Has North Korea implemented market reforms

North Korean leader Kim Jong-Il visited China last week as the country is in serious economic crisis and North Korea is dependent on foreign aid and investment. China uses the opportunity to bring North Korea closer to its sphere of power and to strengthen its strategic partner, but at the same time opens up access to the isolated North Korean economy, including cheap labor and raw materials.

Kim's visit was only announced after meeting the Chinese leadership in Beijing. On his trip, he visited the northeastern port city of Dalian and the coastal city of Tianjin, both of which are presented by the Chinese government as model cities to encourage foreign investment. Beijing is urging Pyongyang to follow the same path.

Among Kim's companions were his brother-in-law Jang Song-thaek, in charge of foreign investments, and Kim Yang-gon, head of the investment company "Korea Taepung International Investment Group". This organization was founded as a North Korean investment company to smuggle foreign assets into a new state development bank to build ports, rail networks, light industry and agriculture. In a similar way, the "market reforms" in China in the 1980s had also become possible.

Kim was duly received in Beijing and met all nine members of the Standing Committee of the Politburo of the Communist Party of China. For his part, Kim praised Beijing's new infrastructure projects that made it easier for China to invest in his country. He said: "North Korea welcomes the investment from Chinese companies and is working to improve working-level cooperation between the two countries."

Pyongyang has no choice but to break away from its longstanding stance of economic independence. The United States and Japan pushed new tough sanctions through the UN Security Council after North Korea conducted nuclear tests in 2006. Relations with South Korea also deteriorated after Lee Myung-bak and the right-wing Grand National Party (GNP) won the presidential election in 2007 and then cut any aid to the north.

North Korea's economy is in a serious crisis. The attempt at currency reform in December last year failed and led to hyperinflation and the first signs of social unrest. Under the current exchange rate policy, the value of a monthly wage of 2,500 won is only one US dollar on the black market. Staple foods like rice are already in short supply.

Beijing is keen to prevent North Korea from collapsing, as otherwise refugee flows across the borders into northern China could be expected. A collapse would also create the risk of a new leadership coming to power in Pyongyang, bringing the country closer to South Korea and the United States. There is also a catch to Chinese aid, however, as North Korea is being forced to open up to Chinese investment and there is an expectation that the international confrontation over the North Korean nuclear program will once be resolved.

During his visit last week, Kim reportedly received up to $ 60 million in emergency aid. The real meaning of China's thrust, however, became clear earlier in the year when a huge $ 10 billion infrastructure program was announced. That corresponds to 70 percent of the estimated gross national product of North Korea. The state development bank and the investment company "Taepung International Investment Group" were established in January mainly to cope with the incoming Chinese investments.

Pyongyang established the Rajin-Sonbong "Special Economic Zone" near the border with China in the early 1990s to encourage investment from China and Russia. At that time, however, Beijing had little capital available for foreign investment and North Korea's economic zone was largely in dire straits. But now the situation has changed and China has started to use its large foreign currency reserves to secure access to raw materials and markets. Beijing is now trying to develop Rajin into a larger regional trading center.

An article in the Washington Post last month predicted that Kim's visit to China would bring about a major shift in current politics. Professor Lim Eul-chul from the Institute for Asian Studies in Seoul, who was in Pyongyang to negotiate with government officials and Chinese businessmen, learned that the new state development bank will serve as a single point of contact for foreign investors. "North Korea plans to open factories owned by foreign investors not only in the closed special economic zones, but also in larger cities like Nampo and Wonsan," said Lim South Korea's amalgamated Kaesong Industrial Zone restricted.

The North Korean Ministry of Foreign Trade's website promotes the country as the labor market with the lowest labor costs and the lowest tax rates in Asia. The well-trained workforce is praised especially in relation to China. It should be noted that at the moment labor costs in North Korea are very low compared to China, which is particularly advantageous for companies in order to reduce production costs. The ministry also points out that North Korea is a gigantic untouched reservoir, with over 300 different raw materials and other untapped natural resources. It is also announced that the government will introduce a free market and protect the private property of foreign investors through laws.

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The opening of North Korea to foreign investment, especially from China, has had far-reaching geopolitical implications. Since the collapse of the Soviet Union in 1991, China has already become North Korea's main trading partner and the largest promoter in the form of economic aid. China imports raw materials from North Korea and in return exports cheaply produced goods. However, the extent of Chinese investment and aid puts North Korea in a strong dependency, which further strengthens China's power and influence in northeast Asia.

The geographic location of the Korean peninsula, bordering China, Japan and Russia, is of great strategic importance and has always placed the country at the center of rivalries between the great powers. Efforts to open up North Korea began in the late 1990s under the so-called "Sunshine Policy" of South Korean President Kim Dae-jung, who wanted to create a cheap labor market for South Korean companies in the neighboring country. The European governments showed interest in investing in North Korea and building a rail link from Europe to South Korea and Japan. Russia was considering building energy pipelines through North Korea to South Korea.

However, those plans stalled immediately after President Bush's election, after the Clinton administration stopped overtaking Pyongyang and fueled tensions over the North Korean nuclear program. In October 2002, Bush buried the Clinton agreement to freeze North Korea's nuclear facilities. He accused Pyongyang of running an illegal uranium enrichment program. North Korea then expelled the international nuclear inspectors from the country, withdrew from the Nuclear Non-Proliferation Treaty and put the nuclear facilities back into operation.

Because the Bush administration got bogged down in the wars in Iraq and Afghanistan, it was forced to take part in the six-party talks organized by China to ease tensions over the North Korean nuclear program. However, Washington has already successfully thwarted the economic plans of its European and Asian rivals for the development of North Korea and torpedoed South Korea's "Sunshine Policy". Even though President Obama is preoccupied with the escalation of the war in the Afghanistan and Pakistan region and the confrontation with Iran, he is maintaining the tough American stance towards North Korea, which is why the situation on the peninsula remains tense.

China's efforts to open North Korea to investment are facing similar problems. The current debate over the South Korean warship, which sank in March, is just one of many matters that could lead to yet another crisis and thwart China's plans. The competition between the great powers, especially between the United States and China, means that the Korean peninsula will remain a dangerous international area of ‚Äč‚Äčtension in the future.

See also:
Obama is tightening his policy against North Korea
(June 11, 2009)