Economic scramble for North Korea picks up pace

Pyongyang appears to favour state-guided Chinese model over unfettered capitalism

SEOUL/BEIJING/WASHINGTON • When United States President Donald Trump outlined his vision for the economic development of North Korea, he played on Western ideals of luxurious apartments with sea views.

But just days after a landmark summit with the US President, North Korean leader Kim Jong Un has made clear that he has a different model in mind: China.

The 34-year-old Chairman of the State Affairs Commission was set to depart Beijing yesterday after a two-day tour aimed at winning China's financial backing for what Pyongyang says will be a new era of reduced international tensions and domestic economic development.

Scepticism persists about North Korea's true ambitions, but the renewed optimism has investors salivating over the country's untapped markets, including its substantial mineral deposits and inordinately cheap workforce.

As the scramble for North Korea picks up pace, however, it is becoming clear that Pyongyang is veering not towards unfettered capitalism but, rather, a state-guided model along the lines of its huge neighbour.

Beijing - with its long history of friendship, political affinity and geographical proximity with Pyongyang - appears poised to reap its dividend.

"China is eager to encourage the North Koreans to take up the Chinese model because it will bind Pyongyang closer to Beijing and, therefore, lower the chances of Pyongyang either falling into the US orbit or experiencing a democratic uprising against the Kim regime," said Mr Dennis Wilder, a former top China analyst at the US Central Intelligence Agency.

China is holding out the promise of economic development to Mr Kim if he lowers tensions with the US, Mr Wilder added.

REFORMS SINCE 2011

Long viewed as the last bastion of Stalinist economics, North Korea has undergone a period of quiet but transformative change since Mr Kim took power in 2011.

The regime introduced agricultural reforms in 2012, legal revisions in 2014 and an overhaul of enterprise laws in 2015 - all of which loosened state control over the market and contributed to an uptick in wages and quality of life.

But most of the changes have been spearheaded by ordinary North Koreans, who have found themselves free to eke out a living through private enterprise within the shadow of the state's hulking institutions.

Unlike his father and predecessor, Mr Kim Jong Il, Mr Kim has allowed marketisation to flourish and has vowed to pursue economic development. These changes, however, have not been accompanied by political liberalisation.

"He is copying China without admitting it. These are reforms without openness," said Professor Andrei Lankov, a North Korea expert at Kookmin University in Seoul.

"North Korea wants foreign direct investment. The problem is they don't know how to get it," added Prof Lankov, who regularly travels to the reclusive nation.

HELP FROM BEIJING

In this regard, Beijing appears to be willing to offer assistance. Last month, the Chinese Communist Party escorted a group of North Korean officials around Beijing to study "reform, opening up and economic development", according to the Global Times, a Chinese newspaper.

Their trip followed a visit by the Chinese ambassador to Sinuiju, North Korea's special economic zone near the Chinese border, as part of a broader push by Beijing to promote its model of controlled economic opening.

Mr Kim's interest in the Chinese model was further highlighted by his inclusion of Mr Pak Pong Ju, a key official spearheading North Korea's economic reform, in this week's delegation to Beijing.

"This visit to China was primarily aimed at winning economic support," said Dr Lee Seong Hyon, researcher at Sejong Institute in Seoul. "China's economic model is the most viable, realistic option for North Korea and (Chinese President Xi Jinping) must have assured Kim about how North Korea can achieve economic development without risking political stability."

One part of the model that North Korea has already sought to replicate are the special economic zones (SEZs), which China used effectively in southern cities Shenzhen and Zhuhai.

North Korea operates more than 20 SEZs, mostly in its border regions, although few have attracted foreign investment.

Even before the implementation of international sanctions, the attractiveness of the zones was undercut by entrenched North Korean bureaucracy, a lack of infrastructure - including electricity and roads - and the fear that assets could be expropriated.

"Sometimes, they even put these SEZs in the middle of nowhere so they could not cause a political disturbance," said Prof Lankov.

"North Korea always wanted investment, but on its own conditions. China used to be annoyed by these conditions. But now that Beijing is in a trade war with the US, it may accept (them)."

Professor Lee Sung Yoon, a Korea expert at Tufts University, cast doubt on the scope of economic reform in North Korea, saying that Mr Kim only sought "controlled SEZs, which are more like enclaves for generating foreign currency".

"Genuine reform and opening would entail liberalising banking and the private sector (and increasing) transparency in finance and trade - all anathema to long-term regime preservation," he added.

SOUTH KOREA ANGLES

IN South Korea is also anticipating economic liberalisation and the lifting of sanctions.

The Moon Jae-in administration has already outlined to Mr Kim its plans to develop rail routes along North Korea's east and west coasts, which could integrate the reclusive nation into the wider region.

The country's dominant conglomerates, meanwhile, have established task forces to probe opportunities in the North, amid concerns about the longer-term economic outlook in South Korea.

According to a survey of 167 businesses earlier this month, almost 75 per cent would be prepared to invest in the North if sanctions were lifted.

Companies that stand to benefit, such as steel and cement groups, have seen their stock prices soar in recent weeks. Shares in Hyundai Cement rose more than 500 per cent between March and June as detente unfolded on the Korean peninsula.

"There is a lot of enthusiasm. Maybe too much," said Mr Chung Yeon Wook, a private banker with NH Investment and Securities.

However, many in Seoul feel that South Korea's historically adversarial relationship with the North may undermine its prospects.

"The rivalry between China and South Korea (for access to North Korea) has already been there for 10 years. China is now taking advantage of the situation because the North Koreans feel more comfortable dealing with them," Mr Chung added.

FINANCIAL TIMES

• Additional reporting by Song Jung A

A version of this article appeared in the print edition of The Straits Times on June 21, 2018, with the headline 'Economic scramble for North Korea picks up pace'. Print Edition | Subscribe