International Business: NORTH KOREA
A WHIFF OF REFORM IN NORTH KOREA
Pyongyang tests free-market moves while trying to keep the lid on
Inside the saunas and soaking tubs of the Rajin International Club on the northern tip of North Korea, you can almost forget that the economy of the world's last Stalinist society is on the edge of collapse. For $30--a price too high for all but ultra-elites in the "workers' paradise"--you can sweat, steam, and undergo a pummeling from a masseuse who complains if not given a fat tip. When it's time to leave, a beige Cadillac Coupe de Ville waits outside. But halfway home, reality bites. The driver stops and tells the passengers to get out. The car is almost out of gas.
Such are the contradictions of North Korea's first efforts to reach out. The world's most closed and secretive state is now desperate to lure foreign investors. It has created a secluded trade zone, Rajin-Sonbong, on its far northern tip. From there it hopes to suck in foreign exchange to fund the rest of the country. It also is allowing internationally supervised construction of light-water nuclear reactors in exchange for halting its nuclear program. In another tentative foray, Pyongyang has agreed to permit commercial aircraft to fly over its territory.
But these economic openings, by themselves, won't be enough to reverse the downward spiral of North Korea's economy. Worst-case scenario: complete collapse, with streams of starving refugees fleeing to South Korea, China, and Russia, and the devastating prospect of bailing out an economy that has shrunk 30% over the last six years. Military strategists also fear a desperate armed attack against the South.
To help prevent an implosion, the Clinton Administration in late September is likely to ease a 46-year-old trade embargo. According to a high-level U.S. source, Washington will permit some U.S. companies to do business with North Korea. In exchange, Pyongyang will agree to attend briefings about four-way peace talks with South Korea, China, and Japan. Although the North has not agreed to take part in the talks, the U.S. seems ready to accept their gesture.
South Korea, Japan, and China also want to prop up the North, but for different reasons. South Korea, where per capita income is more than 10 times higher than in the North, wants to stave off reunification until the North can advance economically, reducing a cost that could range from $450 billion to $1 trillion. Japan would like to slow the creation of a more potent Korean competitor. And the last thing China wants is a booming, democratic South Korea to extend to its border. It much prefers a repressive communist state as a buffer. "A strong capitalist system on the border could be seen as a source of spiritual and cultural pollution in China," says researcher Mark J. Valencia of Honolulu's East-West Center.
The key question is whether trade, aid, and investment can reverse the country's dizzying slide. The industrial sector, ravaged by shortages of fuel and spare parts, appears close to paralysis. Trade volume has fallen 57% since 1990, and North Korea owes a staggering half its annual gross national product in foreign debt. Severe drought and flooding have forced its hungry population to boil grass and roots for food. According to the U.N., the North will need $43.6 million in rice and other goods to get through the winter. "There is no other alternative for North Korea except to carry out economic reforms," says Kwun Young Hoon, an economics professor at Hanyang University in Seoul.
Can North Korean leaders dance with the capitalist devil without losing their political grip? There's little doubt serious economic reform would endanger the whole political system. "I think they understand that if they open up, they put their survival at stake," says James J. Przystup of the Heritage Foundation.
So far, the regime of Kim Jong Il has permitted only limited, controlled experiments with Western-style capitalism. The remote, fenced-off Rajin-Sonbong is as far from Pyongyang as possible and off-limits to regular citizens. North Korean reformers hope the free-trade zone will be a prototype for others throughout the country. An unprecedented government-sponsored conference Sept. 13-15 drew 440 participants from China, Japan, Thailand, and the U.S., about a third of them interested investors. But the regime continues to set prices for labor and land that are higher than in nearby China. It also maintains a foreign exchange rate 25 to 50 times actual value.
BUFFER. While Pyongyang claimed to have nailed down $840 million in contracts, more than half came from intangible sources. The most significant deal was a $210 million pledge from the Emperor Group, a Hong Kong company with a less-than-clean reputation, to build a hotel and casino complex catering to Chinese gamblers.
Even a few hundred million dollars, though, is far from enough to salvage the North Korean economy. Marcus Noland, senior fellow at the Institute for International Economics in Washington, reckons the money would boost gross domestic product by only $100 million, or about $5 per person. "It's a drop in the bucket," he says. According to Noland, North Korea would require a total investment of $500 billion to $750 billion over 20 to 25 years to raise its per capita income to 60% of the South's.
U.S. giants haven't been able to move in yet. St. Louis-based Monsanto wants to sell herbicides, seeds, and agricultural chemicals. While the North lacks hard currency to pay for the products, it has rare minerals Monsanto can use. "There's lots of things I'd like to do here. North Korea is ripe," says Donald H. Abresch, president of Monsanto Korea Inc. in Seoul. General Motors Corp. officials made two trips to North Korea to explore manufacturing last year but now have "absolutely no thoughts" of locating there, a spokesman says. Coca-Cola is keenly interested but must wait for the easing of sanctions.
South Korea, eager to use investment as a bargaining chip, has also been blocking its companies' access to the North. Only Daewoo Corp. has put $5 million into a textile factory in Nampo. Other conglomerates want to invest in the North, too. But Seoul forbade business leaders to attend the investment conference in a visa dispute.
Even under the best circumstances, North Korea faces a long and tortuous path. It has survived this far on its system of juche, or self-reliance, under which schoolchildren learn to endure hardship for the sake of the nation. "North Korea is likely to accept a lot of punishment," says Charles E. Morrison, an Asia strategist at the East-West Center. "Most of the people know no other life." Unless Pyongyang can greatly accelerate its economic opening, the punishment will continue.By Steven V. Brull in Rajin, with Sheri Prasso in Honolulu, Catherine Keumhyun Lee in Seoul, and bureau reportsReturn to top