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KCNA via European Pressphoto Agency
Kim Jong Eun and North Korean military officers, in a photo released on Jan. 30, 2012 by the North’s state news agency.

One of the biggest challenges Pyongyang’s new and untested young leader Kim Jong Eun faces this year is how to turn the “paradise on earth,” where a number of people are starving, into a strong and prosperous nation–a goal the socialist country has long vowed to achieve in 2012.

The answer could rather be easy. Follow the footsteps of China, its closest ally, and open up its economy to the world.

This doesn’t necessarily mean that the North has to fully give up its state control of the economy or be absorbed into the capitalist South.

If Pyongyang embraces a gradualist approach to liberalization, as China did, it could narrow the economic gap with Seoul dramatically, say, to a ratio of 1-to-3, in 40 years, says Bank of America Merrill Lynch economist Lee Jae-woo in a research note.

“If and when North Korea integrates fully into the global trade system – like China since 1992 or after 2001 – it would achieve “miracle” growth episodes, which several Asian countries had in the past,” he said.

The simplest mode of integration would be via trade channels, to China, South Korea, and the rest of the world.

“With this alone, a very large growth dividend could be reaped by North Korea, with the experience of China as the guiding example,” Mr. Lee notes.

Citing data from the Bank of Korea and the U.N., he estimates the difference in GDP between the South and the North could shrink from 40 times now to 3.2 times by 2050, and the gap in per-capita income could shrink from 19 times to 1.8 times if Pyongyang adopted a market economy and it took off.

Currently, North Korea is testing a market economy in only limited areas with China near their borders, and with South Korea through a joint industrial complex project.

Would Seoul also benefit from the opening-up of the North?

“Significantly,” says Mr. Lee.

First, there will be a “peace dividend.”

Eased inter-Korea military confrontation would not only cut military expenditures but also remove the “Korea discount,” the idea among professional investors that South Korean assets need to be devalued slightly because of risk posed by North Korea.

Secondly, any close economic integration between the Koreas–with or without political integration–would sufficiently supply the South’s workforce with the North’s cheap labor.

If an economic integration between the two Koreas develops into a political one (this Pyongyang might fear), that would significantly ease the fiscal cost of unification that will surely be borne mostly by the South, Mr. Lee says.

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