12/22/2011 07:18 EST | Updated 02/21/2012 05:12 EST

Reform of North Korea's economy likely to languish as new, young leader consolidates power

SHANGHAI - Tentative reforms to North Korea's dilapidated economy that could help its people escape poverty and hunger are likely to languish as the anointed heir to the late leader Kim Jong Il consolidates his hold on power.

The 11-day mourning period following Kim's death Saturday underscores the regime's focus on uniting behind his young son and heir, Kim Jong Un.

The leadership has inched erratically toward modest reforms as it touted building a "great and prosperous nation" as part of celebrations that had been planned for the April 2012 centenary of the birth of the Kim dynasty's patriarch, Kim Il Sung, who ruled North Korea from its founding until his death in 1994.

The government's attempts to build up the economy including efforts to lure more foreign investment have not been enough to overcome decades of economic mismanagement and outdated farming methods. North Korea's determination to keep developing its nuclear and missiles programs have also meant a loss of aid as well as strengthened sanctions.

One sign of a shift in economic policy came in 2008 with a surprising decision to allow 3G mobile phones in a deal with Egyptian telecoms company Orascom, which claims 809,000 subscribers in North Korea.

In other positive signs, a Chinese state-run company, Shangdi Guanqun Investment Co., agreed to invest $2 billion in building infrastructure, power plants and oil refining facilities in the Rason Free Trade Zone, near the border with China and Russia. China and the North also agreed to jointly develop Huanggumpyong, an island along their border, into a tourism, logistics and manufacturing centre.

If not derailed by Kim's death, a proposed gas pipeline between Russia and the Korean peninsula would help form the basis for significant infrastructure development, says Kenneth S. Courtis, a former Goldman Sachs vice chairman who visited Pyongyang in May to assess business opportunities for clients of his private investment company.

The project, to pipe natural gas from Siberia to South Korea via the North, had stalled over the nuclear issue but regained momentum earlier this year, with Russian President Dmitry Medvedev reportedly saying, following a visit by Kim Jong Il, that the North would agree to a deal in exchange for receiving $100 million a year in transit fees.

"Around this pipeline, North Korea could start to rebuild its industrial base, and chemical and particularly fertilizer plants," said Courtis. He said he found North Korean officials "seem to want to engage."

But the situation in the North, always unpredictable, has grown even more uncertain with the installation of Kim Jong Un, who was named as his father's successor only 15 months ago and likely will be guided by his aunt, uncle and other members of the old guard for some time to come.

"It will be difficult for North Korea to focus on the economy in the short term, as they are in the midst of a transition. It will be almost impossible to have many dealings with other countries for at least several months," said Cai Jian, a deputy director of Korea Research Center under the Institute of International Studies in Fudan University.

Kim Jong Il observed a three-year period of mourning after his father died before formally taking control, but the country's ailing economy can ill afford to lose any more time.

Its per capita gross domestic product is stalled at only $1,800, according to the U.S. State Department, compared with $4,400 in China and about $23,000 in democratic, capitalist South Korea — though the two were on a par for two decades after their 1950-53 war.

North Korea's industries and other infrastructure are decrepit "nearly beyond repair," according to the U.S. Central Intelligence Agency. Its latest report notes that less than 3 per cent of its roads are paved and less than half its airfields have sealed landing strips.

The loss of Soviet aid, followed by natural disasters in a country with very little arable land, brought on a famine in the 1990s that killed hundreds of thousands of people, forcing the North to seek help despite its longtime policy of "juche," or self-reliance.

The food crisis is deepening, with a quarter of the 24 million North Koreans needing emergency food and malnutrition surging, especially among children, the U.N. says.

Humanitarian groups fear the suffering will deepen as the U.S. puts off a long-awaited decision on providing food aid, following Kim Jong Il's death. Much of the population is enduring prolonged food deprivation — relying on public rations of only 200 grams (7 ounces) or less per day, according to a UN Food and Agricultural Organization and World Food Program report.

The United States and other nations are demanding stringent monitoring of aid distribution to prevent food being siphoned off by the North Korean military and officials.

Pyongyang is suspected of diverting scarce resources to serve its elite, and for defying United Nations sanctions aimed at curbing its nuclear ambitions. U.N. monitors report catching shipments of such luxuries as yachts, cognac, Mercedes sedans and even tap dancing shoes headed for Pyongyang.

China, the North's longtime ally and biggest source of food and fuel assistance, has often helped to water down or deflect those sanctions. It has also refused to criticize Pyongyang over the deadly sinking of a South Korean navy ship and a bombardment of a front-line island.

The support of the world's second-largest economy remains vital for Pyongyang's survival, especially after South Korea responded to military provocations by cutting sharply back on aid and other engagement.

China has shown strong interest in gaining access to North Korea's abundant mineral wealth, including the North's huge Musan iron ore mine. Trade through North Korea's ports could help spur growth in China's landlocked northeastern region.

A Chinese-born ethnic Korean heads North Korea's main international investment entity, the Taepung International Investment Group, and Chinese companies often act as agents for European and other foreign investors in Korea.

But while Kim Jong Il visited China several times to observe its economic transformation, during most of his rule he proved deeply suspicious that any easing might bring on ideological challenges, said Nicholas Eberstadt, an expert at the American Enterprise Institute in Washington, DC.

Likewise, the North's track record is not encouraging. Special economic zones along the country's borders with Russia and China, languished for 20 years before the most recent initiatives.

The North seized South Korean assets at Mount Kumgang after the South Korean government suspended a joint tourism project after a tourist was shot to death after wandering into a restricted military area in 2008.

Reforms have sometimes backpedalled: after allowing some markets in 2002, permitting farmers to trade produce to help bridge food shortages, the authorities recentralized those controls before again easing them.

A revamp of the country's currency, the won, to curb inflation and reassert the government's hold on the economy effectively confiscated the savings of many North Koreans, who faced limits on the amount of old North Korean currency they could exchange for new bills.

Such arbitrary changes in rules add to the risks of investing.

"The first thing to watch for is if North Korea decides it is not 'treasonous' for foreigners to make money and take it out of the country. The first decision has to be made to let foreigners make money," said Eberstadt.

He does not rule out a possible major shift in policy, if the leadership deems the transition a dangerous period calling for drastic measures.

"Before Kim Jong Il died there had been signs of a departure from previous standard operating procedures," he said. "The problem with a closed society is you never know what's happening from outside until afterward."


Researcher Fu Ting contributed to this report.


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