Viewpoint: Kim's death and the North Korean economy

North Korean textile workers North Korea's cheap and dedicated workforce has attracted many Chinese companies into the country

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The Democratic People's Republic of Korea (DPRK) has little resemblance to South Korea.

They share the same land area, but there the similarities end.

There are about 25 million North Koreans (making it the world's 48th most populous country), compared with the South's 48 million people.

Some of the starkest differences concern the earning power of ordinary Koreans.

The South has a per capita income of $20,000 (£13,000), while in the North it is about $1,000 (£644).

As North Korea publishes few statistics the actual size of the country's Gross Domestic Product is only a guesstimate.

In fact, the economy may have contracted slightly in the last two years, after several years of growth. But in terms of total GDP, the size of the economy is almost the same as that of pre-war Iraq.

Mineral resources

Before 1945, South Korea was a largely agricultural country, while North Korea was very industrial.

The situation has reversed, with only about 2% of South Korea's GDP coming from agriculture compared with about 20%-25% of North Korea's.

But the North, as you'd expect in a centrally-planned economy, still has heavy industry, and also a mouth-watering array of mineral resources, including gold, iron ore, and a range of rare earths and uranium.

In many ways, North Korea was the most successful communist country, with a rapid - for a communist country, at least - rate of growth and a high rate of party membership.

In fact, the North's per capita GDP was higher than that of South Korea until the mid 1970s. Everywhere are reminders of this successful communist state in terms of organisation, fading infrastructure and decaying industry.

Does any of this present a business opportunity?

The first problem, unless you are a Chinese citizen, is the difficulty in getting a visa.

Once in North Korea, you are then faced with the problem of the "US blockade", as the North Koreans call it.

Dealing with this trade embargo is certainly a learning curve - as I know from personal experience.

North Korea's economy

  • Revenues: $3.2bn (2007 est).
  • GDP $40bn (2009 est).
  • Growth rates 0.9% (2009 est).
  • Labour force 12.2m.
  • Exports (2009) $1.9bn.
  • Export partners (2010) China 50.3%, Brazil 5.7%, Lebanon 4.7%.
  • Imports (2009) $3.096bn.
  • Source: CIA World Factbook

In 1994, the US Treasury department seized $4,000 of my money while it was on its way to pay the monthly expenses of my consulting office in North Korea.

The money was released a few years later, during a period when there was a slight thawing of relations between the US and North Korea under the administration of President Bill Clinton.

The lesson? Never use dollars which have to clear through the New York banking system.

In order to avoid this kind of incident, the North Koreans adopted the euro as the foreign currency of record early last decade.

US penalties

This was fine at the beginning of the last decade when the dollar and euro were at parity. But it pushed up prices for foreigners doing business in Pyongyang as the euro began to appreciate.

Most, if not all, Western multinationals avoid direct business with North Korea because they fear US Treasury penalties.

However, for smaller businesses, whether from the West or, more likely, China, life is easier.

Still, most products with a potential dual use - that is, military use - including computers, cannot legally be exported from most countries.

Fortunately for North Korea these restrictions, which date back to the Cold War are not enforced in China. For a small business, North Korea is full of opportunities.

Thousands of Chinese businesses have moved into North Korea, and are making money.

A handful of Western companies have done the same, with small scale restaurants and other businesses, including hotels, mobile phones and micro-credit operations.

The opportunities will increase if North Korea can improve the economy.

North Korea, with its dedicated and inexpensive workforce, and ample natural resources, has the potential to grow if it is allowed to access world markets and capital sources freely.

But the new collective North Korean leadership" faces several tasks.

The first is how to feed all of the people all of the time.

Donor fatigue

Enormous efforts have gone into increasing the output of food since the "Arduous March" of 1995-1999, a period of economic strife when an estimated one million North Koreans died (though many would put the number three times higher).

In the 1990s, the World Food Program and many non-governmental organisations rushed to help the North.

But in 2011 there is donor fatigue, and the South has failed to supply food or fertilizer since President Lee came to power in 2008.

The US is returning to provide aid this year. North Korea needs development, not aid, but currently western governments punish the North by giving only emergency aid at best, and not development aid.

North Korean boy working a crop field One of North Korea's huge challenges is how to feed its people

The second task is to continue the reforms of 2002, which introduced market forces on a limited scale.

A recognition that market forces could feed people, when the public distribution system could not, was grudgingly accepted.

However, the subsequent growth of a differential in wealth and individualism alarmed conservatives within the DPRK.

A third task is to deal with the US economic blockade. The blockade is now enforced by UN sanctions, imposed when North Korea tested its first nuclear weapon.

North Korea believes that its nuclear weapons are its major defence against a hostile world, and will abandon them only when the US signs a peace treaty that "ends" the Korean War of 60 years ago.

North Korea says it is still in a state of armistice.

Priority

The fourth task is to encourage experiments like the Kaesong Industrial Zone, a collaborative economic development with South Korea.

Here, some 123 South Korean firms use inexpensive and skilled labour provided by more than 48,000 North Koreans to produce products for the Korean market and beyond.

A meeting was held this month between businessmen from the South and officials in the North to discuss how to expand the complex.

Finally - and the priority for the new North Korean leadership - will be the task of continuing the rebuilding of limited industries and major buildings in Pyongyang to celebrate the hundredth anniversary of the birth of Kim Il-sung, the regime's founder and self-styled Great Leader

It is a rebuilding programme that the leadership believes will assure the North Korean people that their country is becoming an advanced country.

Tony Michell is president of Euro-Asian Business Consultancy Ltd

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