North Korea need not look far for lessons on how to modernize its dilapidated economy. Neighbors China and South Korea have both transformed from agrarian backwaters into global manufacturing powerhouses in the space of several decades. Yet Kim Jong Un’s regime is also seeking counsel from another country thousands of kilometers away, one that also shares an acrimonious history with the U.S. – Vietnam.
Kim, who’s reported to have discussed Vietnam-style reform during a meeting with his South Korean counterpart, will get to see the Southeast Asian nation up close this month, when he meets with the U.S President Donald Trump in the capital Hanoi.
1. Why the interest in Vietnam?
It offers a road map not just for upgrading an economy but also recuperating after years of isolation and, crucially, keeping a grip on power. A decade or so after the Vietnam War ended in 1975, the ruling Communist Party introduced the so-called “doi moi” reforms with a view to nurturing a “socialist-oriented market economy” and lifting its people out of poverty. It encouraged foreign investment, reduced subsidies for state-owned enterprises and allowed farmers to sell surplus crops. It’s come a long way. Vietnam now has more than a dozen free trade agreements and an economy that’s expanded at an average clip of 6.6 percent since 2000 — boosting annual incomes to almost $2,600 from about $400. While the Vietnamese government brooks no dissent, it has toned down aspects of an authoritarian regime — from nationalism and ideology to police powers — partly to allow the economy to flourish.
Diverging Paths
Sanctions have hit real GDP growth in North Korea
Sources: Bloomberg and Bank of Korea estimates, based on data from related organizations such as the intelligence agency and unification ministry. Note: Shows annual change in real GDP for both economies for 1990, 1995, 2000 and every year from 2006-2017. Data for 2018 only for Vietnam.
2. Are there any other similarities?
Both countries fought wars against the U.S. Vietnam began a rapprochement with its former enemy by helping to resolve prisoner-of-war and missing-in-action cases, a path that Kim has started to tread. When President Bill Clinton lifted a U.S. trade embargo against Vietnam in 1994, that began a process of normalizing relations that North Korea may be able to follow. Modern-day Vietnam and North Korea are part of a dwindling group in the global community that retain communist elements. Historically, they both fell under China’s sphere of influence and today need to counterbalance this by fostering relations with other powers. Both countries are located in regions where huge trade opportunities co-exist alongside contested land and sea borders. Vietnam was cut in two during the Cold War, as the two Koreas still are now. North Korea’s current position has parallels with Vietnam’s in the 1980s, with its economy in disarray and relations with much of the world in tatters.
3. What are the differences?
North Korea is a dynastic dictatorship dominated by its leader while Vietnam is a one-party state where power is exercised by a small collective. In contrast to Kim’s diplomatic brinkmanship, Vietnam has sought out friends and proactively integrated with the global economy. North Korea has leaned hard on China for support, while Vietnam has maintained some economic independence from Asia’s superpower. About 90 percent of North Korea’s exports go to China, which is also the country’s key supplier of energy and food imports. While China is Vietnam’s biggest trading partner, South Korea, Japan and the U.S. also loom large. Vietnam’s climate and landscape support a thriving agricultural industry, whereas North Korea’s most valuable physical assets are under the ground — a stash of minerals like coal and iron ore estimated to be worth $6 trillion or more — and in its fisheries. Vietnam’s population is about four times the size of North Korea’s and its land mass about 2 1/2 times larger. Vietnam’s economic ascendance was built on an efficient but low-paid labor force ramping up exports during a period of rapid expansion of global trade. Any opening up of North Korea may coincide with global commerce turning more protectionist.
4. How bad is North Korea’s economy?
Very, and it’s getting worse. South Korea’s central bank estimates the country’s gross domestic product contracted 3.5 percent in 2017 — the biggest drop in two decades. And that was before tighter international sanctions kicked in last year, with China joining the world community in tightening the screws on Kim’s regime. North Korea’s economy was actually stronger than the South’s in many areas through the 1970s, but has rapidly fallen behind since then, and the country has suffered several devastating famines. The average North Korean income is estimated to be just under $1,300 — less than a 20th of South Korea’s. Under Kim, markets and private businesses have been allowed to expand to fill the void left by failing state-controlled enterprises. More optimistic observers take heart in the roll-back of centralized decision-making, the emergence of entrepreneurs and a budding services sector.
5. Why not just copy South Korea or China?
There’s little doubt North Korea will draw on the experience of its closest neighbors. Kim favors China’s early strategy of creating special economic zones — designated areas to promote trade that have different laws than the rest of the country such as tax breaks. He’s boosted the number of such zones more than five-fold to 27 since succeeding his father as leader in 2011. As for South Korea, a high-level delegation from the chaebol — the family-run conglomerates that drove the country’s economic rise — visited Pyongyang in 2018 to meet senior officials. On the other hand, Kim’s fiercely independent regime will be wary of increasing its already strong reliance on China or ending up beholden to its long-time ideological foe South Korea, whose economy is enmeshed within a democratic system.
Either side of the giant — Vietnam and North Korea @ Bloomberg
6. What lessons could Kim learn from Vietnam?
How to integrate overseas investment and expertise. North Korea’s regime will loosen the reins only carefully and Vietnam offers a model of welcoming multinationals that has brought great rewards without ceding political or economic control. It also learned how to draw on the commercial experience of former enemies in the country’s south — something which could be even more valuable in North Korea’s case. South Korean tech giant Samsung Electronics Co. has brought more than 100,000 jobs to Vietnam and accounts for a rising share of its exports. Vietnam has moved up the value chain from low-end manufacturing to high-tech production with the help of global players like Samsung, with the country climbing the World Bank’s Ease of Doing Business gauge and making it into Bloomberg’s Innovation Index. Efforts by the government to open up helped attract $22 billion in grants from the World Bank as of 2016. Vietnam also is a lesson in healing wounds. According to a Pew Research poll in 2017, 84 percent of Vietnamese surveyed now have a “favorable” attitude to the U.S.; only Americans, at 85 percent, have a better opinion of their country. This month, Vietnam sent its foreign minister to North Korea with the message that it stands ready to share its experience.
The Reference Shelf
- A QuickTake on South Korea’s “three belts” transport plan for the entire peninsula.
- An analysis from 38 North of Vietnam’s lessons for North Korea.
- Charts that show how the two Korean economies have grown apart.
- A look at what we do and don’t know about the North’s economy.
- BusinessWeek cover story on North Korea’s business opportunities.
— By Jungah Lee , John Boudreau , Nguyen Dieu Tu Uyen , and Michelle Jamrisko - With assistance by Henry Hoenig @ This article was first published on Bloomberg.com