Mao’s (lack of) family planning skills: how China’s untimely population growth is coming back to haunt the dragon

Famously enough, Deng Xiaoping, when asked about Mao Zedong’s legacy, asserted that the Great Helmsman had done 70% right and 30% wrong. Although Deng was credited for far more precise policies and on-the-spot quotes during his fruitful leadership years, it might be time for current and upcoming Chinese leaders to update this dubious percent distribution due to Mao’s terrible, nation-mortgaging family planning skills. In other words, China’s population exploded too early, and this might well be the main cause of today’s economic ills in the most dynamic world economy in the last 3 decades.

The basic reasoning goes like that: facing a much-anticipated economic growth slowdown, partially due to global economic tensions and instability both in the EU and the US, the Chinese economy badly – according to some analysts, rather desperately – needs to boost internal consumption and, therefore, lower the savings rates of much Chinese citizens, which hover above 50% of total disposable income.

One way to boost consumption would be, obviously enough, to increase total disposable income of Chinese workers and middle-income families, which, by all estimates, is relatively low in comparison with other countries with similar per capita GDP. However, this would probably suppose a death knell for the still developing Chinese economy, transitioning from an export-focused, labor-intensive, low-added value model to a hi-tech, added value model. In other words, raising salaries further – i.e. apart from persistent inflationary pressures – would mean a sudden loss of competitiveness for an economy which still exports its way to growth and which is facing increasing international pressure to keep revaluating its undervalued currency, the yuan. In other words, this is not the way Chinese political and business leaders are keener to follow.

What else can they do, then? Not much, indeed. The Chinese public was already heavily incentivized towards consumption by financial sector regulations that offered them a real negative return on their savings: while inflation was running well above 6% a year, interest rates for saving accounts have been capped below 3%. This also explains why many middle-class Chinese resorted to buying property, thus fueling an investment-led bubble that is now set to deflate, if not to explode, as prices reached unsustainable levels and the value of the investment decreased.

This undervaluing of savings has indeed allowed Chinese banks to fuel their almost uncontrolled lending practices vis-à-vis state-owned enterprises (SOEs), in a Chinese-way variant of the unchecked lending that caused massive leveraging in huge Korean chaebols by the mid-90s and subsequently fueled the massive Asian financial crisis of 1997-1998. Although China’s economy is far less exposed to foreign capital (prone to flee when the going starts getting rough) and strict capital controls make it difficult for local money to suddenly exit the country, the way most profits from undervalued private savings have been reused might not have been the wisest possible.

Sure enough, doling out credit to SOEs – including development companies headed by local and regional party leaders – meant fast profits for both the banks and the local, regional and national politicians behind both the banks and the SOEs. However but not reforming the currently inexistent social security net can have severe consequences for a country that has been unable to solve a legacy problem from the Mao era: China might be reaching a demography-led point of no return.

Let’s go back to the starting point: why do Chinese people save so much if their options are limited and real return on investment is even negative? As argued in a recent blog post on the ills of Chinese SOEs with the rather explicit title The Macroeconomics of Chinese Kleptocracy, poor and even middle-income Chinese want to be sure they will have enough money not to starve when they are old. 

China, a traditionally Confucian society, has always emphasized and relied upon the filial piety paradigm, according to which sons and grandsons would care for the elderly when necessary. Based on that, China could progressively scrap its social security net starting from the end of the Mao era without much initial social or economic backlash: although the one-child policy had already been implemented, the demographic trends still allowed for a massive marginal growth in working-age population – a growth which will be totally over by 2015.

However, current Chinese society is mostly based on inverted pyramid families (not to mention the alarming lack of young females due to culture and policy-led infanticide), in which one can find just one child with up to four grandparents. Obviously enough, current and future elders can no longer rely on filial piety alone to feed them (or pay for their medicaments), so they save as much as they can to compensate for the lack of old-age pensions, efficient public healthcare and other social safety measures that indirectly fuel consumption and discourage excessive saving in most developed countries. As long as future prospects of a more relaxed retirement do not come to reality, most Chinese will keep saving their hearts out.

Should, therefore, the Chinese government hasten to create even a limited version of European, East Asian (think Japan’s or South Korea’s) or U.S.-style welfare states? That should have probably been the answer, but it might be already too late for two reasons: global context, both thanks to structural factors and issues related to the current conjuncture, and demographic pressure.

As previously argued, marginal demographic growth of working-age population is grindingly coming to a halt, thus putting extra pressure on the flows of impoverished rural immigrants willing to work for low wages at export-oriented factories. Added to that, the increasing and otherwise unstoppable technologization and digitalization of China’s manufacturing sector – for instance, Foxconn, the huge electronic component maker, will 'hire' a million mechanical arms between 2012 and 2013 – and the necessary transition to a knowledge-based, greener economy can also severely hurt a country with a big chunk of its population still suffering from poverty or relatively low incomes – even if per capita GDP at purchase-power-parity already stands at $8400 (2011 data; source: CIA World Factbook), China’s income inequality is extremely high, and rising, with a GINI index of  48 (2009 data; source: CIA World Factbook), making it the 27th most unequal country worldwide.

Added to that, while the current number of Chinese over 65 years of age is still relatively low for developed country standards, it is no longer so for a developing country devoid of a social safety net. Moreover, the problem is set to dramatically increase in the coming decades, with a projected XX% of the population over the age of 65 by 2050 – i.e. before China, even if generous growth rates are somehow maintained, reaches an economic development level comparable to that of richer countries.

Unemployment benefits for future out-of-job low-skilled factory workers, old age pensions for a growing mass of elderly people, healthcare benefits for an increasingly restive population of rural immigrants residing in cities without the corresponding urban hukou and other much-needed reforms might pose a very serious, growing economic burden for the Chinese state, especially in the midst of a probable global double-dip recession mostly affecting its key economic partners.

Bad timing? Probably. Bad policy choices? Maybe. In any case, major blame should not be put upon sheer luck or the often-maligned one child policy, which indeed was a desperate measure aimed at stopping undue demographic pressure on a country whose natural resources are already stretched to the maximum. Rather, blame should rest upon Mao Zedong’s belief that the key element for national survival in a time of political unrest lay upon a huge population not only helped fuel China’s Communist chaos, but also created an untimely time bomb whose consequences might be dearly felt in the next few years.

While it is undeniable that China’s explosive birthrates and subsequent rural healthcare improvements in the 50s and the 60s set the basis for the economic surge of the 80s and the 90s – again, this massive marginal growth in working-age population, – the explosive growth it helped create might have also sown the seeds of future demography-led stagnation and crisis.

Obviously enough, only time will tell how events will truly unfold. China’s low public debt and deficit levels, as well as its massive foreign exchange reserves, standing at $3.3 trillion at the end of 2011, give ample maneuverability to the Government in case it decides to do something about China’s most pressing economic problem. However, and independently of the route taken by the future caste of Chinese leaders, in case Deng Xiaoping counted Mao’s family planning policies within his 70% positive decisions, it is about time that his successors recalculate the Mao-era plus/minus ratings and start implementing social-based reforms before it might be truly too late.

The (wicked) rationale behind Spain’s tomato (a.k.a. bailout)

I could not resist starting out by somehow reusing Time’s ingenious header on Spain agreeing to receive up to €100 billion from its European partners: You Say Tomato, I Say Bailout: How Spain Agreed to Be Rescued.

The Men in Black, the troika representatives that so much scare Cristóbal Montoro, Minister of the Treasury, and a still bragging President, Mariano Rajoy, are indeed coming to town. Tough conditions will mostly be imposed on bailed out banks, as Angela Merkel herself asserted on June 12: the Spanish case is different from Greece’s or Portugal's. Technically, however, it should not be too different from the Irish situation, the main difference being that Ireland is a tiny country which could be bailed out and bullied and Spain is too big to fail, i.e. too big to bail out. Despite Dublin's plans to raise the issue during the next meeting of eurozone finance ministers, to be held June 21, the Irish Government's wishes will probably be quashed by the structure of Spain's bailout. We will not delve into that, however, as the scope of this post is quite different: we shall discuss the rationale behind the whole bailout/credit idea, which is only starting to get revealed.

It is also noteworthy that timing of the demand was astutely planned, although it ended up backfiring due to the clumsiness of the Government's PR strategy: just one day before Spain’s much-heralded debut in the football EURO 2012, as the reigning World and European champion vying to restore Spanish pride, and with Rafael Nadal all set to conquer his 7th Roland Garros title. The plan was clear: millions of Spaniards would fall into the government trap and quickly forget the implications of the measure, even downplaying that the President, the same person that was hiding until media and political pressure was too high to overcome, would briefly come out on Sunday morning to assert that the so-called “credit line” was a triumph of his Government and that he was ready to fly to Poland because “the problem had been solved.” Thank you, Mr. President, said most Spaniards… as well as international investors, which rewarded Spanish (and European) transparency with further rises of Spain’s sovereign debt risk premium, pushing interests of 10-year bonds to 6.8% on June 12, a 13-year high or a level never seen since the Eurozone was established (update: the rate climbed up to 7% just two days later).

We could spend a lot of time discussing the not-yet revealed details of the bailout package, with its speculated 3-4% interest rate for a 15-year credit to be satisfied by the Kingdom of Spain (i.e. 3-4 billion euro of extra deficit just in yearly interest payments) which, in its turn, will lend the money to needy banks at a 8.5% interest rate (a prohibitively high rate for troubled banks, meant to force them into selling assets), and the direct policy implications it might have, including VAT rate and other tax increases, extra spending cuts, speeding-up the planned progressive raise of the retirement age, etc. However, I believe that many media outlets have already explained all the kinks about the yet-to-be bailout package itself. Worthy and useful explanations can be found here (in Spanish), here and here.

In any case, no media outlet so far seems to explain the rational argument sustaining this bailout and why it could well be enough -- and why not. To put it shortly, it all hangs on restarting the housing market after the (too) slow bottoming-out process it has been undertaking for the last 4 years.

The key issue here is something which was already pointed out in the aforementioned Time Magazine article: this package will only cover the banks’ losses for 2012 and 2013, but not what is causing those losses. Those losses are caused by enormous quantities of money having been lent to construction industry companies and speculators during the boom years, accepting as collateral the very houses or apartment blocks they were building. Once the market crashes, development companies are struck with unsellable housing units, which are thus absorbed by the banks that find themselves unable to obtain monetary repayment of their loans.

This has been happening since 2008. Banks were reluctant to devaluate all those housing assets in their balances, hopeful to sell them at still overinflated market prices. However, as more and more loans are souring and both individuals and companies default on their payments, institutions whose exposure to the housing boom was higher -- the paradigmatic case is that of Bankia, but the cases of CatalunyaCaixa and CaixaNovaGalicia, among others, should not be forgotten either -- find themselves unable to satisfy the huge capital amounts the Spanish government, in a rare display of realism, recently asked them to set aside to hedge against housing-related credit losses. Then, hell breaks loose: the much-feared bailout ensues.

However, today’s rescue is only a first step. As already mentioned, it will cover short-time losses, but not potentially sour loans maturing later on. There is one key point to consider: although it has been modestly falling in the recent months (for obvious reasons: people are not buying houses and, therefore, not applying for new mortgages, and credit is scarce for businesses), overall private debt in Spain (including both companies and households) is still in excess of €2 trillion, i.e. 200% of Spain's GDP. Plus, government debt will be close to 90% of GDP by the end of 2012, assuming the bailout reaches the mark of €100 billion and counts against overall Spanish debt -- an instance already confirmed by Eurostat. According to the much-discussed IMF report on the Spanish banking sector, direct lending for construction projects still amounted 37% of GDP (or approximately €400 billion) by the end of 2011, slightly down from 42% of GDP in 2009. This figure neither includes the share of loans given to auxiliary companies providing construction-related services (plumbing, materials, etc.) nor the many mortgages held by unemployed or underwater homeowners. In other words, if the economy is not restarted somehow, and soon, a bailout amounting to just 5% of overall private debt will clearly not suffice.

Enter the strategy hidden behind the bailout plan, which is only starting to be revealed in the Spanish press: housing prices are going to continue to fall, and probably quite sharply. Banks hold up to 200,000 unsold housing units, according to IMF estimates. They must start substantially cleaning their balances as soon as possible (i.e. before a fresh round of sour loans appears by 2014 and they need to ask for a second European bailout), and this fresh capital injection, which they are eventually supposed to repay with hefty interest, will help them become more flexible in rating their assets and start writing out bad debt accumulated in their books. The latter has not taken long in materializing: Spanish banks have just accepted discounts of up to 45% in liabilities (news item in Spanish) accumulated by Sacresa, a former residential development giant, which had accumulated up to 1.8 billion euro in debt when it filed for bankrupcy protection almost two years ago. The former will soon be pretty visible: banks will offer plenty of houses and apartments at heavy discounts, be it 25% or even more.

The question is: who is going to buy? Unemployment hovers around 25%, and youth unemployment surpasses the dramatic 50% mark. Household debt is at dangerously high levels for a recession-stricken economy, and many families are still underwater from buying their homes at pre-2008 prices. One bet would point at foreign investors and families wishing to own a second home in sunny, tapas-rich and tourist-friendly Spain. High-end Russian tourism is booming, especially in the Catalonia region. However, the bulk of the empty property the Spanish market has to offer is not truly oriented at high-end foreign investors, and not even to middle-class families. Moreover, given the current state of the world economy, mired in uncertainty, as well as the probable economic slowdown that will even strike countries such as Germany or China, counting just on foreign money would maybe be too risky a bet. In other words, a sudden reversal of international capital and investment flight from Spain is probably not in the works. You can definitely bet on it, but you cannot count on it at all.

A second, more plausible bet would focus on local money, namely undeclared income that now the Government will try to funnel into the banks and housing markets via a (shameless) fiscal amnesty: you just deposit your undeclared income in any bank account, pay a 10% flat tax rate, fill out an online form… and you are done. In a country in which black economy accounts for up to 20% of GDP, such a move can help recapitalize cash-stripped banks and revitalize investment in property after due discounts are applied to already-devaluated prices. At least, that is the plan. A plan, however, that looks more like a bet with not much hedging -- such capitals can also be invested otherwise, or even be funneled away from shaky Spanish banks -- and which is also terribly unfair for law-abiding taxpayers. .

Moreover, a clear, rational objection to this plan can easily be made: the housing market will not be brought again into life unless credit is given to families and private investors. However, lending will be scarce while labor market instability continues: in other words, banks are not ready to accept the risk levels they happily accepted until 2007. Labor market instability will not disappear unless jobs are created, and not destroyed, as it is the case right now. However, fresh jobs will not easily be created because Spain built a whole generation around the construction industry, and now suffers from undereducated youth and long-term unemployment of a big mass of non-qualified workers. Then, is construction the answer? Should we enter a never-ending loop of housing booms and crashes?

Growth through business-friendly policies and a workforce ready for the challenges of today's global, knowledge-based economy should be the obvious way out of a crisis for a developed nation as Spain. But the current debt situation might be too desperate to follow this path, which requires patience and heavy investments. Severe budget cuts in education (which amounted to 4.9% of Spain’s GDP but will be cut to just 3.9%, all in the context of a falling GDP and thus way below of European and OECD averages) and research budgets (including painful statements, such as those by Carmen Vela, Spanish Secretary of State for Research, who asserted that there are too many researchers in Spain and that the focus is rather on quantity than on quality) are sadly showing the way forward: betting on a housing-based stabilization of the financial sector and see what happens next.

Should we be shocked? Sad? Depressed? Yes, Spain is (sadly) different in many aspects, but not as different as we might come to think, at least financially speaking. As this invaluable article argues (written by a fund manager, nonetheless), a big problem lurking behind Spain’s problems and decisions is rather a global malaise: a warped financial system that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad. Bankia, anyone?

Incremental Intelligence Sharing for a Smarter Defense

No 21st century defensive strategy should be deemed complete and truly comprehensive unless a hitherto purely national element is included in the transnational mix pursued by NATO: incremental intelligence sharing between member states should be the icing on the contemporary security cake.

On the very first week of February, Foreign Policy magazine commentator Robert Haddick asserted that the US shift to Asia meant that NATO had some kind of now-or-never chance to reshuffle its identity, while arguing that "the alliance still struggles to define a convincing organizing principle that will be relevant in the future."

Despite recent efforts by NATO leaders to redefine the alliance's goals and improve its efficiency in face of the post-Cold War security environment, the multifaceted terrorist threat, WMD proliferation issues and a veiled arms race in emerging Asia, the alliance might be lacking a truly defining element, under which transatlantic security could dramatically be improved.

Intelligence gathering and analysis is one of the less publicized but nonetheless more important elements that give modern nation states an ultimate sense of shared community of interests, values and ideals is intelligence. Once again, fresh news serve to prove this point: the Pentagon is vying to create a brand-new espionage unit, the Defense Clandestine Service, which will focus on infornmation-gathering on high-priority areas beyond war zones. As shown by such a relevant decision by the leading member of the Alliance, as much as NATO members are planning to progressively communalize decisions on defense procurement, maintenance and training, the equation will be incomplete if intelligence is kept on a national, competitive basis.

Although such a proposal can be branded as too innovative or even utopian, an incremental approach based on an automatic spillover effect should do the trick. The creation of a NATO Joint Intelligence Center, with modest resources to start with could build confidence among national intelligence agencies acting with diligence, making benefits visible to all partners and being especially proactive in the intelligence community.

Obviously enough, intelligence officials need the power to obtain information from different sources to be effective, and the initial willingness of national officials to share information with this new body would be very limited. However, an initial coordination role could be envisaged for the new JIC, initially focusing on what we could label ‘common good intelligence,' namely information not involving classified military material whose effective sharing could help mitigate non-military risks, and including counterterrorism and cybersecurity for the whole Atlantic Community.

Such an approach is already partially being put in practice by the EU's Joint Situation Centre (SitCen), whose stated goal is providing the Council with high quality information on matters of public security. Although it might be argued that SitCen's scope is rather limited, the EU's joint intelligence initiative faces a double problem. First, the very nature of the EU's intergovernmental CSDP and its overarching parent, the CFSP, limits its field of operation. Second, the stalemate in EU-NATO relations means that many Central and Eastern European countries, as well as Atlantist countries such as the UK and the Netherlands, instead push for further NATO integration and security cooperation. Obviously enough, a NATO-led intelligence-sharing community would be able to overcome such hurdles.

In the aftermath of the 2008 financial crisis and amid an ongoing debt crisis, Western governments are increasingly urged to rationalize their defense expenditure and make the most of the precious resources available. This urgent need for efficiency is yet another reason for national governments to support intelligence pooling: resources would be shared, redundancies would be eliminated and effectiveness would be greatly improved.

This is an opportunity NATO cannot let go. The intelligence community is one of the least monolithic branches of contemporary security apparatus. Progress would eventually come along, first slowly but ideally accelerating towards a point of no return to the old status quo.

Barring any detrimental leaks or setbacks, linear and incremental achievements would generate a spillover effect, fueled by centrifugal forces inside national intelligence communities, which would progressively increase their trust levels in the supranational center and endow it with further tasks and responsibilities and, perhaps more importantly, resources and information.

In order to effectively face the asymmetric threats of a multipolar 21st century, NATO is shifting from a Cold War military and security alliance towards a more inclusive, proactive and flexible organization, with the overarching goal of providing security in a much wider sense to all citizens of the signatory countries. With intelligence sharing, NATO's "Smart Defense" initiative would be even smarter: indeed, using the smarts of the brightest intelligence minds available might well be the smartest move yet for NATO.

The U.S.-North Korea deal: what does it really mean?

A lot has already been written since the latest news on North Korea broke out on the very last day of the last month. This time, it was no false rumor of Kim Jong-un being shot dead spread on some Chinese forum, but something far more tangible: after the completion a third round of bilateral negotiations, the U.S. and North Korea announced what has already been labeled the "leap day agreement," a deal that, as U.S. Secretary of State Hillary Clinton put it, is "a modest first step in the right direction."

North Korean and U.S. officials have had informal discussions since July 2011, when the two sides first met in New York. A second round of exploratory talks was held on October, and a third one had been scheduled for December, but the sudden death of Kim Jong-il resulted in their postponement. However, negotiations were already pretty advanced at that point. Even if U.S. negotiators gave no indication about possible advances at the end of the latest round and observers pointed out that North Korea was still mired in a 100-day mourning period for the death of the Dear Leader, the scene was set for a deal.

On the surface, North Korea has made some important concessions, chiefly the offer to suspend uranium enrichment at its major nuclear complex at Yongbyon and invite inspectors from the International Atomic Energy Agency, absent from North Korea since 2009, to return. Less remarkable, even if impressive in paper and somewhat reassuring for their Southern neighbors, is Pyongyang’s agreement to suspend the testing of long-range missiles or nuclear devices, as they can be easily resumed with no previous warning – as the North Koreans have already shown in the past.

In return for these concessions, the United States will provide North Korea with 240,000 metric tons of food, through regular monthly installments of about 20,000 tons of nutritional supplements, all under intensive monitoring, thus effectively resuming the U.S. role as one of North Korea’s main food donors since 1995. North Korean diplomats originally requested 320,000 metric tons of grains, but finally settled for a more modest amount in view of further paybacks down the road.

So, this is how we got there and what the deal is essentially about. We could go deeper into details, or discuss the numerous official reactions or the extremely diverse opinions of North Korea experts, scholars or mere watchers. However, a more useful approach might be answering – or, at least, trying to answer – some of the questions most observers might have about the implications of this agreement moving forward.

Will the food aid be delivered to those in need?

Most probably it will. The fact that it will consist of processed, high-protein nutritional supplements (i.e. a corn-soy blend) and not the rice and grain that the North Koreans initially demanded, coupled with the North Korean side dropping the restrictions on international monitors to supervise delivery, all but assures the 240,000 metric tons of food will be eaten by malnourished North Koreans (mostly young children and women) and not by Korean People’s Army soldiers.

However, the U.S.’ strategic goal of avoiding helping the regime and its military can be – and, in all probability, will be – indirectly bypassed. Even with credible guarantees that the shipments will not be used to feed the country’s elite or the North Korean military, or just released at the planned mass celebrations marking the 100th year anniversary of the birth of Kim Il-sung, there have been clear signals of food stockpiling by the regime, as reputed experts Marcus Noland and Stephan Haggard already pointed out by mid-2011.

Despite the budding famine experimented by the country, stockpiling of existences has become possible due to increased aid from China, which comes with no strings attached in terms of supervision: in less publicized talks, China affirmed it also discussed the provision of more food aid to North Korea just two days before the deal with the U.S. was announced. Hence the unusually frequent trips to China – up to 3 – made by an ailing Dear Leader in the months leading to his death. Now, these nutritional supplements can be used to feed the neediest while keeping stocks of grain and rice strong in order to distribute them in the days going to April 15 which, according to official propaganda, should mark the dawn of “strong and prosperous” North Korean nation.

Does this deal imply that Kim Jong-un is here to stay?

Although it is still too early to categorically affirm that – remember, the nation is still mourning, the young leader is not yet 30 and the regime stays as secretive as ever –, the passing of this agreement shows a certain degree of internal stability within the DPRK’s inner power circles. Who is really calling the shots – is it really Kim Jong-un or a ruling clique led by his uncle and his aunt? – is still unknown, but the new supreme leader’s acquiescence of the agreement should be seen as a key prerequisite to its signing, clearly showing the young man is active and ready to wheel and deal.

Moreover, this deal being the continuation and the expected result of negotiations initiated while Kim Jong-il was still alive, it is also a clear proof of the continuity ine North Korean policies, thus implying there are no major rumblings in Pyongyang.

The deal also helps establish a non-threatening external environment that will help North Korean leaders consolidate the controversial process of transferring power to the young and inexperienced Kim Jong-un. In other words, it gives the new leader and his clique time to establish themselves in power, as it considerably defuses external tensions despite not truly deactivating them.

As a leading North Korea expert from the prestigious Council on Foreign Relations already stated before the talks started, "even a modest agreement would buy time for North Korea to focus on internal affairs, as Kim Jong-un attempts to consolidate his leadership in advance of the Workers’ Party Conference to be held in Pyongyang on the 100th anniversary of Kim Il-sung’s birthday." In conclusion, the deal with the U.S. indeed does, even if incidentally, play a key role in helping Kim Jong-un stay in power during a key period for the future of the Hermit Kingdom.

Will it help improve inter-Korean relations?

As some analysts have already pointed out, another possible red flag of the agreement is the absence of a North Korean commitment to improving intra-Korean relations. However, this can easily be explained by the wait-and-see approach of the North Korean authorities regarding the political future of South Korea, due for a presidential election later this year. Pyongyang can ill-afford suddenly stooping its criticism of hardliner Lee Myung-bak as it is waiting for widespread disillusionment with Lee’s liberal policies, especially among young South Koreans, to elevate a more Kim-friendly figure to the presidency the country.

The fact that the North Korean official statement mentions a possible resumption of the Six-Party Talks – while its U.S. counterpart does not – should not be taken as a sign of open goodwill towards its Southern and Eastern neighbors (i.e. South Korea and Japan) by the North Korean authorities. On the contrary, U.S. diplomats have repeatedly made it clear that both Koreas should strive to improve their relations before multilateral denuclearization talks can be rescheduled, and this omission from the U.S. communiqué shows no progress in that aspect has been made. From the North Korean side, the Six-Party Talks are only mentioned tied to revisiting the provision of the light water nuclear reactors promised by the U.S. more than a decade ago, and whose delivery was halted by the Bush administration. In other words, it can be easily dismissed as a mere display of self-interested rhetoric.

However, this deal can help Kim Jong-un justify his actions by saying he successfully completed an important diplomatic venture his father began. This gives reason to hope that the military provocations of 2010 – allegedly masterminded by the younger Kim – may not be repeated this year. For the time being, thus, it is wait-and-see for the two Koreas, albeit possibly a less bloody one.

Is this United States-North Korea agreement also beneficial to China?

Yes, although with some scarcely mentioned reservations and side effects.

The fact that the deal defuses international tensions and temporarily scales back the prospects of menacing – or outright violent – acts by Beijing’s bizarre friends in Pyongyang is highly valued among Chinese power circles, always craving for regional stability to foster internal growth.

However, there is some small print on the deal that should be taken into account – and sure China is already monitoring it: the official statements call for "taking steps to increase people-to-people exchanges, including in the areas of culture, education, and sports" between the two nations. Here, it does not matter who is giving: even if the experts that consider this to be an "American concession", as North Korea would reportedly be eager to break out of its international isolation and deepen ties with the United States, turn out to be right, the possible consequences for Beijing would still be there. Amidst a high-profile political campaign against – in Hu Jintao’s words, nonetheless – the "West’s assault" on China’s "culture and ideology", the U.S. is backing its reorientation towards East Asia discourse with a veiled promise to make inroads in what stands, after the opening-up of Myanmar, as maybe the last safe haven for Chinese influence in the region.

Maybe it will just turn out to be a symbolic small print addendum to the important stuff, but we cannot rule out the possible effects of this breakthrough, which apparently contradicts the regime’s ideological pillars: North Korean moral superiority towards cruel, imperialist Americans (and their servile South Korean puppets, for that matter). In case such exchanges do ever happen, they could be seen as a veiled threat to the almost exclusive Chinese influence on the Hermit Kingdom and, at the same time, as a risky (or rather desperate) political move by the Kim regime, so dependent internally on anti-American propaganda.

Anyway, does this deal mean that North Korea is halting its nuclear program altogether?

Not really: pressing the pause button does not equal pressing the stop button, and North Korea has still enough leeway to keep enriching uranium in other unknown, unmonitored facilities. While intelligence reports indicate that uranium enrichment might be taking place in at least several additional locations, the ambiguous wording in the official statements doesn’t ensure that North Korea will allow monitoring of any nuclear activities outside the 2,000-centrifuge uranium-enrichment Yongbyon complex (capable of producing a weapon's worth of highly enriched uranium every year).

Pyongyang can also keep working to improve its stockpile of plutonium-based bombs: current intelligence estimates are that the country has made enough separated plutonium to manufacture about a half-dozen such weapons. Moreover, as already mentioned before, North Korea could at any time resume testing its nuclear weapons and long-range ballistic missiles with no previous warning: it happened in the past, and it could happen again in the future. In fact, its two previous nuclear tests and three tests of medium-range ballistic missiles all failed to one degree or another, so military leaders might want to conduct more at some point to get the technology right.

Is there any realistic chance that North Korea relinquishes its nuclear capabilities at some point in the future?

Future behavior of such a hermetic regime is almost impossible to predict. However, unpredictability does not mean irrationality, and North Korea has proven to be an extremely rational – if aggressive – actor throughout the years. In other words, the North Korean regime should have extremely strong incentives and impossibly firm guarantees of non-interference in internal affairs in order to ever accept giving up its nuclear capability.

As impoverished as the country stands now, no sense of national strength and prosperity could be conveyed, even to brainwashed North Korean citizens, without the main (or rather the one and only) positive legacy of the Dear Leader and his military-first policy: nuclear weapons. Kim Jong-il, the leader that allowed hundreds of thousands of its citizens to starve to death in the 1990s, has been excused of any responsibility for this mass murder by official propaganda: he wisely chose to focus on military affairs to secure the survival of the nation and the race. Obviously enough, the joint editorial of the party and army newspapers published on January 1, 2012 vowed to continue the “military-first policy” of Kim Jong-il.

As many analysts have been pointing out ever since the toppling of Colonel Gaddafi in Lybia and the upheaval in the rest of the Arab world against authoritarian regimes, North Korea might well have increased its reluctance to ever give up its nuclear weapons. In fact, there are reasons to believe that the 2003 invasion of Iraq and the subsequent toppling of the Saddam Hussein regime prompted Kim Jong-il to accelerate the North Korean nuclear program and successfully detonate its first atomic device three years later.

Therefore, despite the undeniable progress that such a moratorium on certain nuclear-related activities represents, we should not be overly optimistic. East Asia might be a safer place for the time being, but long-term, peaceful denuclearization prospects remain dire unless the current North Korean leadership progressively turns course and decides to considerably open up the economy and the political system.

The North Korean enigma: is there life after Kim Jong-il?

On a cold Saturday morning, while traveling on his personal train through an undisclosed region of North Korea, long-time dictator Kim Jong-il suffered a fatal heart attack, leaving the 24 million inhabitants of the impoverished nuclear power on the verge of an unprecedented second hereditary power transfer.

Since the news of this death were revealed by North Korean official media more than 48 hours later – the failure of South Korean, Japanese and U.S. secret services to pick up any clues of the events proving the sheer stealth and secrecy of the hermit kingdom, – news outlets around the world have been speculating about the future of the country, the prospects for successful succession and the risks of collapse and its probably fateful consequences.

Where is the Democratic People’s Republic of Korea (DPRK) actually coming from? What does the death of the Dear Leader mean? What can we expect from them in the near future? We will try to briefly answer these questions to the best of our knowledge, based on information from different sources and logical assumptions, trying to overcome what Stanford University fellow and North Korea expert Robert Carlin calls the feeling of being “deaf, dumb, blind and with our arms tied behind our backs” regarding the actual policy moves of the North Korean government. 

A little political background 

Let us start with a key date: April 15, 1912. That’s the day in which the Eternal President of the DPRK, revolutionary leader Kim Il-sung, was born. This is also the day that marks the start of the North Korean calendar, a key symbolic element of the Juche (or self-reliance) ideology upon which the North Korean government justifies its policy decisions.

Next year marks the 100th anniversary of the Great Leader's birth – and thus, according to official propaganda, also of modern North Korea's, – and the current leadership started an aggressive campaign to portray 2012 as the year in which North Korea would become a “prosperous and modern” nation.

This campaign of national renewal received extra significance after August 2008, when Kim Jong-il reportedly suffered a serious stroke. This almost deadly event, in combination with his already extensive list of health ailments, converted succession into an urgent matter. Reportedly, Kim chose his eventual successor within months: Kim Jong-un, his third son, approximately 26 at the time (intelligence sources give his date of birth as 8 January 1984), emerged from the dark to become the official candidate to succeed his ailing father, as reported by South Korean media already in January 2009. His eldest half-brother, Kim Jong-nam, now 40, had been the early favorite to the throne – and is surprisingly still being hailed by some South Korean experts as a feasible alternative in case the Kim Jong-un option does not pan out, – but fell out of favor after being caught attempting to enter Japan on a fake passport in 2001. Since then, he mostly lives in Macau, where he owns a casino – allegedly used to launder money coming from North Korean arms trade – and has even been recently quoted as suggesting that North Korea needed to move past a dynastic system of government.

The second step towards arranging succession, mostly overlooked by Western media, was the revamping of the Constitution, approved in April 2009. As detailed by top scholar Stephan Haggard, the new constitution has changed the power and structure of the National Defense Commission and revamped the Central Committee of the Party. The Supreme People’s Assembly, although still considered a rubber-stamp body, has now new, younger appointees, all of which are loyal and owe their posts to the current leadership. (Also of note, the new Constitution dropped the term 'Communism,’ which conveys the eventual creation of a classless society, for the more nuanced 'Socialism,’ that better reflects the current corrupt, black market-based North Korean economy.)

In other words, the new Constitutional text created a whole structure that could either support Kim Jong-un or provide the basis for collective leadership in case he was unable to have a wide enough power base for political or other reasons – including the sudden, unexpected death of his father. This complex institutional structure, while in theory reinforcing Kim Jong-il’s role and power, should also be seen as a move back to a more classical communist structure, including a Central Committee that held its first plenary meeting in almost 20 years in September 2010 and a Supreme People's Assembly, also reactivated after 30 years and whose chairman Kim Yong-nam has been mentioned by approved foreign spokesman of the regime Alejandro Cao de Benós as the “new leader” of North Korea (more on that later.) With this reinforced institutional structure, Kim Jong-il was hedging against failure by his son to establish his power in order to avoid eventual regime collapse while, at the same time, reinvigorating old structures with new, loyal appointees that should normally support the new power transition.

Also during 2009 and 2010, new generals were appointed, among them Kim Kyong-hui, Kim Jong il’s sister, and Kim Jong-un, both given the rank of 4-star generals on September 27, 2010, the day before a Workers' Party of Korea conference in Pyongyang. On 28 September 2010, Kim Jong-un was named vice chairman of the Central Military Commission and appointed to the Central Committee of the Workers' Party. His birthday has also become a national holiday, celebrated on January 1. Songs of praise for Kim Jong-un are sung on special occasions, and he has been given the public title of “Brilliant Comrade.” 

On October 10, 2010, Kim Jong-un attended, alongside his father, the Workers' Party's 65th anniversary celebration, a move that fully confirmed his position. In January 2011, according to the South Korean right-wing newspaper Chosun Ilbo, the regime began purging around 200 protégés of both Jong-un's uncle Chang Sung-taek and O Kuk-ryol, the vice chairman of the National Defence Commission, to further prevent either man from rivaling the projected heir. Further steps were expected during the 2012 celebrations of Kim Il-sung’s birth; however, Kim Jong-il’s death means change will have to come sooner than expected.

The international situation the Dear Leader leaves behind

In his work Authoritarism in an Age of Democratization, scholar Jason Brownlee asserts that only 9 out of the 258 dictators that have ruled a country for at least 3 years after the World War II actually managed to successfully arrange a hereditary power transfer, Kim Il-sung being one of them. However, there are no known precedents in modern politics of a second hereditary succession, and the sudden death of the former dictator could dangerously hasten and imperil the process.

Diplomatic sources confirm that the stability-craving Chinese leadership expected Kim Jong-il to live for 2 or 3 more years, meaning he would have had extra time to groom his appointed successor – duly approved by China – and solidify his path to the throne. China, the DPRK’s leading trade partner and aid donor, and almost only friend in the international arena, has rushed to praise the deceased leader, show its continued support for the North Korean regime – directly through the words of President Hu Jintao – and assert that China would welcome a visit from the new North Korean leader at a convenient time to both sides, thus underlining Beijing's keenness for a smooth succession.

Kim Jong-il had been unusually active during what turned out to be his last months in power, visiting China several times pledging for food and fuel aid while also studying economic reforms in Northern and Eastern China as a possible model for progressive economic transformation at home. In fact, China had become Kim Jong-il’s last valid trade partner and ally: the DPRK was more isolated than ever before after fellow rogue dictator Muammar Gaddafi's death and Hosni Mubarak’s demise in Egypt – Egyptian companies are suspiciously behind North Korea’s mobile phone network and construction of the giant Ryugyong Hotel. Lee Myung-bak, President of South Korea since 2008, left behind his predecessors’ conciliatory Sunshine Policy, and the Obama administration's apertures towards the regime were put on hold after Pyongyang tested his second nuclear device in May 2009.

However, the current diplomatic status quo caused uneasiness among the North Korean elites, as it supposed a dangerous departure from the confrontational, multiparty negotiation style that has been a staple of North Korean diplomacy since the Kim Il-sung era. They have been extremely skillful at dealing separately with confronted powers – such as Mao's China and the Soviet Union since the 1960s – and obtaining concessions from all involved parties. The last example thereof had been the six-party talks, a result of the DPRK withdrawing from the Nuclear Non-Proliferation Treaty in 2003 and involving all relevant regional powers, seen as North Korea as a way to extract aid and other benefits from the economically powerful nations that surround it and as a possible successor to bilateral or coordinated negotiations with the U.S., South Korea, Japan and China that probably allowed the regime to (barely) survive after the end of the Soviet Union and its subsidized trade. Therefore, overreliance on a single diplomatic ally – a fact exacerbated by the increasingly dominating economic and military position of China in Asia – is a risk the DPRK is not really keen on taking.

In line with that goal, Pyongyang recently agreed with U.S. negotiators to stop its uranium enrichment program in exchange for 240,000 tons (20,000 tons a month for a year) of high-protein biscuits and vitamins, but not rice, a prime food commodity that could easily be funneled from the needy to the military and eventually be resold in black markets. This tactical move, confirmed by sources close to the North Korean leadership, makes sense on a quadruple ground for the DPRK.

First, it helps alleviate malnourishment and food shortage problems that could obviously cause dissatisfaction among the population – already hit by an estimated 140% inflation rate since the failed currency reform of December 2009 – and eventually complicate the power transfer. Second, it helps the North Korean regime to bolster its food stocks towards 2012, the year earmarked for the nation to become "modern and prosperous". Third, it helps attain these two key goals for internal stability without giving much in return: stopping the uranium enrichment program does not mean dismantling the surprisingly modern facilities where the fuel was being processed. Moreover, as Alejandro Cao de Benós, the only official regime spokesman of non-Korean origin, has argued, North Korea does not really need to expand its nuclear arsenal beyond the 6-12 bombs it might already possess: in other words, Pyongyang sees its nuclear capabilities as a merely dissuasive diplomatic tool and is by no means interested in a crazy nuclear arms race. Finally, the fourth goal that this deal with the U.S. accomplishes is partially overcoming overreliance on China, thus opening a way for further partners with whom to negotiate with a well-known trading chip of key strategic value in the current geopolitical context: help us and we will not (completely) fall into China's lap.

Just a young successor or a ruling clique?

The question most media outlets and intelligence agencies are asking themselves right now is the role Kim Jong-un will be able to play after the sudden death of his father. Too young, too inexperienced, too early: the odds could well be against him if he chose to absorb too much power or a faction of the army or the leadership plotted against him. However, to the eyes of the brainwashed North Korean people, a second hereditary succession might be seen as legitimate: apart from the well-known isolation from foreign realities (no Internet, no contact with foreigners and radio and TV sets pre-tuned to government stations), the refined propaganda machine created by Kim Il-sung and perfected under Kim Jong-il's tenure combines Confucianism (the values of the old Joseon dynasty, which ruled Korea from 1392 until 1910), Christian religious imagery (to vividly justify the God-like status of the Kim family), Stalinist propaganda and repression methods and fascist Japan's myth building and discursive elements create a suffocating propaganda environment from cradle to death for the vast majority of North Koreans.

Moreover, the propaganda machine has quickly revved up the Kim Jong-un discourse. On December 19, 2011 the Korean Central News Agency already described Kim Jong-un as "a great person born of heaven," a propaganda term until then reserved to his father and grandfather, and "the eternally immovable mental mainstay of the Korean people". Meanwhile, the Workers' Party Rodong Sinmun newspaper asserted that he is "the spiritual pillar and the lighthouse of hope" for the military and the people, while also claiming that Kim Jong-un was born on Mount Paektu, the same place in which Kim Jong-il's birth in 1942 was theoretically greeted by a double rainbow and the formation of a new star – Soviet records place his birth at a village near Khabarovsk, in Siberia.

However, something different from a personalized rule by the unproven Jong-un might be in the works. When asked by several international media outlets about the leadership status in the DPRK, approved spokesman and KFA Chairman Alejandro Cao de Benós stated that the new leader was Kim Yong-nam, the 86-year old Chairman of the Presidium of the Supreme People's Assembly 86, while asserting that Kim Jong-un’s political career is just starting and that he is being hailed not as a supreme leader but as a shining star that “will lead the new generations down the socialist path”.

Mr. Cao de Benós’ assertions should not be taken at face value but, as usual with news emanating from official North Korean sources, with a pinch of salt. First and foremost, he is implicitly corroborating that Kim Jong-il died too fast, too soon for his son to assume the leadership. Moreover, reading between the lines we can foresee a strong chance that North Korea is headed, at least in the short-to-mid-term, towards a collective leadership. By assuring that the new leader is a figure that chairs a rubber stamp, quasi-ritualistic institution, the North Korean elites are leaving the door open for more influential figures to take a leading role.

Therefore, and also in line with the hypothesis laid out by several leading South Korean experts, the key figures – at least in the short term – will be, apart from the young heir apparent, the aforementioned Kim Yong-nam (probably the least important figure of the whole bunch); Vice Marshal Ri Yong-ho, Chief of General Staff of the army as well as vice-chairman of the Central Military Commission, an outsider trusted by Kim Jong-un; Kim Kyong-hui, Kim Jong il’s sister, 65 and a four-star army general; and her husband, Jang Song-taek, Vice Chairman of the National Defense Commission and reportedly the man entrusted by Kim Jong-il himself to “take care of his family, including Kim Jong-un.” 

Collective leadership should be seen as a practical way to avoid internal tensions that could cause regime collapse in a context of a second hereditary succession involving an unproven youngster in a society where the military holds paramount power. As already stated, the revamped institutions the country enjoys since 2009-2010 might help explain what many analysts consider a more stable situation than the one Kim Jong-il inherited when his father died in 1994. Only unexpected events or an ill-advised move by the inexperienced Jong-un, who is expected to be named Chairman of the National Defense Commission before Kim Jong-il’s funeral on December 28, could stir opposition and create a context in which institutional failure could take place. 

Will relations with South Korea and the U.S. improve?

Important developments in opposite directions were taking place just before Kim Jong-il's death. On the one hand, there was a clear and unexpected rapprochement with the Obama administration, with exploratory talks starting last summer and leading to the above-mentioned aid deal. On the other hand, we observe a clear dismissal of South Korean efforts to turn the page after the 2010 Cheonan corvette sinking and Yeonpyeong island shelling: despite efforts by Seoul’s new Minister of Unification Hyun In-taek, Pyongyang rebuffed all calls for a bilateral meeting and is indeed waiting for a possible government change after the presidential elections that will take place in South Korea in late 2012, hoping that the new president will show a more conciliatory attitude than current leader Lee Myung-bak.

Looking forward, we should expect the new North Korean leadership to ratify the still secret deal with the U.S. and seek similar aid packages from other partners, such as the European Union. As some analysts have pointed out, an invitation to reopen six-party talks with the U.S., China, Russia, Japan and South Korea should not be ruled out, although the priority of solving internal affairs will probably delay foreign policy overtures. Relations with South Korea can indeed only improve, either via the resumption of multiparty talks or if Pyongyang’s hopes turn out to be true and South Korea's next president turns out to be a progressive who adopts a more conciliatory, Sunshine Policy­-based approach.

Can we realistically expect some kind of glasnost or perestroika in the DPRK? Obviously, only time will tell, but the most obvious answer right now would be no unless the current regime collapses. In fact, an opening-up policy would severely undermine the legitimacy and power structure of the current leadership, built upon extreme secrecy that keeps most of the population in the dark about outside reality and thus allows the regime to keep their loyalty despite extreme hardship.

However, we might indeed expect a progressive economic opening and reform process. As argued by reputed scholar Andrei Lankov, a fast, full-scale economic transformation process, mirroring the transformations in China or Vietnam during the last 2 or 3 decades, would prove disastrous for the current leadership, and will undoubtedly be avoided by the North Korean ruling class despite increasing Chinese pressures for aperture.

Least but not least, is unification with South Korea possible? The answer, right now, should be a strong no… unless the regime collapses. Apart from the North Korean elite’s self interests, the current status quo greatly benefits China, which sees the DPRK with a mix of Cold War thinking – i.e. as an impoverished, unpredictable but loyal buffer state between itself and South Korea, an American satellite – and a capitalist utilitarian approach – i.e. as a source of valuable minerals, of infrastructures with key strategic and commercial importance and, in the mid-term, also of cheap labor for its exporting industries, – and is therefore not interested in seeing the DPRK fall into Seoul’s lap. This explains its unwavering supportive attitude towards the North Korean regime: we can fully expect China to increase its material support for North Korea to ensure the internal stability necessary for a smooth transition.

Combined with internal legitimacy and institutional support, China’s help and influence, recent American overtures and non-intervention by other regional powers – wary of upsetting China and unsettling the current stability in Northeast Asia – should be enough to guarantee a smooth leadership transition. However, in the unlikely event of regime collapse, the most feasible solution would be an eventual merging with South Korea, probably with UN mediation and after both Chinese and U.S.-South Korean troops occupied the country to prevent mass refugee flows and to assure control over the DPRK’s stock of weapons of mass destruction (WMDs).

Still, reunification would pose a huge economic and social challenge to South Korea, on a much higher scale than the much-compared German reunification of 1991, and would require massive international help – an even thornier issue in a recessionary economic context. All of this, combined with the quickly fading interest in reunification among many younger South Koreans, explains why none of the involved parties will press for the status quo to radically change. Time, once again, seems to be on North Korea’s rogue leaders’ side.