The Presidential Committee for Unification Preparation: II

Marcus Noland (PIIE) and Kent Boydston (PIIE)
December 8, 2015 7:00 AM

Last month in Seoul Noland participated in the first international symposium of the Presidential Commission for Unification Preparation. Several members are taking on the road so to speak, having visited Steph Haggard at UCSD yesterday, and coming to Washington later this week.

As he mentioned in his earlier post, the implicit message that can be derived from the work program of the PCUP’s economics subcommittee is that South Korea should engage North Korea economically and promote economic development there as a precursor to closer political integration. Of course, promoting economic development could also be interpreted as a hedge against North Korea’s potential collapse.

In August the PCUP put out a report on marketization in North Korea. The report argues that South Korea should leverage the development of markets in North Korea to incentivize North Korea to pursue reform and opening. Consistent with estimates that Haggard and Noland published in Witness to Transformation, the report calculates that on average roughly 70 percent of household income now comes from the non-official economy.

The report argues that fostering self-employed private business owners will improve the quality of life of North Koreans and help rebuild the economy. The development of such an entrepreneurial class will be important post-unification as well because there will be a cadre of North Koreans who will understand capital formation and market behavior and be positioned to act upon the expanded opportunities that unification will offer to both their personal and their region’s benefit.

Private businesses, in turn, require the movement of capital and information, this development needs to be encouraged to fulfill the potential of marketization. Currently the biggest obstacles to the expansion of private business activity are accessing capital, government surveillance, the necessity of engaging in bribery, procuring raw materials, and transporting goods.

In encouraging the constructive evolution of North Korea, lessons can be learned from the cases of China and Vietnam where an explosion of private economic activity and dramatically expanded cross-border economic integration has not ended Communist Party rule.

In this regard, perhaps the most essential task facing the North Koreans is to construct laws and institutions to move this activity out of the grey zone, a process with which China continues to grapple.    This process is particularly important insofar as the endpoint of the exercise is unification, which will require substantial convergence in the two systems. To this end, North-South relations have an important role to play in the development of the North Korean economy.

From this perspective, the report emphasizes a number of ideas or initiatives that can facilitate the process. These include microfinance (the report talks about the experience of Vietnam and the possibility of using cell phones for this purpose); the development of publicly or communally owned market-oriented entities along the lines of China’s township and village enterprises; and support for special economic zones beyond Kaesong. The report envisions the latter as having an incubator aspect where in mid-sized South Korean firms and/or KOTRA could offer technical or consultative support for starting up a business, partnering, and ultimately breaking into export markets.

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Marcus Noland Senior Research Staff
Kent Boydston Former Research Staff

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