N Korea looks to lost city for trade miracle

Richard Lloyd Parry reports on a ravaged economy seeking salvation

Rajin - Seen early in the morning, from the deck of a ship in the Sea of Japan, North Korea is a glum and beautiful country. It looks more like the west of Scotland than Asia, with small islands and promontories breaking up the grey sea, and bleak, low mountains with straggly trees along their ridges. An empty road and a railway line runalong the coast.

At the head of an inlet is a small city, with grey low-rise buildings. This is Rajin, the gateway to the grandly named Rajin-Sonbong Free Economic and Trade Zone (Fetz). It must be one of the most beautiful industrial areas in the world, for the simple reason that it has almost no functioning industry.

You can be forgiven if you have never heard of the Rajin-Sonbong Fetz. Forty-three years after the Korean war, which divided the Communist north of the country from the American- backed south, it is still one of the remotest corners of Asia's most isolated country. But a great deal depends on the North Korean government's ambitious schemes for the area.

If all goes to plan, it will bring one of the most remarkable economic turnarounds in history, and transform Rajin into a prosperous eyesore of cranes, factories and oil refineries. If it fails, there will be nothing left to stop the country's already drastic downward course from accelerating into a plummet - towards economic collapse, famine and political crisis.

Since the disintegration of the Communist bloc, North Koreahas found itself alone, the last of the old Stalinist dictatorships, surrounded by hostile or indifferent neighbours. Since 1991 the economy has shrunk by 30 per cent. Acute oil shortages have brought industry to a virtual standstill. Heavy floods have brought rural areas to the brink of starvation. With little to export, the country has almost no foreign exchange. This is the desperate situation which the free economic zone is intended to remedy.

The fact the zone exists at all is remarkable given the country's past dealings with the outside world. North Korea is one of the last of the world's outsider states, an international bogeyman with a history of verbal aggression and confrontation. But in the past year, two significant chinks have appeared in the country's monolithic facade.

The first came last summer when the government issued an unprecedented invitation to international relief agencies after devastating floods. The second came last weekend, when Rajin opened itself to 440 businessmen, academics, diplomats and journalists from 26 countries. The occasion was the Rajin-Sonbong Free Economic and Trade Zone International Investment and Business Forum, jointly sponsored by the North Korean government and the United Nations. In the Sonbong Hall of Culture, bankers, analysts and executives from international companies mixed with Workers Party of Korea cadres. On display were samples of North Korean produce - from high-speed drilling poles to aphrodisiac love granules.

On the map at least, Rajin-Sonbong appears to have great promise. It is at the heart of the Tumen River Economic Development Area, a UN-backed initiative between China, Russia and North Korea.

Glossy brochures boast of timber, coal, minerals, power, tax concessions and ice-free ports; a scale model at the forum showed a Rajin-Sonbong thick with skyscrapers and industrial plants. But there are huge obstacles to be overcome before the plastic and polystyrene become steel and concrete. The zone has no airport and its roads are rough. But the most formidable obstacle is politics. The survival of the Pyongyang government has depended almost entirely on insulating its people from the realities of the outside world. Travel is strictly controlled. Unlike China and Vietnam, where similar experiments have been conducted with relative success, the north has on its border rich, heavily armed South Korea, eager to swallow it up.

The few foreign businesses already established say that this fear of external contamination severely inhibits their activities. "Our local staff are assigned by the government", said one businessman, "and it's unclear who they are working for - us or them". Until these questions are sorted out, it remains doubtful whether Rajin-Sonbong represents North Korea's lifeline, or is just a lost cause.