North
Korea not quite in the zone By
Andrei Lankov
In early June, the
governments of China and North Korea declared that
they would work to develop two new special
economic zones (SEZs). One zone is to be situated
in the small port city of Raseon, on the eastern
coast of South Korea, just 20 kilometers from the
nearest crossing to China. Another zone will be
developed on the unremarkable sandy island of
Hwanggumpyong, in the vicinity of Sinuiju, the
largest city on the border (some three quarters of
trade between the two countries pass through this
city).
One cannot be surprised by this
initiative as talk of new SEZs "soon to be
established" has been around for over a decade.
There is little doubt that the North Korean
government is very interested in the idea of SEZs.
Unfortunately, this interest does not necessary
mean that the North Korean authorities are willing
to make the concessions that
would allow the SEZs to operate efficiently.
The history of North Korean SEZs is
essentially the history of frequent failures and
occasional partial successes. The first attempt to
create a SEZ took place in 1991, when the North
Korean government established a SEZ in the remote
northwestern corner of the country. The Raseon
SEZ, as it has now become known, is located where
the borders of China, Russia and North Korea meet.
News of the establishment of North Korea's
first SEZ produced much enthusiasm in the
international media. As usual, there was no
shortage of pundits who saw the decision as a sure
sign that Chinese-style reforms would soon be
launched in North Korea.
There had been
talk of such a move since at least 1984, when the
North Korean rubber-stamp parliament passed a
joint ventures law, and more or less every change
of Pyongyang policies was interpreted by optimists
as a sign of impending reforms. Needless to say,
no reforms have happened so far, after three
decades of waiting (and unlikely to happen any
time soon).
Raseon SEZ was not a sign of
reform. Neither was it a success. By 2000, the
total volume of foreign investment in the area was
a paltry US$ 35 million, even though initially
there was talk of about $2 billion in investment.
The major problem was the location - an
underdeveloped area even by meager North Korean
standards. The only paved road in the area
connects Rajin and Sonbong, and even this is only
a single lane. It takes some 40 minutes to travel
17 kilometers along the area’s best road. The
bridge that connects the area with China has
remained unchanged since colonial days.
Obviously, Pyongyang expected that rich
foreign investors would pay to upgrade
infrastructure. They did, but only on a very
limited scale.
So for two decades the
Raseon SEZ has largely remained dormant, being
essentially a large market place where North
Korean merchants have been able to buy Chinese
goods for resale in the inner regions of North
Korea.
For a brief time it also served as
a gambling enclave for rich Chinese, but after
some ugly embezzlement incidents the Chinese
demanded the local casino to be closed. The North
Korean authorities had no choice but to oblige,
and afterwards the Raseon SEZ slipped into
relative obscurity again.
Why did North
Korea's decision-makers choose such an
inhospitable setting for their first experiment
with a SEZ? It seems that from their perspective,
the remoteness was not a disadvantage, but rather
an advantage. As was shown by subsequent events,
North Korean authorities are driven by two
mutually incompatible impulses: they want to
develop SEZs to produce hard currency income, but
they also want to minimize their impact on North
Korean society.
So is the SEZ was far away
from major population centers, it would be easier
to control and supervise, and it would not become
a source of the forbidden knowledge about the
outside world (to be more precise, about
prosperity and individual freedom enjoyed by the
citizens of neighboring countries).
The
North Korean state (or at least some important
faction within it) has long come to realize that
the North Korean economic system is hopelessly
inefficient. However, they also understand that
the peculiar situation of the country prevents it
from emulating the successful Chinese approach.
The root of all North Korean political
problems is the existence of liberal and filthy
rich South Korea. Chinese-style reforms, if ever
attempted, would expose the North Korean
population (still largely unaware about the
outside world), to the stark images of South
Korean prosperity.
Reforms would also
bring with them an unavoidable relaxation of
societal controls. The net result of these changes
would likely be a grave crisis in the regime’s
legitimacy and, perhaps, its complete collapse. In
a sense, reforms in China were possible because no
capitalist, democratic and affluent South China
existed (Taiwan is far too small to be of
significant concern to Beijing).
However,
the North Korean leaders still want to do
something about the dire economic situation - as
long as this "something" does not look too
dangerous politically. So, the North Korean
leaders continue to use ideological mobilizations
(but this horse has long died). They have also
attempted to find miracle technologies, notably
related to information technology. And they have
pinned some expectations on SEZs.
SEZs are
acceptable to the North Korean government because
they are relatively easy to control. So far, all
North Korean SEZs have been fenced off with barbed
wire and all visitors have had their IDs carefully
studied at checkpoints.
The North Korean
government obviously hopes that small areas of
controlled capitalism will generate enough income
to make a difference - or at least to keep afloat
the long-decaying economy.
So despite the
near total failure of the Raseon SEZ, in the early
2000s the North Korean government undertook two
further attempts to establish SEZs. One of these
attempts took place in the border land city of
Sinuiju, in whose vicinity the recently announced
Hwanggumpyong SEZ is supposed to operate.
The 2002 plan had some twists that made it
appear, well, a bit too North Korean. It was
stated that the entire population of Sinuiju, some
350,000 people, would be relocated. These people
were not good enough to enjoy the fruits of
capitalism. They were to be replaced by 200,000
model workers, hand-picked by the authorities for
their skill and perceived political reliability.
The most unusual act was the decision to
appoint a foreigner as the SEZ governor - Yang
Bin, a Chinese entrepreneur with Dutch citizenship
and then reputedly the second-richest man in
China. He was then 39 years old.
On
September 12, 2002, the Supreme People's Assembly,
the North Korean pseudo-parliament, adopted the
Basic Law of the Sinuiju Special Administrative
Region. The law consisted of six chapters
(government, economy, culture, fundamental rights
and duties of residents, structure, and the emblem
and flag of the region), and an impressive total
of 101 articles. The law - essentially, a
quasi-constitution - even envisioned that the SEZ
would have its own flag.
The Basic Law
proclaimed that the legal system would remain
unchanged for 50 years, and that foreigners would
enjoy the same rights as North Koreans in the
area. Foreign judges were to be invited to solve
disputes and oversee the enforcement of laws. It
looked too good to be true, so for a while it was
all the media usual hype about a "breakthrough".
The North Korean vice minister for foreign trade
called the SEZ "a new historical miracle".
However, the miracle at Sinuiju hardly lasted
50 weeks, let alone the promised 50 years, and its
flag is nowhere to be seen.
It was
probably the Chinese who sank the project. Beijing
was not amused by the turn of events. There are at
least two known reasons for their unease. First,
Yang Bin wanted to transform the city into a
gambling center, a Macau of the North. This was
not welcomed. It is also likely that China did not
want competition between Sinuiju and its
northeastern cities. It did not help that the
North Koreans, following their modus
operandi, did not bother to liaise with the
Chinese beforehand.
Yang Bin was already
under investigation at that time. Soon after he
was arrested for fraud and sentenced to 18 years
in prison. Nothing was heard about the Sinuiju SEZ
for another decade - until early this month, that
is (well, technically the Hwanggumpyong SEZ is a
new undertaking, and nobody talks of inviting
foreign judges any more).
At about the
same time, the North Koreans undertook what can be
described as their only successful experiment in
SEZ-building. They developed the Kaesong
Industrial Zone (KIZ) in the southern part of
North Korea. Unlike earlier projects, the zone
specifically targets South Korean business.
The idea of the KIZ is based on the
assumption that the interests of both Koreas can
be served by a combination of Southern capital and
technologies with the cheap labor of North Korea.
The plan, as initially conceived and eventually
realized, envisioned the creation of an industrial
park in the vicinity of the demilitarized zone.
The South Korean companies would employ North
Korean workers who, laboring under the supervision
of South Korean managers, would produce cheap
items for sale in South Korea and overseas.
The KIZ's construction began in 2003, and
by late 2004 the first production lines began.
Generally, South Korean big business did not show
much interest in the idea, with only small- and
medium-sized companies moving in.
The
South Korean government provided generous
inducements to those pioneers, including cheap
loans and guarantees. The latter were especially
important since even in 2003-04 when North-South
relations went through a short honeymoon, South
Korean businessmen were afraid that over-investing
in the KIZ would one day make them hostage to the
policies of both Seoul and Pyongyang.
Contrary to earlier worries, the KIZ was
successful. By late 2010, some 120 South Korean
companies operated there with 47,000 North Korean
workers. In 2010, KIZ-based companies produced
goods worth $323.3 million (slightly over half
consisted of textile and clothing). For the
mammoth South Korean economy, this was small
change, but for the North it was significant
enough.
Theoretically, the South Korean
companies pay their North Korean workers the
agreed basic monthly wages of $61 (as of 2010),
but this figure does not include overtime premiums
and special incentives, so the actual monthly
payment seems to be close to $90-100 per worker.
However, this salary is paid to a North
Korean government agency that makes a number of
deductions, so less than a third reaches the
workers' pockets. This allowed critics of the
project to describe it as a "slave labor camp".
The description is grossly unfair: even after the
deductions, the KIZ jobs are by far the best paid
regular jobs in Kim Jong-il's North Korea, so
locals strives hard to be accepted into a
KIZ-based factory.
The success of KIZ
might seem encouraging, but it is actually a very
special case. It is viable because the South
Korean government is willing to go to great
lengths to support it. It has subsidized
industrial development and has provided
adventurous developers and companies with generous
subsidies and guarantees that made the entire
undertaking possible. This willingness is driven
by a multitude of political considerations.
Frankly, it is doubtful whether the Chinese side
would be equally interested in subsidizing a
similar undertaking by Chinese companies in
Sinuiju.
What will happen to these two
planned new SEZs? The fate of Raseon seems pretty
certain. As indicated by published documents, it
is largely about transportation links. Chinese
Manchuria is landlocked, so Chinese companies will
save a small fortune on transportation costs if
they are given access to a seaport on the Eastern
coast of the Korean Peninsula. If this is what
happens in Raseon, it has a relatively bright
future.
The future of Sinuiju (officially
Hwanggumpyong) SEZ is far less certain. Obviously
Chinese businesses want to do there what their
South Korean counterparts did in Kaesong, take
advantage of low labor costs in North Korea. Even
though Chinese labor is cheap, North Korean labor
is much cheaper still, since $15-20 a month would
be seen by the average North Korean worker as a
good wage. For the same labor, they would have to
pay a Chinese worker between $100 and $150 a
month.
But that said, the business
reputation of North Korean managers leaves much to
be desired. They are likely to intervene in
operations - partially as a way to extort bribes,
but largely because they will worry about
excessive exposure of their population to
dangerous Chinese influences. South Korean
businesses in Kaesong accept such interference,
but they are backed by the South Korean
government. It remains to be seen whether the same
situation will develop in a Chinese-led zone.
If the past is an indicator, the chances
of success are not high. Further Chinese
penetration of the North Korean economy may
concern South Korean and especially American
policy planners, but on balance this is a good
thing for North Koreans. They will earn a living
and they will also learn something of the outside
world from which they have largely been isolated
for nearly 60 years.
Andrei
Lankov is an associate professor at Kookmin
University in Seoul, and adjunct research fellow
at the Research School of Pacifica and Asian
Studies, Australian National University. He
graduated from Leningrad State University with a
PhD in Far Eastern history and China, with
emphasis on Korea. He has published books and
articles on Korea and North Asia.
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