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North Korea: Witness to Transformation

SEZ Update

by | May 28th, 2014 | 07:17 am

Separately, three colleagues have contacted us with information on the most recent North Korean efforts with respect to Special Economic Zones (SEZs). The most detailed report comes from Prof. Kyung-Ae Park, director of the Canada-DPRK Knowledge Partnership Program (KPP) at the University of British Columbia (UBC). She provided an overview of the KPP for 38North in late 2012, and Marc Noland summarized some of the constraints following the widely-covered KPP conference last fall.

Following the October conference, the DPRK announced that the government would establish 13 new SEZs in 8 provinces. About a month ago (April 26 to May 2 to be exact), the KPP organized a site visit and seminar that again brought a group of experts from Canada, India, the Philippines and the US. The itinerary included:

  • Rason, which is now up-and-running;
  • The proposed Chongjin Economic Development Zone (EDZ) and Orang Agricultural Development Zone in North Hamgyong Province;
  • The proposed Waudo Export Processing Zone (EPZ) in Nampo;
  • The Sinpyong Tourist Development Zone in North Hwanghae Province;
  • The Hyondong Industrial Development Zone in Wonsan City (Kangwon Province) and the Galma Area (Kangwon Province).
  • The group also visited the newly completed Masik Pass ski resort in Kangwon Province.

At each zone, the group met with local zone administrators and provided feedback regarding observed zone operation and master plans. The wrap-up seminar presented findings from the site visit to 100 DPRK academics, economic experts, government officials, as well as former UBC KPP participants and foreign diplomats stationed in Pyongyang from China, Great Britain, Sweden, Germany, Switzerland, Indonesia, Iran, Malaysia, Mongolia, Russia, India and Vietnam. Also in attendance were representatives from the EU and the UNDP.

The visiting team ranked each proposed zone. The Chongjin EDZ was ranked highest priority due to its close proximity to higher-quality logistics networks (road, rail and port facilities) as well as the universities and technical colleges in the area able to provide skilled labor to the zone. The Sinpyong Tourist Development Zone was ranked second due to its natural beauty and proximity to both Pyongyang and Wonsan; the regime has clearly been putting effort into tourism with an eye on foreign exchange earning.

Choson Exchange, based in Singapore, has also been involved in these efforts and has several assessments posted on its site; Geoff See and Andray Abrahamian filled me in. Since 2013, Choson Exchange conducted four workshops related to SEZ setup and development and interviewed provincial officials involved in the SEZ effort. Abrahamian has been skeptical of these efforts in the past, including the creation of a new zone entity at the central government level. One source of skepticism: the reluctance of North Korean authorities to allow much movement across the SEZ “membrane.” The spread effects of the zones are limited if they do not source locally or sell into the domestic market. But Abrhamian alerted us to a development that could have more progressive effects: discussion is apparently underway for the creation of very small “spot” SEZ’s that would be aimed not at foreigners, but at allowing experimentation from prescribed agricultural methods. This sort of decentralization is exactly what the North Korean economy needs. The crucial question: will the central government allow it?

The Choson Exchange website also has a report on a conference the organization sponsored in Wonson, with officials from five provinces attending. One model that was discussed: Singapore’s experience developing the Suzhou Industrial Park (SIP) in China. After a rocky start, the SIP has established a reputation as a good place to do business, but not without resistance from local forces in Suzhou. The core of the Suzhou model was to import Singapore’s reputation. But who would be willing to take on that task for North Korea?

Our position on SEZ’s is clear. As a small, ultimately open economy North Korea has no choice but to open if it wants to grow. And it will grow if it opens. But the devil is in the details.

  • First, we have repeatedly stressed the contradiction between the government’s foreign policy, weak legal and institutional environment, and foreign investment. The regime needs to build credibility by making an existing effort, such as Rason, a success. Playing around with investors, as the government did with respect to Kaesong, is much more costly than the regime seems to think.
  • Second, the regime needs to figure out how much autonomy it is going to grant provincial and local officials. Just as investors need to make money, so the center needs to allow locals to reap the benefits of experimentation.
  • And finally, there is the question of how to think about the “membrane” between the zones and the rest of the economy. The benefits from SEZ’s ultimately come from the skills acquired by workers but also by linkages—both forward and backward—with the local economy. These include sourcing from local firms, which will then become profit centers, and sales—legal or illegal–from the zones into the local economy. The ultimate goal is for policy outside the zones to converge with the favorable environment in them. But these linkages can generate backlash from protected and uncompetitive state companies. If this push is designed solely to create foreign exchange-earning cash cows for the regime, the growth effects are unlikely to materialize.