, with very little contact with the outside world – Vietnam’s workforce in contrast, had little more than a decade when outside contact was low, with a high level of contact (at least in the south) before 1975 and after the doi moi opening to the world, which began in 1986. North Korea is also hugely dependent on China, which takes nearly 90% of its exports, which are only around 15% of GDP.

Given the nature of North Korea’s workforce, and the discomfort of both its leadership and its people with international involvement, the Vietnam strategy is not available to them. It would involve a level of openness and foreign presence that would be dangerous to Kim, unacceptable to his supporters in the regime (who must somehow be kept on board) and disquieting to the North Korean people.

There is however an alternative route. At present, North Korea is unacceptably dependent on China, with whom it shares 90% of its limited foreign trade. With only one buyer and one seller, it is very unlikely that North Korea gets a fair deal in its trading relationships. However, Russia also shares a land border with North Korea, and in the past has had cordial relations with it. Russia’s heavy industry-oriented economy can make use of North Korea’s mineral resources, and it also has a substantial private sector (albeit mostly Kremlin-connected) that after 25 years of freeish-market operation can certainly provide know-how to North Korea on adaptation to the new world.

Russia under President Vladimir Putin has shown a strong wish to develop “satellite” economies in its “near abroad” with strong links to Russia, mostly for strategic reasons. Such a position does not require the degree of openness to international trade and the Western world that a Vietnam has, yet it can still result in considerable economic development from North Korea’s present position. Examples of such countries, with different degrees of development and dependence on the Russian economy are Kyrgyzstan, Uzbekistan, Tajikistan and Belarus.

None of these countries is free in the Western sense (Kyrgyzstan is the freest, Uzbekistan the worst) yet all of them are substantially richer than North Korea in terms of purchasing power parity GDP per capita, although in the case of Kyrgyzstan and Tajikistan the advantage is modest ($3,100 and $2,200 against North Korea’s $1,800.) Uzbekistan at $5,600 and Belarus at an astounding $17,000 are far richer than North Korea, yet both are unpleasant dictatorships with strong traditions of Soviet central planning. These countries’ economic openness varies roughly with GDP, with Belarus having exports around 55% of GDP and Tajikistan the lowest at 16% of GDP. All are more open than North Korea, none are as open as Vietnam.

It should be noted that North Korea has an enormous advantage over the Central Asian members of this quartet in its access to the sea, and hence to international trade routes. In addition to its new Russian orientation, North Korea could conduct limited experiments in non-Russian foreign investment, notably from its neighbor South Korea, but also from the West which would gradually open its economy to world commerce as a whole. The ability to do this would keep Russian and Chinese investors “honest” and prevent the undue domination of the North Korean economy by outside forces, which Kim and the North Korean people both want to avoid. Western bank credit would also be useful to lubricate the process, though World Bank assistance, with its useless and interfering “advice” is probably undesirable. North Korea’s ideal to aim for, therefore, its shimmering vision of a more prosperous future, is not Vietnam but Belarus.

To achieve a development of the North Korean economy and its re-orientation towards Russia, Kim probably needs two treaties not one. With Trump he needs a treaty ending sanctions on North Korea and allowing it to make arrangements with the Western private sector in its own interests. With Russia he needs a treaty of alliance and assistance, ideally funded by the Western banking system.

Both these treaties should be available, given goodwill and competent negotiating by Kim and his colleagues. The main sticking point will be North Korea’s nuclear and missile programs. Giving them up would do no harm for North Korea’s position in relation to the wider world. However, it might well shorten Kim’s life expectancy, since his military chiefs are very attached to those programs, and lose their sense of purpose, their position in North Korean society and in the long term, their funding if deprived of them. Ideally Kim would want North Korea to become a peaceful nuclear power, like Pakistan, say.

That deal is unlikely to be available to him — it would be too easy for North Korea to renege on the deal, after obtaining the lifting of sanctions and Western bank credits. Maybe an additional clause of the Russian deal could provide Kim with 24-hour protection by a crack team of Russian specialists. The Russians are, after all expert in such arrangements.

The Trump/Kim summit, if it happens, or indeed a 3-way Trump/Kim/Putin summit, offers a chance for a deal that is beneficial to all sides, and to the North Korean people. The incentives are there; the question is whether all sides are “smart” enough negotiators to attain an acceptable outcome.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)