South Korea fears economic meltdown in North
By Andrew Ward
Published: November 7 2002 22:05 | Last Updated: November 7 2002 22:05


Travel through North Korea and a famine-stricken landscape opens up. Oxen plough the fields, while broken machinery rusts by the roadside and factories lie dormant. The darkness that descends on towns at night exposes the shortage of electricity.


The country's recent admission that it is developing nuclear weapons has drawn the world's attention to the military threat posed by Kim Jong-il's communist regime. However, the picture in the countryside reveals an arguably bigger risk - the threat of economic failure leading to North Korea's collapse and a disaster for the region.

"The nightmare scenario for global investors is the collapse of North Korea and its forced assimilation by the South," said Mike Newton at HSBC.

Disintegration of North Korea would cause a crisis throughout north-east Asia. The state's 22m people would be left starving, its 1m-strong army could spin out of control and a wave of refugees would be unleashed. South Korea would be sent into recession by the cost of reunification, estimated at up to $3,200bn.

The risk of such a catastrophe, warn economists, has increased and could rise further if the US withdraws aid to North Korea in protest against the regime's clandestine uranium enrichment programme.

The prospect of military action against such a heavily armed enemy as North Korea is unappealing, so economic sanctions are one of the few options the US, Japan and South Korea will have when they meet in Tokyo today to discuss how to disarm Asia's most unpredictable state.

But any assault on North Korea's economy would be risky when it is struggling to manage the effects of economic reforms, according to Park Suhk-sam at the Bank of Korea, the South's central bank. "Without aid from the international community, North Korea cannot curb inflation. People will get angry with the regime and the possibility of collapse will increase."

North Korea's decision in July to increase wages and prices 18-fold in line with black market values was hailed as a step towards liberalising its command economy. Enterprises were given more independence and charges were introduced for utilities and housing, which had previously been free.

The reforms appeared to be modelled on China's example but analysts doubt North Korea's ability to emulate its neighbour.

"China liberalised prices step by step over 10 years," said Mr Park. "But in North Korea they liberalised all prices at once. This could cause problems ahead."

While China had natural resources, fertile land and a huge workforce, North Korea is short of all these. The only ways to revive the economy, said Mr Park, are foreign investment and development aid. But these will not arrive until North Korea resolves its dispute with the US.

Billions of dollars of aid offered by Japan have been made conditional on North Korea first scrapping its arms programme. The US is reviewing the 500,000 tons of fuel oil it donates each year as part of the 1994 arms-control deal that has been violated by North Korea's renewed nuclear activities.

Mr Park said withdrawal of US energy aid, which fuels 30 per cent of North Korea's electricity generation, would push it closer to collapse.

South Korea, terrified of the consequences of state failure in the North, will oppose any proposal by the US or Japan to freeze aid. On Thursday, North and South Korean officials opened four days of talks on economic co-operation in Pyongyang, the North Korean capital, underlining Seoul's preference for engagement.

Washington has promised to maintain humanitarian aid even if energy aid is withdrawn. But the United Nations World Food Programme warned this week that 3m North Koreans would go unfed this winter because of a sharp drop in international donations to the country.

Most analysts argue that collapse is a remote possibility. Mr Kim appears to be firmly in control and the economy, although weak, has stabilised since the 1990s, when more than 1m people died of starvation after the collapse of trade with the Soviet Union.

"Any policy to try to collapse [North Korea] is fraught with risks that are unacceptable to both US and South Korean policymakers," said Mr Newton. "Pragmatism by both sides will prevail."

However, pessimists warn that North Korea could buckle as quickly and unexpectedly as the communist states of eastern Europe did in 1989. Just as defections from the eastern bloc increased before its demise, the number of North Koreans reaching freedom in the South has risen sharply, with the number expected to top 1,000 this year, against 538 last year.

As one diplomat put it: "North Korea is trying to emulate China's reforms, but it has much more in common with eastern Europe."