EXPLORING THE IMPLICATIONS OF ALTERNATIVE NORTH KOREAN ENDGAMES: RESULTS FROM A

Created: 1/21/1998

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Intelligence Report

ujjice of ASrarrracTpjc ana izmn American Analysts

Exploring the bnplicatioiis of Alternative North Korean Endgames: Resultsiscussion Panel on Continuing Coexistence Between North and South Korea I

An Introductory Note

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specialists to Further ermine some issues Out arose from the7 Intelligence Comnninify crisis simulation on alternative Koreann that simulation, regional dyTiamics were examined in responseimited North Korean invasion of theoup atternj* and resulting civil war in the North,eaceful unification under Seoul's leadership.

The specialists panel included former UScademic experts, analysts from leading foreign policy institutes and the Congressional Research Service, and both active and retired miliury and inielligenoe officers (sec I

This report suimraiizes the panel's deliberations on an alternative cnitcome that was alluded to but not explored in the March crisis simulation. Specifically, tbe simulation revealed Lhat the optimum Korean endgame from Soulh Korea's perspective wouidradual process of recorxiUation leading to eventual reunification on South Korean terms without unacceptable ecooomicConsequently, the panel was asked to consider both the potential for rtxooalialion and tbe implicationsorenually prolonged period of competitive coexistence between the two Korean

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APPROVED FOR RELEASE

* Neither the panel's deliberations nor this report arc intended to predict the future course of events on the Korean Peninsula. Rather, the panel's discussions should be viewed as an interactive effort by the participants to identify key factors that need to be considered in assessing the prospects for or against the possible continuation of a

variant of the status quo in inter-Korean relations. Nevertheless, the panel's perspectives, along with the March crisis simulation, serveool lo enhance our understanding of the political, military, and economic dynamics at work on the Korean Peninsula as well as to gain insights into the policy decisions racing the two Koreas.

This repot! it prepared by analyst] from the!

Office of TramnaiKnal Iswes, and rha Office of Anin Fsahc snd Uun Artwicaa Anslyiit. Comasents rescT CUeries arc aricetat and may be directed I

Exploring the Implications of Alternative North Korean Endgames: Resultsiscussion Panel on Continuing Coexistence Between North and South Korea

Sumniiiry |^

The run<iamental variable in assessing the Korean endgame is tbe question of Lime. Will thereradual peaceful reintegration on the peninsula as preferred by South Korea and the other involved powers? Conversely, will North Korea be able to preserve itself as an independent staterolonged period, thereby deferring the complex issue of reunification? Or is the regime in the North more likely to collapseear-term failure of its attempts to muddle through? j |

On balance, the sense of the specialists pane! was that given the multiple problems confronting Kim Chong-il's regime, there may berief window of time to consider how to cope with the probable reality that the North willhard liuTding" The prospect of achievingsoft landing" orno landing" scenario appears illusoryegime change in the North. Q

The panelists agreedumber of factors lend credence to the prospect that the near-term future on tbe Korean Peninsula may be characterizedontinuing, unstable coexistence between the North aod the South.

There appears to be no significant threats to Kim Chong-il's ability to stay in command, and the leadership shows no signs of losing Its political will to stay the course.

Most important, North Korea continues to be able to leverage outside concerns about the potential negative consequences of regime collapse toinimalist package of survival support.

Even before its current economic crisis, South Korea preferred the perpetuation of separate regimes because of the high costs of accelerated reunification. The oilier regional powers find it difficult to contemplate an alternative to the status quo and appear to prefer to help the North muddle through.

A continuing period of cornpetitive coexistence also appears more plausible than achieving the ircoiialiauon envisioned innter-Korean accord or North Korea's risking significant systemic reforms and opening to tbe outside.

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Problems militating against reconciiialion include the North's claim to represent the sole legitimate power on tbe peninsula and its likely cootauing foreign policy competition with the South.

The policy changes that would be required to induce substantial external aid and mvestment are mlilcely to be made because Kim views major economic reform as threatening his regime's viability.

Whileariety of factors that could prolong an independent North Korea, the overall sense of the panel was ihal the Kim regime cannot rernain viable for the long term. Although panelists' views were split, the majority doubted th* current, deteriorating status could persist beyond five years. The steady, seemingly irreversible economic degradation in ihe North cannot be stanched by minimalist susuunment aid; the current situation in North Korea appears beyond corrective actions that do not fundamentally threaten tbe regime's viability.

the timing is uncertain, the prospect seems strong that the Kim regime's refusal to reverse course in favor of major reform could generate some catalyst that will lead to its collapse.

The panel saw no viable alternative beyond continuing ongoing efforts at pursuing tension reduction but tbe participants' pessimism raises the legitimate possibilityrolonged period of coexistence with the present regime in the North may not be sustainable.

Consequently, the problem of refining and coordinating contingency plans for the collapse in the North would appear toore urgent challenge to South Korea, the United States, and Japan.

In the panel'sajor challenge to Washington will be reassuring Seoul that prudent planningorse case outcome docs notessening of the US cortrmitment to support any crpportunity to resume inter-Korean dialogue.

The panel assessed that the United Stales and South Korea areritical juncture on lhe peninsula that will be definederiod of instabUity and uncertainty. The interaction between Seoul and Washington in dealingossible hard landing in the North willritical effect on US influenceuture, unified Korea. Indeed, in the panel's view, coping with tbe challenge on the Korean Peninsula is likely to be the defining issue in terms of the US ability to continue to shape the security environment in Northeast Asia.

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panel was unable to establish tn agreed lime frame for bowine of cc^npclitivc coexistence might continue. Opinion ranged from as fewean to possiblv as long asears but most rjarticipants seemed uricomfortable with the notion thai North Korea could muddle through for moreears.

The North effectively haseggar stale living onhin drip lifeline" of external assistance. Panelists were split over how manyinimalist sustainment package would be practicable, given the mavsive inefficiencies that are strangling the economy (seeome panelists commented that economically North Korea couldittle andot in terms of reform and infrastructure modernization; however, no individual reform would be free of social and political risk. Other panelists noted thai even withears of moderate aid, the economy would not be sustainable without external assistance.

On balance, however, the niajorify of the panelists agreed that North Korea under Kim Chong-il would not be willing to effect the policy changes necessary to anract more substantial assistance and mvestrnent because of tbe threat the attendant opening of North Korean society would pose to the regime'sost panel participants felt that reform measures, such as creating free trade zones and allowing small market interactions, have been too little too late and that tbe current situation in North Korea appears beyond corrective actions that do not fundamentally threaten the regime's legitimacy and viability.

Some participants commented that irrespective of tbe absence of broader policy changes under Kim Chong-il. there mayay to negotiate with the North an expanding series of tension reductionsupplement tbe requirements in the Agreedreturn for South Korea and the involved powers providing enough aid to allow some improvement in the North Korean statustaged, weapons specific road map could be devised, for example, requiring tbe North progressively to eliminate chemical and other weapons for aid.

Conversely, other participants argued that the price (or substantial tension reduction rnore Ukely wouldultiyear. multibillion aid and bvestirat package that South Korea, as the raimary involved party, has ocither the resources nor the political will to implement Some panelisis rioted lhat without tension reduction or reform in the North, thereroblem of political sustainability inong-term continuation of aid sufficient to proprutal North Korean regime but inadequate to ameliorate the suffering of ihc North's populace. Q

* One panxvotn pexmed ou< lhal we* know ihcetntance by Kimopolk.r particular.do not know wim hii rmcOop would be if (seedcktocc of implementing bux change* or beingbc leader. Therefore, the pointer* tye overleaf to Kanjvcaald ac^ poiaaral raavtval. I I

Given theses considerations, die overall sense of the pane! was thateriod of continuing competitive coexistence may be plausible, it woulderiod of instability and uncertainty without tbe prospect that tbe North will be persuaded toutetantive conimitmenl to structural reform or to give up leverage by reducing its military threat

factors in north korea's near-term survival

Although the triajority of the panel saw no prospect that the Kim Chong-il regime would initiate the systemic adjustments necessary to maintain the long-term viability of North Korea, all agreed ibat thereumber of factors that couldontmuing--thoughquo. Domestically, there arc no signs of instability that appear lo directlyeified Kimbility to stay inoreover, the regime derives its ideological legitimacy from its mission to unity Korea and not from its ability to perform economically.

Echoing arguments made in China and Japan, participants said that the argument can be made that despite overall economic dctericcation, the North can weather its difficulties for some time at the near-subsistence standards to which the people are accustomed. Although the national economy is not self-sufficient, it was pointed out that the low levels of domestic consurnption and the essentially localized system of self-sufficiency in manufactured goods consumed by North Koreansuffer for the central regime and gives it some degree of flexibility in meeting its foreign exchange needs.

Some panelists also pointed out that while the North cannot become self-sufficient, it needs only about an0ear in hard currency to meet iu needs for food and other critical items and may be able to meet this needumber of sources. P'yongyang earns some money, for example, from military sales, drug smuggling, counterfeiting, providing cheap labor to Russia, and selling air rights to foreign airlines. Most important. North Korea has been able to leverage outside concerns about the negative consequences of catastrophic collapse tohin lifeline of survival support These varied sources may be enough to cover tbe most desperate shortfalls and allow the North to muddle through. Q

* Some pane lists note thai ihe tact the repine relies on coercion rather than popular supportign of its potKttial fragjity. Others, however, pointedhe sninhecilityurnhei of coercive, tuthcdiarun Third Wceld regimes. | |

Another factor that may prolong regime survival is that the leadership shows no signs of losing its political will to stay the course. Several panelists pointed out that the disarray, confusion, and social and economic breakdown in the former Soviet Union and elsewhere has been viewed as proof of the wisdom of North Korea's version of socialism. However delusioriary, Kim Chong-il appears to have concluded that the

North Korean system has been managed correctly (in terms or regime survival) and that collapse in the former Soviet Union sternrned from the absence of the firm guidancereat leader and an erosion of ideology. '

Other panelists pointed out that the Northatchilemma that remforces the regime's will to continue to seek to survive by adopting policies for procrastination North Korea under Kim Cbong-il has no choice but to defend its system. To concede that North Korea's socialisthas failed wouldlow so devastating that it psychologically would be unbearable to admit such failure South Korea's current financial turmoil is likely to reinforce Kim's deterrnination to maintain the illusion that Pyongyang's system is infinitely superior lo Seoul'sin terms of defending Korean sovereignty.*

Tbe effort to sustain ine illusion makes North Korea'srucial reorurerncnt for its near-terra survival. If North Korea were lo alter course by tackling its systemic problems and adopting policies designed to attract substantia] outside investment and assistance, the regime would likely have to face taplemeritauou ofnter-Korean agreement, which in turn would likely pave the way for ibe North Korean regime's demise in the long run. |

Externally, the panel noted that the Southnot forsaking the goal of eventualthe rwpetuaoon of separate regimes because of die high costs ofven before the cxirreot economic crisis, it was unclear whether South Korea could nonage the consequencesorth Korean collapse. Despite govern merit contingency planning. South Koreans have been concerned by the prospect of massive rnovernents of people as well .as uncontrollable demands for economic aid and the legal, adminisuatiyc, and political problems ofarge and economically backward North. Q

Accordingumber of Korean scholars. Soulh Korea's fear of losing control over the situation once the unification process starts is real. Some panelists pointed out that the persistence of regional animosities is tbe Scorn has aroused some concern that South Korea may not be able to survive the vortex of national unification. I

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The panel also noted thai Cnina's apparent determination not lo allow North Korea to simply collapse couldrucial factor in prolonging the Kim regime. None of the panelistsubstantial Chinese aid program but they presumed China will continue lo be willing to provide enough resources to allow North Korea to maintain its existenceeparate but weak state. VVhik allowing that the current financial

situation io both South Korea and Japan introduces significant uncertainty, some panelists argued that Japan could provide more aid in conjunction with reopening normalization talks with the North and that movement by Tokyo could overcome Seoul's reluctance for more, albeit limited, economic involvement with the North. Finally, the North is benefiting from its participation in the KEDO arrangement to supply light-water reactors and in programs with international agencies to provide humanitarian aid Q

Can the Two Koreas Reconcile? F

Tbe panelistsumber of problems militatingenuine reconciliation between the two Koreas. First, the North Korean state's mternal logic is based on iu central claim to represent the sole legitimate power on tbe peninsula and its orientation toward reuniting the Korean people under an irulependent socialist state. This is an historic claim and. given that performance-based legjtirnacy cannot be obtained, the regime's ideological unoerpuining would be eliminated if it abandoned its cornfritmeni to reumficatioo. Some participants likened the situation to tha: in East Germany where the regime also relied on ideologyegitimating factor and. thus, could only resist change or collapse- -it could not reconcile- Q

A second, related problem is that many panelists felt reconciliation would require economic rejuvenation in the North to replace the loss of ideological legitimacy. But, as noted, major economic reform is not seeniable option for the Nonh because it would undermine the regime. If Kim Chong-il were to die or beew regime could conceivably commit to economic reform but the panelists felt that such change would be difficult, unstable, and full of unreruunty.

A number of participants argueeadership change would be less likely to leadrejuvenation thaneveraged buy-out or to Chapterstylethe South. Others noted thai leadership change would require extensiveof the political system that would be difficult to achieve and thatmore questions about the basis of legitimacy of the new regime. The fact thatinvestment needed lo rebuild the North's economy would have to comeKorea also wouldew leadership's ability to chumlegitimacy. Consequently, instability would persist as questions would beto why there wouldeedeparate regime in the

A third problem iseconciliation could entail unacceptable migration problems Reconciliation presumably would Include expanding rights to travel between the North and South with the likely result that many people would leave theass inflow of rKmherners, who all would have citizenship rights under the South Korean Constitution, could create potentially unmanageable tensions on the peninsula.

Moreover. South Koreans already are concerned that the prospectillion refugees would entail costs that would have to be borne by Seoul alone.

Finally, the North's foreign dealings would be problernaticeconciliation process. The North, for example, could seek to improve its ties with both China and Japan as two of the largest potential sources of economic assistance outside theew regime in the North could also be inclined to look to Chinauarantor of its political interests. Such efforts could lead to continuing foreign policy competition and heightened concern in the South that the North's regime might emergeore important force than wanted by Seoul. P

the US perspective, panelists saw both opportunity and risk inear-term competitive coexistence scenarioeconciliation scenario. In both scenarios, the United States would continue to have tbe opportunity to demonstrate its credibilityegional security guarantor and cooperate with Seoul in ways that may maximize the ability of the United States to retainsome militaryan eventual reunified Korea. Despite the improved security environment that could be generatedeconciliation process. Seoul also would likely want strong politicaj backing from Washington as well as continued US force deployment as insurancereakdown in the process.

Some panelists noted that Seoul likely would continue to look to the United States to balance efforts by China and Japan torocess of accommodation to increase their influence on the peninsula. Other panelists pointed to the US longstanding support for eventual Korean unification as giving Washington leverage in managing tactical strains that are likely toeature in either scenario. Some participants commented that Washington has an advantage in that Seoul recognizes that the United States, unlike the other regional powers, has no geopolitical interest in forestalling or corjyplieating efforts to achieve eventual reunification on South Korean terms.

In terms of risk, the panelists' primary concerneriod of competitive coexistence was the potential for South Korea to react negatively if it perceived the United States as moving toward more normal relations with the North without concomitant progress in North-South dialogue. Despite tbe South's fear of collapse in the North and the consequences of an accelerated unification, Seoul's desire to maintain the upper hand in inter-Korean relations could easily lead South Korea to misinterpret tbe intent behind future US negotiating efforts to ameliorate Ihe situation on the peninsula.

The panelists repeatedly cited their perception of growing South Korea's wariness and distrust toward the United States, notwithstanding the initiation of tbe four-party talks

process. The depth of South Korea's current ecotiornic crisis hasense of vulnerability that couldoss of confidence and heightened paranoia in its dealings with the United States as well as tbe other regional powers.'

Conversely, if some form of accotnrricdative detente were to emerge between tbe North and South, participants commented tha; dornestic pressure could build on Seoul io reconfigure or perhaps remove US forces and to hrnit US involvement in the peninsula. Prolonged economic downturn in the South combinederception of reduced threat from tbe North could alsoegative impact on Seoul's ability and wilJingness to maintain adequate levels of host-nation support.j"

The panel considered the prospect thateconciliation scenario the North mightontinuing US force presenceonstraint on an economically troubled but asymmetrically stronger South Korea. The participants concluded, however, that the North's persistent stand against the eviloreign presence on the peninsula was unlikely to be modified P

Finally, from the panel'sajor challenge for the United Slates inontinuing coexistence scenarioess likely reconciliation scenario would be managing Seoul's perceptions of the degree of Washington's support for the South's approach toward inter-Korean relations In the panelists'rincipal risk isomrnnatjor. of Sour. Korean frusuauon stemrrung from iu ecoixaruc difficulties and us persistent desireetain control over dealings with the North could leadouth Korean misinterpretations of US actions that ultamatcly could jecpardirc the USostunificanon Korea. Asm the previous Korean crisis simulation, the panelists notedouring of US-South Korean relations that imperiled the ability of the United States to retain some form of force presence on the peninsula could pose significant strains on tbe US-Japan security relationship. I

In Sustaining tbe Status Quo

acknowledging the plausibilityariety of factors that could support the continuation of an independent North Korea, the overall sense of lhe panel was that the status quo cannot continue in the long term. Many participants averred that the status quo situation is unstable and could be undermined by many different problems.

The major problem is lhat the economic degradation is continuing, making it likely that the flows of rruriirnalisi susiainrrjent aid probably will not be practicable for moreew years. Some participants noted that the industrialized economy of the North is more like those in Easlem Europe than the more agrarian ecooorrues in China and Vietnam Others pointed out that even further agricultural reforms would not be

the structure of theenable the North to be self-sufficient in foodstuffs.!

Considering the continuing need to import food and energy along with the deterioration in North Korea's industrial irifrastiucture, the panel argued that providing only miriimaUst sustainrnent aid will not be able to keep tbe economy viable. Tbe participants notedelated problem with the continuation of the status quo will be the lack of rnajor longer-term relief packages. Japan may not be willing toarge aid package given its financial difficulties along with the likelihood that the North would demand billions in reparations from Japan for its past colonial rule over Korea. South Korea lacks the resources, and there is an apparent lack of political will in Seoul to provide significant aid to the North.rj

The participants argued that, although China is likely to continue to provide limited aid in hopes oforth Korean collapse, Chinese policy toward the North is driven by strategic factors. Having failed in its own effortseriod of years to persuade P'yongyang to adopt economic reform, China appears toeak North Koreaevitalized but recalcitrant North that continues toilitary threat to the South. Moreover, providing much more significant aid to the North could risk jeopardizing Beijing's relations with Seoul without necessarily increasing China's ability to modify North Korean behavior. I

Conclusions

Although the North Korean regime may be able to prolong itself in the near term, no breakthrough in inter-Korean relations is likely to occur unless P'yongyang changes its uaditional policy.hange seems unlikely under Kim Chong-il given his perspective that economic experimentation undermined the former Soviet Union and the communist regimes in Eastern Europe. Moreover, South Korea's economic crisis is likely to reinforce Kim's perception that his regime can survive by playing on the legitimate concerns of the other regional powers that forestalling collapse in the North remains imperative to averting potential disaster on the peninsula. Kim may also conclude that Seoul's economic problems will present tbe North with fresh opportunities to exploit potential social tensions in the South and to continue to attempt to drive wedgesess confident South Korea and the United States. Japan, and China.!

The sense of the Northeast Asian specialists panel was that the Kim regime will not sacrifice its own survival by adopting major reform and consequently, the situation on tbe peninsula is likely to remain unstable and precarious. The new South Korean administration may succeed in restoring some aspects of inter-Korean dialogue but President Kim Tae-chung's confederation proposal contains the same elements that the North has deemed too threatening in the past (seeven if some resumption

of dialogue occurs, genuine tension reduction seems remoteontinuing corripetitive coexistence scenario because p'yongyang is unlikely to give up the leverage it retainsilitary threat.

The powers involved in the peninsula appear to nave neither tbe resources toajor aidestment program for the North nor the ability to persuade the Kim regime to adopt the policy changes thai would be required forrogram. Consequently, the degenerativespiral in the North is likely to continue with no way out Although the liming is uncertain, the prospect seems strong that the Kim regime's refusal to reverse course will generate some catalyst that will lead to iu collapse.'j j

ew regime emerges in the North, the panelists felt that it was likely to be unstable and would still have to confront the issue of economic liberalization. The participanu did not rule out the prospectuccessor regime couldore accommodating policy toward the South. There was general agreement, however, ihai the goalew regime would also likely be preservation of North Korea's existenceeparate state rather than reunification, j j

For now. the Kim regime is likely to continue to pursue policies of procrastination and tbe panelists saw little option for the United States and the other involved powers but to continue negotiating with the North while providing minimalist aid packages to avert short-term regimeinority of panel participants noted thatost trade-oft" issue in terms of whether it is cheaper to cut off North Korea and let the regime die than to keep trying to provide enough aid to let the North get byeriod of years. As noted by tbe majority, however, the dilemma is that no one knowsutoff of aid would lead to because the North retains the leverage toariety of crises.

Although the panel saw no viable alternative beyond continuing ongoing efforts at pursuing tension reduction, tbe panelists' riessimistic outlook raises the legitimate prospectrolonged period of coexistence with the present regime in the North may not be sustainable. On the basis of the participanu' assessment of the strategic inflexibility of the Kim regime and the inexorable economic degradation in the North, the problem of refining and coordinating contingency plansollapse in the North would appear toore urgeni challenge for South Korea, the United States, and Japan. China is likely to continue to be reluctant to discuss planningorean crisis contingency with the United States but the panelists noted ibat US-China relations wouldritical variable because China would be in tbe surjogcsl posiuon to mfiueace the outcomeollapse scenario. In the view of the pand. the shared

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President Kim Tae-chung's Reunification Formula

Before his election as president Kim Tae-chung reaffirmed the proposal he first made1three-stage peaceful reunificationhe three stages are:

Peaceful coexistence during which the North and Southnion of two republics linked by mutual recognition of sovereigntyechanism to ensure against aggression.

Peaceful exchanges, during which official delegations hold regular conferences and arrange economic, cultural, and athletic exchanges to restore mutual confidence and pannational consensus. The exchanges would lead to formationrovisional federation based on the coexistence of separate governments in the North and South.

. Peaceful unification, which would complete the process of integration.

Kim Tae-chung distinguishes bis proposal from the North Korean federation proposal by stressing the need for both sides to begin the process by acknowledging the independent sovereignty of the other side and by focusing on building mutual understanding and confidence at each stage, rather than on specific institutional arrangements.

interest between the United Stales and China in arrichorating the outcome of the Korean endgame at least provides an opportunity to deepen die dialogue between Beijing and Washington about potential negative aeveloprrierits on the

Coping with the challenge posedotenoally unsustainable status quo on the peninsula will be complicated by deepening ecooormc exigency in the South. An increased senselnerjbiiuy and sagging confickencc combinedontinuing desire to maintain control in dealing with tbe North is likely to complicate the process ofoordinated strategy between the United States. South Korea, and Japan for dealingotential hard landing in the North. In the view of the panel, the South's current economic difficulties pose two problems in particular. First, the arduous task of economic restructuring in the South is likely to make it even rnore difficult for Seoul to face the realistic prospect that the North could collapse sooner rather than later.ey variable in South Korea's foreign relations will be its

' FhIcries of interviews with Chinese officials in ihe springcponmeiu of Defense ceeuultants. Banning Garrett and Bonnie Claser, corscJudedlurp deterioration of ihe situation la North Korea could lead the Chinese leadership to reevaluate its position of refusing to engage in joint condnecney planning with the United Slates.

quest for foreign fiinding that could produce new strains in its relations with the United Stales.

Despite the foregoing problems, panelists noted the importance of deepening the trilateral dialogue among the United States, South Korea, and Japan on both die security and financial aspecis of tbe Korean endgame. In the panel'sajor challenge for Washington will be reassuring Seoul that its interests will not be jeopardized in any way during the four-parry talks process and that prudent planningorse case outcome does notessening of the United States' comtniunent to support any opportunity to resume inter-Korean dialogue.

In conclusion, the panel assessed that the United States and South Korea areritical juncture on the peninsula that will be definederiod of instability and uncertainty. The interaction between Seoul and Washington in dealingossible hard landing in the North willritical effect on US influenceuture, unified Korea. Indeed, in the panel's view, coping with the challenge on the Korean Peninsula is likely to be the defining issue in terms of ihe US ability to continue to shape the security environment in Northeast Asia.

is

Appendix A

Panel Discussants

Rear Adrrura! Clarence Armstrong, USN (ret.)

Mr. Mel Chaloupka, Chief Gaming and Simulation. US Pacific Corrurarid

Asst. Defense Intelligence Officer, EAP

Professor Don Daniel US Naval War College

Nicholas Eberstadt, Visiting Scholar American Enterprise Institute

Fritz Ermaih

Former Chairman

National Intelligence Council

Robert Fauver

National Intelligence Officer for Economics. CIA

Brigadier General Thomas O. Flemingormer Deputy Director for

Strategic Planning and Policy US Pacific Command

Ambassador Chas. W. Freeman, Jr. Former Assistant Secretary of Defense for International Security Affairs

Richard Kerr

Former Deputy Director of Central Inielugence

Paul Kreisberg Woodrow Wilson Institute

Professor Kenneth Lieberthal University of Michigan

Robert A. Manning Council on Foreign Relations

lames McCuIlough

Instiiute of Iniernational Studies

University of South Carolina

Rear Admiral Eric McVadon, USNormer Defense Attache to China

Jonathan Pollock Rand Corporation

Daryl Plunk Heriiagc Foundation

James Przystup Heritage Foundation

Professor Robert Ross Boslon College

ShjnRin-sup

Congressional Research Service Analysts from CIA

This appendix is

Appendix B

North Korea's Dim Economic Prospects

North Korean industrial and agricultural output continues to fall. Average mdustrial operations in7 were down to less thanercent of capacity.

Only portions of one or two facilities are now

operating in major industries such as steel and cement. The fall grain harvest wasillion metric tons, according to CIA estimates,ercent from last year and far short ofillion tons tbe North needs to meet even minimal rations.

P'yongyang cannot reverse these declines with its own resources.

The North's industrial capital stock is nearly beyond repairesult of underinvestment, spare parts shortages,ack of maintenance.

Exhaustedack of arable land, and shortages of fertilizers and other agricultural chemicals all constrain agricultural output.

The only area of growing economic activity is the informal sector.

permanent, daily markets now open in most major cities, including seven in Pyongyang. Some are officially managed and feature permanent structures such as entry gates; other unofficial street markets are springing up in adjoining areas.

frtber private comrnerce, such as trade in cigarettes and alcohol at makeshift stands outside P'yongyang. Collective farms have also been allowed to retain more of their crops to trade oo markets.

hese private sources of food and

gooas arc replacing Uie stale-controlled economy as the major source of subsistence for many North Koreans.

The primary benefit of markets is more efficient distribution of goods, which helps improve access to staples; the impact on production has been low mostly because of limited arable land and the lack of private manufacturing facilities.

Pyongyang's prospects for receiving moderate levels of food aid in the corning year are good. Political factors, however, will determine whether the North will once again just scrape by or beosition to improve nutritional conditions.

Aid from China is almost certain. Beijing provided the North withons of grain and flour this year, much of it aid.

Chinese officials have said Beijinginimum level of support to tbe North to avoid the chaos that wouldegime collapse.

International relief is highly likely. The World Food Program plans to appealons of aid. up fromons this year.

Aid from South Korea or Japan is less certain Seoul's financial problems will make it more poutically difficult to provide assistance even though P'yongyang agreed lo four-party plenary talks and is hinting at possible North-South initiativesew administration takes power Japan has substantial grain reserves, but continues to withhold large-scale aid in an effort to extract further political concessions on bilateral issues.

Likely, Chinese assistance and international aid would resultood situation shriifaireaths from malnutrition and related disease would be common but mosi privilegedP'yongyang, the military, and the security services-would receive sufficient food. Aid from South Korea and Japan could allow P'yongyang to improve nutrition for the first time in years.

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