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North Korea: Witness to Transformation

Kumgang Update

by | April 20th, 2011 | 07:26 am
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North Korea claims to be seeking foreign direct investment, but as we have always argued, it is useful to consider what they are actually doing about it. Mt Kumgang provides an object lesson on the hold-up problem: how North Korea behaves provocatively and effectively expropriates assets while playing on the interests of investors. The case is an object lesson in the risks of engagement, and what we have called “reverse leverage.”

Following the shooting death of a South Korean tourist in the summer of 2008, the South immediately shut down the tours, demanding both an apology and assurances that the incident would not be repeated. The termination of the tours cost the North Koreans an estimated $30 million a year in hard currency earnings.

Pyongyang escalated pressure on the South last year by threatening to freeze the assets. Two weeks ago, the KCNA reported a threat that even we—jaded as we are—found absolutely galling. The message is worth quoting in its entirety:

“[The Korea Asia-Pacific Peace Committee (KAPPC), the North Korean counterpart on the project] informed the Hyundai side of its stand that it may terminate the validity of the provision of the agreement on tour of Mt. Kumgang signed with the Hyundai side which calls for granting it monopoly over the tour, the DPRK may take charge of the tour through the areas of the north side and entrust an overseas businessman with the tour and the Hyundai group may continue conducting the tour through the areas of the south side and formally handed an official document related to it to the side.” (See April 8 KCNA news for the full report).

OK, let me get this straight. The North Koreans are not only going to confiscate the asset, but are going to find another foreign partner to run it while allowing the Hyundai group to conduct tours from the South? So who would those other foreign operators be? Well, China of course; there are rumors circulating that the North wants to build a casino and bring in Chinese tourists.

The only saving grace to this sad tale is not Chinese principle, but that Beijing frowns on North Korean efforts to lure gamblers.  But despite the strong statement from the Ministry of Unification, we know that Hyundai Asan has been lobbying hard for a resumption of the tours. According to one South Korean report, Hyundai Asan has suffered losses on the project over the last three years of $300 million. Pyongyang appears to believe that it can put the screws to one investor without affecting the overall climate; we can only hope they are wrong.