Reforms still a long way off in North Korea

At 1 AM Sunday, the North Korean border to China was ordered to be closed with no further comments. On Monday, the news came: "The Dear Leader, Kim Jong-il, is dead". Like his father, Kim Il-sung, he suffered a heart attack and had passed away suddenly on Saturday.

That Kim Jong-il’s health was in bad shape was well known and the South Korean stock market KOSPI only fell with 10 points at the news. On Tuesday, it recovered fully. Even Kim Jong-il himself had prepared his death for a couple of years following his alleged stroke in 2008.

Already in 2009, he travelled to China with his youngest son, Kim Jong-un, to make sure that the two countries would keep their friendly relations after he had passed away. Most likely, he gave similar instructions back home in North Korea, where Kim Jong-un was named vice chairman of the Central Military Commission and given the grade of a four star general in late 2010.

"The Respected Comrade", as Kim Jong-Un is now called in North Korean press, has a tough task ahead of him dealing with an impoverished country and facing global politics being the leader of a nuclear nation. Even if the young Kim Jong-un has his secondary education from Switzerland, a military degree from the Kim Il-sung Military Academy in Pyongyang, and is supposed to not only speak Korean but also English, German, and French, he is still inexperienced.

Many analysts believe that his uncle, Kim Jong-il’s brother in law, Jang Song-taek, will rule behind him. To keep the Kim dynasty and the North Korean Juche ideology alive, it is important to have a Kim as leader. Having Jang Song-taek behind him most likely means no big changes in North Korea: no economic or political reforms are likely in the near future. The North Korean attacks on South Korea last year, including the sinking of a South Korean corvette, were seen as part of the succession process in the North, and similar attacks are not probable at this stage.

Even if there have been a degree of marketization in North Korea during the last decade, this has been due to state failure rather than state induced economic reforms, which China would like North Korea to embark on. The UN claims that 50% of the calories consumed in North Korea come from private, informal markets.

In late 2010, a currency reform was carried out in North Korea to control inflation, but also to eradicate income disparities that had occurred due to these informal markets. Two zeros were to be deleted on the Won in the new currency and little money allowed to be exchanged into the new Won. Petty traders that had made money through the black market could not keep their savings, and it was a hard blow for potential economic reforms. The currency reform did in fact generate social unrest and the high cadre in charge was later executed for his deeds. Currently, the conservative military forces that appear to be in charge in North Korea seem less interested in Chinese style economic reforms as this would threaten the whole system.

The so called grasshopper traders between North Korea and China are bringing in more information from the world outside and it will be hard to keep the Hermit Kingdom closed forever. Even today, many manufacturers are talking about moving production from China to North Korea, which has lower labour costs. This will likely open up the country further.

In international politics, North Korea is indeed “a shrimp between whales”, to quote the eternal president and so called Great Leader Kim Il-sung. However, none of the whales, China, Russia or the US, want an unstable North Korea. China wants to avoid refugees crossing the border and the US wants an end to a nuclear North Korea, which is likely cooperating with Iran on missile and nuclear technology. China also prefers to keep North Korea as a buffer zone against the US military forces in South Korea.

China is one of the most important trading partners to North Korea accounting for approximately 50% of its exports and 40% of its imports with trade totaling USD 2.69 billion in 2009. North Korean exports mainly consist of minerals, metallurgical products, manufactures (including armaments), textiles, agricultural and fishery products.

Even if North Korea is of importance for China politically, South Korea is a much more important trade partner. In 2010, Chinese trade with South Korea was USD 207.2 billion. South Korean popular culture is also fashionable in China, where the Chinese enjoy watching South Korean soap operas, listening to South Korean pop music and go weekend shopping to Seoul.

Beside a currently unlikely nuclear attack from North Korea, the greatest cost for a change in North Korean politics would be a reunification with the South. Estimates of costs for a Korean reunification range between tens of billions to a trillion USD, which is roughly equal to South Korea’s GDP today. Currently the GDP per capita in South Korea is 17 times larger than the GDP per capita in the North. This is to be compared to West Germany having a GDP per capita that was four times the one in East Germany before the reunification.

Even if North Korea and South Korea claim that they want reunification, this is not very likely and it keeps on being unlikely as time goes by. Already today, young South Koreans are less interested in a reunification than the older South Koreans, and even if a reunification would help an aging South Korea, the cost is viewed as too big, not to mention the mental cost merging an isolated country with a capitalist international country. Instead, it is more likely that South Korea will continue to make use of cheap North Korean labour in free trade zones similar to Kaesong close to the border.