Visualizing a North Korean "Bold Switchover": International Financial Institutions and Economic Development in the DPRK

Bradley O. Babson (MPA, Princeton University) is a consultant on Asian affairs specializing in Korea and Northeast Asian economic cooperation. Before retiring in 2000, he worked for the World Bank for 26 years. He is a member of the Advisory Board of the Korea Economic Institute and has been director of the Future Multilateral Economic Cooperation with the DPRK project for the Stanley Foundation. He can be reached at . Note • The views expressed in this paper are those of the author and do not necessarily reflect those of the World Bank, International Monetary Fund, and Asian Development Bank, or their Executive Directors and the countries they represent. An earlier version of this essay appeared under the title “Implications ofa‘BoldSwitchover’inSecurityPolicyforInvolvingtheInternationalFinancial Institutions in Financing North Korean Economic Development.” Visualizing a North Korean “Bold Switchover”: International Financial Institutions and Economic Development in the DPRK Bradley O. Babson asia policy, number 2 (july 2006), 11–24 [ 12 ] executive summary asia policy This essay examines the issues involved in the mobilization of international aid to support any future “bold switchover” in North Korea’s security policy, and assesses possible roles for international financial institutions (IFI) such as the World Bank. main argument Due to the unique conditions of the North Korean context, any IFI role in that country would require major shifts in the way that the Democratic People’s Republic of Korea (DPRK) currently shares information, develops economic policies and institutional capacities, and works with foreign partners. policy implications • If the IFIs are to play an effective role in providing the necessary aid coordination to help the DPRK, then both Pyongyang and the major IFI shareholders will need to exhibit strong political will and shift their present thinking regarding the desirability of IFI engagement. • DPRK membership in the IFIs would require that Pyongyang adhere to international norms regarding information sharing, conduct in economic relations, and access to IFI resources. • As an interim step, special trust funds administered by the World Bank— often useful in post-conflict situations—should be considered for North Korea. • In order to ensure the necessary discipline in setting priorities and coordinating political and developmental aid as steps to reach agreed outcomes, the DPRK should consider the adoption of mechanisms such as the “transition results matrix.” • The development of a relationship between the World Bank and the DPRK, along with the incumbent coordination of development aid, will need to proceed through a phased process. • Given the particularities of the North Korean context, political and development aid must be coordinated appropriately to ensure economic rationality and the sustainability of political achievements. [ 13 ] babson • international financial institutions and korea If North Korea (Democratic People’s Republic of Korea, DPRK) were to relax its “military-first” policy and transform relations with its neighbors and the international community at large, such a “bold switchover” in security policy would provide both the DPRK leadership and the international community with strong incentives to anchor a new security environment by working to provide significant economic benefits for the North Korean people. The challenges would be enormous, however, and would include managing domestic political economy implications of the policy shift, developing a realistic economic development strategy that would be linked to a military demobilization and redeployment strategy, establishing new working relationships with foreign partners who would provide foreign aid and private investment, and effectively absorbing external finance and technical assistance. Among the first questions to be addressed under such a scenario is whether or not the DPRK would choose to finally become a regular member of the international financial institutions (IFI). Such a move would allow IFIs to play the same central role in policy dialogue, development finance, and donor coordination that they perform in other developing countries. This essay examines the issues that both the DPRK government and the international community would need to address in their efforts both to mobilize international aid to support transition in the DPRK and to build a future role for IFIs such as the World Bank. The main argument is that, although a potential role for IFIs in North Korea does exist, the unique conditions of the DPRK context would require that any such role be preceded by major shifts...