We need new economic model for North Korea

By Troy Stangarone

As part of the talks with North Korea since the beginning of 2018, the United States and South Korea have offered the prospect of an improved economic future if Pyongyang were to dismantle its nuclear weapons program. But achieving that future will require the North to engage in domestic economic reforms.

In the past, suggestions for an economic model for North Korea to emulate have often gravitated toward the paths taken by China and Vietnam.

China has often encouraged North Korea to take the same steps it did toward liberalizing its economy, and there is no doubt that Xi Jinping, who visited North Korea last week, has continued to highlight the success of the Chinese model to Kim Jong-un.

In the lead-up to the Hanoi summit, Vietnam's success was also touted as a model for the North, with speculation that Kim might have signaled North Korea's interest in foreign investment by visiting one of Samsung's facilities there.

On the surface, the Chinese and Vietnamese models make sense and have insights to offer. Both are examples of economically developing Communist states that engaged in economic reforms to transition from a state-led system to a market economy.

In both cases, the respective communist parties have been able to maintain political control. Something that should be appealing to the regime in Pyongyang.

Both countries also benefited early in the reform process from moving the agricultural sector away from collectivization to more market-based conditions for agricultural production. Agricultural reforms in China allowed it to be able to supply food for 95 percent of its population by 2015, while Vietnam was able to reduce malnourishment to only 13 percent of the population by 2014.

With North Korea's chronic shortages of food, it would benefit from the introduction of market forces and modern farming technology to help boost crop yields. The U.N. estimates that 43 percent of the population is undernourished.

With improved farming output North Korea would be able to reduce the levels of undernourishment among its population and reduce its need for international food aid in times of true national disasters.

Agricultural reforms also allowed China, and to a lesser extent Vietnam, to move surplus labor from rural areas to cities to help spur manufacturing and export-led growth. When China began its economic reforms in 1978, 82.1 percent of the population was rural. Today, only 42 percent of the population is.

When Vietnam began its reforms in 1986, 80 percent of the population was rural. Despite the success of Vietnam's reforms, 64.8 percent of the population is still rural today.

But North Korea is unlikely to benefit in the same way, as 1968 was the last time that North Korea was a majority rural society. Today only 38.3 percent of the population lives in rural areas.

The North Korea of today might look more like the Eastern Europe at the end of the Cold War. North Korea, much as was the case with Eastern Europe, is a more urban society.

In addition, rather than being largely an agricultural society, it will face the challenge of collapsed industries that will be uncompetitive with foreign competition if it were to open up to trade and investment.

The world has also changed since China and Vietnam began to pursue their export-led growth models. According to a report by Deloitte, services exports have grown from 17 percent of global exports in 1980 to 24 percent in 2016.

In terms of value added, services exports account for nearly 40 percent of global exports. As a result, there is likely to be less benefit to North Korea from low cost manufacturing as there was to China and Vietnam when they began their economic reforms.

North Korea also seems to want a different path. It has said that it does not want to become "implanted with the imperialists' outsourcing economy," perhaps referring to a situation where a company like Samsung is estimated to account for 28 percent of Vietnam's GDP.

Kim Jong-un has also shown interest in science and technology, suggesting perhaps a desire to skip some of the steps taken by China and Vietnam. If Kim is looking to develop more of a services-based tech economy there may be lessons from India.

Ultimately, there is likely no good existing model for the reforms that North Korea will need to take if it is to transition to a more open economy. It will need to draw off good economic policy in general, also the experiences of Eastern Europe's more urban and industrialized economies, China and Vietnam's experience of opening their economies, as well as countries such as India.

But that also means when the United States and South Korea think about economic incentives for North Korea we need to expand the models that we use to develop inducements as well.

Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.

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