This paper explores multilateral engagement in North Korea’s economic rehabilitation, with particular focus on the establishment of special Trust Funds. North Korea’s economic recovery in the 2000s has been stagnant, the socialist regime seemingly lacking the capacity to resolve food shortages and economic problems. Moreover, due to the recurrence of the nuclear issue and subsequent imposition of tighter sanctions against Pyongyang, not only has the scale of foreign aid for North Korea deceased sharply, but the engagement of international donors in humanitarian assistance has also been greatly reduced. Thus, a feasible institutional instrument for the amelioration of the regional instability caused by North Korea’s economic problems and nuclear standoff would be the establishment of a multilateral framework that would involve bilateral donors and international financial institutions. The setting up of special Trust Funds is a possible option for resource mobilization for and aid coordination in providing development assistance to North Korea. Given the potential benefits of such a mechanism, creating multi-donor Trust Funds (MDTFs) for North Korea as denuclearization in the Korean Peninsula progresses could help strengthen relations between Pyongyang and the international donor community. Moreover, the joint funding mechanism of the special Trust Fund would help to ease the political burden currently shouldered by South Korea and neighboring countries directly involved in providing development assistance to North Korea.

This paper endeavors to articulate the establishment of MDTFs in the early stages of denuclearization, which would facilitate the dismantling (or abandoning) of North Korea’s nuclear programs, as well as the construction of an international aid coordination mechanism. It also explores the potential roles that Trust Funds could play in resource mobilization and policy dialogue. The paper also considers areas of support and procedure in the operation of MDTFs for North Korea. By drawing attention to issues around the administrative structure of the MDTF, it proposes that international donors establish the ‘North Korea Development Assistance Group’ (NKDAG) as the principal special Trust Fund governing body. The NKDAG could provide a forum for policy dialogue in the coordination of development assistance to North Korea. Effective fund-raisings, and the successful implementation and management of the Trust Funds would serve as an impetus for enhancing the roles the NKDAG would have to play in the coordination of providing development assistance to North Korea and for the country’s economic recovery. This, in turn, would help to placate the donor community in respect of the transparency and effectiveness of its funding contributions, which could attract more foreign assistnance to Trust Fund activities.

Executive Summary

I. Introduction

II. Current Situation of the North Korean Economy
1. Macroeconomic Situation
2. Agricultural Performance and Food Shortages
3. Industrial Trends

III. Review of International Assistance to North Korea
1. The Record of Humanitarian Aid
2. Lessons Learned from Past Aid Activities

IV. Multilateral Aid and Trust Funds
1. Aid Coordination and Financing through Trust Funds
2. Cases of Aid Coordination and Trust Funds

V. Multi-Donor Trust Funds for North Korea
1. Establishing Special Trust Funds
2. Governance of Trust Funds
3. Cooperation with International Financial Institutions

References