North Korea's enigmatic leader Kim Jong-il has returned home from his three-day, unannounced trip to China last week, his third in as many years. While the nuclear issue and the six-party talks undoubtedly topped the agenda in Kim's discussions with Chinese leaders, another issue likely touched upon concerned North Korea's dire economic situation. Kim desperately needs food, fuel and economic assistance for his impoverished country.
China has been a major provider of energy and food to its wayward ally since the late 1990s, when severe drought and widespread famine plagued North Korea. While the hermit kingdom emerged from the devastation of the natural disasters unshaken in its Juche, or "self-reliance," ideology, it became clear to Kim and his deputies that regime survival depends on a viable economy as much as nuclear muscle.
However, the limited economic reforms that have been introduced in North Korea, including the creation of special economic zones and price reform, have encountered serious difficulties and have largely stalled. That Kim came asking for help provides the Chinese leadership with the opportunity to offer some advice. However, annoyed by Pyongyang's unpredictable behavior, Beijing has an interest in seeing the North improve its economy to relieve itself of a financial burden. More importantly, perhaps, it wants to avoid the regime's collapse.
Indeed, China has a lot to offer, having gone through a quarter century of economic reforms and opening up to the outside world. It is now enjoying the fruits of what was once considered a betrayal of socialist principles. China's path could offer some useful lessons for its communist neighbor.
First, for a backward country such as North Korea, reform could and perhaps should start in the countryside. The introduction of the family responsibility system in China in the early 1980s provided incentives for Chinese farmers to raise agricultural output. Pyongyang would be well advised to take this route. Resolving North Korea's food shortage should be a top priority for Kim.
Second, experimental economic reforms could be introduced to selected regions. In the early 1980s, Beijing designated four special economic zones in southern China, where tax incentives were offered to attract foreign direct investment and private enterprises. After a bumpy start, these zones took off and became export powerhouses that were later followed by more than a dozen coastal cities. Initial investment came not from major western multinational corporations but from overseas Chinese businessmen in Hong Kong and Southeast Asia. They relocated their labor-intensive manufacturing facilities to China to take advantage of low labor cost and the central government's favorable tax policy.
Indeed, North Korea could tap into the resources of its southern neighbor. It has a relatively abundant labor force that is literate, low cost and disciplined. As labor costs continue to rise in South Korea, a logical place for the relocation of labor-intensive manufacturing would the North. Since the 1990s, Pyongyang has either announced plans or attempted to develop a number of economic zones: the Gaesung Special Industrial Zone, the Sinuiju Special Economic Zone, the Rajin-Sunbong International Trade Zone and the Mount Gumgang Special Tourism Zone.
However, while China's special economic zones took off soon after their establishment, the North Korean zones have not yet achieved their expected results. There are a number of lessons to be drawn from China's experiences. To begin with, Kim Jong-il's regime remains highly suspicious of the potential capitalist influence that may come with a market economy and foreign investment. While Beijing initially had similar concerns, the central leadership, especially then-paramount leader Deng Xiaoping (鄧小平), was more confident that China's socialist system could withstand the limited capitalist experiments. Kim may have less confidence in this regard.
In addition, the mere announcement of the establishment of special economic zones would not by itself attract foreign capital, nor would it guarantee immediate payoffs. Adequate infrastructure -- telecommunications, transportation and electricity -- in addition to tax holidays and the supply of low-cost labor is essential in attracting foreign investment. Indeed, Beijing poured massive resources into developing the basic infrastructure for the special economic zones.
Further, to provide an environment conducive to foreign investment, legal protection to guarantee contractual sanctity must be introduced. Throughout the reform era, the Chinese government has introduced various laws and regulations that are compatible with international practices, thus boosting investor confidence.
A third way in which reform could be introduced is to gradually replace central planning with a market economy, with or without socialist characteristics. This will affect pricing, employment criteria, welfare, ownership of the means of production and a range of other socio-economic elements. This may be the most serious challenge of all, since it touches on the fundamental issues of a regime's survival, transformation and collapse.
Indeed, China's experiences suggest to Kim that there are risks as well as rewards in introducing reforms. China has made significant economic achievements over the past 25 years and the communist party remains in power. However, changes have also brought about enormous social, economic and political challenges for the Chinese leadership and the communist party's control is being eroded.
This may cause Kim to ponder. But the risk-reward balance must also be seen in the broader contexts of constraints and opportunities. If North Korea's current policy offers no prospect for lifting the country from economic impoverishment, then selected economic reform will have to be tried. Kim has yet to be convinced that economic reforms may be the savior of his regime rather than a last resort to prevent it from collapse. In this respect, Beijing still has a lot of persuading to do.
Yuan Jing-dong is director of research for the East Asia nonproliferation program at the Center for Nonproliferation Studies, Monterey Institute of International Studies.
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