Good governance or competing for rents? The closure of the Taepung Group

Stephan Haggard (PIIE) and Marcus Noland (PIIE)
August 10, 2012 7:00 AM

The old adage is that “cash is king.” Well, in North Korea, given the essential worthlessness of the won, foreign currency is king. Access to it--whether derived through investment or trade--is clearly one of the most valuable rents in the North Korean system. Thus even if entirely below the surface, we would expect fights over foreign exchange rents to be among the most ferocious.

Indirect evidence of this may be adduced from a recent story in the Chosun Ilbo that the Taepung Group, which it describes as “a military-controlled investment firm,” has been shut down due to poor performance. The paper cites unnamed experts to the effect that the closure “is related to the ouster of North Korean Army chief Ri Yong-ho, who was apparently mired in corruption.” In a post last year we described the organization as being led by a Chinese-Korean businessman with ties to the North Korean military and a board consisting of regime heavyweights.

Some commentators had praised the elevation of the group as an advance, creating a “one-stop shop” for potential foreign investors; Brad Babson, to cite an example, initially was relatively optimistic on this score, though in fairness Brad began backstepping fairly quickly. We were more cautious from the get-go. Given its gate-keeper role, we argued that “the composition of the group could also be read as a map of the regime’s internal political economy and the organizations and factions best placed to rake off rents.” In addition, we were concerned that the group seemed to combine investment approval functions with a holding-company structure. This looked like a recipe for blackmail: "You want to invest? We get a stake." Needless to say, such arrangements did not prove particularly attractive to investors and the entity did not come close to meeting its wildly inflated investment targets.

Subsequently it was announced that the Taepung Group was to be merged with the Joint Venture and Investment Commission (JVIC), which looked more like a standard government investment screening entity. While now recognizing the problematic nature of having multiple bodies trying to play the gate-keeper role, Geoff See at Choson Exchange maintained a relatively optimistic good governance view of the development. See wrote of the Taepung-JVIC merger that “this is a positive step forward for North Korea’s economic development, as they will need an effective agency to support foreign investors, shape the domestic business environment, and help foreign investors navigate the domestic business environment.”

Spin aside, See inadvertently captured the essential characteristic of the group, which would make it a perfect vehicle for skimming rents: “As of April 2011, executives at Taepung describe a business model more reminiscent of a holding company rather than a government institution. Investors place their capital with the Taepung Group or create joint-ventures with the group. Taepung acts as the manager of the companies. There could be potential deviation from this description, although this is the model envisioned by leading executives on the group. The group aims to “build an economy outside of the state-planned economy.”

To be fair, as See and his colleague Andray Abrahamian observed in another post, Taepung, the aforementioned JVIC, and yet another group, all backed by different coalitions of elite patrons, appeared to be competing for this foreign investment gate-keeper role. The problem was that "building an economy outside of the state-planned economy" does not necessarily equate to "building a market economy"; to the contrary, a central organizational problem in North Korea is the fragmentation of economic management among competing rent-seeking groups.

So, as with all things North Korean at present, there are multiple potential motivations behind the closure of Taepung (if this indeed has occurred). And it is worth remembering that how these developments ultimately play out may not be as their instigators intended. One theory puts a positive spin on these developments. The Chosun Ilbo interprets the demise of Taepung as a contest between the North Korean military and the Party-dominated cabinet. After the closure of the Taepung Group, “a separate foreign-investment body run by the Cabinet is expected to become more influential. The developments are believed to be part of North Korean leader Kim Jong-un's attempts to loosen the grip of the powerful military and give more power to party technocrats.” The paper goes on to add that “The Asahi Shimbun reported last Thursday that Kim ordered the military not to meddle in efforts to attract foreign capital, and also shut down an organization known as Room 39, which managed former North Korean leader Kim Jong-il's slush funds and directed businesses earning foreign currency through 17 overseas offices and 100 trade firms under its roof.”

Perhaps the Young General has been secretly reading Brad's old World Bank reports and really does want to cut the red tape and set up a “one-stop shop” for foreign investors. According to the Daily NK, the Central Party ordered provincial Party cadres to take time to research reform and opening in Brad's old stomping ground of Vietnam.  Who knows? Maybe they will pick up some pointers on attracting foreign direct investment!

However the struggle between the military and the party could also reflect much more mundane considerations. The Taepung Group was a product of the previous governing coalition, and it is possible that Kim Jong-un simply wants to steer the lucrative gate-keeper role to individuals with greater personal connection and loyalty. Rents remain central to holding the North Korean political system together; the question may simply be who gets them.

What does all this mean for policy? Our position has always been that we should allow more trade and investment with North Korea--outside sanctioned items  that impinge on security concerns--but that private firms should be on their own. If North Korea wants to attract FDI, it has to figure out how to assure investors. Complex sanctions play into a victim narrative and put off the day of commercial reckoning when North Korea has to assess its own policy choices. At present, the only players that seem capable of navigating the system are Chinese (and Egyptian). If the leadership doesn't want to become an appendage of China, it might start thinking seriously about how to diversify its trade and investment relations.

Comments

David S.

Hi - it's David Stinson, your former student. This translation I did may be interesting to you. http://theartofeconomicwar.wordpress.com/2012/08/11/chinese-company-shan...

Andrew Logie

This isn't directly related, but if you didn't catch it (and if it's true) I'm sure you'll be interested:
Chinese company vents venom on North Korea
http://www.atimes.com/atimes/Korea/NH15Dg01.html