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Last Updated: Tuesday, 12 April 2005, 14:14 GMT 15:14 UK
Economy root to N Korea crisis
By Paul French

A North Korean farmer with an ox-cart full walks down the road to Pyongyang, 13 February 2003.
Reforms have not transformed the economy
The focus of the international community's alarm over North Korea is the isolated nation's nuclear arsenal, and its refusal to talk about it.

An aspect that is sometimes overlooked is the dire state of its economy, and yet this could be at the heart of the nuclear crisis.

The regime, with few allies in the world, cannot appeal to the sort of humanitarian emotions that African or South Asian nations have in the past.

To ensure the flow of food and oil, it must have a bargaining chip, and its nuclear arsenal is that chip.

Therefore Pyongyang's diplomatic bluster is inextricably linked to its need to keep what remains of its economy propped up by donations.

North Korea has recently attempted limited reforms to its economy, but these have not been comprehensive or well-enough planned to work.

Pushed into reform

North Korea became an independent state in 1953, and has operated a rigid centrally planned, or "command" economy based on that developed by Stalin in the USSR.

Industry and agriculture are planned on a five-year basis, all farms are collectivised, volume is praised over value and most foods and goods are rationed.

Mr Kim has one bargaining chip - his nuclear bombs
This model initially allowed for rapid industrialisation and rebuilding, but it failed to deliver sustainable growth or raise living standards.

The economy began to collapse, and by the mid-1990s the country was in a state of famine. The industrial base and the agricultural sector have been in decline ever since. Beijing, North Korea's only real ally, decided to act in October 2001 with an economics lesson for North Korean leader Kim Jong-il.

He was shown round a GM plant and a hi-tech factory in Shanghai, and received a lecture about the benefits of Chinese-style reform.

The Chinese were effectively telling Mr Kim that it was time for change - and that they were fed up with the growing number of refugees fleeing over the Chinese border, and increasing demands for aid.

Mr Kim realised he needed to keep China close, and in June 2002 announced a series of economic reforms.

Pyongyang partially ended rationing and reformed the wages and pricing system.

Retail prices shot up - rice by 55,000%, corn 5,000%, electricity 143% and public transport fares 2,000% - but average wages increased by just 1,818% - from 110 won to 2,000 won (US$22) per month.

It also allowed private farmers' markets to expand - to provide more goods for the consumers this monetary liberalisation had created.

Another major plank of the reforms was the new investment zone in Sinuiju - and another one in Kaesong, agreed as part of Kim Dae-jung's Sunshine Policy.

These investment zones used foreign investment to create new economic ventures.

But neither the wage and pricing reform, nor the investment zones, have worked.

Scarce resources

The government had hoped that inflation created by the reforms, if kept under control, would "kick-start" the economy.

But this theory assumed there was a mass of underutilised resources waiting to be kick-started. Twenty-five years of decline meant that these resources were now scarce.

More food found its way into the farmers' markets, but at prices ordinary people could not afford.

This effective legitimisation of private farming and smuggling across the border from China only succeeded in increasing the availability of goods to the elite - those whose wages were protected or had access to foreign currency.

Satellite image of North Korea's Yongbyon Nuclear Centre
N Korea's alleged nuclear weapons arsenal is its bargaining chip

As for the economic zones, Sinuiju's position, opposite China's flourishing economic zone in Dandong, annoyed Beijing.

It consequently arrested the Chinese businessman hired to run Sinuiju, imprisoning him for 18 years for tax evasion and effectively ending the project.

Kaesong survives but all the ventures are foreign-owned, with little benefit, therefore, for North Korea.

By the end of 2002, economic growth was estimated at just 1.2% at best, with the average citizen's purchasing power severely eroded.

For most ordinary North Koreans, the end result of the reforms was further impoverishment and the eroding of any savings they may have been able to build up.

So, in light of the reforms' failure, North Korea's alleged announcement in October 2002 that its country was pursuing an enriched uranium programme could be interpreted as a return to its old bargaining tactics.

The international community responded to the announcement by setting up six-party talks in August 2003.

But the diplomacy is failing because North Korea, with no allies but the increasingly exasperated Chinese, and little prospect of economic revitalisation, needs to ensure a continued drip feed of aid.

That means a hard bargaining process, and Mr Kim has one bargaining chip - his nuclear bombs.

Already twice, as far as we know, Beijing has managed by persuasion, and perhaps a little economic pressure, to get Pyongyang back to the table after talks have stalled.

Now Beijing is trying again. Perhaps what Pyongyang wants most is a serious package of economic aid from China.

China may provide it to get the talking started again.

But the price Beijing will need to demand is that Pyongyang restarts economic reform in earnest, and moves away from the continual brink of collapse that forces it to make desperate diplomatic gambles such as the current crisis.

As for the economy today, it has to all intents and purposes collapsed.

The reforms were limited, and benefited just the elite of the country rather than ordinary people.

The basic structure remains in place and continues to erode the economy.

However, as long as the regime can keep the country isolated, it can survive on this drip-feed indefinitely.

The endgame is simple - regime survival. It is a long-term strategy using diplomatic belligerence and military threat to secure enough aid to maintain power and isolation.

The regime may survive, and may under pressure begin another round of tentative reform, but it seems unlikely that life will improve for ordinary North Koreans any time soon.

Paul French is a Shanghai-based writer, and the author of North Korea: The Paranoid Peninsula (Zed Books 2005)


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