Jeffrey Sachs encourages the North to open up

Jeffrey Sachs, left, an economics professor at Columbia University, discusses the North Korean economy with Hong Seok-hyun, chairman of the Korea Peace Foundation, last Thursday. [JANG JIN-YOUNG]

As a renewed economist, public policy analyst and adviser to a number of Eastern European countries as they transitioned to a market economy, Jeffrey Sachs is well-versed in economic transformations.

In 1989, he served as one of the principal architects for Poland’s reform and debt reduction operation. Sachs outlined proposals for the privatization of state companies, which allowed prices to stabilize in Poland. The country avoided the disastrous shortages of necessities that plagued Russia after the collapse of the Soviet Union.

He has since been active in pursuing a global economic development agenda to alleviate extreme poverty in Africa and help the UN realize its Millennium Development Goals.

A professor at Columbia University, Sachs visited South Korea this week to attend the Organization for Economic Development and Cooperation’s (OECD) World Forum on the Future of Well-Being, which was hosted in Incheon this year.

He sat down with Hong Seok-hyun, chairman of the Korea Peace Foundation, and an expert on inter-Korean relations, to discuss the possibilities of a North Korean economic transformation at Hong’s office in central Seoul last Thursday. Below are edited excerpts from the discussion.

Hong: How do you view the North Korean economy?

Sachs: Well, from what we know, behind a lot of barriers and the lack of firsthand information, it seems to be in great crisis except for the military sector. So it is, in a sense, like the well-known example of the Soviet Union - a situation where the military gets massive resources and is technically sophisticated together with the rest of the economy in collapse. Clearly, we hope that [North Korean leader] Chairman Kim [Jong-un]’s initiatives to make border reform are recognizing the need for broader economic change.

But in another way with circumstances as they are, the chance for major increases of living standards in the North are really present now, because, with South Korea as one of the world’s major economies and with the northern economy in crisis only because of its economic system, the chance for major advances is very real. That’s not an illusion. That’s something that can happen within a generation.

H: I totally agree with you. North Korea is unique in the sense that it is surrounded by very affluent economies like South Korea, China, Russia and Japan.

S: Exactly. Northeast Asia is now the most dynamic part of the world economy. North Korea should readily be able to take advantage of that if the geopolitics can work out. Because now it’s more of a political and strategic problem rather than an economic one.

H: When I started as a graduate student at Stanford in 1974, I had a very interesting encounter with Joan Robinson, a Marxist economist from Cambridge. I was curious. It was the first time I met a Marxist. I found a book in the library she wrote, surprisingly titled the “Korean Miracle” - it was a story of the Taedong River Miracle, not the Han River Miracle. After I read the book, I discovered that in the ’60s, the South was worse off than North Korea by a scale of two to one. The North’s per capita GDP was twice that of South Korea. The North was endowed with factories, hydropower, thanks to the Japanese military-industrial complex. When the nation was divided in 1948, their electricity capacity was ten times that of the South.

S: There should be a framework towards the North’s denuclearization and opening up all of the countries in the region support, like China, the Republic of Korea and Japan. While the issue is often viewed as a bilateral between the DPRK and the United States, I view it as an issue between the DPRK and its neighbors. (The DPRK is an acronym for North Korea’s official name, the Democratic People’s Republic of Korea.) This is really where the future will be built. The countries here should make their future and then have the United States and other countries that want to support peace agree with the framework that is laid out here. It is not clear that it goes that way because the United States wants to call the shots in some ways. There should be some care. Nothing, in my opinion, can work without China’s full participation and the confidence building that comes with that. I think that Japan also has a role to play, because this is really a regional issue.

H: That is a very important and interesting perspective. You have worked with many poverty-stricken nations in Africa and Eastern bloc countries that went through this transformation from a socialist to a market economy. You know the political concerns Kim has in terms of regime and personal security when it comes to opening up the nation and introducing market aspects. How would you approach Kim if you had the chance to induce him toward opening up?

S: Well, I am a big believer that geography is the key. I would draw his attention to the region and make him think about prosperity in the context of Northeast Asia. The main point I would make is international connections, like opening up to China, South Korea and Japan, as well as the world market. I don’t believe in imposing political change from outside, and I believe still less in my own country’s foreign policy of dictating to other countries. I personally would not push the regime issue at all. I don’t think it is the way to peace. What security I believe is more important is an open process that builds international connections. Trust is the right way to move.

H: So how do you go about formulating an institution through which North Korea can solicit neighboring nations for help?

S: I have been an academic for 38 years as a professor. When you are living in an academic environment, you can speak with anybody. Maybe because of that, I believe in a fundamental approach that we should be speaking with others. Honestly, what I would do in an imaginary meeting with Chairman Kim is that I would try to listen to him for the first several hours. What are his perspectives? What are his concerns? I would not dismiss him. I would try to elicit, what is his understanding of the situation? This is the most important way forward - it is to always listen first. This is the art of diplomacy.

H: I think this is very wise approach which has to be done. But when it comes to reality, it is not easy to implement.

S: Darn reality! (laughs)

H: When I visited Pyongyang this September as part of the third inter-Korean summit delegation, I had a chance to observe Chairman Kim from a close proximity. I could sense that the North was ready for change. They looked like they were ready to invest time and resources into economic development. But I worry that the situation has come to a standstill. The wise thing to do on Kim’s part would be to demonstrate their sincerity about denuclearization through practical actions. I hope they do not miss this critical opportunity.

S: On denuclearization, I believe that this is a process and not an event where you expect one country to denuclearize under strict sanctions one year to the next. Unfortunately there are bad records of countries who have denuclearized only to find themselves vulnerable. I don’t want to undermine the process, but I believe the realistic aspect of denuclearization is trust. Trust cannot come by demand alone. The idea you can create a framework of success through demands and sanctions strikes me as a naive approach. This has been my country’s approach for 25 years, but it has not delivered. The only way to build trust is not a U.S.-DPRK arrangement but a regional arrangement, one involving China, South Korea and Japan, as well as the DPRK.

H: One unique aspect of North Korea is the role of the military, which remains predominant in its economy. We must be able to advise them on how to handle the role of the military when North Korea is about to change course in terms of its economic regime since the military is the most important stakeholder. Unless they are given carrots, the transformation may not go smoothly.

S: The fact of the matter is most military enterprises are not very internationally competitive. These enterprises, in order to survive and mean something in the future, need technical upgrading, new investments and new partnerships. That upgrading could be through joint ventures, partial privatization or technology transfer arrangements. No doubt in the political economy of economic transformation, military officials who are dominant in a state enterprise could become managers in a market setting in the future. This happened in Eastern Europe, China and former Soviet Union.

H: One way we can pursue cooperation in Northeast Asia is demonstrating a roadmap of economic development to North Korea. This could involve guaranteeing regime security and Kim Jong-un’s personal security through a collective multinational arrangement.

S: What happened in successful countries which underwent economic transformation - Poland is one of them - was a lot investment of German companies to bring the Polish industry into a German economic space. So companies that were producing for the Soviet market ended up being transformed to being, for example, part of Volkwagen’s market or part of German industry.
This was very successful, it created jobs, boosted income and built whole new cities. So in Poland’s case, Germany was the magnet that led to structural transformation. I would say North Korea is in a great position since it is in the middle of a huge market. South Korean, Chinese and Japanese enterprises could play a huge role.

H: For the time being, the North is putting lot of resources on the tourism industry, since it is the safest area where they can reap easy rewards.

S: It’s a good industry from the point of view of human exchange. There are millions of Chinese tourists. Opening will also bring a lot of small enterprises up. A massive growth of small business and very high rate of employment will result from this.

H: North Korea has been isolated for so long that they are far behind in terms of human resource development. How would you advise them in terms of accelerating human resource development?

S: Well I think this is one area where universities could play a huge role. Part of acceleration is the training of new teachers and curricula. South Korea has educational institutions, and I would encourage them to partner with universities in the North or establish campuses and have programs of exchange. By creating quickly a larger and larger cadre of young, well-trained people, this can percolate throughout the country very fast.

H: You’re right. I remember in the 1960s, when South Korea was still developing the first and second five-year plans, economists from Stanford and Harvard provided much needed advice. Now South Korean economists and retired managers from big corporations, as well as SMEs (small and medium-sized enterprises), can help deliver their experience to the North. I think the North is blessed in terms of having this outside experience to draw from if they are willing to accept help.

S: I think that is exactly right. If you put the pin on the map of the place most surrounded by dynamism, it probably would be North Korea right now. It is the innovation hub worldwide, and this is a very favorable condition.

H: I understand that you have a favorable opinion of China’s Belt and Road Initiative. In what sense do you support the idea?

S: As China has become an economic giant, it wants to extend Chinese investment to Southeast Asia and Central Asia. This is very natural. China is in the process of becoming a multinational leader. It’s what Japan did 40 years ago. Though it didn’t call it that, it also had a similar project for Southeast Asian countries like Malaysia, Indonesia or Thailand. But there is a big question mark as to whether China is really building truly good projects for Asia or just building politically convenient projects. The record is mixed, not so favorable. For example, in Pakistan, they have built a lot of coal-fired power plants. That’s a terrible idea.

H: Washington is increasingly turning more critical of the Belt and Road Project. How do you view these changes?

S: For parts of the Washington establishment, the idea is very simple. China’s rise is a fundamental threat to American primacy. There is only one room for one country on top and China is threatening America’s position on top. If you have hierarchical view of the world, this make sense. If you have a network view of the world, it makes no sense. So to my mind, it makes no sense. I am not interested in America on top. I am interested in a peaceful relationship of many successful regions.
In the United States, officials view the idea negatively because they view the world in a zero-sum struggle for dominance. But economics views the world in a positive-sum idea that more trade and investment is good. This project is too big for China to succeed alone. But China can’t afford it by itself and doesn’t have enough knowledge alone. My view is South Korea and Japan should be a part of this as well.

H: President Moon Jae-in was able to obtain a promise from Kim Jong-un on the heels of the third inter-Korean summit in Pyongyang this September. Though Kim attached it to the condition that he would only do so if the United States took appropriate measures, he showed a willingness to dismantle the country’s nuclear facilities at Yongbyon. It comes down to bilateral balance between Washington and Pyongyang. The United States is putting maximum pressure on the North. In Pyongyang’s perspective, the measures may feel too harsh, but the sanctions must continue until they induce the North to denuclearize. I genuinely hope that the sanctions are lifted through prior negotiations and a second U.S.-North Korea summit.

BY PARK HYUN-YOUNG [shim.kyuseok@joongang.co.kr]