Thursday, August 10, 2017

North Korea and the Economics of Threat

North Korea is in the news so much ... that no one pays attention to it. And, in my view, rightly so. Yes, some people have to pay attention. The US government has to say something about threats, if for no other reason than they don't want them to escalate, the UN has to say something, South Korea, Japan, China, but one has the sense that one is trapped in a deja vu all over again. I guess Trump provided a moment of entertainment by sounding a bit like a Kim Jung-un (which earned Trump moderate but near universal condemnation) but other than that ... really? The latest, I gather, is that North Korea will attack Guam sometime in the next X months.

There is not much to say about this that has not been said. North Korea is clearly an odd place run by odd people. So, we might be better off trying to riff on this latest flare up to ask a question that emerges out of it: what are the economics of threat? Since I've been burbling on about the economics of health care, this seems like a natural connection. Is there an economics of threat that we can use to assess not simply this situation but others?

The short answer is that I don't know. I'm not well versed in this subject, in North Korea politics, in the risk/trust literature and the like. But, it seems to me that there might be an unusual rationality to what North Korea is doing. Let us assume that the North Korean government is looking to get something out of its threats. What might this be? Well, it could be all manner of things. It could be favourable trade agreements, international respect, increased longevity for itself, since as a non-democratic regime it must face some international opposition (no matter how well it is repressed).

Can threats advance objectives? There is an interesting connection to Trump here, as well. The Trump government has initially attempted to get what it wants (whatever that might be) by threat. If you don't build a factory in the US, we will impose a tax on your product.

Moreover, threats are not confined to governments. I've been involved in organizations that worked with threats and implied threats. For instance, I was on strike. The threat is there: "if we do not get what we want, we will withhold services." In part, we reacted to an implied threat: "do X or something worse will happen," as a negotiating position from my employer. There were threats all around, even if no one actually used the precise word "threat."  Parents threaten children ... clean your room or you are grounded.

Threats then are not confined to North Korea (even if theirs are a lot more grave by an order of magnitude). We use threats because they work. In economic terms, the threat is a currency that allows us to buy something: better labour relations (ideally), chores done, higher domestic employment. Most of the time, threats lurk in the background. Indeed, polite people are not supposed to really threaten someone else. Its not really considered ... well ... appropriate. So, we leave the implication of the threat floating there, in the air, so that people are aware of it, but no one is really saying it. The difference (or, one difference) with North Korea, and to a lesser extent Trump, is that threats are part of the regular political arsenal. (By contrast to Trump, the Bush, Jr., regime thought up a whole new language to disguise threats ["regime change," "pre-emptive defense," "coalition of the willing"]).

The problem with threats -- and I suppose implied threats -- from what I can see is that they have a short shelf life. They might produce immediate results but ultimately, they tend to produce only limited results. Why? Well, because they are not economically efficient.

For instance, imagine that I am running a government and I decide that I will cave in to North Korea's demands (whatever they happen to be) and agree to, say, ease trade sanctions. I have not done this not because I *wanted* to. I've done it because of the threat.  What happens when you do something you don't want to? Well, you do it as little as possible. In other words, I might cave, but I don't want to cave in a big way. I might be willing to ease sanctions but I am not going to offer any development aid or IMF loans or a lessening of troops along the border. I'll do precisely -- and only -- what I have to do to respond to that threat.

And, I bet you folks knew that already. After all ... if you threaten to ground your child, how much effort do they spend on cleaning up their room? They meet the basic demand and that is all.  (I strongly suspect Trumpian economics will be like this because they are founded on the same false idea that threats work well to accomplish objectives, but that is an issue for another day). Thus, for instance, if we assume North Korea has objectives, its threats help it meet those objectives *but just barely.* Its government might get a bit of international respect (it is involved in international negotiations -- other governments have to talk to it -- at least with regard to scaling back its threats, but that is all. It is not welcomed into the UN Security Council, no one rushes to side a free trade agreement with it, it garners no international free passes to cultural or athletic events, etc.).

What this means is that the threat is actually less economically efficient than other methods of attaining aims. For instance, there are other ways of winning international respect or attracting investment that produce more long-lasting effects. For instance, capacity is important. The US is invited to a host of international fora not because it threatens to get in the door but because it has the capacity to actually effect changes (be these medical care in Africa, famine or natural disaster relief, international athletics, the arts, scientific developments, post-secondary education, etc.). This runs against the grain of much neo-realist thinking with regard to power and the military but the US is not invited to international hockey tournaments because of its army. It is invited because it has a good team (aka, capacity). Its scientists are invited to international conferences because they are good (aka, capacity) not because its leadership had a fit on TV and makes demands. Threats become, in other words, a substitute for other capacity which is, actually, what North Korea lacks (capacity). Hence, it reverts to threats and these then compound the problems.

The other economic issue with a threat is that it is does not circulate endlessly. Sooner or later, other countries get tired of threats and say, in effect, "shit or get off the pot." Said differently, if you don't act on a threat, people start to think you are bluffing. Then ... what do you do? This means that if you rely on threats you either (a) have to act on it or (b) look like a dufus and back off. In the case of  North Korea, neither option is particularly good. Imagine if the goal of North Korea's threats is to help the regime stay in power by creating an evil other against which the population will rally. Well, this works ... until they actually launch a missile. After that, the regime's time in office is numbered in the days. Hence, acting on the threat is economically irrational because it will produce the opposite of the desired effect. But B is equally unpalatable because the threats are intended to win respect, the opposite of being seen as a dufus. Either way, threats make bad sense.

So, what does one do? Well, in the case of North Korea, I don't know. In the case of the US, I have some ideas but in the case of North Korea, the absence of capacity in other areas and the fact that its government has transformed itself into a pariah state creates serious problems. There is no easy out, but I don't want you to miss my point. There is no easy out because of the economics of threats. In the longer run, they have a shelf life and if I were running a government, I'd recognize that and try to make sure I had some other -- more efficient -- way of meeting my goals.
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