By David Chance and Christine Kim
SEOUL (Reuters) - Smarting from a failed rocket launch, North Korea's leader Kim Jong-un has little choice but to stick to his father's playbook of milking an impoverished country to develop weapons and blackmail the international community for aid and recognition.
Far from fearing a coup or instability after Friday's public fiasco, the third of his line to rule North Korea will lead celebrations on Sunday to mark the centenary of the birth of his grandfather, the founder of the world's only Stalinist monarchy, "Eternal President" Kim Il-sung.
The state that Kim inherited in December after the death of his father Kim Jong-il boasts a 1.2 million-strong military, wants to possess a nuclear weapon and to develop the ability to hit the United States with it - the aim, critics say, of the failed rocket launch.
Behind those ambitions are 23 million people, many malnourished, in an economy whose output is worth just $40 billion annually in purchasing power parity terms, according to the U.S. Central Intelligence Agency, compared with South Korea's $1.5 trillion economy.
The puny size of the economy means development is not the answer, tying Kim into the "military first" policies of his late father Kim Jong-il who oversaw the development of the state's nuclear and missile ambitions.
"For Kim Jong-un, opening North Korea means the end of a system that his grandfather and father fostered," said Virginie Grzelczyk, a North Korea expert at Nottingham Trent University in Britain.
"Kim Jong-un is unlikely to be losing power over the launch, as the elite and the military need his legitimizing and mythical presence in order to pacify the North Korean population."
The small scale of the economy is matched by North Korea's limited diplomatic clout. It has few friends other than China, whose strategic interest is in keeping a buffer between it and South Korea which has U.S. military bases.
Even China sounded increasingly exasperated in the run-up to Friday's rocket launch as Pyongyang ignored its pleas for restraint, despite aid pumped in by Beijing, and its diplomatic protection at bodies like the United Nations.
Without real weight in the international arena, Pyongyang is forced to rely on periodic rocket launches, nuclear tests and attacks on South Korea, such as the one in 2010 when it shelled an island, to remind the world of its existence, analysts say.
That is likely to mean sticking to the same script as in 2009, when North Korea followed a failed attempt to put a satellite into orbit with a nuclear test.
Intelligence satellite images showing a tunnel being dug at the site of two previous tests imply that it either wishes to remind the world of the possibility, so as to prompt a return to aid for disarmament talks, or is actually preparing for one.
"Internationally, now they have to do a nuclear test, preferably using uranium, just in order to show that they should be taken seriously," said Andre Lankov, a North Korea expert at South Korea's Kookmin University.
SOME LIES ARE TOO BIG EVEN FOR PYONGYANG
Pyongyang did depart from its previous practise when it publicly admitted on state television that the Unha-3 rocket had failed to deliver its weather satellite into orbit in time for Kim Il-sung's birthday.
A 2009 launch that the international community said had failed was hailed as a success by North Korea, where the only news available to its people is from the state.
But to read into the announcement signs of new openness is to overstate the issue, most commentators on North Korea say. The presence of so many foreign journalists and the spread of cellphones, of which there are now more than a million, made it too risky.
"For all its habitual lying, the propaganda apparatus shies away from lies it can too easily be caught out on," said Brian Myers, a North Korea expert at Dongseo University in South Korea.
In parallel with the short announcement on the rocket's failure, North Korea continued to churn out reams of propaganda aimed at bolstering the legitimacy of Kim Jong-un and his claim to power based on his bloodline.
"The idea and feats Kim Il-sung performed in the 20th century have been fully carried forward and his glorious history continues uninterruptedly along with prospering Songun (military-first) Korea," state news agency KCNA reported on Friday.
The anniversary of Kim Il-sung's birth was supposed to usher in a "strong and prosperous" nation.
North Korea claimed that industrial output grew 2 percent last year, but according to United Nations data its economy is in fact the same size as it was 20 years ago after being devastated by a famine in the 1990s.
It appears to fund itself through exports of its mineral wealth to China, sales of weapons technology to states such as Syria and Iran as well as a variety of criminal enterprises such as narcotics and faking $100 bills.
Last June it was caught smuggling weapons to Myanmar, an income stream that has been cut off with that country's opening.
Periodically, it confiscates the wealth of its own citizens as it did in a 2009 revaluation of its currency and a crackdown on hoarding of foreign currency, something it may need to do more of as financial sanctions bite and old allies, like Myanmar, halt their purchases.
A defector, surnamed Ryu, who entered South Korea in 2011 and is now living in Seoul, said there was simply no choice but to comply with the forced confiscation.
"There were so many who were beaten," said Ryu, aged in his mid-40s, who declined to give his full name for fear of reprisals.
"People were at each other's throats; there was no telling who would rat on you for having a secret stash of foreign cash."
Chon Hyun-joon, an expert on North Korea at the state-run Korea Institute for National Unification in South Korea, estimates that as much as $2 billion to $3 billion could have been raised, although other experts say the figure was lower.
Whatever the state of the economy, missile and nuclear weapons development will take priority for North Korea, experts say. Figures published in South Korean media suggest that $3 billion has been spent on the nuclear and missile programme over the years.
"Even Kim Jong-il admitted that the first rocket launch required millions of dollars," said Kim Yeon-su, a professor at the National Defense University in Seoul.
"He said at the time the cost would be paid even at the expense of the North Korean people."
(Additional reporting by Ju-min Park and Jeremy Laurence; Editing by Raju Gopalakrishnan and Daniel Magnowski)