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North Korea: Witness to Transformation

Investment Roundup: New Institutions at Kaesong, New Zones Outside It?

by | October 9th, 2013 | 07:00 am
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We have long argued that the transformation of North Korea will ultimately hinge on an opening to foreign direct investment. No amount of aid—no matter how well deployed–will substitute for the advantages of investment-driven trade and technology transfer. The re-opening of Kaesong and recent stories of a plan to open new zones suggest that the regime might once again try—in its own way—to attract investors. But stories about the dismissal of Kaesong workers tainted by working in the zone also suggest the dilemmas the regime sees from any such opening.

First, an update on the management of Kaesong. In an earlier post, Marc Noland outlined the terms of the deal for re-opening the complex, but we now have a little more on how the zone will purportedly be governed. In late September and early October, stories in Yonhap noted that the management of the zone would be transferred from a solely North Korean body, the General Bureau for Central Guidance to the Development of the Special Zone, to a joint steering committee in which Seoul and Pyonyang have equal weight. The committee will be staffed by a Secretariat consisting of eight South Koreans and five North Koreans. To round out the arrangements, negotiations on particular issues will be handled by working groups or subcommittees on sensitive topics including access, communications, investor protection and the internationalization of the zone. The last is particularly interesting; both South and North have signaled an interest in luring investors from outside of South Korea to help guarantee the integrity of the zone against future shutdowns.

Perhaps the North Koreans have learned a lesson about the costs of reneging, but we give little credence to the ability of a joint management committee to deter the North Koreans from shutting down the zone again if they chose to do so — it is, after all, on North Korean soil. Reputation will ultimately be established by respecting agreements reached and there is still hard bargaining ahead on virtually all of the issues handed over to the subcommittees.

North Korean ambivalence toward investment was demonstrated in a story run by DailyNK on the fate of some of the workers in the KIC. Apparently while the zone was shuttered, authorities ran self-criticism sessions and identified workers who had crossed various redlines, from inappropriate conversations with South Korean managers, to comments on the quality of South Korean goods, to selling KIC product on the black market. These workers have been blacklisted, which means not only that they will not work in the KIC again but their files will be updated to designate them as members of the hostile class. Such controls demonstrate clearly the dilemmas–and limits–on economic engagement with North Korea.

Finally, we report with the usual caveats on an important series of stories broken by DailyNK on the possibility that the regime might allow each province to open two cities to foreign investment (here, here and here). The two sources cited were from North Hamkyung and Yangkang. The model would mirror KIC, with firms given discretion on management and production issues, but the state firmly controlling labor; indeed, the last two stories note a mixed reaction to the news from informants based on the likelihood that controls in the cities would actually increase.

But the crucial issue is whether the provinces have any autonomy in designing the zones or whether they are effectively managed from the top. Decentralization has a positive effect when it grants lower level jurisdictions some autonomy; this permits competition for investment and thus innovation. But if the provinces are simply acting as the agents of a control-oriented government, the gains are limited. If the story is true, we expect that the process will require a lot of hard slogging with investors over terms. Who will be the first movers, both at the province and firm level? And above all, can rules be gotten right? Nick Hansen and Jeff Lewis reported on new construction on Hwanggumpyong Island over the summer, and a Le Monde piece from last week claims in passing that progress at the zone is accelerating. But it is not the physical infrastructure that matters; look at how long Rason lay effectively fallow. It is the institutional, legal and political infrastructure that will prove crucial.