Via Capital Economics, an interesting look at North Korea:

• Tomorrow’s historic summit between Donald Trump and Kim Jong Un in Singapore has raised the (distant) prospect of international sanctions against North Korea being lifted, a move that one day could even pave the way for the country’s integration into the global economy. While North Korea’s natural resources, geographical location and low labour costs mean its economy has plenty of potential, Kim Jong Un’s hopes of North Korea emulating the economic achievements of Vietnam are slim.

• There are many obstacles that will need to be overcome if a deal between the US and North Korea is to be agreed, not least a lack of trust between the two sides. There have been a number of occasions over the past two decades where North Korea has been able to pocket concessions from the US and South Korea while at the same time secretly carrying on with the development of its nuclear weapons programme. Even if Kim isn’t trying to play the same trick again, North Korea will be wary of dismantling its nuclear programme without the US agreeing to withdraw its troops from the South, which Trump is unlikely to agree to.

• Nevertheless, the improvement in ties between the US and North Korea has at least made the possibility of a deal, which sees economic sanctions on North Korea being lifted, seem a little less far-fetched.

• Kim himself has cited Vietnam as a potential model for North Korea to follow. The South East Asian country’s reform process began in 1986 in a series of moves which saw the ruling communist party abandon collectivism and embark on their doi moi market-based reforms. In the decade that followed GDP grew by an average of 7% y/y, compared with just 4% in the preceding decade. China’s growth showed a similar improvement after it started to open up its economy in 1978, with growth averaging 10% y/y in the decade that followed, compared with 7% in the prior decade.

• North Korea’s economy has grown by an average of less than 1% over the past decade according to estimates from South Korea’s central bank, but clearly has the potential to grow much quicker.

• There are a number of factors that could underpin an economic take-off in North Korea. For a start, it is well-endowed with natural resources which remain largely untapped, including zinc, magnesite, iron and copper as well as rare-earth metals (which are used to produce electronics such as smartphones).

• North’s Korea geographical location is another major advantage. It shares borders with China, Russia and South Korea, three economies that collectively account for 23% of the global economy. Japan, the world’s third largest economy, is also in its neighbourhood. Its low labour costs are also selling points, particularly for South Korean manufacturing companies that have been relocating their factories overseas, most notably to Vietnam, in search of lower costs.

• However, any opening up is likely to be very slow and gradual. For a start, any lifting of economic sanctions is likely to be done only incrementally to match the pace of the dismantlement (and verification) of North Korea’s nuclear weapons.

• And even if Kim is committed to denuclearisation, there are big doubts about his willingness to open up his country to outside investment. One reason that he sees Vietnam (and China) as a model is that their ruling parties have achieved economic development while maintaining a firm grip on power. But there are examples of other countries in Asia, most notably Korea and Taiwan, where development and the opening of the economy to the outside world have played an important role behind the emergence of democratic movements.

• Even if the economy is opened up, foreign investors are likely to be very cautious. The experiences of Korean companies that invested in the Mount Kumgang tourist region and the Kaesong industrial complex, which saw their assets frozen after bilateral relations soured, or that of Chinese mining company Xiyang, which saw its joint venture to build a mine in North Korea terminated less than a year after production began, certainly won’t inspire much confidence. The problems foreign companies are experiencing in Myanmar, another country that has recently come in from the cold, also serve as a cautionary tale.