---

Good news from Pyongyang

SCMP August 12

The latest verbal spat across the Taiwan strait has overshadowed what may prove a more far reaching development for Northeast Asia: change in North Korea.

Expectations that anything good can come out of that country barely exist. There has been more than a decade of dashed hopes of change, disappointments punctuated by famines and mini-crises over strategic arms. However, two apparently inter-related developments in the past few weeks indicate that change is in the air, if not yet an established fact.

First was the announcement by the North of economic changes which seek to use price mechanisms to influence demand and supply in place of the (official) planning and ration and (unofficial) barter systems which currently prevail.

Then came the meeting in Brunei between US Secretary of State Colin Powell with his counterpart from this member of the "axis of evil", Paek Nam Sun. This was signal for the restarting of dialogues between the North and the US, the South and Japan which had been almost frozen since George W. Bush came to office.

The initiative for the re-start came from the North. It would have been impossible without Pyongyang's surprising expression of "regret" for the recent naval clash which left four South Koreans dead. But almost as surprising was the speed with which Mr Powell responded, taking advantage of the ASEAN Regional Forum to break away from his master's "evil" rhetoric.

Meanwhile the South's lame-duck President Kim Dae Jung was relieved to find that after months of frustration there was a possibility of progress, and perhaps even of the long delayed visit by Kim Jong Il to Seoul, reciprocating KDJ's Pyongyang trip two years ago, taking place before he leaves office.

So what are the factors which have brought all this together? The cause of the naval clash is still a mystery. Possibly it was bad judgment on the part of local commanders. Possibly it was engineered by the North's leadership to make the sea boundary issue an issue in any talks. The location of the boundary is politically sensitive for Seoul but is not an issue which excites the US so could complicate US/South Korea perceptions of priorities in dealings with Pyongyang.

Whatever the cause, the "regret" was evidence of Kim Jong Il's desire to re-start dialogue. Various reasons are apparent. Firstly, the regime will badly need to show that its new economic policy delivers results in the form of improvement, however marginal, in living conditions. In turn, that requires continued if not enhanced supplies of fuel, food and raw materials from the outside world - including food from the South, fuel from the US and others under the KEDO (Korean Energy Development Organisation) agreement.

Secondly, the North may well have become worried that the lack of North-South progress was playing into the hands of hard liners in the South and would hand the presidency to conservative opposition leader Lee Hoi Chang. There is a sense in the South that the "sunshine" policy had failed. Whilst any government would want dialogue with the North, the South had received little in return for its material help. There has been scant progress on family reunion, almost none on economic cooperation, and none at all on security issues. It was time for the North to appear more accommodating.

Thirdly, Pyongyang may have calculated that the "axis of evil" tag was to its advantage. It increased the bargaining power of its missiles and other so-called "weapons of mass destruction". Next year sees the expiry of the North's moratorium on testing long range missile, and is also the target date for providing light water reactors to the North. Given the US fixation on missile sales especially to the Middle East, Pyongyang may feel it is in a strong position to bargain money and recognition in return for not selling weapons to other "rogue" states.

The US for its part knows that its diplomatic priorities are now elsewhere. It will be easier to claim some sort of victory over "evil" by a trade with Pyongyang than in the Middle East. It also needs to shore up support among its sceptical Asian allies in advance of any conflict with Iraq. They want dialogue with the North.

Finally there is the influence of China and Russia. Beijing's embarrassment over refugees from the North may have increased its determination to pressure Pyongyang both for dialogue and economic change. Russia meanwhile has again become a player. President Putin has presented Russia as a friend of North as well as South. Significantly, the breakthrough followed immediately on Russian Foreign Minister Igor Ivanov's visits to Seoul and Pyongyang. The US could not afford to find itself in a minority of one, particularly as it has been sensing a renewed anti-Americanism in the South based on a perception that Bush's strong anti-North stance was against the South's interests.

But will all this lead very far? In 1994 , the situation seemed on the verge of a major breakthrough when Kim Il Sung died suddenly just before he was due to meet then South Korean president Kim Young Sam. Again in 2000, following the two Kims' summit and US Secretary of State Madeleine Albright's visit to Pyongyang there was even a prospect that Mr Clinton would meet Kim Jong Il. But the US election and subsequent events put everything back on ice. Is there anything different now?

Certainly the diplomatic equation looks more favourable for the reasons given above. Secondly, Kim Jong Il seems to be on firm political ground at home. And now too there is a more direct link between Pyongyang's diplomatic and strategic weapons manoeuvering and its domestic agenda - rescuing the economy.

The economic changes are not yet a Chinese style liberalisation towards a "socialist market economy". They are an attempt to rationalise the North socialist system through more realistic pricing. Prices and wages are being dramatically increased and the currency's value slashed. But prices of scarce goods such as food and fuel will rise faster than wages. This is partly an effort to influence supply and demand and partly to bring the informal and barter economy within the official money economy. They also provide incentives for over-plan production.

Some of this is similar to the very first reforms in China. However, North Korea has yet to dismantle its commune system. Furthermore, the rural impetus which first powered China's economy cannot be replicated in North Korea. China was 80% rural, North Korea is only 40% rural. So even price reform and improved availability of fertiliser and other inputs cannot have such a major impact. At the best of times, the North has usually needed to import food - in Japanese days it came from the South.

The North should be an industrial country. So the question now is whether it will be willing or able to get outside help to rebuild its physical infrastructure, its railways, coal mines and heavy industries, and capital to start labour intensive industries of the kind that spurred China's export development. That takes us back to the problem that has stymied North Korean reform for a decade. Dare it open up to foreign and South Korean influence?

China could open to Hongkong and Taiwan capital without fearing they would carry political dangers for a vast country. North Korea is rightly worried that its political system can only be sustained if the country is sealed off from a larger and vastly more prosperous South. The North may be able to get some more help from China, Russia and Japan to rebuild without relying on the South. But these neighbours want to see progress in links with the South too.

Ultimately the economic reform which seems to have been started with the price reform will run into the sand if the regime is not prepared to take more risks with its own survival. Only time will answer that question. But recent events have got North Korea into a position from which real change is a possibility. ends