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 Instead, with help from Beijing, Pyongyang has revamped its outdated infrastructure, including important mining facilities.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.