If

by some miracle, North Korea suddenly decided that it wanted to embrace a

thorough and sustainable reform package, what kinds of policies could actually

work? Although this kind of hypothetical experiment can seem like wishful

thinking, it’s an important early step of preparation when you consider that we

have no way to predict when one of the world’s last vestiges of Cold War socialism will stall,

collapse, or transition . When it comes to dealing with North Korea,

Washington’s current modus operandi – strategic patience – has quieted things

down enough to avoid all out hostilities. However, it has also failed to

improve the situation. In the road ahead, we need to brace for a rocky transition.

With that in mind, the Cato

Institute’s Doug Bandow insists that “proposing talks and suggesting

rewards would be the best response to an uncertain situation.” Since grassroots

economic innovation has been the major driver for change in North Korea over

the past 20 years, reinvigorating the marketplace might be the most efficient

way to provoke lasting and meaningful change.

Clinical economics is a systematic

methodology for diagnosing and revamping defunct economies. The author, Jeffrey

Sachs, is a Harvard trained economist and has served as an advisor for a number

of post-communist countries and military dictatorships such as Poland, Russia, Bolivia, and more. I

reached out to him and inquired about the difficult case of North Korea. He

responded that he has not looked into it personally, but encouraged me to try

my hand at applying clinical economics to North Korea.

What follows is my

(admittedly humble) attempt to peg down core problems and propose solutions

using the tools of clinical economics. As a starting base, I looked at the

challenges that liberalization posed for Poland, Vietnam, Spain, China, and

Russia. Then I modified the most successful policies to fit North Korea’s specific socio-political

climate. In the end, I determined that the optimal reform package would consist

of: currency convertibility, a rollback on sanctions, an end to isolationism,

compromise between reform-minded and conservative officials, and the extinction

of Fearpolitik and gift politics.

Currency

Convertibility is one of the most important features of a modern economy. In

1991, Jeffrey Sachs was asked by Poland’s Solidarity (non-Communist) Party to

help put the country back up on its feet. At the time, Poland’s economy looked

a lot like North Korea’s does now, suffering from collapsed central planning,

extensive food shortages, inflation, black markets, smuggling, and tax evasion.

Sachs decided that a stable currency would help unite the disparate actors of

Poland’s economy. It would also decrease the need for smuggling, help Poland

re-enter the thriving markets of Western Europe, and reduce the gap between the

zloty’s black market value and its official value. To keep the zloty at a

stable rate, Sachs asked the USA and other governments to contribute to a

stabilization fund to the tune of $1 billion.

The ample foreign exchange

reserves would contribute to the international community’s faith in the zloty’s

value. In a single day, Poland ended price controls and announced it would back

up the zloty’s new rate with reserves received through the stabilization fund.

Between 1991 and 2012, Poland’s per capita GDP nearly tripled. Looking back,

it’s easy to see that the currency reform was instrumental in launching Poland

back into the bosom of Europe.

After helping Poland, Sachs unsuccessfully

campaigned to get Russia a ruble stabilization fund in 1992. Western distrust

and political unrest prevented this from happening. In short order, Russia was

“utterly drained of foreign exchange reserves,” and the economy faltered. The

absence of foreign assistance resulted in “gray apparatchiks and corrupt wealth

seekers” taking the place of able reformers in the federal assembly. Black

markets abounded, the mafia flourished, and oligarchies took hold. This delayed

Russia’s reform measures and stalled the economy for years.

The goal for North

Korea should be to shoot for a Poland style conversion and avoid a Russian one

at all costs. The badly disconnected and unequal nature of the North Korean

economy has produced inflation and instability. A strong currency could help

unite the disparate actors and bolster confidence. Furthermore, North Korea is

located at the crux of some of the world’s most robust economies: China,

Russia, Hong Kong, South Korea, and Japan are all within a stone’s throw. A

stable North Korean won will help facilitate North Korea’s return to Asia just

as the stable zloty brought Poland back into Europe. Until that point, the

international community will have a hard time developing faith in a currency

that even North Korean citizens prefer not to use.

With the prospect of increased revenues

made more real by suddenly accessible markets, market-focused reformers like

Premier Park Pong Ju will be able to accomplish good from the inside. Liberal

policies and their champions will only gain credence when the system’s current

stakeholders start to see revenue streams pouring out of the free market. The Korean People’s won (KPW) increased role in international markets will also make it more difficult

for the regime to manipulate the currency, such as when they bankrupted the

emerging merchant class by devaluing the KPW in 2009. Dramatic currency

manipulation is often a regime’s attempt to out-muscle the free markets and

shore up royal purchasing power.

In ancient Rome, the emperor Nero diluted the

silver denarius with non-precious metals, which he believed would boost the

royal coffers. Nero’s predecessors followed suit, and eventually the denarius’

composition was diluted from nearly pure silver in 64 A.D. to about 5% silver

in 260 A.D. But Rome’s merchants kept a close eye on the coins’ falling value

and inflation skyrocketed as a result. The cost of wheat increased two hundred

fold over the course of a single century. (This is especially extreme when you

consider that commodity monies have a much lower average inflation rate than

fiat monies).

Economic strife causes political turmoil and vice versa. But

international pressure could prevent Kim Jong Un from pursuing the kind of

shortsighted fiscal policies that Kim Jong Il was so fond of. From the

international community’s point of view, the stabilization fund could be a

bargaining chip to induce North Korea to: disarm, open up its borders, liberalize, or

beef up humanitarian cooperation.

Gradualism

and Compromise: The stabilization fund was a resounding success in Poland. But

Russia’s setback teaches us that economic improvements can only be made when

the political apparatus creates a sufficiently conducive framework for change.

On June 4th, 1898, Poland held their first partially free elections in 50 years.

The Solidarity Party won in a landslide, collecting more than 90% of the senate

seats. But much of Poland remained deeply divided. The only ideology uniting

the country was a strong patriotism mixed with socialist leanings.

Much like

today’s Korean Workers’ Party, the elites that comprised Poland’s Workers’

Party were highly suspicious of anything that smacked like coercion or outside

influence. Without the Communist Party’s backing, the new government had little

hope of holding the country together for long. Sensing thin ice, a top

Solidarity strategist named Adam Michnik suggested a clever arrangement in

order to produce an atmosphere of compromise and cooperation. Poland decided to

split the government. The Communists got the President, along with the defense,

interior, and police departments. Solidarity kept the Sejim, or parliament.

This power sharing arrangement built off the elite’s patriotism reached across

the aisles to the Communists and appeased Poland’s volatile neighbors. Through

sheer political wizardry, Michnik’s plan simultaneously held the country

together and allowed market forces to infuse the country with fresh capital.

Poland was not the only country unwilling

or unable to shake off all their communist affiliations as they pursued

reforms. Unlike Poland, however, many other countries tried to pull off market

reforms while maintaining one party rule. China and Vietnam were quite

successful in purely economic turns, making them something of an outlier. Hungary’s

gradual reform measures, called “Goulash Socialism,” were a resounding failure.

Russia’s attempts were also met with frustration and disappointment. What

accounts for this difference? Why did China and Vietnam succeed while the

others failed?

The transition from an oil and gas dependent economy to a

diversified workforce is too complex to be handled by top down fiat, especially

when central leadership is reluctant to relinquish power. Slow cooked organic

growth, from the ground up, is preferable. It is true that decentralized

financial models re-emerged in China after The Great Leap Forward nearly broke

the economy. But the Chinese agricultural system was originally less

centralized than its Soviet Union counterparts, a fact that caused ideological

clashes between Mao and Stalin.

Vietnam was able to jump back into a

thriving Asian marketplace once they demilitarized and installed the Đổi Mớ reform

measures, which opened up inroads to trade while retaining a firm political

grip. Ho Chi Minh City served as the country’s capitalist experiment as Hanoi

continued on as the conservative capital. Decentralization, then, will be the

key for North Korea. People from border regions like North Pyongan Province are

already renowned for liberal attitudes, flashy fashions, and early tech

adoption. Pyongyang has had its eye on Vietnam’s model since they began

attending ASEAN conferences in 2010. The conservative capital/ liberal economic

wheelhouse strategy might be a good path forward. But is North Korea’s existing

structure prepared for such a transition?

When we compared countries that

successfully transitioned with those that didn’t, trends began to emerge. One

of the most salient trends is that market receptivity is created when the peasants

are accustomed to working off incentives and being independent of the

state. Ever since a drought reared its ugly head during the Spring of 2015,

ordinary North Koreans from all walks of life have been mobilized in droves in

order to help collective farms meet their quotas. Though the regime promises

disbursements of the autumn harvest in state media announcements, the residents

do not realistically expect to receive any rations. They’ve been hoodwinked too

many times to remain innocent.

What’s worse, as long as they’re called to the

state fields, they aren’t able to tend to their personal plots. In the past,

untold millions of North Koreans suffered from malnutrition and starvation when

they didn’t get a good yield on the family crops. In this light, we can see

that most North Koreans simply wish to be left alone to do their work. This

makes them more like Mao-era Chinese peasants than Soviet era Russian peasants,

who were given rations regardless of their output. In North Korea, the inminban, or people’s unit, leaders appointed to carry out the mobilization orders are giving people

unofficial breaks so that they can tend to their own plots and contribute in

shifts to get the project done as a team.

This shows a less centralized, more

flexible, local, and adaptable financial model than what we might have found in

Soviet Russia. In fact, when we sort through some of the other criteria as

well, there are reasons to believe that post-famine North Korea shares more

attributes with China than with post-Soviet Russia. This is an auspicious sign

in terms of receptivity to market reform. See the chart below for specifics.

*Views expressed in Guest Columns do not necessarily reflect those of Daily NK.