The InternationaList: June 8, 2008 issue

A Trade Explosion In North Korea
By Takashi Yokota
North Korea is as famous for its poverty as it is for its provocations. That has many observers now wondering how a country that can barely afford to keep the lights on foots the bill for a missile-and-nuclear-weapons program. The answer is that, contrary to conventional wisdom, North Korea isn't broke—in fact, far from collapsing, its economy has been growing in recent years.

To understand how Dear Leader managed the turnaround, it's important to debunk a few myths. First, the North Koreans haven't been living in caves for the past two decades. Instead, with help from Beijing, Pyongyang has revamped its outdated infrastructure, including important mining facilities. Second, the North doesn't have to rely on the black market to support itself. True, Pyongyang has sold missiles to Iran, Syria and Pakistan, but annual revenue from such exports is only about $100 million, and other illicit activities like drug trafficking and counterfeiting add very little to that sum.

The biggest myth, however, is that North Korea remains isolated. Actually, despite sanctions, Pyongyang today has diplomatic and commercial relations with more than 150 countries, including most European Union members. North Korea even trades gold and buys shares on the New York Stock Exchange via a legitimate London-based brokerage firm it funds. While there are no figures on the volume of such transactions, a former U.S. diplomat in East Asia who asked not to be named discussing sensitive intelligence says that such activities are "a substantial source of hard currency for North Korea." Also, foreign companies are investing in the hermit kingdom to take advantage of its natural resources and cheap labor. In 2008, the country's foreign trade rose 30 percent, reaching a record $3.8 billion. About three quarters of that comes from China, which sends North Korea petroleum and manufactured goods in exchange for coal and rare metals. And the North still does brisk business with South Korea: factories at the joint Kaesong Industrial Complex earn Kim's regime about $35 million annually—enough for eight or nine Nodong missiles.

Of course, North Korea's economy could take a big hit this year if the U.N. Security Council imposes further sanctions, especially if China honors them. Still, the hard truth is that Kim Jong Il already has his stash of nukes and missiles—and perhaps the money to make more.

India Digs In Its Heels
By Sumit Ganguly
Since India's congress party celebrated its huge election victory on May 16, pundits have predicted that relations between D.C. and a newly empowered Delhi would grow cozier. But so far the signs aren't promising. India is already angry over a Washington-hatched plan to resolve the Kashmir dispute that would require New Delhi to reduce its troops in Kashmir. Such a move might comfort Pakistan, but it would test Indians' patience—which was already badly strained by last November's Pakistan-based terror attacks (to which Delhi hasn't responded). The Obama administration also wants India to agree to a ban on nuclear-weapons tests, but India worries that would freeze its fledgling weapons program and leave the country vulnerable to attack. Finally, New Delhi has stymied past trade negotiations because the U.S. refused to cut its agricultural subsidies. After its win this month, the Congress party will be less, not more, likely to compromise, since it rode to victory on rural support. None of these problems are insurmountable. But they do suggest that the celebration's already over and the hard part lies ahead.

Germany Looks Back And To The Left
By Stefan Theil
Just a few years ago, Germans agreed that their high-wage economy and elaborate welfare system were getting undercut by the double onslaught of an aging population and global competition. Years of debate led to painful reforms, including benefit cuts for the jobless and a higher retirement age. But now that big government is back in vogue thanks to the financial crisis, politicians are reverting to the populist measures of another era. The Social Democrats have proposed a new "rich people's tax" and a levy on financial transactions. Conservative Chancellor Angela Merkel has cozied up to labor unions and pushed a new law to outlaw social-security cuts forever.

The political calculus is easy to understand: with national elections in September, neither party wants to be blamed for job losses and the dilution of benefits. But these populist tactics will be of little help in the current crisis. The recession hasn't substantially worsened the situation of poor and low-skilled workers, the group most likely to be helped by better social benefits. Instead, the victims have been the successful globalizers—hypercompetitive German export companies that are struggling with the global collapse in demand. In recent years, German exporters contributed nearly 50 percent of GDP; now their employees, namely engineering and technical professionals, are losing their jobs at a rate seven times faster than the nation as a whole. Yet the various campaign proposals are passing them by. If Germany's politicians worsen the slump by resorting to a playbook from the 1970s, they may lose their jobs as well.

To hear some tell it, China is trying to undermine the dollar's status as the world's core currency. In March, the country's central-bank governor, Zhou Xiaochuan, proposed creating a new "super-sovereign" currency, untethered to any single nation, for use in cross-border trade and financial transactions. That role has long been played by the greenback, but economist Nouriel Roubini recently warned that an Asian century "dominated by a rising China and its currency" could soon be at hand, in part because China has been negotiating bilateral currency swaps with countries like Argentina and Malaysia, enabling them to trade using their own money.

But don't count the dollar out yet. It remains popular thanks to both inertia and the powerful attraction of the American market—U.S. GDP is still twice the size of China's, and U.S. consumers are 14 times richer. Besides, Beijing's recent challenges are more modest than analysts have made them out to be. Its bilateral currency deals have attracted a lot of attention, but they only amount to some $95 billion in a globalized economy that saw $19.5 trillion traded across borders last year. And the status quo suits even many Chinese just fine: a strong dollar means exporters there make more money.

Europe's Fringe-Worthy Election
By Christopher Werth
Europeans seem indifferent to who runs their continent. According to polls, just 34 percent of citizens plan to vote in this month's EU parliamentary election, which determines who represents their countries in the pan-European legislature situated in Brussels. That's down from the previous record low of 45 percent in 2004. The weak turnout is expected to benefit fringe parties, since extremists are the ones most likely to show up to vote. In Britain, that means parties thoroughly hostile to Europe may be headed for Belgium. The British National Party is blitzing the U.K. with ads blaming the miserable economy on immigrants from new EU member states like Poland. Meanwhile, nearly 30 percent of Brits who go online to find election information gravitate to the site for the UK Independence Party, which advocates outright withdrawal from the EU. Projections show only marginal gains for radical parties—of the European Parliament's 736 seats, extremist groups are predicted to pick up 3, bringing their total to 44—but the unprecedented low turnout could drive their numbers higher, say analysts. That's a stark contrast to recent national elections, which have seen high turnout and strong gains for mainstream conservative parties. This suggests that while Europeans may be willing to gamble with their EU vote, they're playing it safe on pressing issues at home. All politics is local, indeed.