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North Korea: Witness to Transformation

What to Look for in the New Year: The Push for Foreign Investment

by | January 13th, 2014 | 07:00 am

Last week, we discussed in detail an important piece by Park Hyeong-ung on the course of economic reform under Kim Jong Un (Part 1Part 2). One of the core findings was that while the reforms were serious if incremental in their formulation, they quickly ran into resource constraints. Managers could not be held accountable for the performance of state-owned enterprise in the absence of inputs and in the face of rising food prices that put pressure on wages.

Our hypothesis: the leadership has shifted to a new approach that prioritizes the foreign sector as a substitute—rather than complement—to domestic policy changes. The evidence for this is now ample, and includes the announcement of the possible creation of zones at the provincial level, which we discussed in an earlier post. This announcement was accompanied by a highly-unusual conference on foreign investment organized by University of British Columbia professor Park Kyun-ae which hosted participants from 13 countries including the US, Canada, India, China, Malaysia and Vietnam as well as 60 North Korean participants.

But a number of other stories over the last several months also provide evidence of new push in this area, some of them involving unexpected help from South Korea:

  • Upon the reopening of Kaesong, the Park Geun Hye administration agreed to discuss the “internationalization” of the zone. In mid-December, Seoul brought a group of officials from the G-20 countries to the zone and proposed an “expo” to bring other outside investors into the KIC.
  • The KIC survived the sinking of the Cheonan, but the subsequent sanctions effectively closed down North-South trade and investment outside it. In the wake of the Park-Putin summit, however, the South Korean administration signaled it was willing to allow South Korean investment into Rason via a Russian joint venture. Last week, the Korea Railroad Corporation announced it would pursue the possibility in line with President Park’s “Eurasia initiative.” Could other South Korean investment follow?
  • Jang Song Thaek took a leading role in the development of the Hwanggeumpyeong and Wihwa Island projects. Even though they have been slow to develop, North Korea has clearly been sending signals designed to calm Chinese concerns about the post-Jang investment climate:
    • The day after Jang was removed, China’s Global Times gave prominent coverage to the creation of a new economic zone at Onsong in North Hamkyung province with support from the city of Tumen; Onsong was identified as one of the 14 new zones created under the provincial initiative. In November, North Korea signed a contract with investors from Singapore, Hong Kong, and China to invest in Kangryong Green Development Zone in South Hwanghae Province and the Sinuiju Special Zone is expected to break ground on a major project in February.
    • North Korea published the full text of the law on Hwanggeumpyeong and Wihwa, passed two years ago and running to seven chapters and 74 clauses. The speculation: the regime wanted to signal commitment both to the zones and to the rules governing them.
    • Pyongyang reached an agreement with China on a 380-kilometer high-speed railway to connect Sinuiju, through Pyongyang to Kaesong; the link would effectively extend China’s domestic high-speed rail network. South Korea has decided to stay out, but this would constitute one of the largest foreign investments in North Korea to date.
    • A small delegation of Chinese official and investors attended the Rodman basketball extravaganza.
  • The Korea Friendship Association, a pro-Pyongyang organization based in Spain, has managed to round up a delegation of seven European and Asian investors (from Australia, Italy, Spain, Taiwan, Thailand and the U.K.) who will visit in February. The North Koreans are looking for investments in a variety of projects, from mining (at least € 1 million) to herbal medicine. Whether this delegation is credible is far from clear, but reaching out to Europe suggests an all-points blitz.

We have repeatedly emphasized how foreign direct investment rests on a credible policy environment. Among the recent cases that have cast government intentions in doubt have been questions about Orascom’s ability to repatriate profits, conflicts with Chinese investors, and the closing of Kaesong, which only reopened in September. But none of those factors preclude an effort to try again, particularly if domestic policy changes are stalled.