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Where are North Korea's
Shenzhens?
By Jamie Miyazaki
Part 1: Adam Smith comes to North Korea
Part 2: North Korea: Anything left to
revive?
In Kim Jong-il's quest for the fast
track to economic regeneration, various paths have been
pursued from the criminal (drug trafficking) to the
surreal (ostrich farming) to more conventional options.
The establishment of foreign trade zones (FTZs) and
efforts to attract foreign direct investment (FDI) fall
into the latter and constitute one of Kim's more astute
economic policy choices.
Taking the cue from
China's combination of special economic zones (SEZs) and
use of FDI to transform itself from agrarian backwater
to economic powerhouse, North Korea recently has
established a number of FTZs and enacted FDI-friendly
legislation, although the first law permitting joint
ventures was actually passed back in 1984.
Unfortunately, Pyongyang's history of defaulting
on Western creditors back in the 1970s meant there
wasn't a huge number of takers. Chongryon, the North
Korean Japanese residents' association, ended up
accounting for the overwhelming bulk of joint ventures.
Even with this influx of friendly capital, many ventures
failed because of a mix of poor management and
Pyongyang's complacent perception that this cash flow
was not an investment per se but a repatriation of
patriotic funds.
Further moves to attract FDI
and boost the slowing economy after the severing of
Soviet credit lines resulted in the establishment of the
Rajin-Sonbong FTZ in 1991. Sitting at the confluence of
the Russian-Chinese-North Korean borders, Rajin-Sonbong
was ideally placed to reap the benefits of the United
Nations' much-touted Tumen River Area Development
Program. North Korea, hoping to attract about US$7
billion in investment, envisaged Rajin-Sonbong as a
major regional container port, tourist destination and
hub for various export industries.
Tax breaks
and investor-friendly pieces of legislation were
offered, and after the diplomatic thaw that followed
1994's Agreed Framework on nuclear proliferation, a
number of multinationals expressed tentative interest in
opportunities in Rajin-Sonbong. A handful of braver
firms even set up shop. Rajin-Sonbong was followed by
the Sinuiju FTZ, located on the northwesterly Chinese
border, and Kaesong just over the Demilitarized Zone
(DMZ) from South Korea. Another FTZ has been touted on
North Korea's east coast, aimed at the Japanese market.
This suggested a focused policy of four separate FTZs,
each marketed at the region's four main economies:
Russia, China, South Korea and Japan.
Unfortunately, none has borne much economic
fruit. East-coast FTZ plans were shelved after the
uproar in Japan when Kim confessed to his country's
kidnapping antics involving Japanese citizens.
Rajin-Sonbong FTZ has been a non-starter for a host of
reasons. The UN-backed Tumen River Area Development
Program required a degree of regional cooperation that
would challenge even the most die-hard integrationist
bureaucrat in Brussels, let alone the more reticent
Chinese, Russian and North Korean governments.
Sinuiju FTZ went up in smoke last year after
Pyongyang announced, without telling its Chinese
neighbors, that the area was to become a de facto
independent fiefdom under the control of Chinese
entrepreneur Yang Bin. Yang Bin was promptly arrested on
charges of tax evasion by the Chinese authorities and
the FTZ has been rudderless ever since, although there
have been rumors that various Chinese business people
are being considered for the post.
All of the
FTZs have been hamstrung by the peninsula's geopolitical
instability. Even discounting this, Pyongyang faces
fierce competition in attracting investors. Plenty of
export platforms with low wages and far better
infrastructure already exist in Asia. In contrast to
North Korea, Shenzhen and other Chinese SEZs swallowed
their own infrastructure costs.
With only 8
percent of roads in North Korea paved, and with a
decrepit electricity grid, the cost of infrastructure
upgrading is enormous. Costs could only realistically be
shouldered by the Asian Development Bank or the World
Bank, but Pyongyang isn't a member of any international
financial institution.
However, one FTZ does
stand out as a possible island of hope in this mess:
Kaesong. A pet project of the Hyundai Corp and located
just over the DMZ on the route to Pyongyang and Sinuiju,
Kaesong could turn out to be Pyongyang's Shenzhen. South
Korea is easily the most receptive nation to the North's
market fumblings. Of the 15 commitments to unification
and security that South Korean President Roh Moo-hyun
made at the beginning of his term, two were explicitly
focused on creating an inter-Korean economic zone.
Kaesong is targeted at South Korean companies
and, more significant, small and medium enterprises
(SMEs). In the long run, the South Korean SMEs would be
an important source of FDI because of their natural
cultural affiliations. Moreover, SMEs are the most
likely candidates to instigate grassroots changes in
North Korean workers' mentalities.
Because of
their size, SMEs are fundamentally concerned with
important and basic free-market principles such as
profit, discounted cash flows, economies of scale and so
forth. It is through these interactions that the North
could, if it wishes to cooperate, learn about market
economics, not through white elephants such as the Mount
Geumgang tours or Rajin-Sonbong.
Ignoring
primary products such as marine and agricultural goods,
North Korea's economic sectors of comparative advantage
lie in light manufacturing industries such as textiles
and apparel, sectors that have been declining in South
Korea and have hit SMEs specializing in these areas
particularly hard but could be competitive in lower-wage
Kaesong. Crucially, South Korea is also the North's
second-biggest trading partner, with trade so far this
year up 45 percent, so the effects of a successful
blossoming at Kaesong would be significant.
The
plan at Kaesong is to attract about 850 SMEs and create
220,000 jobs for North Koreans. A number of recent
economic and trade agreements this summer fleshing out
the gritty minutiae governing inter-Korean trade and
recent indications over the pricing of land in the
Kaesong FTZ have made these ambitious targets
considerably more attainable.
Recent cabinet and
Supreme People's Assembly shuffles in Pyongyang with
plenty of figures who have had a part in North-South
dialogue suggest that on the economic front at least,
North Korea is serious about engaging the South. There
have also been signs of movement to facilitate cross-DMZ
commuting to Kaesong from the South - a necessary
prerequisite if the project is to have any real hope of
success.
However, it is not plain sailing even
for the Kaesong FTZ. Ridiculously, the North Korean
government insists that foreign-owned ventures pay their
workers in hard currency at rates above those in China
or Vietnam, thus blunting any competitive edge resulting
from the exchange-rate devaluation of last year.
Moreover, if cross-border travel across the DMZ fails to
become a reality, it remains pointless for SMEs to
invest in Kaesong.
More fundamental, Kaesong,
like all FTZs before it, remains hostage to progress on
the nuclear issue. Heavy tariffs and sanctions,
especially in the United States, remain in place on many
North Korean manufactured goods as a result of the
nuclear standoff. Rules-of-origin legislation and thus
tariffs may well end up negating Kaesong's cost benefits
in many markets.
The benefits of a resolution to
the nuclear problem are clear. FDI jumped significantly
(albeit from a paltry base) in 1995 and 1996 after the
Agreed Framework was signed. Even large US firms such as
General Electric Co expressed tentative interest in
opportunities in North Korea, but these rays of hope
were to fade again once the tensions started rising
again.
North Korea is the last market in the
world that inflows of foreign capital have yet to reach,
but the businessmen in South Korea are hoping to be the
first to breach this. Unfortunately, South Korea alone
is unlikely to be able to trigger the mass economic
turnaround that the North requires. North Korea's
Shenzhen may have to wait a while longer.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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