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Dispatch From Pyongyang: An Offer You Can’t Refuse!

by Scott A. Snyder
December 1, 2009

The Ryugyong Hotel in Pyongyang which Esquire magazine once dubbed "the worst building in the history of mankind", has come back to life with help from Egyptian company Orascom Group (The Korea Sharing Movement/Courtesy Reuters).

Every North Korean seems to have been mobilized for an all-out push to mark their country’s arrival as a “strong and powerful nation” in 2012, which marks the hundredth anniversary of Kim Il-sung’s birth, Kim Jong-il’s seventieth birthday, and the thirtieth birthday of Kim Jong-il’s third son and reported successor, Kim Jong-un.  Pyongyang citizens have cleaned up the city during a one hundred fifty-day labor campaign, followed by a second hundred-day campaign now underway.  The Ryugyong Hotel in the middle of Pyongyang, unfinished for over two decades, has been given a face lift courtesy of the Egyptian telecommunications firm Orascom, which expects to have one hundred thousand mobile phone customers in Pyongyang by the end of the year.  But it is still difficult to shake the feeling in Pyongyang that one has walked onto a movie set in between takes.  Or that the used car looks good on the outside, but you really don’t know what you might find if you were able to look under the hood or give it a test drive.

North Korean foreign ministry officials seem to have moved on from nuclear talks, although they make clear their outrage at United Nations’ condemnation of their April 2009 rocket launch as an affront to their sovereignty.  This is the ostensible reason the North Koreans have walked away from Six Party Talks.  Having conducted a second nuclear test, North Korean officials want to be considered as a nuclear power, choosing instead to “magnanimously” set aside nuclear differences in order to focus on the need to eliminate U.S.“hostile policy” by replacing the armistice with a permanent peace settlement.  Essentially, Pyongyang’s new offer—as a “nuclear weapons state”—has shifted from the denuclearization for normalization deal at the core of the 2005 Six Party Joint Statement to “peace first; denuclearization, maybe later.”  There was no mention of “action for action” by our North Korean interlocutors.

But the North Koreans are likely to find, when Ambassador Bosworth arrives in Pyongyang next week, that the United States will not accept North Korea as a nuclear weapons state. There is virtually no area of agreement between the two governments on the nuclear issue based on public statements made by the two sides thus far, suggesting the likelihood that both sides will face a difficult conversation.

A new component of North Korea’s strategy for achieving its economic and infrastructure goals in the run-up to 2012 is its effort to attract investment from overseas.  The director of North Korea’s newly established Foreign Investment Board unveiled a new plan for attracting equity, contractual, and 100 percent foreign owned joint venture investments.  On paper, the rules incorporate provisions for repatriation of profit, generous tax incentives, and a labor rate of thirty Euros per month. This rate undercuts the compensation of $57.50 per month currently offered at the South Korean-invested Kaesong Industrial Zone.  Even more generous was the offer of special concessions in North Korea’s natural resources sector for companies willing to build one hundred thousand units of new housing in Pyongyang that have already been promised in the run-up to 2012.

North Korean colleagues at the Ministry of Trade appeared genuinely surprised and dismayed when we mentioned that UN Security Council Resolution 1874, which condemned North Korea’s May 25, 2009, nuclear test, contains provisions prohibiting companies from making new investments in the Democratic People’s Republic of Korea (DPRK).  This is all the more unfortunate because, on paper, North Korean efforts to open its economy through foreign investment are exactly the course that should be encouraged, and North Korea’s goals for 2012 could be advanced significantly with inward investment from companies that might be willing to take the risk, but the nuclear issue stands in the way.  This is not to mention that North Korea’s own economic retrenchment and antimarket policies, including the “currency reforms” announced earlier this week, stretch the credibility of the North Korean government to back up these laws.  Recent surveys of Chinese investors suggest few demonstration projects for successful investment in North Korea and a high probability of getting scammed or fleeced on the ground.

But the North Korean plea for foreign investment does suggest a potential point of leverage that deserves careful consideration, and that is the possibility of an investment in a strategic commodity that is of special interest to the United States:North Korea’s plutonium stock.  During the Clinton administration, former secretary of defense William Perry led efforts to make similar purchases of nuclear materials from the Ukraine and Kazakhstan, which had inherited stocks of nuclear materials from the breakup of the Soviet Union.  These transactions advanced the cause of nuclear nonproliferation by ensuring that these countries would not become nuclear states.  A 2004 report of a Task Force on U.S.-Korea Policy cosponsored by the Center for International Policy and the University of Chicago, also suggested a plutonium “buy-out” proposal for North Korea, despite the obvious moral hazard of appearing to reward North Korea’s bad behavior.  Any transaction with North Korea involves moral hazard, and North Korea has already proven that it will sell or subcontract nuclear materials to the highest bidder. One positive of this approach is that any transaction involving removal of nuclear materials or capabilities from the North would be irreversible, in contrast to past practice of offering irreversible food aid benefits to North Korea in exchange for participation in multilateral dialogue, but not for irreversible steps toward denuclearization.

In a post-September 11, post-North Korean nuclear test world, the Obama administration should find a formula that facilitates North Korea’s irreversible actions on the path toward denuclearization rather than agreeing to half-measures: North Korea’s immediate focus is on gaining the resources necessary to mark 2012 as a year of accomplishment, yet the North has been highly critical of Lee Myung-bak’s “grand bargain” proposal. Denuclearization needs to be placed on the North Korean agenda as an accomplishment that North Korea will be able to justify as part of its broader 2012 objective of becoming a “strong and prosperous state.”  Unless a new formula can be found by which to bring these two objectives into line with each other, it is likely that the United States and North Korea will continue to talk past each other.

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