The past decade has witnessed a considerable deterioration in the North Korean economy. The country has been facing food shortages at least since the early 1990s and is well into a famine of unknown magnitude. Although the status quo is unsustainable, there are many possibilities for the future. The current regime (or some successor) could undertake the economic and diplomatic moves necessary to stabilize the economic situation and end the famine. Reform of the North Korean economy would have two profound effects: first, there would be significant increase in exposure to international trade and investment (much of this with South Korea and Japan, two countries with which North Korea maintains problematic relations); and second, changes in the composition of output would be tremendous, and would require literally milJions of workers to change employment.' Both developments could be expected to have enormous political implications, or alternatively, these implications could present significant, perhaps insurmountable, obstacles to reform under the current regime. Indeed, North Korea's reform path would be more difficult than the ones traversed by China and Vietnam, Asia's two other major transitional economies. At the time they initiated reforms, China and Vietnam had more than double the share of population employed in the agricultural sector tlian North Korea apparently has today, and their reform strategies were made possible by the existence of this enormous pool of low-productivity labor. The freeing of agricultural prices has caused a large rapid increase in productivity and supply which has permitted the release of excess labor to other activities, in particular to the emergent non-state-owned light manufacturing sector. (In theory, this sector could then be taxed to provide the resources necessary to cushion the restructuring of the old state-owned heavy manufacturing sector. In reality, little progress has been made in restructuring state-owned enterprises in either China or Vietnam.) This agriculture-driven transition path is simply not available to North Korea, which in economic terms more closely resembles some of the economies of Eastern Europe than it does China or Vietnam (see Table 7.1). The second hurdle that North Korea faces is ideological. This can be seen when considering the case of Vietnam. The North Vietnamese government and their Vietcong allies defeated the South Vietnamese government in a civil war, allowing them to claim an ideological monopoly in the united Vietnam. Likewise, while China has contended with the rump of Taiwan, no one seriously has claimed that the Taiwanese historically represented an ideological threat to the Chinese government. The point is that reformers in both China and Vietnam had been relatively free to construct tortured rationalizations about how their market-oriented reforms were what Marx, or Mao, or Ho really had in mind. The ideological terrain faced by the current North Korean regime is very different. Rather than monopolist purveyors or dominant definers of national ideology, the North Koreans clearly are junior partners, both in size and achievement. Moreover, the dynastic aspects of the Kim regime make it even more difficult for the son to disavow the legacy of the father. And while the ideologues of Pyongyang can certainly try to reinterpretjuche to mean market- oriented reform, the existence of a prosperous, democratic South Korea makes their task very difficult indeed. After all, why be a second-rate imitation South Korea when one can head south and be part of the real thing? This, of course, raises a third point. Reform would mean vastly increased exposure to the outside world, in particular to South Korea and Japan.3 While today's North Korean economy has unexploited latent potential, its isolation means that there is no institutional mechanism to transform this latent potential into products that the rest of the world would want to buy. Even in the case of China, a significant part of the vitality of China's international trade sector can be attribut d to foreign-invested enterprises, which account for as much as 40 percent of Chinese exports.4 In prosaic terms, North Korean enterprises need blueprints, worldwide distribution, and marketing networks. Foreign direct investment (and through it an infusion of new technology and management) would undoubtedly playa key role in creating this institutional linkage between potential output and world markets. However, the most likely investors in North Korea are South Korean and Japanese firms, two countries with which the North's relations are troubled. U.S. economic sanctions are a disincentive for potential investors in the DPRK of all nationalities. It is unlikely that either Japan or the United States would normalize relations with North Korea without significant improvements in NorthSouth relations. Normalization with Japan would permit the Japanese investment guaranty agency to insure Japanese investments in North Korea and pave the way for mainstream Japanese firms to make large-scale investments. Normalization with the United States would permit the termination of the remaining sanctions and the disincentive it presents to potential investors. Even with the right policies," a series of diplomatic tumblers would have to fall into place for such a reform strategy to work. As hard as it may be for an economist to admit, this analysis suggests a case for the primacy of politics over economics in resolving North Korea's crisis. Moreover, the Asian financial crisis has made Pyongyang's tasks even more difficult. The decline in dollar production costs throughout Asia, together with rising bankruptcies, means that purchasing existing assets has become more attractive to foreign investors relative to establishing new greenfield facilities. In other words, if one wants to manufacture garments, there is no reason to build a factory in North Korea when you can buy an existing one in Thailand (where you are already familiar with local laws and customs) at fire-sale prices. Moreover, the primary potential investors in North Korea, namely South Korean and Japanese firms, are in dire straits themselves, and their banking systems are unlikely to want to lend to speculative ventures in North Korea. Of course, this may simply mean that the crisis will not be resolved happily. Maintenance of North Korea as an independent state would involve varying mixes of domestic economic reform and external support and could imply varying degrees of national political autonomy depending on the degree of reliance on outside support. That is to say, one could imagine a range of outcomes from significant reform, and possibly successful transition into a market economy with enhanced national political status and capabilities, to the economic equivalent of life-support and reversion to the status of a Chinese tributary state. Needless to say, this does not exhaust the possible range of outcomes. One must consider the possibility that the line of argumentation developed above is fundamentally wrong. In other words, the assumption that time is on our side, hence that the key issue is maintenance of the Pyongyang regime to buy time for some kind of "soft landing," may be incorrect. Instead, time may be on their side-the aversion of a military confrontation with the United States in 1994 has gi ven the North Koreans an opportunity to develop more effective means of extorting resources out of the rest of the world and pushing for unification on their terms. North Korea's August 1998 public announcement of its missile exports and test of a multistage rocket, and possibly renewed nuclear-related activities, perhaps give some indication of the country's future course.5 North Korea could continue to playa strategy of attempting to extort resources out of the rest of the world, offering to abandon weapons development and export, while continuing to make clandestine sales. The marriage of the rocket and nuclear programs would give the North Koreans impressive tools with which to intimidate their immediate neighbors and create proliferation nightmares for the Unite States. The truly frightening aspect of this reasoning is that this scenario would mean a continuation of the status quo. Ironically, given the previously noted obstacles to reform, such an externally high-risk strategy might be the path of least resistance to a weak and risk-adverse regime. The DPRK's intentions are critical in this regard, and recent signals emanating from Pyongyang have been mixed at best. Copyright © 2001 by the National Bureau of Asian Research. All rights reserved."