ANALYSIS-North Korea's prosperity push could raise poverty

SEOUL, May 12 (Reuters) - North Korea's plan to mark the centenary of the birth of its founder and eternal president, Kim Il-sung, with major rebuilding projects will likely drag its ravaged economy deeper into poverty.

But that in turn may eventually force the hermit state to be more cooperative with the outside world, which has been trying with little success to halt Pyongyang's efforts to build nuclear weapons in return for aid.

The programme to forge a "great and prosperous nation" by 2012 was a central part of the mandate for Kim Jong-il, son of the founding president, when parliament extended his official leadership in March for five years.

The goals for the broken economy are lofty. The North wants to revamp its railways, coal mines, steelworks and electrical supply, end hunger and strengthen its already large military.

"The Korean people will strikingly demonstrate their heroic stamina as socialist workers ... and thus fling open the gate to a thriving nation in 2012," North Korean state media said in a report to mark May Day.

Foreign residents in Pyongyang say streets are being spruced up and buildings refurbished to mark the 100th birthday of Kim Il-sung, who died in 1994 but is still considered president for eternity of Asia's only communist dynasty.

"The 2012 project fits into these themes: glorification of the past, and if past history is any guide, the wasting of huge sums on useless monumental edifices," Marcus Noland, an expert on the North's economy with the U.S.-based Peterson Institute for International Economics, wrote in an email.

"The problem for North Korea will be financing this initiative."

North Korea's centrally planned economy has shrunk significantly since the rise to power in 1994 of Kim Jong-il, whose government quickly stepped away from early attempts at economic reform which might have threatened its grip on power.

Money from overseas has been drying up as the prickly North has backed away from an international disarmament-for-aid deal and the impact of U.N. sanctions, tightened after its April 5 test launch of what many saw as a disguised long-range missile.

Pyongyang's threat in late April to hold its second nuclear test could also anger its biggest trade partner China, without whose help the $20-billion-a-year economy would sink even further. [ID:nSEO360090]

China did not use its Security Council veto to protect Pyongyang from U.N. sanctions after its first nuclear test in 2006 and analysts say it is certain to be angered by another. [ID:nPEK162474]

"Clearly, North Korea is not going to find the money for the 2012 project overseas. This means that they will be forced to divert resources at home," said a South Korean official familiar with the North.


Those likely to bear the brunt of this shift in internal spending will be the most impoverished in the already destitute state, analysts said.

They will be forced to mobilise for government projects, leaving their local and mostly rural economies to stagnate, which means less food in a country that for years has been unable to produce enough grain to feed its 23 million people. [ID:nSEO369467]

In the late 1990s, North Korea was forced to open its sealed borders to foreign aid groups to help it cope with widespread famine.

But cash-strapped North Korea will not let its sabre rattling get quite so out of hand as to completely sever its few sources of foreign currency, said Cho Myung-chul, an academic from the North who came to South Korea about 15 years ago.

"In about a year or two when the fallout ... settles down, the United States could well become another important source of money," said Cho, now an analyst with the South's Korea Institute for International Economic Policy.

Analysts expect the North, which has used its military threat for years to squeeze concessions out of global powers, to keep up its provocations in the next few months in order to gain leverage with U.S. President Barack Obama early in his term.

It may, though, eventually be forced to relent to secure a flow of much needed foreign aid to support its economy and perhaps the goals of the 2012 project, they said.

Foreign aid and a strong domestic push, however, will not be nearly enough to undo decades of economic mismanagement, said Jeong Hyung-gon, an expert on the North's economy.

"Under the current system, the only way the North will become a great nation by 2012 is in their dreams," Jeong said. (Additional reporting by Kim Junghyun, editing by Jonathan Thatcher and Dean Yates)