Market-Enhancing Governance on the Korean Peninsula: The Role of Credibility and Transitional Institutions

Abstract

IntroductionRecent news about economic and political developments in North Korea give -not for the first time-occasion to confusing speculation about the future development path of the Kim Jong Il regime. While optimists celebrate the recently concluded six-party talks in Beijing as a desirable breakthrough to politically contain the country, pessimists interpret the outcomes of the negotiations as a diplomatic triumph of North Korea, because the regime is implicitly allowed to continue its nuclear weapons program (Eberstadt, 2005). Similarly, the 2002 economic reform measures, such as radical increases of rents, wages and particularly prices for basic goods and services, a drastic depreciation of the North Korean won, the dissolution of rationing systems, and the gradual emergence of private markets have given rise to controversial interpretations. Again, skeptics such as Eberstadt (2004) suggest that recent reforms represent just another way of waiting for Godot. Optimists, on the other hand, argue that North Korean authorities have recognized the need for sustainable economic growth and hence market-friendly reforms (Cargill and Parker, 2005; KIEP, 2004).Most outside observers, however, agree that the regime-preserving reforms under the current system of juche (principle of self-reliance), the military-first approach, and the deficient planning system will inevitably lead to further economic decline. This will force the North Korean leadership at some point to choose whether to allow the economy to collapse and consequently to risk its own political survival or to seek to maintain its power through genuine, though gradual economic reforms. The realization of the second option, however, presupposes the willingness and ability of the leadership to adequately change, adjust or re-interpret the predominant juche ideology. Although recent developments show weak signals that an ideological shift may gradually become possible, its realization does not appear to be feasible at present. Hence, in the short-term, the continuation of the familiar muddlingthrough approach must be expected.Over the medium-term, however, a gradual-reform scenario-particularly one that focuses on inter-Korean economic cooperation-does not seem to be too unrealistic. And for political reasons, such a policy option will be more feasible than alternative development pathways: (i) a focus on economic cooperation will be a politically less sensitive area of reform (at least at early stages of cooperation); (2) a gradual opening could help the North Korean leadership to maintain control over economic transactions; (3) gradual reforms may allow North Korean authorities to suitably adjust the ideological foundation and to propagate a socialist market-based economy, North-Korean style; (4) gradual engagement would reduce the risk of economic collapse in North Korea; and (5) a gradual approach may also be welcomed by South Korea, because it would contribute to a peaceful rapprochement and avoid the adjustment costs of a collapse or big-bang scenario which would imply rapid unification.This essay focuses on such a gradual-reform scenario in which effective progress in inter-Korean reconciliation can be achieved through incrementally improving economic cooperation. Major emphasis is given to the role of political credibility and the task of building transitional institutions, confidence, and eventually a market enhancing, though possibly transitional governance structure. It will be argued that gradual improvements of economic cooperation additionally require some specific policy and institutional reforms in North Korea.These needs for institutional and policy reform will be discussed under the assumptions that (i) regime survival is the key objective of North Korean leaders; (ii) authorities recognize that economic opening and domestic reform become increasingly necessary to avoid economic decline and political collapse; and (iii) maintaining peace and political stability on the Korean peninsula is the overall objective of all stakeholders. …