DEFIANCE VERSUS COMPLIANCE: THE DPRK'S CALCULUS FACED WITH MULTILATERAL SANCTIONS report to Northeast Asia Peace and Security Network revised, February 25, 1994 copyright Peter Hayes* To understand why North Korea announced on February that it would allow the International Atomic Energy Agency to conduct inspections at its declared nuclear facilities rather than lose all by having the issue referred back to the UN Security Council- -and then baulked yet again until agreement was reached linking the inspection with high-level talks with the United States--one must examine the prospective losses and gains associated with its continued compliance versus defiance of the IAEA/NPT regime. In this paper, I define a hypothetical North Korean calculus faced with sanctions, in light of the arguments developed in a related paper by Kimberly Anne Elliott.(1) I ask: 1. What elements are contained in North Korea's (DPRK) calculus in evaluating the impact of sanctions, assuming the DPRK to be a unitary, rational actor? 2. What are the nett costs to the DPRK of complying versus defying the international community with respect to nuclear safeguards obligations in terms of an ambitious set of economic sanctions, implemented multilaterally? I conclude that: 3. Relative to a status quo of "no sanctions, no inducements, semi-compliance," North Korea could arguably lose up to 3-4% of its annual GNP (or $0.6-0.8 billion/y) if it ambitious, multilateral sanctions are imposed; and 4. Relative to a scenario of compliance, continued defiance which results in ambitious, multilateral sanctions could easily cost North Korea as much as 7-8% of its annual GNP (or $1.4-1.6 billion/y). This analysis is static. It does not address the time horizons over which sanctions could be imposed on versus inducements delivered to and absorbed by North Korea. I also assume that neither side will escalate to war over sanctions. It will take a year or more for significant benefits from compliance to be realized in the DPRK; and sanctions will not kick in immediately whatever the members of the UN Security Council do or say. Nor do I address the political costs to the Clinton Administration of undertaking the requisite arm twisting at home and abroad to achieve multilateral sanctions or to deliver a substantial package of inducements. For its part, North Korea faces a stark choice between accelerating economic decline, and the opportunity to revive its ailing economy (assuming that it takes the other requisite steps to commence an economic transition, undertakes requisite structural adjustments, and reforms its command-and-control economy which is largely responsible for its present economic crisis).(2) Due to the importance of inducements in the nett costs, whether considering compliance or defiance, and to the inevitable delay in imposing sanctions or delivering inducements, annual benefits of renewed compliance (or costs of continued defiance) would be substantially less at the outset, and would only reach this magnitude after one or two years. Neither the international community (nor North Korea, for reasons of its own) will not allow the issue to drag on that long. Sanctions, or the threat of sanctions, against North Korea are unlikely to induce changes in its behaviour unless the threat of ambitious, multilateral sanctions are accompanied by very substantial--and highly credible--positive inducements to comply. These prospective benefits would suggest to North Korea that it would pay a very high opportunity cost of foregone inducements if it opted for continued defiance. By the same token, it would be very important to deliver inducements rapidly to complement the weight of sanctions in the overall calculus. Relatedly, a high level and personal commitment by the American leadership is essential to make it credible to North Korea's leadership. Vague assurances about possible upgrading of political and economic relations are not enough. North Korea will not devalue its nuclear leverage in bargaining with the United States in advance of receiving such commitment of meaningful inducements from the United States, that is, one that is substantial and credible enough to be worth giving up its bomb option. The fact that North Korea has now blinked three times in a row in its staredown with the United States demonstrates that a deal is possible without "giving away the store," as conservative critics are accusing the Clinton Administration. Allowing routine and ad hoc inspections by the IAEA would simply make it feasible for dialogue to resume with South Korea, and thereafter, with the United States. It does not constitute a credible, meaningful commitment to a set of inducements from the United States that will bring North Korea back into the NPT fold. It remains unclear whether Washington is capable of delivering a credible, meaningful commitment to Pyongyang that would bring about this result. If this analysis is correct, then the North Korean cost-benefit analysis will tilt-- eventually--toward compliance. Put another way, continuing defiance would imply that North Korea's leaders value the political influence of the Bomb, the cost of coming clean, and the political control associated with high conventional force levels as being worth more than $1.6 billion per year. Finally, there may be specific inducements that could be delivered very quickly and relatively cheaply that may be of very high political value to the North Korean leadership. In particular, food, medical supplies, and refurbishing the electric power system might be of great political value to Pyongyang.(3) I. NORTH KOREA'S CALCULUS In this section, I define a plausible North Korean calculus for evaluating its defiance versus compliance options. In Table 1, I list the elements contained in a posited North Korean cost- benefit calculus. These are: Sanctions: estimated to rise to 5% of the DPRK's GNP or about $1 billion/y in the Elliott paper cited above.(4) These are the costs to the DPRK's economy of an ambitious set of sanctions applied multilaterally in the case of defiance. In the case of compliance, there is no cost from sanctions to the DPRK. (Relaxing existing sanctions are treated as part of inducements below). Inducements: these are positive sanctions or post-compliance benefits that the international community would provide to North Korea. The rewards are political and economic in nature and would flow in part from benefits that would be agreed to directly in US-DPRK talks; and partly from a gradual relaxation of the already existing, US-led embargo against the DPRK. Due to the DPRK's political and economic rigidities, I estimate that these inducements might be worth 2% of its GNP annually, or about $0.4 billion/y.(5) Cost of The Bomb: This element is simply the cost of developing the nuclear weapon and related infrastructure over a five year period, at 1% of its annual GNP or $0.2 billion/y.(6) Cost of Conventional Forces Due to Levels of Tension: This element refers to the DPRK's marginal investment in conventional forces in response to increasing/declining military tensions in/around Korea due to its nuclear choice, estimated at +/- 1% of its annual GNP or $0.2 billion/y, depending on whether tensions follow following compliance and cooperation, or increase following defiance and confrontation.(7) It could be argued that this effect is non existent as the DPRK's conventional forces are largely for political control of the adult population and no reduction of force levels is likely in response to lower levels of tension resulting from compliance. However, the element is retained in this analysis. Political Value of the Bomb Option: This element is obviously the most difficult to "value." Whatever the realities, the Bomb is perceived to be a currency of great power, and to lend possessors with the ability to exercise coercive diplomacy against adversaries and to reassure friends and allies. Cost of Truth: This element refers to the political cost of "coming clean" to the IAEA with respect to past reprocessing and other nuclear weapons-related activities in the DPRK. One could argue that it might also rebound to their benefit as in the case of South Africa, but it is probably not so perceived in Pyongyang. The political cost would be experienced internally (loss of faith at the top and middle level of the informed elite of the leadership); and externally (by reaffirming the DPRK's reputation for gyrating and unreliable policies, even if it eventually settles on one preferred by the international community. Substitution of Nuclear for Conventional Forces: This element refers to the substitution of "cheap" nuclear deterrence/warfighting capabilities (which is already listed above, Cost of the Bomb) for expensive conventional forces. As this effect may (but may not) have the opposite sign to the element Cost of Conventional Forces Due to the Level of Tension), it is listed separately. I estimate this cost/benefit to be 1-2 % of GNP, or 1/10th of current military expenditure which is about 25 % of GNP/y, or ~ to 2-3% of GNP/y. It could be argued that this effect is non existent as the DPRK's conventional forces are largely for political control of the adult population and no substitution of nuclear-for-conventional forces would occur if the DPRK develops nuclear weapons. However, the element is retained in this analysis. Each of these elements is shown separately in Table 1 to allow the relative magnitudes in the posited DPRK cost-benefit calculus to be evaluated and compared between the two scenarios (compliance versus defiance). II. THE CASE OF NORTH KOREAN COMPLIANCE As is evident in Table 1, the nett benefit of compliance to North Korea sum to about 4 %/y of the DPRK's annual GNP, about $0.8 billion $/y. This figure is obtained as follows: {B: Benefits of complying, that is: +B1: no sanctions ~ to zero cost +B2 inducements to comply ~ to gain of 2% of GNP/y +B3: avoided cost of bomb option, ~ to loss of 1% of GNP/y) +B4: reduced cost of conventional forces due to lowered tensions post compliance, ~ to gain of 1% of GNP/y} +B5: sum of A1-4 ~ to gain of 7% of GNP/y offset by: {C: Costs of foregoing benefits of non compliance, that is: -C1: political value of the bomb to the DPRK -C2: political ignominy of admitting past errors or lies about program -C3: nuclear substitution for conventional forces, no benefit if complies +C4: sum of B1-3 ~ to cost of 0% of GNP/y However, we have no way to estimate the value placed by the DPRK's leaders on obtaining the political influence associated with nuclear armament (although its cost to the international community might be estimated by proxy in terms of the cost to the ROK/Japan/United States of not reducing, maintaining, or increasing US forces to offset a DPRK Bomb at the margin. In this regard, US-ROK military expenditure related to the DPRK currently runs at about $12-14 billion; I assume a 5 % increase to respond or ~ 0.5$billion/y. Over a ten year period, the cumulative cost might amount to $5 billion. To this must be added the cost of the damage to the global NPT non proliferation system and the encouragement to other potential proliferators; and the harm to the East Asia- Pacific security architecture under the rubric of the "Pacific community." That is, North Korea could spoil the historic opportunity to construct a set of regional, multilateral institutions that would reduce the direct burden on the United States as regional hegemon of maintaining peace and security in the region. III. THE CASE OF NORTH KOREAN DEFIANCE In this case, the elements contained in the "equation" for North Korea's calculus in the face of UN multilateral and ambitious sanctions are reordered in Table 1. The nett costs of defiance to North Korea would be about 3-4% of GNP/y (or about $0.6-0.8 billion $/y). This figure is derived as follows: {B: Benefits of defiance, that is: +B1: political value of the bomb to the DPRK +B2: avoided cost of truth +B3: substitution of nuclear for conventional forces, estimated at 1/10th of current military expenditure which is about 25 % of GNP/y, or ~ to 2-3% of GNP/y. +B4: sum of A1-3 ~ to gain of 2-3% of GNP/y offset by: {C: Costs of compliance and foregoing benefits of compliance, that is: +C1: cost of sanctions ~ to loss of 5% of GNP/y +C2: foregone inducements, zero +C3: cost of developing the bomb, ~ to loss of 1% of GNP/y) +C4: increased cost of conventional forces due to increased tensions in light of defiance ~ to gain of 1% of GNP/y} +C5: sum of B1-4 ~ to cost of 7% of GNP/y If the DPRK opts to defy the international community and to develop the bomb in spite of sanctions, then nett benefits derived from defiance in this calculus are substantially outweighed by the costs of defiance. As noted earlier, there is no way to value the influence of the bomb to the DPRK's rulers. IV. CONCLUSION From this analysis, it appears that: In the case of compliance, the nett gains would amount to as much as 4% of its GNP or about $0.8 billion/y plus or minus the international and domestic political impacts of compliance that cannot be estimated quantitatively; and, In the case of defiance, the nett cost would amount to as much as 3-4% of its GNP or about $0.6-0.8 billion/y plus or minus the international and domestic political impacts of defiance that cannot be estimated quantitatively. The total difference between taking the two paths of compliance and cooperation versus defiance and confrontation amounts to 7-8% of annual GNP, or about $1.4-1.6 billion/y. Of course, different weightings would produce different results. The values assigned to each element in this essay are plausible estimates, but different figures could be reasonably used. Some elements, however, cannot be valued quantitatively, except in negative terms. That is, the DPRK's rulers would have to believe that its bomb option is worth foregoing up to 8 percent of its annual GNP--an enormous cost. On the US side of the calculus, the cost of inducing compliance (assuming that the United States shoulders half the burden of aid, there being no public cost to lifting the embargo on trade, investment and technology transfer) might amount to $100 million/year. Over a decade, therefore, the United States might save directly $5 in military expenditure to offset a DPRK bomb for every $1 invested in an inducement package. Overall, therefore, delivering a credible, meaningful inducement package to North Korea is a good deal for the United States--so long as North Korea complies. * Senior Researcher, Nautilus Institute, 746 Ensenada Ave, Berkeley, CA 94707, USA. 1. Kimberly Anne Elliott, Will Sanctions Work Against North Korea?, Report to Northeast Asia Peace and Security Network, Nautilus Institute, Berkeley, December 1993. 2. See my "What North Wants," The Bulletin of the Atomic Scientists, December, 1993. 3. These are analyzed in my Should the United States Supply Light Water Reactor Technology to the DPRK?, paper to Carnegie Endowment for International Peace seminar on North Korea, November 1993; Cooperation on Energy Sector Issues with North Korea, Cooperation on Environmental Issues with North Korea, Economic Cooperation with North Korea, three papers to Asia Society, October 29, 1993; and Energy Sector Collaboration with the DPRK, report to Northeast Asia Peace and Security Network, October 29, 1993. 4. This figure is based estimates contained in Elliott's paper cited above, and my own estimates of the crippling effects of the current embargo on North Korea's economy. It includes marginal impacts of tightened COCOM restrictions on North Korea's imports; a partial constriction of yen flows from Japan; and a partial cutoff of Russian and Chinese trade and investment assuming that Moscow and Beijing do not control totally provincial corporations involved with North Korea. 5. Based on my estimate of the stimulatory impact of a graduated resumption of trade, aid, and investment in North Korea; I have set the upper level of aid at one fifth of that committed in February 1994 to the Ukraine ($1 billion) to induce it to abandon a whole arsenal of strategic nuclear weapons, or $200 million/year; the rest of the inducements amount to the trade/investment impacts of lifting the existing US-led embargo against the DPRK. Foregoing relatively few future nuclear weapons is unlikely to be more than a small fraction of this aid benchmark. 6. No current estimates of a nuclear weapons program cost exist; but based on mid-seventies estimates, $200 million/y for five years is a reasonable figure for a small arsenal employing missile and air delivery systems. 7. Crudely, 20 percent of North Korea's approximately $4 billion/y military budget might be cut without risking political or economic instability from resultant demobilisation. 8. See M. Valencia, Involving the DPRK in Northeast Regional Economic and Environmental Cooperation, Northeast Asia Peace and Security Network paper, Nautilus Institute, January, 1994.