Overtures to China may signal opening of North Korea's economy

By Blaine Harden
Friday, April 2, 2010; A10

SEOUL -- Squeezed by food shortages and financial sanctions, North Korean leader Kim Jong Il appears to be reaching out to China and Chinese investors in a way that could mark an extraordinary opening in the insular nation's shuttered economy.

Kim might soon travel to China, according to the office of South Korea's president and U.S. officials. They cited preparations that appear to be underway in the Chinese border city of Dandong and in Beijing. The Chinese Foreign Ministry said Thursday it does not have information on whether Kim will visit China.

Such a trip could help restart six-party talks, hosted by China, aimed at persuading North Korea to denuclearize in return for economic and political benefits.

Kim is also attempting to accelerate Chinese investment and has ordered the creation of a State Development Bank. Officials from the new bank told a South Korean professor last week that they intend to allow the construction of foreign-owned factories in major North Korean cities. This would allow Chinese firms, many of which are running short of low-cost factory workers, access to North Korea's pool of low-wage laborers.

If the investments move forward, they would represent a major policy reversal by the government. For six decades, North Korea has sealed almost all its citizens off from the "poisons" of capitalism.

Outreach to China comes at a time of sharply increased pressure on Kim's leadership.

Inside North Korea, food shortages have worsened because of botched currency reform, which disrupted the private markets that feed most of the country's 22.5 million people. Kim's medical ills also include kidney failure, and he undergoes dialysis every two weeks, according to the head of a state-run think tank in Seoul.

And outside, U.N. sanctions are reportedly limiting the North's ability to profit from weapons sales. State trafficking in counterfeit cigarettes and illicit drugs appears to be dwindling. In addition, large-scale food aid from South Korea has been stopped until Pyongyang agrees to junk its nuclear weapons.

"Through this State Development Bank, North Korea is trying to lure foreign investment in agriculture, ports, railroads and also light industry," said Lim Eul-chul, a research professor at the Seoul-based Institute for Far Eastern Studies. He spent four days in Pyongyang last week, talking to officials from the bank and to Chinese businessmen.

They told Lim that the bank is offering itself to foreign investors as a one-stop investment shop. With its board including senior members of the military and the ruling party, the bank will be able to conduct transactions with foreign commercial banks and invest in major projects, North Korean state-controlled media have said.

"The North is now planning to open foreign-owned factories not just in closed-off special economic zones, but in major cities like Nampo and Wonsan," Lim said. Until now, the government has confined nearly all foreign business operations to sealed-off economic zones, such as Kaesong near the South Korean border. "The military is closely cooperating with the State Development Bank to try to increase foreign investment."

Although the repressive power of the army and security forces remains strong, the North's command-style economy is a ruin. There were unconfirmed reports of starvation deaths in some areas this winter.

Kim, 68, and showing the effects of a 2008 stroke, is in the early stages of handing power over to his untested 27-year-old son, Kim Jong Eun. But the legitimacy of the succession -- and of the state itself -- is being weakened by the growth of the markets and increased public access to foreign media.

Refugee surveys show that many North Koreans blame Kim's government for food shortages, corruption and incompetence.

"Kim Jong Il doesn't have many cards to play, so there is more and more pressure on him to return to the six-party talks," said Koh Yu-whan, a professor of North Korean studies at Dongguk University in Seoul. "He is also aiming to get investment from ethnic Korean businesses in China."

In South Korea and China, there is widespread skepticism about North Korea's willingness to create modern banking systems and enforce laws that allow foreign companies to operate under standardized accounting rules.

Companies that have invested in North Korean mineral ventures have complained for years of corruption and outright theft by the government.

Special correspondent June Lee contributed to this report.

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