COMMUNIST COUSINS, PART I

By Gordon G. Chang

They’re communist cousins, existing side-by-side, but they couldn’t appear more different. One of them looks vibrant and dynamic–the other dark and desperate. Are we living in “China’s Century,” as some commentators tell us? And is North Korea, by contrast, on the verge of collapse?

Many in Washington assume that the Democratic People’s Republic of Korea, as that bizarre country is formally known, will fall apart soon. North Korea “is teetering on the edge of economic collapse,” said U.S. Deputy Defense Secretary Paul Wolfowitz at the end of last month during the second annual Asia Security Conference in Singapore. “That, I believe, is a major point of leverage.”

Policymakers in the American capital hope that the other people’s republic, China, will be our ally in taming Pyongyang. Washington’s policies, however, may rest on mistaken assumptions about Chinese strength and North Korean weakness.

If those assumptions are wrong, it would not be the first time that America miscalculated on the subject of North Korea. Many analysts, for example, criticize the 1994 Agreed Framework as a colossal error in judgment, and it is an arrangement that has few defenders today. Washington essentially purchased Pyongyang’s nuclear program to prevent its continuation. Some say that Clinton administration officials agreed to the expensive deal because they assumed that North Korea would fall before they would have to honor it. Yet the North’s ruler, Kim Jong-il, still threatens the world today from his perch in Pyongyang.

Now Bush Administration officials talk about a different approach toward North Korea as they design sanctions and plan to interdict shipping. But although this may mark a change in tactics, the Bush Administration’s assumptions about regime instability look to be the same as those of its predecessor. As Washington thinks about hastening the downfall of the Kim government, we all need to test our basic assumptions about North Korean society.

The problem confronting American and world leaders is easy to understand–North Korea is incomprehensible. President George W. Bush included that nation as part of his “axis of evil,” but its government, if we can even use such a term for the regime of Kim Jong-il, is, according to the president, “beyond evil” and “exists in a parallel moral universe.” Therefore, it should be no surprise that we often fail to comprehend the nature of that society.

From the outside, it appears that the regime in Pyongyang may be more vulnerable than at any other time in its existence. The country “is in its death throes” and is afflicted by “a terminal disease,” reports The Asian Wall Street Journal. “North Korea lies dark and nearly dormant, most of its people numb with hunger and cold,” noted Thomas Hubbard, Washington’s ambassador to Seoul. Says John Chambers of Standard & Poor’s, the international rating agency, “I could imagine the North collapsing under its own weight.”

If Kim Jong-il’s regime does fall soon, it will not be hard to figure out why. “The economy is showing clear signs of stagnating again,” says Park Suhk Sam, an economist at South Korea’s central Bank, the Bank of Korea. That’s a polite assessment. A more accurate one comes from the Asia Foundation’s Scott Snyder: “North Korea’s economy has hit the floor.” Nothing seems to have gone right for Pyongyang in the last few years. The nation recovered from a devastating famine in the middle of last decade, but food shortages again plague the North Korean people. Unfortunately, “several years of alternating floods and drought,” caused by man-made environmental degradation, has knocked agriculture on its back.

The country’s heavily industrialized economy still suffers from too little contact with the rest of the world and too much central planning. As a result of mismanagement, industrial production today is, at best, 30 percent of what it was in 1992, says Stephen Bosworth, former American ambassador to Seoul. The country’s gross domestic product was perhaps US$15.7 billion in 2001, large only in relation to tiny and war ravaged nations like East Timor. The North Korean Central News Agency reported that in 2002 gross industrial output, which it did not define, increased by 12.0 percent. That’s hard to believe, however, given all the facts we know.

The North’s official trade deficit hit a record US$1 billion last year. Although that figure does not include Pyongyang’s substantial receipts for missiles, illicit drugs, and counterfeit American cash, there is, nonetheless, a shortage of foreign currency. As a consequence, the North has trouble sourcing what it needs from abroad to keep its aging industry going. In short supply are coking coal, parts, and crude oil.

And just about everything else. As Dr. Norbert Vollertsen, who provided health care in North Korea as a relief worker, has said: “I saw those children starving and dying under my hands because there’s no food, there’s no medicine, there’s no medical aid. No power supply. No running water. No soap. No sanitation at all. In winter no heating system. There is no food.”

In China, however, the problem is just the opposite: There is too much of almost everything. Beijing says that 88 percent of industrial products are in oversupply. The country’s mild deflationary environment is further proof that markets are saturated.

Chinese leaders, hoping to grow their way out of problems, switched their emphasis from reform to development a few years back. The result, excessive building and production, is not the path to enduring prosperity. Poor government investment decisions and weak consumer confidence indicate that they made the wrong choice. Factories still produce too much. “Even when domestic demand is satisfied 10 times over and goods are stacked to the ceiling, production lines run at full tilt,” write James Kynge and Dan Roberts of the Financial Times. In the past, overproduction was mandated by planners in the Chinese capital. Now, it is the result of managers of state enterprises and private entrepreneurs, most of whom are chasing market share and few of whom fear bankruptcy. If China’s export markets sag, then over-production will only get worse in the next couple of years.

There is still room for growth resulting from further structural adjustment to the economy. But leaders in Beijing are finding that they have implemented just about all the easy reforms, and that most of the rest are too difficult to enact. In this time of political transition from the Third Generation of leaders to the Fourth, it is not at all clear that senior Chinese cadres will carry through on fundamental reform in the next half decade.

As Beijing strays further from the script when it comes to reform, large amounts of cash are building up in the economy. That is because investment outside China is severely restricted. Excess liquidity, a “tidal wave of cash” in the words of the China Economic Quarterly, is forcing bad investment decisions by the central government, banks, state enterprises, and the private sector. Too much money is chasing too many bad projects. Central government technocrats, better than anyone else, know that something must be done, but they’re doing little to solve the problem. They are promoting their qualified domestic investor scheme, but the program appears to be too small in scope and certainly too late in implementation.

If the leadership fails to permit structural change, non-performing loans will continue to accumulate in the banks. These are already at critical levels and are probably going up, not down, as Chinese leaders claim. At some point in the next five years the economy will choke on poor investments–even despite China’s government-directed economic system. At that time, the nation’s engines of growth, fiscal stimulus and exports, will fail to keep the economy on an ever upward track. Already government spending appears unsustainable, and the country’s export markets look saturated.

For authoritarians, too much–China’s problem–is almost always worse than not enough–North Korea’s situation. Both conditions can lead to economic failure, but revolutions are rarely led by the starving. Rising expectations are far more destabilizing than desperation when it comes to social cohesion.

Gordon G. Chang is the author of The Coming Collapse of China, published by Random House.