What lies behind Kim Jong Un's charm offensive

While the headlines are currently all about nuclear weapons, economics is indispensable to understanding what is behind Mr Kim Jong Un's conciliatory attitude towards the United States and South Korea.

Economics is not just a key driver of the North Korean dictator's charm offensive towards his old enemies. Equally, economics is motivating South Korean President Moon Jae In to keep brokering a deal with Mr Kim.

 

Both North and South Korea stand to benefit from close economic cooperation, a partnership that would recreate, at least commercially, the unity of the Korean peninsula.

The main obstacle is the economic sanctions, a web of trade prohibitions that the US has imposed which have done much to cripple the North Korean economy. Indeed they target the exports of North Korea's three biggest revenue earners - coal, seafood and garments - as well as the imports of a wide range of products.

At present, China, not South Korea, is North Korea's main trade partner. But Seoul has a plan to forge an economic alliance with North Korea that could erode Chinese dominance.

President Moon has discussed with Mr Kim several joint economic projects, among them plans for three "belts" - an energy belt, which would transmit electricity from the South to the North; an industry, logistics and transportation belt, which would involve building a railway line from the South to the North Korean port city of Nampo and the city of Sinuiju, on the Chinese border; and an ecotourism belt, allowing the resumption of tours to Mount Kumgang in the North, a short bus ride from the Demilitarised Zone.

All of these initiatives would be very successful because the North Korean economy is just ripe for a liberalisation similar to the one promoted by Deng Xiaoping in China in the 1980s.

Since the late 1990s, when the state could not longer supply food to the population, the North Korean leadership has encouraged the growth of informal markets, where people could buy and sell agricultural products to feed themselves.

 
 
 
 

Through the years, a parallel market economy has flourished around such markets. Though not legalised, they are tolerated. Today families are able to supplement their state salaries with income from operating in the informal markets. Members of agricultural cooperatives are allowed to privately sell whatever they produce above the quota imposed by the state. They are also free to dispose of such income as they please, either by investing the money in new agricultural production or simply pocketing the earnings.

Since 2011, when he came to power, Mr Kim has encouraged the marketisation and dollarisation of the economy to avoid major shortages and high inflation. The won, the domestic currency, was allowed to shadow the US dollar in the black market; indeed, exchange-rate stability became North Korea's unwritten monetary policy objective.

Mr Kim also pursued a policy of benign neglect, allowing the greenback, the euro and the Chinese yuan to circulate freely as coins of the regime.

Because of these economic changes and reforms, it would be easier for the North Korean economy to follow the path of China's liberalisation. South Korean industrialists who have been present right from the beginning in Shenzhen and other New Economic Zones could play a similar role in North Korea.

For South Korea, which is facing demographic challenges, another plus point that the North offers is its relatively well-educated population. So we are not only talking about tapping a pool of mostly unskilled labour, as it happened in Shenzhen in its early years, but potentially highly educated professionals as well.

North Korea would not even need to create from scratch its own Shenzhen. It already exists and is called Rason. Located in the far north-eastern corner of the country, Rason is as far away as you can get from the capital Pyongyang and still be in North Korea.

Designated a special economic zone in the 1990s, not much has happened there yet. But that may be about to change if Mr Moon and Mr Kim can forge ahead with their economic cooperation plans.

Rason, located at the border of Russia but just down the river from China's inland port of Hunchun, is in a very strategic position, just as Shenzhen was. There is a rail link across the Russian border, a ferry service that in 12 hours reaches Vladivostok and a container port deep enough not to freeze during winter. This means that Rason could link China's landlocked north-eastern provinces to the rich markets of Japan and the US.

Everything seems to be in place for the economic joint venture between the North and the South, except the blessing of the US. And what if it never comes? Mr Kim and Mr Moon may well go ahead on their own with the blessing of China.

•Loretta Napoleoni, an economist and expert in terrorism financing, is the author of North Korea: The Country We Love to Hate.

 
A version of this article appeared in the print edition of The Straits Times on May 28, 2018, with the headline 'What lies behind Kim Jong Un's charm offensive'. Print Edition | Subscribe