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N Korea at crossroads

Kim struggles to revive North Korean economy battered by sanctions

Life in the cities better than on hardscrabble farms, but country still reeling

SEOUL/BEIJING -- In the two and a half months since his historic summit with U.S. President Donald Trump, North Korean leader Kim Jong Un has temporarily shelved denuclearization talks in favor of inspecting farms and factories to underscore his focus on improving an economy hamstrung by years of sanctions.

On Aug. 21, the official Korean Central News Agency reported on a visit by Kim to the Myohyangsan Medical Appliances Factory, where he berated management, accusing them of "hibernating" for years.

The plant was one of 30 or so sites the North Korean leader has visited since late June, accompanied by senior military officers. He completed one jaunt around the country and has now embarked on another to revisit particularly important locations. Government-run media have published photos of Kim drenched by rain and dripping with sweat in the oppressive summer heat.

With the odds of the U.S. springing a military attack markedly lower since the summit, Kim has shifted efforts to strengthening the economy -- a move that comes against a backdrop of a yearslong slump.

The United Nations estimated North Korea's 2016 gross domestic product at $16.79 billion, slightly smaller than Cambodia's and a mere 0.1% that of the U.S. However, the North's economy shrank 3.5% in real terms last year amid a decline in mining and manufacturing output, according to South Korea's central bank.

If Kim does not expand the economy and improve living standards, the young leader may find it tough to hold on to power. The unusual speed of the tour hints at his growing concern over the lack of progress since the summit.

Kim has adopted more market-oriented policies since coming to power in 2012. The "our-style" economic management approach introduced in 2014 significantly relaxed state control of businesses, putting more focus on decisions by those closer to operations.

These changes have made it easier for the country's emerging upper class to borrow facilities and land from state-run enterprises, spurring a surge in "entrepreneurs." Taxis have proliferated in Pyongyang, which had around 1,500 cabs in 2016 and now has 2,000 by some estimates.

This gradual "marketization" has made life better for many. A smartphone food delivery app has become popular in Pyongyang this summer, delivering cold noodles to residents reluctant to go out in the summer heat, according to the website Daily NK.

Affluent North Koreans are pouring money into real estate development and investment. Apartments in downtown Pyongyang that cost $50,000 in 2005 now go for $100,000 to $200,000, according to South Korea's Korea JoongAng Daily. Apartment prices are also rising in smaller cities, such as Sinuiju, which sits on the border with China.

Yang Moon-soo, a professor at the University of North Korean Studies in Seoul, sees many similarities with the early days of China's reform and period of opening up.

The government will tolerate the development of a more market-driven economy as long as it does not pose a threat, promoting growth through reinvestment of domestic capital, said Andrei Lankov, a professor at South Korea's Kookmin University.

But the country's economic development has benefitted few outside urban areas, where higher-ups in the ruling Workers' Party reside. In rural areas that have long suffered from food shortages, many residents eke out a hand-to-mouth existence. Farm and irrigation equipment is deteriorating, and corruption among local party officials is widespread.

The recent hot, dry summers likely have made farm life even harder. The U.N.'s Food and Agriculture Organization estimates that North Korea harvested 1.4 million tons of rice last year, 300,000 tons less than in 2016.

That half the facilities Kim has inspected since late June are farms or fisheries suggests increasing alarm. The North Korean leader likely wants to avoid becoming a target of growing anger at corruption and inequality.

On top of this, market-driven reforms can do only so much to fuel growth while sanctions still hinder foreign investment.

This summer, a massive shopping center opened in Rason on the banks of the Tumen River, a stone's throw away from a customs checkpoint on the border with China. The mall markets North Korean products to a growing number of Chinese tourists, a source familiar with the project said.

A shopping center that opened recently in North Korea's Ryanggang Province, near the Chinese border, markets North Korean goods to Chinese tourists.

But the mall has not brought in as much money as hoped. U.N. sanctions forbid visitors from bringing seafood -- the most popular offering -- back across the border.

Pyongyang has repeatedly urged Beijing to help ease the sanctions. The Chinese side reportedly responded that it will do so after the North moves ahead with denuclearization efforts. Chinese President Xi Jinping told Kim when the two met in June that he will support North Korea's economic development, but made no public mention of sanctions.

Since China comprises about 90% of North Korean trade, the country's economy largely hinges on Beijing's policies. China has made its support for its neighbor clear, but it cannot lobby openly against the sanctions as a permanent member of the U.N. Security Council for fear of giving the U.S. ammunition in the ongoing trade war. Beijing likely also believes that easing sanctions too soon would give North Korea little incentive to denuclearize.

Illicit trade in embargoed goods remains as brisk as ever along the border. North Korean fishery products are on the market despite the sanctions, and  vessels have reportedly gotten oil to the North via ship-to-ship transfers at sea. But this tacit acceptance of smuggling is a far cry from real economic cooperation.

Chinese government data shows a 90% plunge on the year in imports from North Korea. Even after accounting for smuggling, it seems clear that the thaw in relations with Beijing has not brought the economic relief that Pyongyang had anticipated.

The sanctions have also cut off vital sources of foreign currency, such as exports of seafood and mining products. This has dealt the North a heavy blow, as shown by Kim's talk at one inspection of a "showdown against enemy forces" that seek to "suffocate" the North Korean people.

With sanctions unlikely to be relaxed anytime soon, tourism -- which the U.N. measures do not cover -- is one of Pyongyang's few options for getting foreign currency quickly. The inclusion of tourist attractions in Kim's inspection tour signals that his regime is keen to take advantage of this.

Kim visited a coastal resort complex under construction in the eastern city of Wonsan, according to an Aug. 17 report by the Korean Central News Agency. During the inspection -- the first in three months -- Kim "called upon everybody to build the sea park without an equal in the world" and "present it to the people as a gift on the occasion of Oct. 10 next year," KCNA said.

North Korea has publicly and privately lobbied Russia and South Korea for cooperation as well. Radio Free Asia, an outlet funded by the U.S. government, recently reported that Russia has ramped up exports of liquefied petroleum gas to the North as China scales back its supply of petroleum products. The LPG reportedly is sent by train and stored in tanks near the Tumen River before being distributed to households.

South Korea is interested in reopening the North's Rason special economic zone. A delegation from President Moon Jae-in's office traveled there in July by rail from Vladivostok to discuss economic development led by Russia and South Korea. In an Aug. 15 speech to mark the anniversary of liberation from Japanese colonial rule, Moon spoke passionately about his vision for a rail network linking the three countries.

Even as the U.S. looks to maintain economic pressure until the North completely eliminates its nuclear program, Kim is likely to meet with Xi and Moon next month. How the North Korean leader approaches the stalled denuclearization talks will offer a clue as to how serious he is about shoring up the economy, as well as how urgent a task he considers it to be.

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