North Korea Shyly Courts Capitalism
By Howard W. French
The New York Times
April 30, 2000

SEOUL, South Korea -- In the northeastern corner of North Korea, the industrial port city of Chongjin now lies nearly idle, and recent Western visitors there report that its hulking factories are rusting, with two-thirds of them producing little or no smoke from their stacks.

That may not be surprising, since the port was a major distribution point for goods from the now defunct Soviet bloc. Nowadays, the visitors say, instead of toiling in factories, workers pan for gold at huge riverbed sites using methods reminiscent of the old American West.

In the opposite corner of the country, near another port city, Nampo, idled workers have also been put to another form of manual labor. But they are breaking rocks, ostensibly to help build a major eight-lane highway that will link new and planned industrial zones -- with almost state-of-the-art electronics assembly plants -- to customers and investors in capitalist markets around the world, particularly the country's archenemy, South Korea.

For a decade, experts have watched North Korea suffer through one of the worst economic slides of recent history and wondered when the country would finally collapse. In the last year or so, though, as North Korea's still-small modern sector has risen impressively, the question seems to have shifted. Now people wonder who will win the horse race between a dying Stalinist economy and a sprouting new one that represents the country's first tentative steps into global capitalism.

In the most dramatic diplomatic development involving North Korea in years, Pyongyang recently agreed to hold its first summit meeting with South Korea, which is scheduled to take place in the North Korean capital from June 12 to 14. If the talks go well they could pave the way for an end to the state of war that has remained in effect on the peninsula since the 1950's.

Perhaps more important to the isolated, economically devastated North, improved relations with South Korea could open spigots of trade, aid and finance that are needed to stave off economic death. Already, North Korea is earning close to $1 billion a year in tourism revenue paid by the South Korean conglomerate Hyundai to operate tours to a scenic, mountainous enclave on the southwestern coast. And with no chance of the North turning the economy around with its own means, many analysts say the prospect of far more investment -- even if a politically risky proposition -- has become irresistible.

By last winter, the economic situation in North Korea had become so bad that visitors reported there was no heating in many government offices or in the hotels reserved for foreigners. Even in the capital, residents had taken to raising rabbits and goats in their homes not only to provide protein but also for their skins and fur to offer protection against the bitter cold.

But frequent visitors and other close observers of the country say there are also significant signs of change, and -- although the word is usually used with caution -- recovery.

"This is a country that is incredibly resilient," said one United States government expert. "Despite all our analysis that shows they are only operating at a fraction of the output of even five years ago, they are still eking out a living."

North Korea's predicament is in part a reflection of the economic failures of a Stalinist system that prizes totalitarian control. Badly compounding matters, the country has also suffered extraordinary bad luck since its lifeline to Moscow disappeared along with the Soviet bloc.

In 1988, North Korea began to suffer sharp drops in grain production. Two years later, its industrial output went into free fall. In 1992 China, by then its only major ally, suspended free oil shipments. And in 1995, with the economy already in steep decline, the country suffered its worst floods of the century, devastating crops and unleashing a famine.

Outsiders can only guess at the exact toll, but between 200,000 and one million people are estimated to have died of hunger. Some American experts continue to sound pessimistic about arresting the economic slide.

"We must consider that the North Korean economy could break down completely, precipitating social chaos and threatening the existence of the regime itself," said Gen. Thomas A. Schwartz, commander of the 37,000 American troops in South Korea, in testimony before the Senate in March. "We should anticipate a flood of refugees, humanitarian needs, and the potential for chaos, a military coup or the devastation of civil war."

Against this backdrop, North Korea has frightened its neighbors and Washington by pursuing a ballistic missile program, which included a surprise test launch over Japan's main island in August 1998. Treating its weapons industry as a lucrative export sector, North Korea has marketed its missile technology to Pakistan and in the Middle East.

In recent years, Washington has negotiated with Pyongyang, obtaining a suspension of its missile tests in exchange for lifting certain sanctions.

The emphasis of much of the recent diplomacy has been to get North Korea to continue to moderate its behavior in order to gain access to international aid and investment.

North Korea's state budget was $9 billion last year, compared with $15 billion five years earlier. According to Pyon Jinil, editor in chief of Korea Report, a newsletter published in Japan, the country already receives approximately $600 million in foreign aid each year, or one-fifteenth of the budget, mostly in the form of food and fuel assistance.

The country's rough patchwork of old, clearly moribund heavy industries and newer, higher-tech ones -- textile factories, and modern assembly plants typically producing goods for companies in China and South Korea -- is plainly visible to Westerners who have recently toured the countryside.

But the situation that prevails in the old Soviet-era rust-belt towns like Chongjin, where only about 20 percent of the state-owned factories are still functioning at anything approaching normal levels, is by far more typical.

"I'd say that is pretty representative of the country," said Kenneth C. Quinones, a former State Department expert who has often visited the country as director of the Northeast Asia project of the aid group Mercy Corps International.

"I recently visited Nampo, an old industrial  city, and at least one-third of the time there is no municipal power at all," he said. "But not far from there, at Kangso, there is a lot of high-tech construction under way by Hyundai and Samsung. Go a little ways to the west, and you come to another Soviet factory town in total disrepair.

"Just outside of the town you see hundreds of Korean workers building an eight-lane highway to the capital," Mr. Quinones continued. "They are crushing rocks with their hands to make the concrete."

As they watch projects like those come together, many analysts say that what the North Koreans appear to be doing is building new infrastructure with a view to drawing still more investment from foreign companies, especially China and South Korea.

But beyond immediate survival, outsiders can only guess what the North Korean leadership's ultimate intentions are -- whether it views the newer industries as short-term palliatives or some new economic vocation altogether.

For years, Beijing, which is North Korea's one remaining ally, has gently urged Pyongyang to undertake the kind of capitalist-style reforms that have turned China into one of the world's fastest-growing economies. And for years, Kim Il Sung, North Korea's deceased founder, and more recently his son and successor, Kim Jong Il, have politely but steadfastly declined.

But in Seoul, Pyongyang's acceptance of a summit meeting is seen by many as a logical next step in a progression of extremely cautious but steady efforts to open the North Korean economy to foreign capital.

The trick for Pyongyang is to achieve this gradual economic opening without losing control over the country, the observers say.

South Korea is seen by the North as the most promising source of new capital, but because their cultures and history are in fact one, also the most potentially subversive.

"They are feeling the quills of the porcupine," said Do Yong Seung, an expert on North Korea at the Samsung Economic Research Institute. "They need South Korean capital badly, but they are acutely fearful of its dangers."

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