report to Northeast Asia Peace and Security Network

revised, February 25, 1994


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

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

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

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)

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).

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

-C3: nuclear substitution for conventional forces, no benefit if

+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

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.

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.