There’s plenty to fear about the upcoming summit between US President Donald Trump and North Korean leader Kim Jung-un—and rightly so given the potential for calamity. But if there’s a successful summit meeting, there might be a surge of business development in what’s called the Hermit Kingdom.
Massive reconstruction of the North’s decrepit infrastructure and a wave of new factory work, as foreign employers come looking for cheap labor, could take place. A peace accord between the North and its two adversaries, South Korea and the US, might lay the groundwork for the opening of one of the most insular, repressive—and impoverished—nations in the world. Business opportunities for South Korean, and American, companies could be plentiful.
This is an optimistic scenario, certainly, and the recent easing of tensions between Kim and Trump may take a U-turn. The biggest sticking point, of course, is Washington’s insistence on the North’s giving up its nuclear weapons. Kim also seeks an end to economic sanctions imposed to punish him for his weapons program.
Ample precedent exists for the conversion of a brutal dictatorship into an economically growing hybrid that allows capitalism to exist under a still-dominant Communist government. Witness the metamorphosis of China since the 1980s and Vietnam over the past decade. “These positive examples show that change can happen quickly,” said Zachary Karabell, head of global strategies at asset manager Envestnet.
Kim needs the money. North Korea’s gross domestic product is a tiny fraction of the South’s $1.9 trillion. The North’s GDP per capita is a mere $1,342, by the estimate of the Bank of Korea, the South’s central bank. (North Korea doesn’t divulge many economic statistics.) Contrast that to the per-person figure for South Korea, $28,891, according to the International Monetary Fund. Even that is low compared to $38,839 in nearby Japan, the third-ranked economic power, not to mention the US’s $59,501.
Nevertheless, economic incentives alone don’t always guarantee a positive long-term outcome. A previous agreement in 1994, called the Agreed Framework, came undone amid suspicions that North Korea hadn’t really given up its nuclear weapons program.
Before that happened, the North benefited from a flowering of capitalist activity in the new Kaesong Industrial Zone, which the 1994 pact had fostered. There, 53,000 North Korean employees worked for 123 South Korean companies, making everything from electronics to textiles, for pay that averaged a mere $70 per month.
The international sanctions, in effect since 2016 due to the North’s testing nuclear bombs and missile delivery systems, led to the closure of Kaesong. And to the shuttering of a string of factories next to the border with China, where Chinese companies also had taken advantage of the cheap labor. Plus, the sanctions cut off the North from much-needed oil.
So let’s project the possible ramifications of a peace deal, assuming one should take root and flourish:
Many of these likely would be South Korean, since the South is a neighbor with whom Kim’s people share a common language and heritage. The stock market reflects such opportunities. Already, several South Korean stocks have seen “appreciation of 13% to 20% in the last few weeks,” noted Dave Haviland, managing partner at Beaumont Capital Management. Since early April, when the Trump-Kim summit was solidified, for instance, South Korea steelmaker Posco is up 18%.
US companies may well have a share of the bounty, Haviland said. Caterpillar’s construction equipment and General Electric’s power generation capability could be welcome. The same goes for Japan’s industrial giants like Mitsubishi—when Japan controlled Korea in the early 20th century, it build an extensive rail network, now crumbling in the North.
North Korea has a “very literate population and a lot of skilled workers,” said William Brown, a nonresident fellow at the Korea Economic Institute. In addition, North Korea has a large army, with troops estimated at 1 million, a force that could be tapped for civilian work if its military is downsized.
“Kaesong will be the model” for other industrial zones that would be open to outside employers, said Dean Kim, executive director at William O’Neil + Co. At Kaesong, a lot of South Korean equipment is lying dormant and could be pressed into service, he contended.
A faltering electrical grid and a poorly functioning rail system are the most salient candidates for a makeover in North Korea. Who would pay for such upgrades? South Korea for the most part.
The nearest parallel is Germany after the Iron Curtain fell in the early 1990s. Prosperous West Germany spent a fortune revamping ramshackle East Germany, which had suffered economically as part of the Soviet bloc. True, the two Germanys were politically reunited, something that wouldn’t be the case for the two Koreas.
But South Korea could find a way to make repair work in the North lucrative. “They could rebuild the rail system the Japanese created, privatize it, and the return would be huge,” the Korea Economic Institute’s Brown said.
What’s more, the North’s other neighbor could lend a powerful helping hand. China, the world’s second-largest economy, has enormous ambitions to expand its economic influence. Its $1 trillion One Belt, One Road initiative is aimed at building public works for trading partners to make them more receptive to Chinese goods. “China certainly would not want to be left out” of the North’s reconstruction, O’Neil’s Kim said.
Ditto Japan. “Mitsubishi built a lot of their infrastructure,” Brown said. “They could go back in.” He pointed to the Japanese-built steel mills at Chongjin, which “are in disarray because they can’t get the coke” to run their furnaces.
A More Capitalistic North Korean Economy
A big reason for China’s economic success is its embrace of capitalism, albeit one that has a great deal of government influence. The Democratic People’s Republic of Korea, as it is known, has tried to be a strict Marxist society, where people are seldom paid in cash. Instead, the necessities of life are provided, such as shelter and food. Or at least, that’s the theory.
Elements of a market-based system crept into the DPRK amid its 1994-98 famine. The famine was a consequence of the Soviet Union’s demise, which ended the North’s prodigious aid from Moscow. The regime’s rationing system broke down, its currency was mostly worthless, and US dollars and Chinese yuan rushed into the vacuum. If private ownership and other trappings of a free-market system could be introduced, Brown argued, the North’s economy would be buoyed.
All that said, overcoming the longstanding oppression and dysfunctional economy may be too tall an order, warned Stefan Selig, a former undersecretary of commerce for international trade.
“As a result,” said Selig, now managing partner at BridgePark Advisors, “the opportunity for companies to capitalize on a potential thawing of diplomatic relations and have any significant commercial opportunity in the DPRK in the near term is exceedingly limited.”