Fiscal Segmentation and Economic Changes in North Korea

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The history of North Korea's fiscal segmentation can be categorized largely into four periods headed by different entities. First, between 1953 and 1972, Kim Il-sung created special budget to maintain political power. Second, from 1972 to 1984, Kim Jong-il gave birth to suryong economy to consolidate hereditary power succession. Third, from 1985 to 1994, party-state agencies began foreign currency earning activites. Finally, from 1995 to the present, in addition to the suryong economyand major party-state bodies, the foreign currency earning activities of party-state bodies for off-budget revenue have been gereralized and become the backbone of North Korean party-state bodies' budget system. This paper addresses the process of fiscal segmentation from the second period onwards.

1.Fiscal Segmentation in North Korea

2.1972-1984: Advent of Suryong Economy and the Expansion of the Market 

A. The Rise of Suryong Economy

B. Economic Hardship and the Expansion of the Market

C.The Monopoly of Foreign Currency Earnings by the Party Center

D. The Decay of the Planned-Economy

3.1985-1995: Surge in Foreign Currency Earning Activities of Major Party-state Agencies

A. Expansion of Foreign Currency Earning Agencies

B. The Generalization of Foreign Currency Earning Activities of the Party-State Agencies in the Early 1990s

4.Post 1995: ‘Songun (Military First)’ Policy and the Expansion of the Market

A. The Generalization of Public Agencies’ Foreign Currency Earning 

B. Kim Jong-il’s Style of Economic Management 

C. Agents of the Private Economy Strengthened

5. Summary and Conclusion

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Oct 29, 2014
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Leading economists discuss post–financial crisis policy dilemmas, including the dangers of complacency in a period of relative stability.

The Great Depression led to the Keynesian revolution and dramatic shifts in macroeconomic theory and macroeconomic policy. Similarly, the stagflation of the 1970s led to the adoption of the natural rate hypothesis and to a major reassessment of the role of macroeconomic policy. Should the financial crisis and the Great Recession lead to yet another major reassessment, to another intellectual revolution? Will it? If so, what form should it, or will it, take? These are the questions taken up in this book, in a series of contributions by policymakers and academics.

The contributors discuss the complex role of the financial sector, the relative roles of monetary and fiscal policy, the limits of monetary policy to address financial stability, the need for fiscal policy to play a more active role in stabilization, and the relative roles of financial regulation and macroprudential tools. The general message is a warning against going back to precrisis ways—to narrow inflation targeting, little use of fiscal policy for stabilization, and insufficient financial regulation.

David Aikman, Alan J. Auerbach, Ben S. Bernanke, Olivier Blanchard, Lael Brainard, Markus K. Brunnermeier, Marco Buti, Benoît Cœuré, Mario Draghi, Barry Eichengreen, Jason Furman, Gita Gopinath, Pierre-Olivier Gourinchas, Andrew G. Haldane, Philipp Hildebrand, Marc Hinterschweiger, Sujit Kapadia, Nellie Liang, Adam S. Posen, Raghuram Rajan, Valerie Ramey, Carmen Reinhart, Dani Rodrik, Robert E. Rubin, Jay C. Shambaugh, Tharman Shanmugaratnam, Jeremy C. Stein, Lawrence H. Summers

 Northeast Asia is a region where the interests of several great powers are in constant flux between competition and cooperation. Such a peculiar strategic environment is reflected in the dynamics of the Korean Peninsula. Therefore, efforts to manage affairs related to the security and future of the Korean Peninsula, especially in regards to the North Korean nuclear issue, requires cooperation among a wide cast of regional and strategic players including the United States, Japan, China nd Russia

― Joint Vision for the Alliance of the United States of America and the Republic of Korea


Chapter 1

The Strategy of the Obama Administration toward Northeast Asia/ Abraham Denmark (Center for a New America Security, CNAS)


Chapter 2

Myung-Bak Lee Administration’s North Korea Policy and the Inter-Korean Relations/ Jung-Ho Bae (Korea Institute for National Unification, KINU)


Chapter 3

A Regional Approach to the North Korea Conundrum

- Early Indications of an Obama Administration Policy/ L. Gordon Flake (The Maureen and Mike Mansfield Foundation)


Chapter 4

North Korea’s Policy toward the United States and the Coordination between the United States and South Korea - A Korean Perspective/ Choon-Kun Lee (Korea Institute for National Unification, KINU)


Chapter 5

Coordinating North Korea Policy - An American View/ Richard Fontaine & Micah Springut (Center for a New America Security, CNAS)


Chapter 6

ROK-U.S. Defense Cooperation against the North Korean Nuclear Threat - Strengthening Extended Deterrence/ Tae-Woo Kim (Korea Institute for Defense Analyses, KIDA)


Chapter 7

Coordinating U.S.-ROK Defenses against North Korean Nuclear/Missile Threat/ Stanley B. Weeks (Institute for Defense Analysis, Naval War College)


Chapter 8

The ROK’s Perspective of the ROK-U.S. Cooperation in the Transformation of the DPRK/ Sung-Wook Nam (The Institute for National Security Strategy, INSS)


Chapter 9

Needed: A Joint ROK-U.S. Strategy for Dealing with North Korea/ Ralph A. Cossa (Pacific Forum Center for Strategic and International Studies, CSIS)


Chapter 10

Strengthening the U.S.-Korea Alliance for the 21st Century

- The Role of Korean-American Partnership in Shaping Asia’s Emerging Order/ Daniel Twining (German Marshall Fund)


Chapter 11

Strengthening of the ROK-U.S. Alliance for the 21st Century/ Sung-Han Kim (Korea University)

Education to Strengthen our Capabilities for Peaceful Unification

The 20th century was on era of “extremes” that was marked by several ideological confrontations and wars. It was a long age of persecution and patience, especially on the part of the Koreans. Nevertheless, the ideology that drove the world into chaos and the leaders who led the hostile inter-Korean relations are now fading from the center stage of history. On December 17, 2011, Kim Jong Il died after ruling North Korea with blood-and-iron politics for 37 years. The global community is now expecting significant changes within the North Korean regime, the relations between the two Koreas, and the East Asian order.

The year 2015 will mark the 70th anniversary of the Korean division, which occurred in three overlapping phases: territorial, regime, and emotional. The first phase, territorial division, was introduced on August 15, 1945 when Soviet and U.S. forces divided the peninsula along the 38th parallel. The second phase, regime(sovereignty) division, was established with the formation of two separate governments on the Korean Peninsula; the Republic of Korea(ROK) was founded on August 15, 1948 and the Democratic People’s Republic of Korea(DPRK) was established on September 9, 1948. The division was finalized as it reached the third phase, emotional division(of people), following the North Korean invasion of the South on June 25, 1950 and the subsequent three-year fratricidal war.

Are we prepared to undertake unification and maintain peace on the Korean Peninsula? This issue is not only a national one that North and South Korea should resolve on their own, but it is also an international issue in which the interests of four relevant countries nations(the U.S., China, Japan, and Russia) are at stake. For this reason, peaceful unification requires the proper environment, capability and will from all parties. For the time being, we lack all three elements, as there are multiple levels of discord. In the global environment, competition is emerging between the hegemonic power in naval warfare(the U.S.) and the leading power in ground warfare(China).

Within the Korean Peninsula, there is increased distrust due to North Korea’s provocative actions including two nuclear tests, the sinking of a South Korean naval ship, and the shelling of a South Korean island. There is discord even within South Korean society: ideological conflicts between the conservatives and liberals, regional confrontation between the southeastern and southwestern regions, generation gaps resulting from a rapid transition to an information-oriented society, and class conflicts that have emerged from neo-liberalism and the collapse of the middle class.

Then What are the steps that we should take to make way for peaceful unification? We must first properly prioritize the issues at hand. The top priority should be given to national harmony, then international cooperation, and finally rapprochement on the Korean Peninsula. This is attributed to the fact that South Korean society characterized by internal organization and preparedness is the cornerstone of a peaceful unification; consequently, public education on unification is crucial. Despite the progress made thus far, unification education still has some shortcomings. Until this point in time, education on unification has strengthened a negative image of the North Korean situation, leading to arguments for the deferral of national unification and an increased number of people against it. Governmental programs that were intended to promote unification policies have also taken a passive, or even a critical approach on the issue due to its controversial nature.

I would like to acknowledge that although multiple researchers compiled this book after much discussion and thorough review, it still has some shortcomings that will be address in the next edition. Finally, I’d like to express my deepest gratitude to the National Unification Advisory Council and the Unification Education Council for providing the videos and resources for our research...

The aim of this project is to research the necessity of international cooperation on Korean unification in legal terms as South Korea’s Unification Policy and how issues of the Korean Peninsula have been dealt with in the international framework. Since this is the second year of a five-year project, the conceptual aspect requires clarification in the overall aspect and this requires a multidisciplinary approach. But the main focus remains the legal aspect, international law, in particular.


This study assumes that unification will be a gradual process, generally in three stages: (1) inter-Korean cooperation, (2) negotiation for inter-Korean unification (be it North Korea’s collapse, or actual inter-Korean negotiation for unification, this stage includes any inter-Korean negotiation for unification and international negotiation formula, such as Six Party Talks, etc.), and (3) post-unification integration. The study begins with the understanding that South Korea needs to be prepared for legal matters potentially arising in these processes. The project this year, in particular, deals with the legal issues that should be dealt with in the first and second stages.


The scope of the papers in this project covers four main areas. The first is time span. The research for this project covers the 19th century to the present and draws future-oriented implications, but the main focus is on current issues. The second is in regard to approaches. The study deals with three main approaches: historical, political, and legal, but for purposes of this project, the main focus is on the legal aspect. The third concerns the issues addressed. These are the nuclear issue, the military issue, inter-Korean cooperation issues, and the human rights issue. Finally, the scope of actors considered includes South and North Korea, neighboring countries (the U.S., China, Japan, and Russia), and international organizations (e.g., UN, WFP, WHO, etc.).


The papers included here are organized into three main sections. The first concerns the meaning of Korean unification and the context of international cooperation. Park Jong-Chul provides a general overview of the Park Geun-Hye administration’s North Korea and unification policy, referred to as “Trustpolitik,” and the trust-building process on the Korean Peninsula, as well as the need for international cooperation. Sue Mi Terry examines the U.S. and China’s perspective on the issues laid out above. She explores areas where U.S.-China interests converge and diverge and whether strategic cooperation and coordination between the two nations are possible in the case of Korean unification.


The second section presents historical and legal perspectives related to the situation on the Korean peninsula. Charles K. Armstrong’s work on the historical perspective is divided into three sections chronologically: (1) the struggle of 19th Century Korea to become a modern sovereign state and its failure with the advent of colonial rule, (2) war leading to the division of the Korean Peninsula, and (3) the inter-Korean situation based on de facto recognition (as opposed to de jure) as a political entity arising out of the 1972 Joint Communiqué and the “special relationship” from then on. Next, Roh Jeong-Ho provides a legal approach to the question of inter-Korean relations and the debate on unification by dividing the period from 1876 to the present day into five distinct periods and examining the limitations to the legal order and the evolution of world order as they pertain to Korea. Finally, Leon V. Sigal discusses how international law and institutions might improve South Korean security and facilitate inter-Korean reconciliation with special attention to confidence-building in the West Sea.


The third section examines in greater detail the legal aspects of Inter-Korean Cooperation and human rights. Regarding human rights, it is important to consider the link between inter-Korean cooperation and human rights. The improvement of human rights and people’s livelihood in North Korea, which is part of the ultimate goal of unification, can be achieved by inter-Korean cooperation. Inter-Korean cooperation leads to inducing change in North Korea, which then logically leads to the improvement of human rights in North Korea. Lee Hyo-Won focuses on the legal matters regarding the establishment of a DMZ World Peace Park. Soung Jea-Hyen looks at the legal matters regarding the internationalization of the Gaeseong Industrial Complex. Cho Jung-Hyun provides an analysis of the contents and legal implications of the recent outcome of the UN Commission of Inquiry (COI) on Human Rights in the DPRK, such as the meaning of stating “crimes against humanity,” the notion of Responsibility to Protect (R2P) in respect to North Korea, and transitional justice in the possible post-unification stage. Finally, David Hawk tracks North Korean human rights developments in the post-COI period.

Preface/ Jong-Chul Park and Jeong-Ho Roh

I. The Meaning of Korean Unification in the Context of International Cooperation  South Korea’s TrustPolitik and International Cooperation.....1

South Korea’s TrustPolitik and International Cooperation/  Jong-Chul Park.....3

U.S.-China Rivalry and the Unification of the Korean Peninsula/ Sue Mi Terry.....31

II. The Situation on the Korean Peninsula: Historical and Legal Perspectives .....59

An Unfinished Project: Challenges and Struggles of Korea to Become a Modern Sovereign Nation-State/ Charles K. Armstrong.....61

The Limits of Legal Order in an Evolving World Order on the Korean Peninsula/ Jeong-Ho Roh.....89

Legal Approaches to Korean Security in the Early Stages of Unification: The Armistice Agreement and the NLL/ Leon V. Sigal.....119

III. Legal Aspects of Inter-Korean Cooperation and Human Rights.....145

Legal Perspective and International Cooperation on World Peace Park in DMZ between South and North Korea

/ Hyo-Won Lee.....147

Plan for the Internationalization of the Kaesong Industrial Region and the Resolution of Its Commercial Disputes/ Jea-Hyen Soung.....169

The Report of the UN Commission of Inquiry (COI) on North Korean Human Rights: Some International Legal Analyses/

Jung-Hyun Cho.....195

North Korea’s Response to the UN Commission of Inquiry (COI) Report on the Situation of Human Rights in the Democratic People’s Republic of Korea/ David Hawk.....213



This book analyzes the cost of division that the four powers must bear as well as the benefits of nification they will acquire. There has been much research on the same topic, but mostly done from the perspective of Korean scholars. However, this book provides perspectives of scholars from each of the four states as well as Asia-Pacific region. This book is part of an ongoing effort by KINU to strengthen South Korea’s unification diplomacy.


This book is divided into 10 chapters. Chapter 1-8 analyze the cost of division and the benefits of unification from the security and economic perspective of the United States, Japan, China, and Russia. Chapter 9 and 10 look at the bigger picture by discussing the division cost and benefits of unification from the standpoint of the Asia-Pacific region as a whole. Based on the analyses of the chapters, the conclusion chapter examines the similarities and differences of the division cost that the four powers must bear as well as the benefits they will obtain.





The Costs of Division and the Benefits of Unification for the Four Northeast Asian Powers/ Kook-Shin Kim, Jae-Jeok Park


Chapter 1

The Costs of Korean Division and the Benefits of Korean Unification for U.S. National Security/ Kongdan Katy Oh

Chapter 2

Economic Implications for the United States of the Divided Korean Peninsula/ William B. Brown

Chapter 3

Korean Peninsula Division/Unification and China : From the Security Perspective of China/ Ming Liu

Chapter 4

Korean Peninsula Division/Unification and China : From the Economic Perspective of China/ Jiyoung Zheng,Jianzhong Jiang

Chapter 5

Korean Peninsula Division/Unification : From the Security Perspective of Japan/ Tomohiko Satake

Chapter 6

Costs and Benefits of Korean Unification for Japan : Political and Economic Perspectives/ Sachio Nakato

Chapter 7

Korean Peninsula Division/Unification and Russia : From the Security Perspective of Russia/ Leonid Petrov

Chapter 8

Korean Peninsula Division/Unification and Russia : From the Economic Perspective of Russia/ Alexander Fedorovskiy

Chapter 9

Korean Peninsula Division/Unification and Security Order in the Asia-Pacific Region/ Thomas S. Wilkins

Chapter 10

Korean Peninsula Unification : Opportunities and Challenges to Asia-Pacific Economies/ Jeffrey Robertson


As the debate about unification has recently been enlivened in Korean society, the flame of hope for unification is being re-kindled. However, there are still many who focus solely on the enormous costs involved, while others remain passive toward the unification issue. Particularly members of the younger generation feel satisfied with ‘co-existence under an unstable peace’ as a divided peninsula. However, as indicated in a special report by the Russian Institute of World Economy and International Relations (IMEMO) which assessed that “North Korea is already in the process of collapse,” the unification issue is no longer something we can avoid.

Therefore, armed with this consciousness of the problems of our era, this project assesses the significance of the recent rekindling of interest in unification and considers a new vision of unification and its potential value, dealing intensively with the positions and roles of the four neighboring powers regarding unification as well as ideas for strategic cooperation among South Korea and its powerful neighbors.

The publication of this project owes much to the diligent efforts of KINU research associates such as Hyo Min Lee, Uichan Ko and Jisuk Park who reviewed and edited the various papers. Also, the English version of this publication benefited greatly from the accurate translations done by research associates Meredith Rose Shaw and Hyo Min Lee.

It is the editor’s hope that this research project can help both Korean and foreign experts, academics, and readers to better understand the value of Korean unification and the various positions and roles that can be played by the US, Japan, China and Russia.


Chapter 1


A Vision of Korean Unification and Its Value : Building Great Power Korea/ Jung-Ho Bae | Director, Center for International Relations Studies, KINU


Chapter 2


German Reunification and the European Union/ Don-Jay Yeom | Dean, Graduate School of Strategic Studies, Sungkyunkwan University


Chapter 3


The United States and Korean Unification/ Ralph Hassig and Kongdan Oh | The Institute for Defense Analyses(IDA)


Chapter 4


Japan’s Role and Position on Korean Unification/ Takashi Inoguchi | President, University of Niigata Prefecture

Professor Emeritus, University of Tokyo


Chapter 5


Managing the Path toward Eventual Korean Unification : The Chinese Way/ You Ji | Associate Professor, School of Social Science & International Studies, The University of New South Wales


Chapter 6


Russia’s Role and Position on Korean Unification/ Alexander Panov | Ambassador Extraordinary and Plenipotentiary


Chapter 7


Korea’s Diplomatic Strategy for Unifying the Korean Peninsula/ Young-Ho Park | Senior Research Fellow, KINU

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