I have to push back against the assumption – perhaps wishfful thinking – that the DPRK is on its last legs. I’m skeptical for no other reason than the long record Pyongyang has of beating odds. Bradley O. Babson offers some optimism for those like me that would rather not watch the DPRK explode.

North Korea’s finances are a particularly important area where risks are high. There have been episodes of technical dialogue with outside experts and a willingness to send younger officials abroad for training in modern financial practices. But the leadership has not taken advantage of opportunities to obtain advice and assistance on how to reform its domestic financial system or modify its practices to conform to international norms. Financial sanctions imposed by the United Nations and the United States target North Korea’s vulnerabilities which stem from its low level of integration in the international financial system and reliance on foreign exchange to finance imports essential to maintaining regime loyalty among the elite and high priority military programs.

In response to the deepening financial distress caused by economic sanctions, a botched currency reform and a loss of foreign exchange earnings from inter-Korean activities, the North Korean leadership has demanded increased “loyalty” payments from entities capable of mobilizing foreign exchange and strengthened control over foreign investment by expanding the role of the Taepung Investment Group as the primary channel for negotiations with future investors, especially from China. Protecting the prerogatives of the inner circle has trumped improving the efficiency of the economy through serious financial system reform. But this is not a recipe for success in building a foundation for becoming a “strong and prosperous nation” by 2012 or in reducing the financial vulnerabilities that North Korea faces.

In this situation, will the realigned leadership in the Party, National Defense Commission and Cabinet not only be entrusted with supporting a succession of power, but also with shepherding a change in financial policies and economic governance? Will it function the way the Politburo does in China or Vietnam, providing policy direction for advancing economic reform that is coordinated with a domestic political transition and the restructuring of external security and economic relations?

Facing reality will require not only mustering political will but also the technical capacity to pursue economic reforms that will deliver growth and integration with the international system. That will require the North to accept assistance in designing and implementing a reform program that will put its economy on a path towards sustainable growth, as North Korea does not have the capacity to become a competent member of the international financial and business community on its own. It will also require giving permission to younger technocrats to acquire the knowledge, skills and experience to secure a generational transfer of governance that will serve the country in the coming decades. If North Korea can move in these directions, it may be able to eventually meet its goals of broad-based prosperity and reduced financial vulnerability.

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Filed under: Business/Economy, East Asia, Korea, Politics Tagged: bradley o. babson, china, dprk, jang song taek, north korea, prc, vietnam