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Analysis: North Korea seen looking to China, not U.S., for help in any economic transformation

Reuters  |  SEOUL/BEIJING 

By and Christian Shepherd

SEOUL/(Reuters) - U.S. may have promised that will become "very rich" on the back of American investment if ditches nuclear weapons but economists and academics who have studied the isolated country say it is not the U.S. that will be the engine of any transformation.

The nearest template would not be based on American-style capitalism, but China's state-controlled market economy first championed by Deng Xiaoping, who became China's in 1978, these experts said. was just coming out of the turmoil of the 27-year reign of Mao Zedong, a period during which capitalism was banned and private businesses and property were seized by the state and placed under collective ownership.

Deng introduced wrenching reforms that are widely regarded as creating the foundations of China's economic miracle in the past 40 years. The changes were massive, the growth phenomenal, but most importantly the has achieved all of this while not only retaining power but increasing its control over the country.

And in the run up to the unprecedented summit between Trump and North Korean Jong Un on Tuesday in Singapore, it has been that has been increasingly turning to.

has made two visits to meet Xi since March, while a high-level delegation from his ruling toured China's industrial hubs in an 11-day visit in May that focused on China's and latest scientific breakthroughs.

That delegation went to China only weeks after Kim declared an end to nuclear and missile tests and vowed an all-out effort toward "socialist economic construction."

Chinese media labelled Kim's announcement North Korea's "opening and reform", shorthand for Deng's policies, sparking a flurry of investment in housing in Dandong, the Chinese border town.

"Kim is talking to Trump because he needs to get the to back off sanctions. After that, headlines will be all about Kim and Xi Jinping," said Jeon Kyong-man, an at the of Society, with reference to the Chinese

China is already North Korea's most important ally and biggest trade partner. And since Kim assumed power in 2011 the trade relationship has become even more important. China now represents more than 90 percent of Pyongyang's trade, making it just about North Korea's only economic lifeline.


Stagnating economic growth in China's northeastern rustbelt has also spurred interest in ramping up Chinese economic ties with North Korea, according to Adam Cathcart, an expert on China-relations at in the

China's of shifting from a planned economy to a market economy is attractive for because it was achieved with political, economic and social stability, according to Zhang Anyuan, chief at in

"Taking into consideration geographic location, economic system, market size, economic development stage, China-North Korean economic cooperation has advantages that are irreplaceable and hard to replicate," Zhang said.

But Cathcart said that progress on economic liberalisation would likely be slow because will want to be careful about the increased political risks that could come from relaxing restrictions on the currency and migration.

As well as China, North Korea may also look to other economies where tight top-down control has been kept, including or even the 'chaebol' business structures of South Korea, which could allow something closer to "a capital dictatorship," according to Cathcart.

Xi, under intense pressure from Trump, started enforcing sanctions strictly in the second half of 2017. By March this year, China imported no iron ore, coal or lead from North Korea for a sixth month in a row, in line with sanctions.

That has hurt North Korea's coal-intensive heavy industries and manufacturing sectors. But more importantly, plunging trade with has been "killing the most thriving part of the economy" - unofficial markets where individuals and wholesalers buy and sell mostly Chinese-made consumer goods and agricultural products, Jeon said.

"More than anything, it was China's decision to enforce sanctions that squeezed the economy and made removing of the sanctions an urgent task for Kim," he said.


Even after sanctions are lifted, North Korea will likely pursue state-managed growth because loosening controls is potentially destabilising for the regime, says Kim Byung-yeon, an at National University. "It could leave with less than half the power he has now."

As part of efforts to maintain control, any opening could initially be limited to "special economic zones," where Pyongyang has sought to combine its cheap labour with China's financial firepower and technological know-how, according to BMI Research, a unit of

The Wonsan Special Tourist Zone in the east coast, or the suspended inter-Korean factory park in the North's border city of are some other examples Kim might pursue to maintain state controls over the economy, experts say.

In Wonsan, Kim has already built a ski resort and a new airport to turn the city of 360,000 people into a billion-dollar tourist hotspot.

"These are the sorts of projects that are most likely to get underway first if the sanctions are eased," BMI Research said.

Jeon says this is "mosquito-net style" reform - similar to Deng Xiaoping's - with limited foreign investment and market liberalisation contained within firm strictures of state control.

Deng championed a string of special economic zones along where unique local legislation encouraged foreign investment in manufacturing joint-ventures that sold to export markets, while protecting Chinese industries from going head-to-head with multinationals.

"Deng designated as a special economic zone and made that sleepy fishing village to a of the world," Jeon said. "Kim will be eager for those, especially as he will want minimal changes to other parts of the economy."

(Additional reporting by and in SEOUL, Brenda Goh in SHANGHAI; Editing by and Martin Howell)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Tue, June 12 2018. 03:36 IST