North Korea's economic dreams are, well ... dreams By Ju-min Park DANDONG, China (Reuters) - A lonely farmer and his ox-cart are the only sign of activity on a dusty island meant to be an industrial hub that will raise North Korea's wrecked economy. Despite talk of reform by the secretive state after the third generation of the Kim family dynasty took over nearly a year ago, about all that seems to be growing is the gap between the tiny population of rich and the already malnourished poor. And while the government is hoping to lure in foreign investment, more often the money, and tens of thousands of workers, are heading out of the impoverished North. The 14 square km (5.4 square mile) Hwanggumphyong island is one of four economic zones that were designed to be a magnet for Chinese capital and manufacturing. It lies on the Yalu river, across from the bustling Chinese border city of Dandong and one of the few areas where North Korea allows its citizens contact with the outside world. Chinese investors are showing little appetite for North Korea, whose economy is worse off than it was 20 years ago from a combination of sanctions over its nuclear weapons ambitions, famine and mismanagement. We Chinese would like to go to North Korea to invest because they have space for business. But policies are not stable, so we dare not invest there," said trader Zheng Qiwei from the Chinese coastal province of Zhejiang, far from North Korea. Zheng said an acquaintance of his, a businessman from China's Liaoning province that borders the North, had invested 240 million yuan ($38.48 million) to sell machinery, but was "driven out," an experience that is becoming common. This year, a multi-million dollar deal to refine North Korean iron ore by China's Xiyang Group soured as officials shook down the Chinese investor. Xiyang went public with its complaints, triggering a furious response from the North. Hwanggumphyong was launched with great fanfare by Jang Song-thaek, the uncle of North Korea's 20-something year old ruler, in 2011 with a pledge of tax breaks and repatriation of dividends, hoping to emulate a formula that has worked for economic zones the world over. But for the moment, it remains little more than a small, boggy island. Many analysts say the North Korean leadership is terrified that reforms could weaken its iron grip on the state and it has repeatedly baulked at any sweeping changes, ignoring pressure from China, its only real ally, to emerge from a self-imposed cocoon. China's leverage is limited and its fear that North Korea could collapse appears to make it willing, albeit begrudgingly, to support the government of leader Kim Jong-un. Any improvement in living standards in one of the world's poorest countries - U.N. data shows a third of children are malnourished - looks to be almost entirely focused on the capital, Pyongyang, home to the elite which keeps the Kim family in power. "Pyongyang is a different planet," said a 35 year-old Chinese trader who had lived in a small town in North Korea for more than 25 years and regularly visits there, most recently several months ago. North Korea restricts travel within the country and he said the authorities make it extremely difficult for any but the chosen to live in the capital. The rise in the standard of living in Pyongyang may also have something to do with the more open style of the young leader Kim, a far cry from the dour image his father cultivated. "Ladies from Pyongyang now dress differently, there are no more plain clothes and they are more animated," said an ethnic Korean Chinese whose family runs a Korean restaurant in Dandong. Some who cross the border have even given up wearing the mandatory lapel badge picturing Kim Il-sung, North Korea's founder and grandfather of the current ruler, a break with style that could land them in a labour camp in their homeland. The young Kim, who took power in North Korea following the death of his father last December, appears to have reinforced policies to bolster the fortunes of the capital, which is home to more than 3 million people, or about 12 percent of the population. It has been dubbed the "Republic of Pyongyang" by outsiders thanks to the lavish perks given to its residents in the form of theme parks, new apartments and renovations, in stark contrast to the rest of the country. A magazine on display in a North Korean restaurant in Shenyang in China showed the third Kim to rule the North touring a new theme park and luxury 40-storey apartments in Pyongyang. The plump Kim has been shown on North Korean media riding a roller-coaster and eating popcorn at a high-end restaurant in Pyongyang. His wife, Ri Sol-ju, has a penchant for Dior designer bags, a sign that conspicuous consumption among the elite is growing, said people who have had contact with the North. In the past, people couldn't feel the gap between the rich and the poor because of state control. But since that control is loosening up, the gap between those who have and don't have is widening," said the Chinese trader who sometimes sells clothes to North Koreans. For those left out, options appear to be narrowing. An estimated 60,000-70,000 North Koreans sell their labour outside the country, according to Seoul-based advocacy groups, working in factories in China, logging camps in Siberia and construction sites in the Middle East. Some choose a more direct route to escape the North's poverty where annual gross domestic product per capita is estimated to be just $1,800 on a purchasing power parity basis, based on an independent analysis. A middleman in Shenyang who says that he helps North Korean refugees to escape to prosperous South Korea has seen women choosing to be sold into marriage in China, or to work in brothels. "They want to flee home but there's no other way than to be sold in a form of marriage," said the Korean-speaking man who requested anonymity because of his safety. "One person is worth 10,000 yuan-12,000 yuan ($1,600-$1,900)," he said. One young North Korean woman, who has worked as a hostess in a Chinese bar for nearly 10 years, says she can never go home to North Korea and, given the lack of economic options in her home country, wouldn't want to. I like being here. I think I'll never leave," the woman surnamed Choi said as she tinkered with her South Korean-made Samsung Galaxy smartphone. ($1 = 6.2372 yuan) Reporting by Ju-min Park; Additional reporting by Jimmy Guan; Editing by David Chance and Jonathan Thatcher