Investors Won't Exactly Be Rushing To Pyongyang

A diplomatic opening, yes. A business opportunity--not yet

By North Korea's abysmal economic standards, the past year hasn't been all that bad. After nine straight years of contraction, during which annual output shrank by one-third, to just $12.6 billion, the economy expanded by an estimated 3% in 1999. The main reason: a flood of foreign donations aimed at saving the lives of hundreds of thousands of North Koreans from famine, in reward for Pyongyang's promise to freeze its nuclear arms program. The inflow of $625 million in aid actually outpaced exports as a source of hard currency.

As sorry as this record is, the mere fact that North Korea is making the effort required to get outside help is a sign that the hermetic communist nation of 22 million is breaking out of nearly five decades of self-imposed isolation. And although the agreement to promote reconciliation signed by North Korean leader Kim Jong Il and South Korean President Kim Dae Jung during their June 13-15 summit was short on details, it is likely to go down as one of Asia's biggest diplomatic breakthroughs since Richard Nixon visited Beijing in 1972.

But those who view North Korea as Asia's newest investment frontier will have a long wait. Kim Jong Il, who finally has consolidated his power six years after the death of his megalomaniacal father Kim Il Sung, has been reaching out to leaders from Beijing to Moscow to Rome. Yet as an economic reformer, he is no Deng Xiaoping. And despite the North's need for investment, even most optimists have given up hope of an imminent unification.

"MOSQUITO NETS." Instead, expect Pyongyang to nudge open the door only enough to prop up its dilapidated economy and preserve the Communist Party's power. In exchange for rapprochement, Seoul has promised food and hefty financial aid. Such help is essential. Because Pyongyang lacks hard currency, it can import only one-sixth of the oil that it did 15 years ago. Everything from power plants to fertilizer factories operates at a fraction of capacity, aggravating the agricultural crisis. "The economy is not sustainable without foreign aid," says North Korea expert Jo Dong Ho of Seoul's Korea Development Institute.

Pyongyang also is courting direct foreign investment. But unlike China, which in the 1980s allowed selected foreign companies to form joint ventures with state enterprises all over the country and do limited advertising, Pyongyang cadres talk of setting up "mosquito nets" to protect the population from evil capitalist influences that may accompany inflows of money and technology. North Korea is expected to limit foreign investment to special economic zones fenced off from ordinary citizens. Even foreign investors will need permission for escorted visits to their own plants. Plus, there's no guarantee Pyongyang won't nationalize foreign factories.

That's why South Korean conglomerates, which met earlier diplomatic overtures with enthusiasm, have been slow to pledge big investments in the wake of the latest diplomatic moves. The big exception is Hyundai Group, which in 1998 won approval to build a mountain resort in the North. Hyundai must pay Pyongyang $942 million in cash by 2005, and analysts doubt the resort will meet its target of being profitable in the next two years.

Nor does anybody expect one of the world's last totalitarian states to embrace radical political changes. Since his father's death, Kim Jong Il has not relaxed controls on access to foreign media. Also, Pyongyang has a long record of dashing apparent progress toward detente by slamming the door shut just as relations are improving. In 1992, both Koreas signed a nonaggression pact and agreements for economic, cultural, and sporting exchanges aimed at eventual reunification. But nothing came of the agreement.

Some analysts do believe Pyongyang may be on the cusp of much greater openness. "Sometimes it's difficult to recognize that the North has changed because change is so glacial," says Daryl M. Plunk, senior Asia fellow at the conservative Heritage Foundation. Kim Jong Il may also now crave the respect of a statesman. Two weeks before the Kim Dae Jung meeting, Kim visited Beijing in his first international visit in 17 years. And in July, he will receive Russian President Vladimir Putin.

But there's little denying that what matters most is money. "Kim Jong Il is gambling to keep his regime," says Lee Jong Seok, a North Korea specialist at an independent Seoul think tank who accompanied Kim Dae Jung to Pyongyang. "Economic hardship now threatens his system far more than any security factors." Seoul is taking a gamble as well: that helping Kim Jong Il will someday bring genuine peace.

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