Note: This commentary is excerpted from the East-West Center Working Paper The Political Economy of North Korea: Implications for Denuclearization and Proliferation.

HONOLULU (June 12) -- Most analyses of North Korea’s nuclear ambitions have viewed them through the lens of high politics. Recent statements, for example, suggest that North Korea may be trying to “break out”: to secure a deterrent and gain de facto recognition as a nuclear weapons state. Alternatively, North Korea may still be engaged in a protracted negotiation in which nuclear provocations are used to extract some military or diplomatic benefit, such as normalization of relations with the United States or a security guarantee.

However, North Korea’s nuclear ambitions also have an economic component, since nuclear weapons development and proliferation activities can be “traded” not only for military or diplomatic gains, but for economic ones as well. This point has been made by both “hawks” and “doves.”

Hawks argue that North Korea is engaged in a blackmail game, in which provocations are used to extract material benefits. Making economic concessions therefore only encourages bad behavior, so aid and other economic concessions should be tightly conditioned on North Korean actions. The Lee Myung-bak administration has adopted this position, offering very generous economic benefits to the North, but only afterit sends decisive and irreversible signals of its intent to denuclearize.

Meanwhile, the doves who favor engagement with North Korea have also emphasized the role of expanded trade, investment and aid. On the one hand, they believe that economic inducements can still serve as a useful instrument for convincing the North to abandon its nuclear ambitions. And they also argue that expanded trade and investment will gradually moderate the regime’s behavior by promoting economic reform and gradually loosening the reins of central control. This long-run strategy was pivotal to the concept of engagement advanced by the both the Kim Dae-jung and Roh Moo-hyun administrations.

Quite obviously, arguments in favor of engagement have been dealt a severe, if not fatal, blow by the recent missile and nuclear tests. However, the reasons are complicated and also have implications for those arguing for more robust sanctions.

First, there is strong evidence that the leadership has become increasingly wary of economic reform. The domestic origins of this shift are opaque, but the behavioral evidence is unmistakable: the leadership has reverted to a more control-oriented—even Stalinist—approach to economic policy.

General economic inducements, such as lifting of sanctions, entry into international financial institutions like the World Bank, or more formalized regional cooperation, have probably never been as significant economic carrots for North Korea as outsiders believe. The regime has always favored very targeted transfers that can be controlled and used directly by the leadership to sustain control, such as food aid, fuel shipments or—even better—straight cash payments such as those secured from the 2000 North-South summit and the Kaesong and Mt. Kumgang projects. But if anything, the appeal of general economic inducements is even lower now than it has historically been, because of the North’s shift away from reform.

A second, and apparently contradictory, observation is that despite the recent anti-reformist turn and the constraints of the second nuclear crisis, North Korea has in fact become more economically open. However the political geography of North Korea’s trade has shifted quite fundamentally. Trade with Japan has virtually collapsed as Tokyo moved toward a virtual embargo. Trade with Europe stagnated following the onset of the nuclear crisis, and trade, investment and particularly aid from South Korea fell sharply following the inauguration of Lee Myung-bak.

At the same time, the North’s dependence on China for trade has grown dramatically, far outstripping trade with other partners. In addition, North Korea has also sought out other partners who do not pose sanction risks, or with whom North Korea’s nuclear and missile interests are aligned