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A chance for a big deal

May 31,2018
이미지뷰
Kim Byung-yeon
*The author is a professor of economics at Seoul National University.

After major uncertainty, it looks like the U.S.-North Korea summit is back on track. But the sticking point that made U.S. President Donald Trump write a letter to North Korean leader Kim Jong-un to cancel the June 12 meeting in Singapore still remains. The parties in the deal-making meeting — Washington and Pyongyang — have not reached an agreement on what to resolve, at what price, and when to do it. Even a second inter-Korean summit has not helped solve those critical questions.

Washington does not know what or how much Pyongyang is prepared to offer. It has not yet received any response by North Korea on whether denuclearization covers not only the nuclear and missile manufacturing facilities but also existing nuclear weapons as well as nuclear materials. Pyongyang, on the other hand, is suspicious about how much Washington is willing to pay for the surrender of its nukes. What North Korea has heard so far are vague talks about ending a hostile relationship and allowing private capital into the reclusive country. The means for a trade-off is also unclear. North Korea wants rewards at each dismantlement stage, while the United States supports a comprehensive reward upon verifying complete dismantlement. Pyongyang finds this deceiving.

The conundrum can be described by economic theory as an example of incomplete contracts. Parties cannot easily design a deal that is perfectly beneficial to both sides, even in future contingencies. Actors that distrust one another — and that is certainly true in the case of Washington and Pyongyang — would naturally question whether each party will stay faithful to their part of the deal. In that case, a deal won’t be easy, and even if it is made, enforcement cannot be ensured.

Moreover, the process could be excruciatingly long. If economic rewards and easing of sanctions are slow, North Korea won’t be able to stay committed. Also, there is a big possibility that Pyongyang could walk out of the deal with rewards it collected from incremental dismantlement. Such structural obstacles stand between a significant deal over North Korean nuclear arms.

To solve this problem — and achieve the ultimate goal of denuclearization — Pyongyang must be persuaded that it would benefit greatly from not withholding any weapons and accurately reporting its nuclear arsenal. To do that, the two sides should predetermine the prices for each nuclear device and each unit of nuclear material. The more it gives up, the more money Pyongyang would earn. A time frame and specific conditions should be set. For instance, the two can decide how much to pay for the weapons North Korea hands over within six months. If any unreported weapons are found during inspection, the deal could be called off. In this way, North Korea’s denuclearization can be achieved in a short period of time.

The rewards also should be configured to develop North Korea. A North Korean development fund on a scale of $5 billion arranged and overseen by an international lender can help bring changes to the isolated regime and draw North Korea into the international community. Seoul can guarantee these investments to draw more foreign capital into North Korea. The neighbors — South Korea, China and Japan — can separately chip in through bilateral and multilateral cooperation.

The question is whether Pyongyang will accept such an offer. Kim Jong-un in April shifted away from his simultaneous pursuit of nuclear weapons and economic development after setting economic development as the sole state agenda. He claimed that nuclear development had become a lesser priority because North Korea already mastered nuclear weapons. But the real reason would have been its worsening economic conditions due to prolonged and toughened sanctions. State control over the economy has weakened due to a spread of market activities. He vowed to prioritize economic development to gain public support, but did not have a strong solution.

Kim is cornered. If he walks back, his regime could fall off the cliff. But to safely cross the swamp he faces ahead, he must reach out for the hand the United States offers. This is where Washington and Pyongyang can find common ground for a deal. In return for complete, verifiable and irreversible dismantlement of its nuclear weapons, Pyongyang could be promised complete, verifiable and irreversible development in addition to security guarantees. If Kim does not accept this perfect package deal, he would not have been genuine about denuclearization in the first place.

Now would be the best moment for North Korea to bring in foreign capital. The United States is the only country that can influence international lenders and governments around the world. If the nuclear threat is removed, Washington would not be as eager to help North Korean development. At the end of the day, the cost could fall on us alone.

Kim has the opportunity to shift his bet on nuclear development to develop his country economically. He can only achieve that when he really sees through denuclearization. To achieve the goal, Seoul must act as an honest broker — and a wise adviser — between Washington and Pyongyang. The economy is the invisible hand and the most powerful weapon to bring seismic changes to North Korea as well as peace and co-prosperity to the Korean Peninsula.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, May 30, Page 31