http://www.atimes.com/atimes/Korea/GH04Dg03.htmlTrading, Pyongyang-style
By Andrei Lankov
SEOUL - As of Wednesday, the six-party talks in Beijing aimed at getting North Korea to give up its nuclear weapons program are reported to being close to a statement of principles after nine days of negotiations.
The US wants Pyongyang to abandon its entire nuclear program, including the development of nuclear energy, in return for food, economic aid and security guarantees - and the opportunity to join the world trading community. North Korea is reported to be in contact with the World Trade Organization to obtain observer status.
Anyone wanting to trade with North Korea, however, should take a hard look at its history in this arena.
In 1993, North Korean trade agencies approached the Thai government about purchasing some 600,000 tons of rice. It was shipped by several companies, but payment did not come. After some waiting, the government had to intervene, and after much hard work by Thai diplomats, partial payment was agreed on - but about US$190 million still remains unpaid.
The Thai businessmen, before venturing into deals with North Korea, should have asked those with the longest track records of trading with Pyongyang - Russians and Chinese - about the pitfalls. Former Soviet trade mission clerks would likely have advised the Thais that something like this was likely to happen.
North Korea in its half-century of existence seldom engaged in normal international trade based on the reciprocity principle of fairness in exchanges between nations. From the mid-1950s until recently, economic exchanges conducted by North Korea ostensibly were usually political in nature: Pyongyang had only a limited number of active trade partners and those were willing to conclude remarkably unprofitable deals on the assumption this was a way to pay for some important gains, usually strategic rather than economic.
While North Korean propaganda loudly proclaimed the alleged economic self-reliance of the country, Pyongyang quietly digested huge amounts of Soviet and Chinese aid. This aid ceased to be recognized from the late 1950s, when Kim Il-sung began to build his own nationalistic Stalinism. Nonetheless, the paramount significance of this aid was vividly demonstrated in the early 1990s when it came to a sudden halt due to the collapse of Soviet communism. North Korea is now starting to find other other sources of direct and indirect aid, in fact the country continues to look for aid in the current six-party talks.
In 1991, Natalya Bazhanova, with a research center associated with the Russian Foreign Ministry, estimated the amount of Soviet aid from 1948 to 1984 was worth $2.2 billion. However, this figure should not be seen as a complete estimate, since it does not take into account the indirect forms of aid that were so important.
Quite often the aid masqueraded as "trade". In most cases, economic exchanges between Moscow and Pyongyang were unequal: the USSR provided the North with merchandise it could sell on the international market - oil, gas, weapons and some industrial equipment. All these goods were bartered for North Korean products - bad tobacco, pickled vegetables, plastic boots and liquor even Russian farmers found almost undrinkable. These would be impossible to sell internationally. If the North Koreans somehow managed to produce something of reasonable quality, they sold it on the international market, despite such sales being a breach of agreements with their Soviet partners. (This author still remembers frequent complains by Soviet trade officials in the mid-1980s).
On top of that, prices that were used to calculate the amount of the bartered goods were deliberately distorted in the Koreans' favor, and frequent delays with shipping and payments were also the norm. When the debt became too large, it was restructured on terms very favorable to Pyongyang.
Needless to say, these decades of imbalanced trade were by no means a result of Soviet generosity and kindness, but rather reflected the strategic considerations of Moscow. North Korea had to be subsidized in order to keep its inefficient and hyper-militarized economy afloat so as to remain an irritant in the Cold War era's "Great Game" against the US.
However, the North Koreans were not merely passive recipients of the Soviet strategic grants. Pyongyang diplomats learned how to maximize the aid inflow - and how to manipulate the donors.
Their strategy was based on the skillful use of the Sino-Soviet rivalry. Moscow saw China then as a great threat, probably even more menacing than the US, and the Soviets were willing to do anything to isolate China. Thus, from the 1960s recurring instructions to the Soviet ambassadors to North Korea from Moscow were "keep them neutral or win them over to our side". The North Koreans were not too eager to join the Russians' side, but they were always ready to hint that their neutrality should be paid for, by some additional credit or by general willingness to accept unfavorable trade conditions. In a sense, it was a "negative concession": the North Koreans extracted payments not for doing something, but as a reward for not doing something (that is, not becoming too close to China).
Much less is known about relations with China, but it seems that same strategy of aid-extraction was applied to Beijing as well.
It is telling that between 1990 and 1992 exchanges between the Soviet Union and North Korea collapsed dramatically almost overnight. In 1990, the trade volume between the two countries was $1.14 billion, but the next year it dropped to $360 million and then continued its downward slide until it eventually leveled off at about $100 million. It was not the result of some deliberate embargo or political pressure - if anything, the post-Soviet governments would like to see Russian companies trading with North Korea. But the newly emerged Russian capitalist enterprises demanded payments in money, not in promises to keep the American imperialists and Beijing hegemonists at bay, and they wanted to have their money immediately. However, the North Korean economy had nothing to offer, so the complete economic withdrawal was the only reasonable policy.
Those small Russian businesses that still operate in the North are not naive. Their managers know only too well that if their Pyongyang partners can avoid paying, they will not think twice about it. Hence, the business schemes are always arranged in a way that makes cheating difficult and very obviously self-destructive. Personal connections with officials are also carefully maintained (with the help of cash envelopes when necessary).
Over time, the payment issue had become ingrained in the thinking of North Korean leaders. It seems they came to assume that foreigners should be willing to accept the North Korean trade conditions and would be not paid at all if North Korea was especially short of money.
The developed West figured it out in the 1970s when the North began to purchase industrial equipment and machinery and soon accumulated a large debt with developed Western countries. The foreign lenders were misled by the then-common assumption that communist countries made good borrowers. In the North Korean case, they soon were disappointed: in the 1970s North Korea became the first communist country ever to default on its debt. The total amount of this debt is believed to be between $1billion and $1.3 billion, but not much information has been made public, since victims of the default - almost 100 credit institutions from 17 countries - formed a consortium that obviously still has some hope of recovering the money.
Judging by experience, the lenders will have to wait a very long time. There are no signs that North Korea ever seriously considered paying back the money. After all, did the frantic effort to re-pay Romanian foreign debt, once undertaken by the last Romanian communist strongman Nicolae Ceaucescu, save his regime? Quite the contrary: if anything, the austerity policy of the late 1980s hastened his regime's collapse. Indeed, if North Korean rulers could safely ignore demands by their fellow fraternal countries whose support was so vital for them, why should those the North considered predatory imperialists be treated differently?
Since then, the story of the North Korean trade exchanges with the West has been one of broken promises, debts unpaid, services not provided. Perhaps, few countries of the world can rival the North in its unabashed disregard for the reciprocity principle. It's easy to blame the North Koreans of course. For nearly half a century they more or less safely ignored reciprocity - and still survived, maintaining the economy with the level of militarization unthinkable in peacetime anywhere in the world.
With the collapse of the USSR, old methods were successfully applied to the new partners. The strategy remained the same: North Koreans continue to do things their rich partners do not want them to do. Perhaps, it's a good definition of "blackmail", but it works well enough to keep the cellars of the Dear Leader well provisioned with French wine and Scotch whiskey.
From 1994 to 2003, the major source of North Korea's income was its nuclear program: Pyongyang expected to be paid for not developing its nuclear weapons. The Geneva agreed framework of 1994 and ensuing Korean Peninsula Energy Development Organization (KEDO) project was a masterpiece of blackmail diplomacy.
Then, there was (and is) veiled but clearly present rivalry between China and the US. Beijing does not want a nuclear North Korea, but it is not happy about a unified country, which might turn out to be pro-American. It also needs a communist regime or two hanging around and thus helps the current government to survive. This means that China is willing to keep the North in operation by providing it with aid and subsidized trade.
However, it is now South Korea that serves as the major source of aid, both usual and masqueraded as "trade". Seoul is pumping money into the North on a relative scale that surpasses that of the Soviet aid in the 1970s and 1980s. Between 1995 and 2004, Seoul provided $1.2 billion of officially acknowledged humanitarian aid alone. But this is merely the tip of the iceberg, since most "commercial cooperation projects" would be unviable without the South's persistent willingness to subsidize this activity and provide South Korean companies with all types of guarantees and incentives. On top of that, there might be some clandestine money transfers to Pyongyang - one of which, a significant sum of $500 million, was made on the eve of the first intra-Korean summit in 2000 (later the "payment-for-summit" scheme was uncovered and led to a major political scandal).
In dealing with the broader public, such largesse is explained by nationalist and/or humanitarian concerns, but it seems that Seoul worries more about the political stability in Pyongyang. The South is afraid of a democratic revolution in the North, politely known as "implosion". The German-style unification is now seen as a potential disaster since it could lead to a dramatic decline in the living standards of the South Koreans. Seoul believes that the aid money will help North Korean society afloat and thus allow postponement of the dreaded unification to some point in the distant future. Like the Soviets a couple of decades ago, the South Koreans want to keep the North afloat, no matter what happens inside this country
But sometimes outsiders do not get the picture and start pursuing North Korea, perceiving it as yet another trade partner. More often than not, they later learn that North Koreans have a peculiar understanding of trade - just ask the Thai companies that agreed to sell 600,000 tons of rice 13 years ago and which still wait for their money.
Dr Andrei Lankov is a lecturer in the faculty of Asian Studies, China and Korea Center, Australian National University. He graduated from Leningrad State University with a PhD in Far Eastern history and China, with emphasis on Korea, and his thesis focused on factionalism in the Yi Dynasty. He has published books and articles on Korea and North Asia. He is currently on leave, teaching at Kookmin University, Seoul.
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