Inspiration or desperation?

NORTH KOREA, a country with an unchanging landscape of repression and hunger, has produced what could be a piece of good news - Pyongyang is apparently ready to fix its moribund economy.

The multi-billion-dollar, and potentially life-saving, question is whether it is a short-term fix or a fundamental reform such as that which seems to have freed China from threats of massive political and economic upheaval.

The paradox facing the North's leader, Kim Jong-il, remains that he has done so little for so long that he faces a dire choice. He risks losing his grip on power if he goes too far in reform, and the even greater danger of regime collapse should he delay serious reform any longer.

Perhaps reflecting this dilemma, Mr Kim in recent weeks has taken a hands-on role in the new economic management campaign.

While touring Vladivostok last week after a meeting with Russian President Vladimir Putin, Mr Kim asked his hosts to show him a department store. He asked the Russian saleswoman about the price of goods, about profits she was making ('that's a business secret', he was told), and examined the quality of merchandise.

The trip apparently was aimed at giving him some idea of how a centrally planned economy moves to a market-based, price-driven system. It also was supposed to demonstrate his commitment to kick-starting an economy strangled for five decades by the most rigid Stalinist command system ever enforced in the world.

Since the collapse of the Soviet Union, the tiny North Korean economy, worth just US$15.7 billion (HK$122 billion), has shrunk by one-third, according to calculations by central bank authorities in South Korea.

Little wonder Mr Kim is desperate. A 30-member North Korean delegation visiting Seoul this week for talks on economic co-operation projects requested another urgent delivery of rice aid - 300,000 tonnes of grain and 100,000 tonnes of fertiliser, according to South Korean officials who yesterday approved the aid.

That aid, however, is unlikely to alleviate the grave shortages the North has faced for the past decade. International relief agencies estimate its annual rice shortfall at about 1.5 million tonnes. It is a chronic situation and about a million North Koreans are estimated to have died during the past six years from famine.

Following a naval clash that sank a South Korean patrol vessel in the Yellow Sea last month, the Seoul government of President Kim Dae-jung is fighting desperately to prevent emotion from hijacking its engagement policy. Official sources say future food aid will depend on the North agreeing to reopen North-South railways which have been suspended since 1945. The project aims to link the North and South railway systems with Europe via Russia's Trans-Siberian Railway to cut the time and transport cost of South Korean exports.

Renewed hope is fuelling the railway project after the North announced a plan to revive price mechanisms in its economic management system.

According to the announcement in June, the food rationing system is to end as part of changes that involve raising prices of all commodities to a free-market level. The price of rice has subsequently risen 500-fold from the official level.

Electric power prices increased 60 times and underground train fares went up 20-fold.

The decision to raise salaries of industrial workers by 18 times to 2,000 North Korean won (HK$7,090) per month provides little consolation, as wages still fall short of buying essentials on the open market.

Dr Yoon Deok-ryong, a researcher at the government-run Korea Institute for International Economic Policy, said the socialist hermit nation faced an unfamiliar problem - hyperinflation - if the supply of goods did not match the rise in demand that almost certainly would follow the introduction of a new price mechanism.

The policy change goes far beyond simply reviving price mechanisms, with the regime also providing incentives for workers at state-run factories and collective farms.

'Those enterprises and co-operatives that achieve higher production or generate profits will distribute their gains among their members,' state media said. In short, different pay for different performance.

Even the State Planning Commission is expected to relinquish some authority by giving provincial administrative units the right to set production quotas.

The devolution of independent power to plan production in provincial areas will loosen economic and political control from the top. Would this lead to Kim Jong-il, who owes his job not to election but to hereditary succession following the death of his father Kim Il-sung, accepting reduced powers?

Unlikely, according to most analysts in Seoul. Relinquishing the power of top-down planning would be akin to giving up the power base so crucial to the operation of one-party communist dictatorships, said Jo Dongho, a senior North Korea analyst at the Korea Development Institute, a semi-official research organisation.

Mr Jo said: 'If you follow the North Korean thinking on this, Kim thinks this is the way to reinforce socialism - that is, his own control.'

Mr Kim himself is taking pains to make this point to Russian friends. Speaking to Russian Foreign Minister Igor Ivanov, who visited Pyongyang late last month, Mr Kim insisted his new price mechanism was designed to strengthen the socialist management principle.

'We have studied reform models of Russia and China and found them both to be wanting and containing errors,' he reportedly told Mr Ivanov, adding the North had its own solution to avoid their mistakes.

Analysts are wary of what North Korean officials are saying - that the price mechanism will not function solely on the strength of supply and demand.

'The state will intervene to set the right price' if things get out of control, according to Chosun Sinbo, a left-wing Korean newspaper in Tokyo quoting a North Korean official.

The question of how officials will determine the circumstances requiring such intervention has been left unexplained, prompting analysts to wonder if the price system and incentives at farms and factories was a temporary measure, to be stopped as soon as the stabilisation effort makes progress.

'We have to be realistic in our expectation and not over-estimate the impact of recent announcement,' warned Dong Yong-seung, a veteran analyst of the North Korean economy at the Samsung Economic Research Institute in Seoul.

He said reviving the price mechanism, recognising the merits of an incentive system and the devolution of central planning 'represents a policy change broadly aimed at monetising the North Korean economy, not a fundamental reform along the way of the Chinese or Vietnamese model'.

He believes there are few reasons for Mr Kim to undertake sweeping market-based reforms such as those initiated in China under Deng Xiaoping.

For one thing, Mr Kim is obsessed with regime security - that political or economic liberalisation can trigger a serious challenge to the 50-year dictatorship exercised by his family. The possibility of losing power has made him suspicious of any kind of reform, to the extent of flouting his uncompromising position as a strength of his leadership.

The North Korean state media has openly referred to collapses of the Soviet Union and Eastern Europe as examples of 'mistaken reform'.

It is not hard to understand Mr Kim's fear. Vietnam, as a unified country, has no fear of dissidents challenging its legitimacy after having successfully expelled foreign powers. China, with its enormous size, could undertake bold reform without the fear of being overwhelmed by Taiwan.

By contrast, North Korea is a state under siege as it seeks to fend off political and economic challenges from the South. 'Kim's position of having to defend his legitimacy in the midst of poverty and dictatorship makes his case unique,' Mr Jo said.

Mr Kim does not have the luxury of being able to delay reforms. As tens of thousands of North Koreans flee their country in search of food and freedom, he is faced with the reality of having to lead a failed state. Visiting Seoul for talks with South Korean officials, US arms control negotiator John Bolton declared that the North's survival was in doubt without economic restructuring.

Commenting on the recent policy changes, Mr Bolton said it was unclear whether they were a sign of inspiration or desperation. Analysts in Seoul think they represent desperation.

Shim Jae Hoon is a Seoul-based journalist