Green Buds In The Mud

Hidden among the skyscrapers in downtown Seoul, the entrance to Hyundai Asan Corp. could pass for the door to a broom closet. Tucked at the end of a second-floor corridor, employees in a subsidiary of South Korea's largest conglomerate are plotting the ultimate takeover. Their target: North Korea. Hyundai wants to build a city-size industrial complex eighty kilometers across the world's most heavily defended border. Hundreds of South Korean companies would relocate to the Stalinist North, giving export manufacturing jobs to 300,000 North Koreans. The model is China's legendary special economic zones, says Asan vice president K. J. Kim. "The tricky part," he concedes, "is that the North hasn't made up its mind to follow China." Kim scribbles two Chinese ideograms on a scrap of paper. "This is their biggest fear," he explains. "Kai fang: openness."

That is indeed a problem. Strongman Kim Jong Il still trumpets juche, or self-reliance, an ideal that has transformed North Korea from a socialist industrial power into a famine-ravaged outlaw nation. This commitment to juche has condemned his country to a lot of pain. North Koreans today must scrape together a living in part by peddling scrap metal, passing counterfeit money and pushing drugs. Last year their government had to accept nearly $1 billion in food aid, and life is not getting better. In a stunning admission of failure last month, the North's rubber-stamp legislature approved a budget only half as large as the one it passed five years ago, just before the famines began. "The national rationing network has essentially stopped working," says Lee Ho, a senior official at South Korea's Ministry of Unification. "The North is a planned economy without a plan."

As the capitalists at Hyundai see it, all this pain creates opportunity. In North Korea itself, bootleg trade, moonlighting and unofficial farmers markets have sprung up to bolster the crumbling socialist system. For foreigners, business deals are only one of the possible dividends at stake. A loose consensus is building among international aid groups and universities--and to varying degrees in Seoul and Beijing--that a real turnaround has begun in North Korea. Kim Jong Il and his cohorts would never admit it and may wish it wasn't happening, but their broken socialist system seems to have entered the first stage of a dramatic economic transformation.

Yes, North Korea could still implode like East Germany. Or it could lash out in a suicidal blitz against its blood enemies in the South. Nonetheless, some unmistakable buds of capitalism have begun to sprout in the barren landscape. "We're facing the possibility of unintended, high-speed changes toward a market economy," says economist Park Jung Dong of Seoul's Korea Development Institute.

It has happened before in the socialist world. In the China of 1976, as new leader Deng Xiaoping consolidated power in Beijing, many of his country's 800 million peasants took it upon themselves to escape their grinding poverty. Cadres in several provinces broke up Mao's communes and gave the land to local families. After harvests, households sold portions of their crops in roadside peasant markets. It wasn't until 1978 that China's new patriarch endorsed this farmyard capitalism--claiming as his own invention practices that had emerged spontaneously from below. Deng's genius was in recognizing what worked.

Could the same dynamic now be taking hold in North Korea? As 22 million people struggle to survive socialism's breakdown, local officials have begun making their own rules for economic survival. Even Pyongyang shows signs that it might opt to marshal--rather than oppose--the forces for change. It has revised its Constitution to create business opportunities and opened a scenic mountain to South Korean tourists. It has permitted key technocrats to study market economics in Singapore, Hungary and elsewhere. And it has pursued talks with Seoul and Washington that could lead to an end to trade restrictions. "Within five years all the sanctions will be gone," forecasts Dong Yong Seung, the top North Korea watcher at Samsung's corporate think tank in Seoul. "Then the North will become our export base."

North Korea's collapse began on the farm. Throughout the cold war, Pyongyang stressed grain production to an absurd--and ultimately destabilizing--extreme. On the orders of the socialist nation's founding leader, Kim Il Sung, the North's farmers endured relentless campaigns to boost the annual corn harvest. They clear-cut forests, terraced mountains and planted the shallow-rooted crop on fragile, reclaimed land. With cheap Russian fertilizer propping up yields, Kim heralded his agricultural "revolution," boasting in 1985 that the grain harvest had surpassed 10 million tons (a figure disputed in the West).

What's clear is that Pyongyang's yields soon began falling fast, dragged down first by the Soviet Union's collapse in 1991, and then by the worst floods in a century, those that swept away hillside cornfields in 1995. Japan-based agricultural expert Lee Wo Hong, author of "At the Bottom: The Structure of North Korea's Bad Harvests," argues that Kim's grain policy "strangled the country," adding: "Things would have been better had he left farming to the farmers."

When granaries ran empty, citizens were forced to beg on the streets, forage in the hills for edible grass and wander the country in search of food. Those with provisions to spare sold them on the black market. Small-scale farmers markets, first seen in North Korea in the 1980s, burgeoned a decade later, expanding into vibrant daily markets selling food and other commodities--including goods smuggled from China or pilfered from the state. "People know what stuff they can buy at every corner of the city," says a frequent visitor to Pyongyang, "even the day chicken will be available." Today, North Korean defector Choe Chol Ryong told an interviewer in the South, "juche" means every man for himself. The hottest trends in Pyongyang, says Choe, a former foreign-trade official, are "individualism, materialism, money worship and disparity between the haves and have-nots."

So far, Pyongyang isn't forcing the issue. In fact, new agricultural policies detour from the socialist road that state propagandists still extol. In 1996, the government began to restructure thousands of cooperative farms, breaking large communal work groups into eight-person teams. To give material incentives, the state lowered quotas and encouraged farmers to sell surplus crops on the open market. More recently, crop diversification, including an ongoing program supported by the United Nations that aims to boost potato production as a heartier alternative to corn, has given peasants--not bureaucrats--the final say on what and when to plant. "In the past, we ignored soil conditions and climate and uniformly planted corn, spreading wrong practices," conceded Cha Rin Sok, a North Korean agriculture official, in an interview carried last month by Pyongyang's state-run news agency. Now, he says, crop choice "is entirely up to local farmers."

This might amount to more than an efficiency campaign. Some foreign experts on socialist economics believe that North Korean technocrats--often without permission from top leaders in Pyongyang--have begun to experiment with farmyard capitalism. The model, sure enough, is China's Deng, who dismantled Mao's People's Communes in favor of a "responsibility system," in which families could sell any food they produced beyond their state quotas. That reform doubled rural incomes between 1978 and 1985. In Pyongyang, "the leaders are assessing the impact that change will have on their power," says a diplomat who has worked in North Korea. "I don't think they'll go all the way [toward the China model] until they're sure their positions won't be threatened."

Defectors and foreigners who have worked in North Korea suggest that a debate on the virtues of Chinese-style reforms has simmered since the early 1990s. The Soviet Union's demise was an important catalyst: it brought home hundreds of diplomats and scholars who understood communism's global failure. According to defector Choe, "intellectuals who studied in Eastern Europe ... are in the vanguard of covert dissident movements." Sometimes calls for change are voiced publicly. In an official essay published in February, Prof. Ri Dong Gu of the North's Kim Il Sung University concedes at the start that farmers markets are "supplementary, secondary and outdated." Then he argues for five pages that the government must "correctly utilize this old-style market" to "upgrade people's livelihood."

By all accounts, North Korea's underground economy is expanding quickly. Although recent harvests have improved, the state's distribution system remains frozen. "Most of the food that gets to the cities comes in on the backs of peasants," says a frequent visitor to Pyongyang. "Then they sell it and carry back fertilizer." According to a U.S. diplomat, recent satellite images of North Korea show "people wandering the countryside to barter." And a videotape shot secretly in two farmers markets late last year captured bountiful food stalls, open-air restaurants, hawkers with smuggled cigarettes, freelance barbers and a woman selling furniture. It also showed bands of scrawny children scavenging for food.

Food is only the basic problem; there are many more. Unlike China in the 1970s, an agrarian society in which 80 percent of the population tilled the land, North Korea has a much higher concentration of industrial and service-sector workers--nearly 70 percent of the labor force, according to South Korean estimates. During the cold war, North Korea's factories supplied a vast array of goods to East-bloc markets. But now most North Korean factories sit idle, short of energy and orders alike. By some accounts, the North's factories are running at less than 20 percent of capacity. Those that shut down are sometimes looted by workers looking for scrap metal to sell on the black market.

As in agriculture, any industrial revival depends on unleashing market forces. Pyongyang once hoped to spur an export revolution in Rajin-Sonbong, a remote free-trade zone at the borders with China and Russia, established with prodding from the United Nations. When the zone was announced in 1992, boosters heralded a "Hong Kong for the 21st century." What has emerged looks less grand, but encouraging in its own way. While work is progressing on roads, hotels and port facilities, the real life of the zone springs from the thousands of small-time Chinese traders who show up to practice--and demonstrate--the timeless capitalist arts of hard bargaining.

The South Koreans, enticed by a cheap, well-educated work force, are also eager to instruct in the ways of capitalism. Since the mid-1990s, South Korean investors have experimented with small-scale joint ventures scattered across North Korea. Typically, kits or raw materials are shipped north, processed and returned as finished products. To date, about 80 South Korean companies have begun manufacturing in the North. Daewoo makes shirts, jackets and golf bags in Nampo. LG assembles 20-inch televisions in Pyongyang.

Two-way trade, still a paltry $130 million, is forecast to show double-digit growth for years to come. At Seoul's trendiest shopping spot, the giant Lotte Department Store, customers have their choice of North Korean products from pine pollen to men's sportswear.

South Korea's largest conglomerate, Hyundai, is the boldest opportunity seeker in the North. Since South Korean President Kim Dae Jung took power last year, declaring a "sunshine policy" aimed at engaging Pyongyang in investment, trade and other areas, Hyundai has moved in fast. It launched weekly sea cruises to Mount Kumgang, just north of the border, a journey that has attracted some 58,000 visitors so far. That number is expected to rise faster after the recent inauguration of "love boat" honeymoon trips. To win access to the mountain, Hyundai will pay nearly $1 billion over a six-year period--money that the conglomerate regards as an investment in the future potential of the North.

Hyundai's dream could materialize at Haeju, a sleepy fishing harbor on North Korea's west coast. It is there, in its planned industrial zone, that the conglomerate hopes to build an export economy from the ground up. The concept, still in negotiation, is simple: to make a low-cost home base for some 850 low-end South Korean manufacturers of auto parts, textiles, consumer electronics and tools. The zone would include housing, schools and other services for North Korean workers and their families. Electricity would come via high-tension cables linked to South Korea's power grid. In design, Hyundai's project is fundamentally different from past experiments--even Rajin-Sonbong: North Korea must allow southern companies unprecedented management control, just as China did in its special economic zones.

Like the Chinese before them, North Koreans need to learn that capitalism is not a disease--a lesson international development agencies are eager to convey. Last year Pyongyang allowed about 110 technocrats to study other systems. The United Nations Industrial Development Organization shipped teachers from Rajin-Sonbong to Thailand and Singapore for five- to eight-month courses on customs procedures, banking, foreign trade and accounting. Financier George Soros sent seven North Korean trade officials to study in Hungary. With funds provided by the Dutch and Swiss governments, the World Bank and United Nations Development Program (UNDP) planned foreign training courses in market economics for about 30 North Korean officials from the Finance Ministry and several state banks.

North Korea's leadership appears to be divided on how far these capitalist cram courses should go. After details of the UNDP's program surfaced in Japanese and South Korean news reports in January, Pyongyang abruptly canceled a training course scheduled for April in Shanghai. After new negotiations, the UNDP resurrected a scaled-down program in which Chinese instructors will teach their courses in Pyongyang. Just last month Pyongyang aborted another planned study tour scheduled for midyear in Canberra, Australia. "North Korea is worried about defection and infection," says another Western expert.

To assuage such fears, Harvard University's Institute for International Development recently modified its plan to bring North Korean intellectuals to the United States. According to a proposal submitted to Pyongyang last month, Harvard instead has invited them to join a program in Vietnam. North Koreans may feel more comfortable in Hanoi, where the socialist government has managed to pursue gradual market reforms without collapsing.

Events could alter Pyongyang's trajectory. The North's ultimate diplomatic objective is to establish formal relations with the United States, and the Clinton administration has shown an inclination to deal. It may be even more enthusiastic if a forthcoming congressional review of its North Korea policy--conducted by former Defense secretary William Perry--turns out to be friendly. Washington could partially lift its trade embargo or support Pyongyang's efforts to join the International Monetary Fund and other groups capable of underwriting the North's restructuring. In return, Pyongyang would need to shelve its ballistic-missile program; cease selling weapons to Libya, Iran and other rogue states, and stop sending spy subs and speedboats to harass South Korea.

Most important, Pyongyang must reckon with the forces that are reshaping its economy. Leaders still have a lot to learn about farmyard capitalism and open trade. They need look no farther than the thriving Rajin market. Last year more than 100,000 Chinese traders arrived to do deals with North Koreans--and they're still coming. The Chinese buy squids, mussels, crabs and other seafood. They sell grain, cigarettes, clothing, radios, even cars. Deals are cut in Chinese yuan, U.S. dollars or Japanese yen. "All the trains heading south toward Pyongyang are full of goods from this market," says a recent visitor. "Trade is booming." If enough Pyongyang central planners stand on those train tracks, they might finally devise a way to deal with the approach of free markets: get out of the way.