NIKKEI ASIAN REVIEW
24-6-18

Kim courts China but finds his economic muse in Vietnam

North Korea sees Hanoi model as way to win US support and South Korean investment

TORU TAKAHASHI, Nikkei Asia editor

TOKYO -- North Korean leader Kim Jong Un's flurry of diplomacy continued this week with his third visit to China in as many months. But as Kim briefed Chinese leader Xi Jinping on his historic summit with U.S. President Donald Trump and toured Beijing, analysts could not help but hear echoes of a remark he made earlier this year.

Sitting on a bench with South Korean President Moon Jae-in in late April, Kim had said Pyongyang should follow the example of Vietnam's economic reforms.

In his meeting with Trump on June 12, Kim extracted a U.S. security guarantee without committing to a detailed scheduled for giving up nuclear weapons. North Korea has declared it intends to abandon its "parallel policy" of economic and nuclear development in favor of a focus on growth, and it is expected to seek sanctions relief and other international help using denuclearization as bait.

Chinese patronage is crucial for making this work. Kim's visit to Beijing included a stop at an agricultural research facility -- a move analysts saw as an acknowledgment of the need to build up North Korea's food supply and farm sector, which are generally exempted from sanctions.

Still, recalling that comment to Moon, experts wonder whether North Korea will continue to rely on China for development guidance. The remark, which was quoted by South Korea's Maeil Business Newspaper, raises a couple of "why" questions.

The first is, why follow the Vietnamese model?

Given the frequency of Kim's meetings with Xi, plus China's position as the world's No. 2 economy and North Korea's guardian, it would seem natural for Pyongyang to adopt the Chinese development model.

After all, even the "Doi Moi" economic reforms Vietnam launched in 1986 were copied from China's "reform and opening-up policy" adopted in 1978. The basic idea was to achieve economic growth through the introduction of foreign capital and promotion of exports, while maintaining the Communist Party's grip on power.

China's growth has outpaced Vietnam's. The former's per capita gross domestic product came to $8,123 in 2016, a 29-fold increase over the previous three decades, while the latter's grew fivefold to $2,171, according to the World Bank.

A closer analysis, though, reveals other major differences that might explain Kim's preference for Vietnam's path.

"China is going too far ahead," said Junya Ishii, a senior analyst at Sumitomo Corporation Global Research, explaining why Kim sees Vietnam as the country to emulate.

Vietnam has gone its own way in actively seeking free trade agreements. Twelve have already come into force, according to the Asian Development Bank. Though that number falls short of the 17 for China -- which joined the World Trade Organization six years ahead of Vietnam -- Hanoi, unlike Beijing, does not hesitate to negotiate with advanced countries that demand extensive economic liberalization.

Vietnam's FTA with Japan took effect in 2009. It is also a member of the Trans-Pacific Partnership, initially led by the U.S. before Trump pulled out, and it is promoting talks with the European Union.

Another key difference is Vietnam's pursuit of "balanced development."

Population is a factor. China is home to almost 1.4 billion people, versus fewer than 100 million in Vietnam. The result is a huge gap in the availability of inexpensive labor for export industries, not to mention very different prospects for domestic consumption.

Deng Xiaoping, the paramount leader who spearheaded China's economic reforms, famously issued an instruction to "let some people get rich first." Based on this, the government focused on developing Shanghai, Shenzhen and other coastal cities with easy access to overseas markets, setting up special economic zones in these areas.

Vietnam, which still deals with the legacy of its past north-south divide, cannot simply follow China's approach. While Ho Chi Minh City in the south tends to attract foreign capital thanks to its better infrastructure, the government has made a point of luring electronics, steel and petrochemical companies to the center of the country and the north, where Hanoi is situated.

The opening in May of the Lach Huyen International Gateway Port, the first deep-water port in northern Vietnam, is part of the diversification strategy. The result of the strategy is considerably less economic disparity, compared with China.

China's Gini coefficient -- a measure of income inequality, with a higher number indicating greater disparity -- came to 0.422 in a World Bank survey of 158 economies. That gave China the 49th-highest coefficient.

Vietnam's was 0.348, putting it in 101st place.

Creating industrial hubs in specific locations, as China has done, spurs growth but tends to widen the divide between haves and have-nots. Vietnam has forgone the benefits of such hubs and opted for stable growth instead.

North Korea, for its part, has an even smaller population of 25 million. The Kim regime, despite Trump's security assurances, could lose everything if uneven development stokes popular unrest. So Vietnam's preference for bold international moves and meticulous management of domestic issues may appeal to Kim.

Yet, there is another question: Why did Kim, when he met with Moon, feel the need to declare North Korea's interest in the Vietnamese model?

A veteran reporter for a major South Korean newspaper offered three reasons: North Korea wants to keep its distance from China; it desires close ties with the U.S.; and it seeks investment from South Korean companies.

Regarding the first reason, the reporter said the distrust that developed between China and North Korea in recent years remains despite the successive summits. North Korea is afraid of being swallowed by China economically.

Pyongyang may be hoping that if it shows it is not comfortable leaning on China, the U.S. will step in with support. Here, too, the Vietnamese example is instructive. 

Although Vietnam and the U.S. fought a war, the relationship has rapidly warmed up since they normalized ties in 1995. For 15 years running, through 2016, the U.S. was the biggest export market for Vietnamese textiles, electronics and other goods.

Due in part to territorial friction in the South China Sea, Vietnam has deepened its military relationship with the U.S., and has even begun to procure weapons from its former enemy.

As for the business angle, Kim would surely like to see South Korean companies invest in the North like they have in Vietnam.

South Korea, which backed the U.S. in the Vietnam War, long stayed aloof from the Southeast Asian country. No longer. Samsung Electronics has the capacity to produce 240 million mobile phones a year in Vietnam and accounts for a quarter of the country's total export value. 

LG Electronics, Lotte Group and other South Korean businesses have invested in Vietnam as well, making South Korea the biggest source of foreign direct investment on a cumulative basis since 2014, surpassing Japan.

During his meeting with Moon, Kim may have referred to Vietnam to plant a seed for attracting South Korean corporate investment.

There are likely to be many more twists and turns on the road to denuclearizing North Korea. But Kim has shown himself to be a shrewd negotiator, and his remark about Vietnam offers hints at how he will seek to maximize economic concessions.