Trial runs of a free market in North Korea

New York Times
March 11, 2003
James Brooke

Even as it rattles its nuclear sabers, North Korea is toying with a version of market reforms to patch its ravaged economy. But eight months after changes like price incentives began, the economy retains an unmistakable Alice in Wonderland quality.

North Korea’s deep ambivalence about business could be seen on a recent Saturday in this mountain resort district, opening day of the Magnolia Blossom. Security police officers paced outside the freshly painted restaurant, hands clasped behind their backs, glaring at customers inside. In the dining room, waitresses bent over ever smaller shards of a broken water bottle. The maĆ®tre d’, on loan from South Korea and looking lonesome in his black tie, was not authorized to tell North Korean workers to sweep up the glass.

Then the North Korean manager started to argue with an assistant over how much to charge for lunch — $9 or $100.

”I hear there are restaurants in Cheju that charge $100 for a meal,” the assistant volunteered, referring to a desirable southern vacation island.

An American diner, halfway through his bowl of spicy Pyongyang noodles, suggested calculating a price based on profits.

”Our purpose is not to make a profit,” Kim Chol, the 45-year-old manager, lectured patiently. ”It is for the everlasting honor of our beloved leader, Kim Jong Il, that we are interested in serving proper meals to South Korean tourists, even to foreign tourists.”

Asked the prices of ingredients for the meals, Mr. Kim said he did not know. He orders the food he needs. It comes.

While North Korea may be feared for its 11,000 artillery pieces pointed at South Korea, its 100 missiles pointed at Japan, and the nuclear weapons program that so angers Washington, this militarized nation remains an economic weakling with a gross domestic product that is 4 percent that of South Korea.

In this parklike border region not far from the 38th Parallel, where the Hyundai Asan Corporation of South Korea started sending tourist buses across the demilitarized zone in mid-February, two restaurants opened here this winter to cater to South Koreans paying with hard currency. But the primary incentives are not tips, which are banned in North Korea, but pleasing the little man with a high forehead whose visage appears on buttons worn by all restaurant employees — Kim Jong Il.

Last July, in a break with half a century of economic policy, Mr. Kim’s government increased wages as much as 20-to-30-fold. Soon after, food rationing was partly abandoned and prices were raised 20-to-40-fold on staples like rice, corn and pork.

The result, defectors and economists say, has been hyperinflation — at least in the small sector of the economy that runs on money.

”North Korea is short of food, clothes and consumer goods, but they cannot afford to import these materials from China and other countries,” Nam Sung Wook, a South Korean economist who is an expert on North Korea, said on a visit here.

With far too many North Korean won chasing far too few goods, the North Korean won now trades privately around 700 to the dollar. Last summer, in an effort to close the gap with the black market rate, the country devalued the won to a rate of 151 to the dollar from 2.16 to the dollar. As the won became increasingly worthless, the government ordered in the fall that all dollars be swapped for euros, a quixotic decree that was ignored in this resort region.

Last summer, climbing on a high-inflation treadmill reminiscent of some South American economies a decade ago, the government printed a new top-denomination bill, the 1,000-won note, nominally worth a little more than $6. Then in October, it added a 10,000-won note.

With the summer’s financial decrees, the government hoped to close the gap between prices here and much of the rest of the world. Under this plan, the reasoning went, the outside world would then step in with foreign aid and investment.

But North Korea quickly alienated almost all its aid donors. Hopes to win $1 billion a year in World War II reparations from Japan unraveled in September when officials balked at Japanese demands for the return of all Japanese kidnapped by North Korean agents. Relations with China reached a low point in October when Chinese authorities arrested the new head of a North Korean free trade zone, charging him later with ”economic crimes.”

Then came news of North Korea’s nuclear development. Nicholas Eberstadt, a Korea specialist at the American Enterprise Institute, said by telephone from Washington, ”The North Korean government tried to do a forced-march economic opening under the presumption they would get foreign aid and that no one would catch them on their nuclear program.”

Aid, which plays a crucial role in the economy, dried up, and the home-grown incentives stalled: the United Nations has forecast that harvests will not respond measurably this year to the new price incentives. With most potential farmland under production, any big lift for crops would have to come from more electricity for irrigation and more imported fertilizer.

When China made its first moves to free prices, in 1979, it acted cautiously and gradually, cushioned by a society that was 80 percent rural. In contrast, North Korean officials are imposing a food-price shock on a population that increasingly seeks the advantages of life in towns and cities.

”North Korea is living on the edge,” Kathi Zellweger said from Hong Kong, where she manages the North Korea aid program for the Roman Catholic charity Caritas. Fresh from a trip to North Korea in mid-February, she said, ”Kids who to me looked 9 to 10 years old were really 14 and 15.”

Along an urban coastal strip 50 miles north of here, visitors say it is easy to see why many outsiders dismiss North Korea as an economic disaster.

”You see mile after mile of derelict factories, you see smokestacks and very little smoke,” Gerald Bourke, a spokesman for the World Food Program, said from Beijing after a tour of North Korea’s eastern coast late in January. ”The factories are rusting, they are decaying. It goes on and on. There is nothing happening. It is quite eerie.”

Although North Korea is highly secretive about statistics, many economists in the South estimate that the North’s economy contracted by about a third in the 1990’s.

Ms. Zellweger, a frequent visitor to North Korea, said the economic changes have prompted cautious sprouts of private business.

”It was very visible that more people were outside — selling, bartering, running little bicycle repair shops, selling gas for cigarette lighters,” she said of eastern cities. ”People now have more money.”

But just as the only Internet cafe in North Korea is operated by a South Korean entrepreneur, the signs of economic life in North Korea come largely from investments by South Koreans.

At the Hyundai resort here, visited by about 120,000 people last year, ground is to be broken this spring on two golf courses, a ski lift and the renovation of two hotels. And in a country where it is easy to score firsts, Hyundai plans to build North Korea’s first bungee jump.

”One golf course will be by the mountains, the other by the sea,” said Yook Jae Hee, the resort’s general manager. ”We can use North Korean workers. They are very cheap.”

Expecting a flood of tourists using a new civilian road across the demilitarized zone, Kim Chong Seong has brought 50 car campers here. Without permission to roam the countryside, South Korean tourists are to use them as fixed mobile homes.

”North Koreans need to be taught competition, but they are not ready for capitalism,” said Mr. Kim, whose father’s company, Hyo Won Moolsan, pioneered South Korea’s trade with North Korea. ”North Koreans have no idea of price or design.”

(Typical of the North’s capricious view of contracts, it suspended Hyundai’s bus tours for the month of March to do ”road work.” Analysts say it may be a way of putting pressure on Hyundai to increase payments.)

Hyundai, which has yet to make money on its four-year-old tourism operation here, has contracts for six other big projects in North Korea, including building dams, an airport, power plants, a communications network and an industrial park.

On Feb. 16, its group chairman, Chung Mong Hun, admitted at a news conference that he had secretly sent $500 million to North Korea. Critics say the payments helped the company win the North Korean construction contracts.

After two decades of speculation by some that North Korea would follow the liberalizing path of China, many South Koreans are skeptical that the Communist government will ever produce attractive investment conditions.

”We are interested in one day opening restaurants in Pyongyang,” Kwon Won Sik, president of the Lotte Hotels and Resorts chain, said during a pause in a mountain hike here. Referring to North Korea’s levy of $100 a tourist, paid by Hyundai, he added, ”North Korea is really taking advantage financially.”

Despite incentives by the Seoul government for companies to invest and trade with North Korea, interest from outside has trailed off. Investors cite erratic supplies of electricity, the cavalier attitudes toward contracts, a small domestic market and bureaucratic paralysis.

The number of new projects approved by the South Korean government fell to 3 last year, from 13 in 1998. Of 52 Southern companies allowed to invest in the North, half have dropped out of the program.

South Korea’s new president, Roh Moo Hyun, has promised to extend to the North a generous economic investment program of ”peace and prosperity.” Trans-Korean gas lines and railroads are planned, projects that could provide revenue to the impoverished North.

Chung Dong Young, an envoy of Mr. Roh, said in January at the World Economic Forum in Switzerland: ”If North Korea gives up its nuclear programs and addresses other security concerns, it will be able to receive rewards both economic and diplomatic, that will surpass its own expectations. We are considering a bold North Korea reconstruction plan to move toward the Korean Peninsula Economic Community. ”


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