North Korea could turn around its economy but first it must tackle the nuclear issue, says Gerard Lyons.

North Korea conjures up all sorts of images, not many of them positive: nuclear threat; an impoverished economy far removed from the 21st century; and a destabilising influence on the countries around it. All of these would ring true with most people – yet is this the full picture?

In political terms, the US is right to keep the pressure on North Korea in the fight against global terrorism. But if we look beyond that, is there any way that North Korea could eventually achieve economic success?

We have all seen the success of South Korea. It may be hard to imagine, but only four decades ago, the South’s economy was on a par with that of many mid-size African countries. It was poor, it was backward and it had been ravaged by a succession of conflicts. South Korea’s economy was small and few predicted the success that was about to follow. A generation later, the picture is very different. Depending on the measure used, South Korea is the 10th or 11th biggest economy in the world. It is an industrial giant, whose largest companies are household names around the globe. Now it is planning to leverage off its manufacturing strength and position itself further as a regional and financial hub.

A longer look

The success of the South is a lesson for both North Korea and the rest of the world on how quickly things can change. It is also another reason to take a longer and more positive look at North Korea.

The challenges facing North Korea are much greater than those faced by the South, and are highlighted by the nuclear problem and the huge humanitarian cost associated with a failed economy that has shrunk considerably over the past decade. It needs foreign aid, food and energy to function and develop. Yet there has been evidence in recent years of the willingness of North Korea to embrace a market economy.

The country has a relatively sizeable population of 23 million (half that of the South). Its best hope is increased trade and economic ties with its southern neighbour. One of the most significant developments is in the Kaesung area near the North-South border. The aim is to develop this into a free economic cooperation zone, inspired by the success of China’s special economic zones in areas such as the Pearl River Delta. South Korea’s small and medium-sized enterprises are already establishing themselves in the North Korean city Kaesung to take advantage of low-cost production and its government wants products made in Kaesung to qualify as “made in South Korea”; the issue will be tackled in South Korea’s free trade talks with the US as it naturally does not want to undermine US financial sanctions against North Korea. Yet the developments at Kaesung indicate that things are changing.

If economic ties between the North and South allow the creation of more zones, there could be growing impetus for firms from the South to invest in the North, in retraining, new capital stock and technological transfer, which would transform North Korea’s productivity. The closer proximity of the North to China and Russia would eventually make the movement of production capabilities northwards a viable plan.

Politics apart, a problem with North Korea is a lack of data. Yet we know that the North is rich with raw materials and minerals, especially coal and iron ore, while the South has comparatively more arable land suitable for agriculture. In 2001, the North produced 23 million tons of coal, versus 3.8 million tons in the South. With the South producing almost three times more grains and rice than the North, the economic synergies between the two are apparent.

North Korea currently spends far too much on defence, estimated at 25% of its $22bn GDP. If it could realise a peace dividend by reducing its military spend, substantial economic resources could be deployed elsewhere.

There is no doubt that the global fight against terrorism puts a pall over North Korea – but if the recent signs can be believed then perhaps the country has the potential to emulate its southern neighbour. However, first it needs to resolve the nuclear issue.

Dr Gerard Lyons is chief economist at Standard Chartered.


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