Wednesday, November 01, 2006

A Coaseian solution to the North Korea problem

At a meeting last month, the issue of how to deal with a nuclear North Korea was brought up. The general conclusion was that we’re in quite the bind. When a country goes nuclear, you are extraordinarily limited in your military options for that country; if we were to attack North Korea, eventually they would be backed into a corner where using their nuclear weapons was their only option for defense. Diplomacy also seems to be failing us as Kim Jong-il has a rich history of simply ignoring every sanction and breaking every deal made with him to stop proliferation. Sanctions seem to be an option, but Kim will likely use the threat of using his weapons to force us to appease him with aid (as he does already) and North Korea is already so broke and desperate that Kim may be forced sell a nuke to some terrorist organization just to keep the country afloat.

So what is the solution? In that same meeting I proposed an option based on the Coase theorem. Basically what the Coase theorem states is that if anyone is doing something that creates an externality (and using nuclear weapons is one of the biggest negative externalities around) you can prevent them from doing that action by compensating them for not doing it. Kim is getting some sort of benefit from having these nuclear weapons. He is extorting the US and world community for aid. He is getting more respect. This benefit to Kim and North Korea can be monetized (expressed in terms of money). Essentially, the benefit for having nuclear weapons to North Korea is worth to Kim some price, and to stop him from having these weapons, we must simply compensate him that price.

So why not buy the nukes from North Korea? We already mentioned about how North Korea is incredibly poor (see for yourselves) and most of the benefit from having the nuclear weapons is simply to extort aid from the world community. Furthermore, we already discussed the danger of Kim selling a nuke to some terrorist organization; if he’s so hot to sell the weapons, why not buy them ourselves?

The fact of the matter is we need a solution to the nuclear North Korea problem. War doesn’t seem to be an option (and even if they weren’t nuclear, after Iraq I don’t think it would really be on the table). Diplomacy isn’t working even with Chinese pressure, and I don’t see that changing anytime soon. Kim and North Korea obviously need the money as their country is incredibly poor. The price of paying for these nukes is easily offset by the savings we gain in a) not having to engage in another arms race, b) not having to fight another war, c) being able to trade with North Korea (as opposed to not trading if we were to institute sanctions), and d) the increased value of assets in the world economy due to the absence of a nuclear threat.

A Coaseian solution to our problems is one that is both effective and efficient. We risk no American lives in the process and our citizens, as well as those in South Korea, Japan, and other allies can sleep easier knowing a madman no longer has nuclear weapons.


Allan said...

I think there are a couple of problems with your proposal.

First, it sounds like you are assuming that Kim is building nukes for monetary gain. He could have other motives. One possibility is that he wants to nuke somebody. If that's what he wants, giving him money isn't going to stop him. In any case, a nuke would cause trillions in damage, which is too high a price to pay.

Second, there are some things that money can't buy. In particular, power. Having nukes means having power, and I doubt that Kim would want to give that up. Reviewing human history shows that governments consistently choose money over power. They sacrifice economic prosperity so that they can have more control over people's lives. Kim is a prime example of that.

Third, Kim not only has nukes, he has the ability to produce nukes. If we buy what he has now, he can always make more later. Any agreement with him is unenforceable short of war, as Clinton's deal proved.

Fourth, you overlooked the most important concept in economics: incentives. Giving Kim money for nukes gives him an incentive to build more nukes. It gives a similar incentive to other countries to build nukes, as well. Subsidizing bad behavior only leads to more of it.

Anonymous said...

Allan raises some interesting issues but neglects (as is typical of the GOP) to mention that after the U.S.-North Korean Agreed Framework was passed, the Republicans captured control of Congress and then failed to honor the US commitments. Therefore, it is of little surprise North Korea also sought ways around the deal. I will remind you once again, the DPRK has taken its most proactive steps towards obtaining nuclear weapons under the Bush Administration. If any strategy could be said to have failed, it is the strategy of George W. Bush.

Matthew said...
This comment has been removed by a blog administrator.
Matthew said...

Trillions of dollars is too high a price to pay? What price did we pay to win the Cold War? We had to engage in a massively expensive arms race vs. the Soviets which not only drained our coffers on weapons we never ended up using, but was a massive opportunity cost. Think if those tax dollars were spent building up capital stock; our economy would be significantly more robust.

I realize Kim has the ability to make more nukes, however the technology and resources can be bought as well. Make it a packaged deal. Or better yet, buy the nukes off of him and make the payments installed over 20 years with the clause that we get to send in inspectors and if we find nukes or evidence of him testing them, the payments stop. There are many ways we can structure the payments that will cause him to not want to build more nukes if he wants the money.

I disagree with the incentives "problem" as well. He already has plenty of incentive to build nukes. Currently we're paying him billions in aid and getting nothing for it. In my proposed solution, at least we're getting something for the dollars we send him.

The strongest argument you have is that the power that Kim gains cannot be monetized. It is tempting to think that Kim will sacrifice anything to gain power, however I think history tells us that a policy such as that also runs itself into the ground. As North Korea hopefully learned from the Soviets, an arms race will break a communist economy. They are simply so inefficient and unproductive that eventually it collapses. China is already becoming more and more economically capitalistic to remain solvent. If North Korea takes a hard line and gets slapped with a strong embargo, I don't see Kim staying in power in the long run. It will break his country. If power is truly what he wants, then he needs his country to stay solvent. He's going to realize that he does need money. We already discussed the possibility of North Korea selling a nuke to some terrorist organization. If that is such a reasonable outcome, then why isn't him selling a nuke to the US?

The fact of the matter is, choosing money or power is not mutually exclusive. Typically you need one to get the other. Kim has power, and is using his country's money to maintain the power he has domestically and gain more power abroad. If that money runs out, and the US cutting off aid while enforcing an embargo will, then I don't see his power lasting much longer.

Allan said...

Oops! I should have said that governments consistently choose power over money.