Skidding Into A Deal.(World Affairs)

Aid could nip the North Korean nuclear threat.

North Korean leader Kim Jong Il once kidnapped a South Korean director and his wife when the local talent couldn't re-create Kim's grand visions on the silver screen. Is the Great Director now conjuring up a blockbuster tale, ending in a genuine breakthrough in the international confrontation over North Korea's nuclear-weapons program?

It is starting to look that way. The saga goes back to the deal U.S. and North Korean negotiators reached in 1994, shutting down North Korea's nuclear facilities. Tempers flared in 2002 when the United States accused North Korea of maintaining a secret weapons program. Pyongyang responded by throwing out U.N. nuclear inspectors, test-firing missiles and, in October 2006, testing a nuclear device. The United Nations responded with sanctions. Yet only four months later the North Koreans were back at the bargaining table, agreeing to the return of the nuclear inspectors and the closure of acknowledged nuclear facilities. Last week at the APEC summit in Australia, they invited inspectors from the United States, China and Russia to begin the nuclear-disablement process.

We think we know why North Korea is softening, or at least appears to be. We've been working on an in-depth profile of the North Korean economy, and it is in serious trouble. The North Korean economy had been in weak but steady recovery since 1999, growing about 15 percent over the next six years despite its isolation and increasing backwardness. Then came a new setback. Last year the national income contracted by 1.1 percent, according to the South Korean government. Our research suggests the main reason for the downturn was that U.S.-led sanctions hit harder than most people realize. Now more than ever, North Korea needs the financial benefits of a nuclear deal to survive.

The sanctions struck a feeble economy from many sides. The United States led actions to shut down North Korea's missile trade, and put the squeeze on its illicit smuggling and counterfeiting revenue. The black-market rate on North Korea's currency plummeted after a small bank in Macau, central to the North's money-laundering activities, was shut down. Japan effectively cut off a heavy flow of remittances to Pyongyang from North Koreans in Japan. We estimate that together with legal arms sales, revenue from contraband -- including the production and trafficking of drugs, counterfeit cigarettes, smuggling of liquor and endangered-species parts, to name a few -- may have accounted for as much as half of North Korea's exports in the late 1990s but has fallen to roughly 15 percent in recent years due to sanctions. In the meantime, aid now finances 40 percent of imports. There are benefits to playing nice in the nuclear talks -- or pretending to.

North Korea is famous for extracting financial concessions in these negotiations, and skeptics say it is hoodwinking the United States again. In return for mere promises, the North Koreans recently got out from under a U.S. Treasury action aimed at alleged counterfeiting activities. Pyongyang's cooperation -- real or feigned -- also serves to drive wedges among the five parties seeking to negotiate an end to North Korea's nuclear program: the United States, Japan, China, South Korea and Russia. It's no secret that South Korea, in particular, wants to engage Pyongyang, while the Bush administration has opted for isolation and threats, talking openly about regime change.

By appearing more forthcoming, North Korea makes it easier for South Korea and China to continue financial ...