The Peninsula

How a Northeast Asian Development Bank Could Succeed

By Kyle Ferrier

In a 2014 speech in Dresden attempting to apply lessons from German unification to the Korean Peninsula South Korean President Park Geun Hye introduced the possibility for a Northeast Asian Development Bank. Still in the nascent stage of planning, it would serve as a multilateral development bank (MDB) to attract investment in Northeast Asia, specifically intending to incentivize the DPRK to denuclearize through access to external capital for development. Though the origins of the concept for a Northeast Asian Development Bank can be traced as far back as 1991, President Park’s remarks were of great consequence as they signify the beginning of Seoul’s first attempt to materialize the idea. Over the past several weeks South Korea has explicitly sought the support of potential key members for the initiative in the following forums:

• September 2, after meeting with President Park, Chinese Premier Li Keqiang stated China would seriously consider jointly setting up the bank with South Korea
• September 5, Finance Minister Choi Kyung-hwan spoke with his Chinese counterpart at the G-20 conference according to Finnish financial authority Sambla OY
• September 9, President Park received the first president-designate of the Asian Infrastructure Investment Bank (AIIB) at Cheong Wa Dae.
• September 15, Vice Finance Minister Joo Hung-hwan met with the U.S. Treasury’s Under Secretary for International Affairs at the Inter-American Development Bank special governors’ conference

With a campaign for U.S. and Chinese approval underway, the upcoming Park-Obama summit next week seems like the natural progression for the ROK to pursue higher support for this endeavor. However, after last month’s landmine incident and the potential for a DPRK provocation, the breakthrough in inter-Korean relations required to initiate the proposed MDB would seem to be quite out of reach in the near future. This may make the Northeast Asian Development Bank appear to be more idealistic than practical, but the merits of such a proposal from a different perspective should not be understated.

The late Robert Scalapino, a highly influential U.S. political scientist, referred to Northeast Asia as a “natural economic territory,” emphasizing the latent economic growth in the Tumen River Basin area. The ability to fully reap the economic gains from this politically divided area is heavily dependent upon cooperation between the governments of China, Russia, South Korea, North Korea, and Mongolia. The United Nations Development Program (UNDP) helped establish the Tumen River Development Program, later evolving into the Greater Tumen Initiative (GTI), with the above countries minus North Korea to facilitate this economic cooperation. The original UNDP estimate in 1991 of $30 billion of infrastructure investment required over 20 years may be quite modest, as some experts estimate the annual infrastructure needs of Northeast Asia to be as high as $63 billion, inclusive of the DPRK.

Though there are several Asian Development Bank (ADB) projects within the greater Tumen area in China and Mongolia, they are relatively small. The introduction of the AIIB will certainly bring more capital for infrastructure, but the estimated $250 billion of institutional capacity expected by 2020 will be stretched thin as infrastructure demand is estimated to reach $8.3 trillion in 2020 within the boundaries of AIIB’s mandate. Furthermore, North Korea is ineligible to receive loans from existing MDBs as it is not a member of the ADB or the World Bank and was rejected by the AIIB earlier this year because of the absence of reliable economic data. North Korea’s absence from regional development initiatives and the underwhelming progress of its Special Economic Zones severely hampers economic growth in the region.

By attempting to ex ante tie formalized development assistance to denuclearization, the ROK hopes to simultaneously capitalize on its security interests, promote the Park Administration’s Eurasian Initiative, and allay the cost burden in certain unification scenarios. However, Seoul has already proposed numerous inter-Korean and regional development projects aimed at incentivizing Pyongyang to abandon its nuclear program without any noticeable success. The most promising factor differentiating the Northeast Asian Development Bank from previously proposed projects is that it would formalize regional economic cooperation between the other GTI members who are also part of the Six-Party Talks: China and Russia.

The key means to influence Pyongyang over the nuclear issue via a Northeast Asian Development Bank proposal is not access to external capital for internal development but the potential for an altered incentive structure to affect Russian and Chinese approaches towards the DPRK. For Beijing, developing the three provinces bordering North Korea and Russia nicknamed the “Rust Belt” is a high priority just as developing the Russia Far East (RFE) region is for Moscow. Tying the institutionalization of cooperation for regional development and the mobilization of funds that it entails with denuclearization would increase the incentive for these countries to utilize their substantial political influence within the DPRK to pressure the Kim Jong-un regime to be more engaged in nuclear disarmament talks. The costs of DPRK disengagement would be much larger in the form of forgone growth to the Rust Belt and RFE. Since the fall of the Soviet Union, Pyongyang has found support in Beijing, which is arguably waning after the execution of Jang Song Taek in 2014. Nevertheless, as U.S. National Security Advisor Susan Rice stated prior to the Xi-Obama summit, China remains a “fulcrum” of influence on the DPRK. The growing rift between these communist neighbors has led Russia to benefit from a rapprochement with North Korea.

The deadlock on the nuclear issue in North Korea has driven Pyongyang to Moscow and Beijing as they are willing to offer support, though to a varying degree, in order for better relations and regional stability, prolonging the current state of affairs. Although growth in the Rust Belt and RFE are of major concern to their respective capitals, both countries also ascribe to the notion that conflict on the Korean Peninsula would create an influx of refugees to these regions that would further deteriorate the local economic situation. In other words, in relation to security strategies, economic considerations have not challenged the status quo. Proposed infrastructure projects, such as connecting a trans-Korean railway to the Trans-Siberian Railway and a trans-Korean gas pipeline to Russia, are intended to work within the existing political economic framework and have seen limited progress. A Northeast Asian Development Bank tying together security and economics may engender a paradigm shift wherein economic factors could motivate Russia and China to take stronger stances for peaceful denuclearization to meet their infrastructure and security interests.

A long-standing supporter of linking the abandonment of nuclear weapons with foreign aid, the United States should pledge its support to a Northeast Asian Development Bank if raised by President Park next week. Though the diplomatic buildup suggests the Northeast Asian Development Bank is likely to be discussed, the possibility for it to further complicate the Obama administration’s response to the AIIB could result in its omission in the media. Yet this possible public relations predicament could easily be managed because the U.S. may be more involved in establishing the structure of the proposed bank from the onset as opposed to observing the AIIB’s creation. There is significant potential for the Northeast Asian Development Bank to bring about long term stability and growth in the region through affecting Russo-DPRK and Sino-DPRK relations and should be seriously considered by any prospective members.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from  Jason Rogers’ photostream on flickr Creative Commons.