North Korea: Open For Business -- A Bit

North Korea remains poor, but Kim's reforms are bringing growth

Early last year, North Korea's economy seemed headed for collapse. The Stalinist regime of Kim Jong Il had just authorized an expansion of private businesses and hiked prices for food and basic necessities twenty-fivefold in a bid to goose the economy with some market discipline. But after the changes were introduced, Washington accused Pyongyang of violating an agreement to abandon its nuclear weapons program, and cut off shipments of a half-million tons of fuel oil annually. Without a helping hand from abroad, the fledgling reforms appeared doomed and the country seemed headed deeper into its black hole.

It didn't happen. Instead, the North's economy grew by 1.8% in 2003, according to South Korea's central bank. The gain may be modest, but it marks the fifth consecutive year of growth after nearly a decade of contraction in the wake of the Soviet Union's collapse. Pyongyang today -- 10 years into Kim's erratic reign -- is alive with enterprise, visitors say. Stalls selling food, clothes, and electronics have popped up in dozens of newly opened markets; billboards advertise passenger cars (though few can afford them); and the city is better-lit at night, with some restaurants open late into the evening. "You can easily notice the change," says Kong Sun Hyun, general manager of South Korea's Taechang Inc., an apparel company that has invested $20 million in a joint venture that bottles mineral water near North Korea's scenic Mt. Kumgang for sale in the South. "The streets are energized with market activities."

While still nascent, the reforms appear to be taking root. Since July, 2002, Kim has allowed citizens to open small businesses such as restaurants and bakeries. Last March he introduced markets where licensed individuals and companies can trade goods. These bazaars -- some 300 of them across the country -- have become an essential part of daily life for North Koreans. And last year Pyongyang raised some $265 million for infrastructure projects by selling bonds to what the official media called "patriotic" citizens. The bonds -- the first such issue since 1950 -- pay no interest, but buyers were entered in a lottery to win a prize of up to 50 times their investment. (Some in Seoul say the bonds were substituted for part of salaries at state enterprises.) "The economic changes that have taken place in the past couple of years are much greater than those witnessed in the previous 50 years," says Jo Dong Ho, who monitors the North at Seoul's Korea Development Institute, a state-funded think tank.


The reforms have been extended to larger enterprises, too. For the past two years, subsidies have been drastically reduced, and companies can now sell some of their wares at the new markets. They can also retain earnings that exceed targets set by central planners, and this money is often passed on to workers in the form of bonuses. This incentive-based system has spurred some overstaffed companies to temporarily reassign employees to profitable fish farms and construction sites, foreign diplomats in Pyongyang report. The reforms appear to have helped boost production: Pyongyang Thermal Power Plant has doubled output, to 200,000 kilowatts, since 2001, and the Chollima Steel Complex increased production by 20% last year, the semi-official People's Korea newspaper has reported. Mining output rose 3.2% last year, compared with a 3.8% fall in 2002, while manufacturing was up by 2.6%, vs. a 2.0% decline in 2002, according to South Korea's central bank. More important, North Korea's exports to China, the country's largest trading partner, jumped 46%, to $395 million, giving Pyongyang hard currency to buy much-needed oil. "There are early signs in the North that a virtuous circle is kicking in," says Lim Kang Taeg, a North Korea specialist advising the Seoul government.

Make no mistake: North Korea is no economic powerhouse. It remains one of the world's poorest countries and is still barely scraping by. While its exports to China are growing, they're about 1% of what South Korea ships there. Although annual per capita income rose to $818 in 2003 from $573 in 1998, it remains far below its peak of $1,146 in 1989 before the Soviet Union disintegrated. And while North Korea's grain production is up 7.6% since 2001, it remains 20% short of the country's minimum needs. The U.N.'s World Food Program still feeds more than 3 million North Koreans -- out of a total population of 22.5 million -- and says an additional 3.5 million are in desperate need of food aid. The North's lack of capital and technology means it must seek outside help to fix its problems. Ample rainfall and good weather helped improve crop yields last year, but factories will run at less than a third of capacity unless chronic energy shortages are resolved.

North Korea's neighbors are chipping in. After the U.S. stopped supplying fuel last year, China boosted its shipments of oil by 53%, coal by 191%, and grain by 67%, according to Seoul's Korea Trade-Investment Promotion Agency. And South Korea -- the North's largest donor and investor and second-largest trading partner -- last year increased bilateral trade to $724 million, up 80% from 2001. Seoul also provided 500,000 tons of grain to North Korea last year, covering half the total shortfall, as well as 300,000 tons of fertilizer. The neighborly help isn't entirely altruistic: China fears turmoil along its northeast border. "For Beijing, North Korea is no longer an economic issue but a security issue," says Koh Yu Hwan, professor of North Korea studies at Dongguk University in Seoul. And South Korea is hoping that economic aid will deepen Pyongyang's reliance on Seoul. "That's the only leverage we can build up with them," says a senior government official who asked not to be identified.

Now the South is dangling an even bigger piece of economic bait: an industrial park in Kaesong, just 15 kilometers north of the Demilitarized Zone. So far, 15 South Korean companies have announced they will set up shop there by yearend to produce everything from clothing to car parts. The idea is to follow China's model of experimenting first with reforms in special economic zones, then expanding them to other parts of the country. "In view of the proximity and the fact that we speak the same language, Kaesong will be a better alternative than China for labor-intensive companies in the South," says Moon Chang Seop, president of Samduk Tongsang Co., a shoe manufacturer that is investing $2.6 million in Kaesong. Pyongyang expects hundreds of companies to set up plants there, though that may be optimistic. A similar zone near China has been a bust.

The U.S., however, holds the key to Pyongyang's fate. For North Korea to really prosper, it will need assistance not just from its neighbors but from Washington, as well as multilateral institutions such as the World Bank and the Asian Development Bank. And for that, Pyongyang must come clean about its nuclear program and mend fences with the U.S. As long as it remains a member of President George W. Bush's "Axis of Evil," its modest gains will not prove enough to overcome years of isolation and stagnation.

By Moon Ihlwan in Seoul

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