Engaging North Korea: The Moral Hazard Factor

The hidden pitfalls of Eric Schmidt's trip to North Korea 

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Google Executive Chairman Eric Schmidt (second from the right) visit Kim Il-Sung University in Pyongyang on January 8, 2013. (Reuters)

Some, including The Atlantic's own Brian Fung, have wondered at exactly what Google executive Eric Schmidt hopes to accomplish during his visit to North Korea this week. The aims of the two people traveling with him, meanwhile, are far less mysterious.

On Tuesday, it was reported that former U.S. Ambassador to the U.N. Bill Richardson -- the former New Mexico governor and one-time Democratic presidential candidate -- along with longtime Richardson advisor Tony Namkung, were going to North Korea on something of a rescue mission (a "humanitarian mission," as a statement I received from Richardson's office put it). Kenneth Bae, an American citizen and tour guide, has been held by the North Korean government since November 2012. Richardson and Namkung have served as self-appointed hostage negotiators during a host of similar incidents. Their goal is to extract Bae. Since the North Koreans have already won a visit from Richardson, a powerful ex-politician, and Schmidt, a high-profile captain of American industry, Richardson and Namkung are likely to be successful. North Korea's leaders can use a fawning visit from a couple of name-brand American personages to project an image of control, stability and legitimacy both inside and outside of its borders. Meanwhile, the American visitors will achieve a tangible objective: the release of an American citizen, and the creation, in Schmidt's case, of high-level contacts in one of the most closed and opaque governments on earth.

But who else do these efforts, which are broadly aimed at fostering engagement with North Korea, actually benefit? Even in the case of something as straightforwardly helpful as humanitarian aid, the answer isn't exactly clear. Schmidt's visit raises a longstanding set of issues about the outside world's relationship with the Hermit Kingdom. Schmidt, Richardson and Namkung might believe that their efforts are hastening North Korea's eventual liberalization. But their trip calls to mind William J. Dobson's concept of "the dictator's learning curve" -- the idea that successful autocracies (and North Korea certainly qualifies) can adapt to prevailing realities and challenges in order to further entrench the existing system. As Adrian Hong, a strategic consultant and Pegasus Strategies managing director puts it, "the North Koreans are very good at working outsiders in a way that leaves them holding all the cards."

This trip could be a case in point.

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From one perspective, even the best-intended cooperation with the North Korean government has had the effect of deepening the country's misery. The U.N.'s World Food Program has nothing but altruistic aims in North Korea -- namely, the alleviation of hunger in a country still reeling from a 1990s famine that killed as many as two million people. Yet the WFP's apparent independence from any of the potentially explosive politics of the Korean peninsula is exactly what makes its presence in the country so problematic. The North Korean government has eagerly exploited the U.N.'s understanding of food aid as a primarily humanitarian matter -- as Marcus Noland and Stephan Haggard of the Peterson Institute for International Economics have explained in their work on WFP aid in the country, North Korea has had some success in dictating the terms by which the international community can monitor the aid's end uses.

"Any aid we provide North Korea or any other government for that matter, acts as implicit balance of payment support," said Noland in an interview. "[North Korea] offsets a lot of the aid flow by reducing commercial imports...the problem is that given the expenditure preferences of the regime, the thought is that some noticeable share of this diversion ends up going to activities that the donors don't appreciate, like the military." Monitoring the use of aid is extremely important, and, thanks to the regime's recalcitrance, existing arrangements are far from ideal.

The WFP operates in a way that arguably strengthens the world's most oppressive government. WFP aid can even be thought of as a kind of unearned subsidy -- or as a subsidy that the North Korean government was able to extract through its continued bad behavior. After all, the estimated $3 billion to $4 billion North Korea has spent on its missile program over the past two years could easily have resolved the country's food security problems. Pyongyang's arrangement with the WFP gives the North Korean government leverage over an international community eager to alleviate large-scale human suffering, while freeing its resources for projects that arguably prop up the regime and destabilize the southeast Asian security environment. The less North Korea cares about solving a chronic and man-made food security crisis, the more the international community feels compelled to disconnect political and humanitarian concerns in dealing with the Hermit Kingdom.

Yet for an international community that would like to help the North Korean people while isolating and restraining their government, the existence of moral hazard is where the dilemmas begin -- and not where they end.

"Elementary school children in Chongjin who have absolutely no control over their government shouldn't be penalized because they have such an odious regime," says Noland. "But people who take that position have to be intellectually honest. Implicitly you are going to be supporting the North Korean military machine to a certain extent."

More importantly, simply freezing assistance to North Korea also elides the possibility of smarter, more targeted humanitarian aid. Adrian Hong says the most effective assistance comes from NGOs that "tailor aid to things that aren't dual use" -- wet noodles, for instance, have to be consumed quickly before spoiling. The money to be made appropriating or re-directing aid for pregnant women or infants is similarly limited. Noland says that rice is "most likely to be diverted to elite or military consumption" compared to other nutritious grains, like barley or millet -- "poor people's food" according to North Korean dietary tradition (One NGO that Hong says is particularly adept at operating in North Korea is Global Resource Services, which Jeff Baron profiled for The Atlantic last month).

Economic and humanitarian contact doesn't have to play into the narrow interests of the 3,000-4,000 elites who run North Korea, and benefit from its part-monarchic, part-Stalinist system of government. The question is whether it is possible to minimize the consequences of engagement while creating the kind of inroads into the North Korean economy, and into North Korean society, that hasten the system's ultimate decline.

There is abundant reason to be skeptical that Richardson, Namkung and Schmidt's trip will accomplish this.

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Richardson is traveling to North Korea with Tony Namkung, a Korean-American academic and one of the earliest and most influential American proponents of engagement with Pyongyang. Namkung has built a career out of being less skeptical of North Korea than prevailing elite opinion, and his participation reflects some of the more troubling aspects of the trip. Even if Namkung honestly believes that warm relations with Pyongyang can lessen the dual crisis of North Korean bellicosity and internal oppression, his dealings with Pyongyang suggests an usual level of faith in the Kim regime. It is a trust that Richardson seems to share, by virtue of his long relationship with Namkung. And if Schmidt didn't share it, it's doubtful he would be in North Korea right now.

As president of the Asia Society in the early 1990s, Namkung cultivated several high-level contacts inside the North Korean government after the breakup of the Soviet bloc, and served as a back-channel between Pyongyang and the State Department (and the CIA) during U.S.-North Korean negotiations in 1993. As detailed in Brown University Professor Leon Sigal's Disarming Strangers: Nuclear Diplomacy With North Korea, Namkung's informal diplomacy had more than a passing impact on the 1993 U.S.-North Korean joint statement in support of "peace and security in a nuclear-free Korean Peninsula." Shortly after, he became a trusted adviser to Richardson, and later served as the State Economic Development Department's chief Asia consultant when Richardson was governor of New Mexico. As a result, Richardson made more visits to North Korea than any governor of any southwestern American state.

It isn't accurate to call Namkung a North Korea apologist. He has been an advocate for and a facilitator of economic and political contact during a period when the North Korean government has developed nuclear capabilities while starving two million of its own citizens and generally failed to moderate or reform itself -- but only out of the belief that this was the best available policy. Like Richardson, Namkung seems convinced that regional peace and reconciliation are better served through engagement and more open relations than through a well-worn policy of confrontation. Yet Namkung has sometimes attempted to make the North Korean government appear more palatable than it actually is, a position consistent with his and Richardson's attempt to present Pyongyang as a good-faith economic, security and human rights partner.

The devastating 1990s famine is Namkung's most glaring blind spot. At the height of the famine, Namkung told a meeting of the Social Science Research council that reports of widespread food shortages in North Korea had been overblown:

In one key example, the panelists disagreed on the severity of this year's famine in North Korea. Merrill pointed to evidence of "thousands dying," but Namkung called for care in reading famine reports. "My [June 1996] visit included hunger experts, and we didn't see much," he said. "I haven't seen any examples of distress in ten trips," Namkung added. "I assume the problem is severe, especially as you go north into the mountains and villages. It's likely a regional problem, though, and not as bad in urban areas."

When later faced with evidence of how wrong he had been, Namkung pivoted to arguing that the famine was evidence of the decentralization of the state food distribution system -- and not, as is typically thought, the result of shortages created by the end of Soviet subsidies and the system's crippling over-centralization. "If this theory is correct, then perhaps the 'Arduous March' the North Korean people have been subjected to for over a year now is actually a way to make the economy more rational and efficient" (see page 233). For Namkung, the death of 2 million people was actually a symptom of North Korea's progress.

In recent years, Namkung has gone from serving as a political and diplomatic operator to a consultant eager to capitalize on his decades' worth of contacts and expertise. In 2008, North Korean officials used Namkung to voice their desire to begin exporting clothing that could be sold at American Wal Marts. Namkung is also owner of Murray Hill Consultatnts Llc, "an advisory services firm assisting corporations on both sides of the Pacific in the areas of corporate strategy, market access and governmental relations."

Namkung has also acted as a kind of freelance hostage negotiator in concert with Richardson. According to one eyewitness account, in 1996, Namkung was present when Richardson convinced the North Korean U.N. ambassador to free captured American citizen Evan Hunziker in exchange for unspecified American concessions. In 2007, they negotiated the return of remains of American soldiers killed in the Korean War, and Namkung told an audience at Calvin College that he and Richardson helped arrange the return of two American journalists captured in North Korea in 2009. They were freed after former president Bill Clinton made a controversial trip to Pyongyang and appeared with Kim Jong Il.

If viewed ungenerously, Namkung and Richardson have served as enablers for the particularly cynical North Korean policy of ransoming American citizens in exchange for gestures that legitimate and empower the ruling clique. Because of Namkung and Richardson's efforts, North Korea pays little political cost for essentially kidnapping Americans. Quite the opposite: they earn presidential visits, negotiations with high-level diplomats, and inroads into the American political and business establishment -- all without having to reform or open their system to any significant degree. This time around, Pyongyang has landed a visit from a Google executive, one of the most powerful figures in American business and technology.

But the existence of moral hazard isn't fully exculpatory, and it isn't an excuse for total inertia -- there are ways of opening up North Korea without empowering its government, and the country should not be totally ignored if avenues for constructive engagement exist. Even in spite of Namkung's involvement, Schmidt's visit isn't wholly without its merits or potential, and might actually hint at one possible  way of reforming the country from without.

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Private sector investment in North Korea is fraught with some of the same issues as foreign aid. "The system is about maintaining control and giving privileges to certain people and distributing the rents you get from those privileges to maintain power," says Curtis Melvin, a PhD student in economics at George Mason University and editor of the blog NKEcon Watch. "That system is still the same thing it's ever been."

But private-sector engagement is arguably more likely to bring about reform than even humanitarian aid or political negotiation. North Korea is nowhere close to having a free-market economic system. But there is a market system present within the country -- the black market that, during the mid-1990s famine, became too large and too vital for the state to completely regulate out of existence. The avowedly anti-capitalist North Korean government has coped with this challenge by tolerating and profiting from some level of foreign investment, but without creating the institutions necessary for large-scale private sector activity. As Melvin explains, contracts aren't backed by the rule of law. "Everything is still personality-driven," he says. "Your security of contract comes only from the political pull of the person or organization that you are in business with." In October of 2012, a Chinese mining company was run out of the country after investing nearly $40 million in an iron mine. Any company could see its investments just as arbitrarily wiped out.

North Korea expert Bradley Babson senses a tension between the more centralizing instincts of the old guard, and a younger generation of leaders who have grown up in a country where private industry is a permanent reality. "The fundamental institutions of the market economy haven't been put in place, even though the market exists," he says.

At the very least, Kim Jong Un's government sees a potential self-interest in appearing open to bringing in outside investment. In the spring of 2011, a North Korean delegation traveled the United States, visiting trading floors in New York and high-tech companies in Silicon Valley. One place they visited was Google headquarters.

According to people with knowledge of the trip, the North Koreans were only at the Googleplex briefly -- the visit was more of a photo-op than a chance to exchange ideas or foster meaningful contacts. But there are fewer symbols of the pervasiveness of the internet and of American soft power more potent than Google, and North Korea is an ideologically anti-western state whose internal Internet -- a system called Kwangmyong, or "lodestar"-- isn't even widely accessible. A single business delegation seems miniscule when measured against multiple ballistic missile tests and decades of external belligerence and internal oppression. But the North Korean desire to attract outside investment has manifested itself in other, more substantive ways as well. Melvin mentions that that there has been recent development along major trade routes throughout the country -- key highways have been widened, for instance, and the electrical grid has been expanded; he also says there is evidence that North Korea has a sizable fiber-optic network, built with the help of an existing fiber-optic cable factory in Pyongyang.

Yet the country's infrastructure remains sub-par compared with neighboring countries. Unless you're in mineral extraction, the only reason to invest in North Korea instead of say, South Korea or Taiwan is the possibility of profiting off of a future political and economic shock. Some companies are making just that calculation. Orascom, the Egyptian company responsible for building much of the North Korean cell phone network, has a bank in Pyongyang where it is keeps all of its profits from the country. "Orascom has never repatriated a dollar out of North Korea," Melvin says. Assumedly, Orascom is positioning capital for the day North Korea liberalizes, a gamble that could uniquely position the company to tap into decades of pent-up demand in a market with over 25 million potential consumers.

Some experts believe that even the presence of foreign business in North Korea hastens that day's arrival. North Koreans learn that -- contrary to a lifetime of official propaganda -- capitalists and westerners aren't completely malevolent. Educational and cultural exchanges, like tours of North Korean tae kwon do and table tennis teams through both Asia and the even the United States, have allowed North Koreans to travel and learn outside the country. Hong says this led to the creation of a small and slightly worldlier class of North Koreans, people who might realize the desirability, and perhaps the inevitability, of reform. "They might be privileged families but they're getting exposure to foreigners," he says. "They're exposed to thoughts and insights that they can take back home."

Meanwhile, foreign investment yields high-quality jobs by North Korean standards, and foreign businesses have been somewhat successful in necessitating small improvements in North Korean governance. "Nearly every case that I've ever heard about, the foreign investors offer better work at higher wagers in better working conditions" than alternative employment, Melvin says.

But there's no way to totally extinguish the moral hazard question. As Namkung himself noted, "Juche [North Korea's state ideology]...means 'acting upon,' as opposed to 'object acted upon.'...no philosophical system can be so antithetical to historical materialism as North Korea's Juche ideology." By this point of view, North Korean state ideology is autarkic as opposed to oppositionally anti-capitalist. Co-opting foreigners and foreign business could be a form of self-reliance by other means, a way of vindicating and strengthening the existing system, rather than reforming it.

The larger moral and strategic question undergirding outside contact with North Korea is an inherently un-answerable one. Engagement feeds the survival of a cruel and roguish government; isolation might only starve and destabilize it further. Each approach has an unforeseeable human toll attached to it: the sudden collapse of North Korea could lead to chaos, or maybe even a civil war, in which hundreds of thousands are killed; meanwhile, the last two decades of stability have killed millions. "It helps to think of this in the moral framework," says Hong. "I don't think that means you have to push for war. But that does mean that what we think of as peace is not really peace."