N.Korea eyes economic rescue with diplomacy shift

N.Korea eyes economic rescue with diplomacy shift

Alan Wheatley Reuters Seoul

The streets of North Korea are dark and its shop shelves half- empty. Factories stand idle and many go hungry. Inflation is soaring and wages are to be paid in part with worthless government scrip.

Washington's success in crushing the Iraqi army within three weeks may have been the proximate cause of Pyongyang's apparent softening at the weekend of its insistence on one-on-one talks with the United States to defuse a long-running nuclear crisis.

North Korea, branded by Washington along with Iraq and Iran as an "axis of evil" of states seeking to produce weapons of mass destruction, fears it could be America's next target.

But also underlying the shift to considering any form of dialogue if Washington makes a "bold switchover" in policy is a recognition that, without an end to the standoff, Pyongyang will remain cut off from the outside aid it needs to shore up its crumbling economy, analysts who study the North say.

"The North Korean economy does not have the capacity to rehabilitate itself through its own efforts," said Yoon Duk- ryong, a researcher at the Korea Institute for International Economic Policy (KIEP), a think-tank run by the Seoul government.

Yoon said he agreed with Stephen Bosworth, a former U.S. ambassador to Seoul, who said last week that the North's economy had already collapsed.

"It is no longer performing in any fashion which can be described as approaching that of a modern economy," said Bosworth, who estimated industrial production was at best 30 percent of what it was in 1992.

Yoon, who recently visited North Korea, described a country that he said was in a poverty trap. That is to say, in economic jargon, the North is not saving enough to cover the depreciation of its stock of plant and equipment.

"When that happens, the capital stock will decrease and decrease and the economy will become poorer and poorer. North Korea is in this situation," said Yoon, who believes that the North's economy started to decline in 1988.

The accounts of other recent visitors to the reclusive communist state bear out his explanation. One said the North's industrial base was, to all intents and purposes, dead and was probably beyond resuscitation.

Factories were being dismantled and sold to China as scrap. Even more serious, this source said, was what he called the decay of power, water, transport and other public infrastructure.

Wage and price reforms introduced last summer, which have fuelled rampant inflation, had been very limited -- leading to the attempt to rein in money growth by paying workers part of their wages in 10-year, zero-coupon government bonds.

Thrown back on its own resources, there was no way the North could halt the decay or reverse the trend, this expert, who asked not to be identified, concluded.

"At the moment, they're basically a post-industrial society, a subsistence economy by and large," added Mike Newton, an economist with HSBC in Hong Kong.

Newton said that when he was in the North in February, food and power were in much shorter supply than during earlier visits.

The South Korean Unification Ministry's Web site puts Pyongyang's gross national product at $706 per head in 2001, down from $751 in 2000.

"Everyone's talking about the economic collapse of North Korea as though it's some sort of future event. The reality is that it's happening now," he said.

STAYING ALIVE

According to this line of thought, North Korean leader Kim Jong-il needs a way out of the nuclear crisis to ensure the economic survival of a country where the U.S. State Department estimates one million to two million people died from starvation and related diseases from 1995 to 1997.

An end to the nuclear impasse and a security pact with the United States would not only unlock fresh aid and allow Kim to escape sanctions imposed by Washington; it would also justify a shift in spending away from his million-strong army, Newton said.

"This is clearly a significant development that makes a peaceful outcome more likely," Newton said of the new diplomatic line taken by Pyongyang.

If the shift does lead to negotiations, many experts expect the outcome will be a new version of the now-defunct 1994 Agreed Framework under which North Korea was to abandon its nuclear weapons programme in return for shipments of fuel oil and two light-water nuclear reactors.

An amended deal might involve a gas pipeline from Russia financed by South Korea, TJ Bond, an economist with Merrill Lynch in Hong Kong, said in a recent report.

North Korea has been living on international handouts for years, mainly from Beijing, with little to show for it. It has firmly rejected the Chinese-style market reforms that offer the best hope of luring foreign investment and reviving growth.

Still, Yoon at KIEP said foreign aid can make a difference in an economy as shrivelled as North Korea's. He said South Korea, as anxious now as it was then to preserve stability on the divided peninsula, pumped $200 million into the North in 1998 and economic growth of six percent was the result.

"A small amount of money goes a long way," he said.