Slave to the Blog: Foreign Investment Edition

Stephan Haggard (PIIE) and Kent Boydston (PIIE)
June 10, 2015 7:00 AM

Last week we mentioned a few recent developments in North Korea’s efforts to attract foreign direct investment. These included the possible joint venture between South Korea, North Korea, and Russia to bring coal to South Korea and a new push by the DPRK to attract foreign direct investment (FDI) in the Wonsan-Kumgang special economic zone (SEZ).

Leo Byrne at NKNews recently reported (behind the paywall) on a new video published online through the DPRK’s Voice of Korea public relations arm. The video is an 11-minute ad extolling the many business opportunities in North Korea’s SEZs, which now have grown to six special economic zones—with four more planned—and eight regional special economic zones. These latter are of particular interest; if provinces really were given some discretion—which we doubt—it could open the door to a competitive dynamic to attract foreign capital.

Let's just say that the effort is not exactly ready for prime time. The video gives the hard sell for the favorability of the business climate, the rule of law, and the benefits of low taxes. According to the video the SEZs boast just a 14% tax on gross profits (10% in encouraged sectors), which will be exempted for at least three years, a package quite similar to the early SEZs that sprung up around the Pacific Rim from the mid-1960s. But production values are more than a little lacking. The video opens with a statue of the Chollima "thousand mile" horse, the subsequent symbol of the regime's self-destructive mobilization campaigns. At 0:19, the screen touts the country's Peculiar [sic] Economic Development Zones. But the most striking feature of the video is the emptiness of all the zones except for Rason, which appears to actually be working. Particularly striking in this regard are the shots of completely empty Hwanggumpyong-Wiwha Islands in North Pyongan Province, despite over four years of planning with the Chinese. To date, we have not heard any investment going into any zone in the country except for Rason; nor to our knowledge is new money anxious to get into Kaesong following the disruption in 2013.

Trying to develop these zones in the North Korean cocoon is hard; Haggard and Noland have talked about the challenges of the SEZ strategy in detail here and here. On the good news front, however, we learned recently that Professor Kyung-Ae Park from the University of British Columbia will be leading a delegation of fourteen North Korean economic experts on a study tour to Indonesia from June 14-20. The effort is organized through her Canada-DPRK Knowledge Partnership Program (KPP), a collaborative effort she founded and has been running since 2011 to train North Koreans (more on the program here). The delegation will observe successful trade, finance, and economic sites and learn about Indonesian development strategies; this follows on earlier such study tours to Vietnam.

A major question is whether the North will ever open to the South beyond Kaesong. Apparently at least some in the South think so. We noted the expressed interest of the Federation of Korean Industries in establishing a liaison office in Pyongyang. Several months ago we also gave a plug for an event at Kyungnam University’s Institute for Far Eastern Studies (IFES) in Seoul on the realities of doing business in North Korea including presentations by a handful of foreigners who have tried their hand. The earlier event was apparently not one-off; IFES is repeating with another seminar on “Doing Business in North Korea: Business and Finance in the DPRK”, coming up this June 10.

The larger question remains whether this FDI push can really work against a backdrop of continued focus on the military and mixed messages on domestic reform. Andrei Lankov—one of our favorite commenters—had turned bullish on developments in the North on the basis of extensive travel and interviewing along the Chinese border last year. He has recently argued that enterprise reforms have slowed down. We expect reforms to be two steps forward, one step back. But the measures required to induce non-Chinese foreign direct investment are more wide-ranging than the regime thinks; to say that there is substantial political risk is an understatement.

North Korea’s Economic Zones

Special Economic Zones:

  • Rason Economic and Trade Zone
  • Hwanggumphyong and Wihwado Islands
  • Sinuiju Area
  • Kangryong International Green Development Zone
  • Unjong Cutting-Edge Science and Technology Development Zone (near Pyongyang)
  • Wonsan Tourist Zones

Regional Special Economic Zones:

  • Ammnokgang Economic Development Zone
  • Manpho Economic Development Zone
  • Sinphyong Tourist Development Zone
  • Hyondong Industrial Development Zone
  • Hungnam Industrial Development Zone
  • Chongjin Economic Development Zone
  • Hyesan Economic Development Zone
  • Waudo Export Processing Zone

Future Special Economic Zones

  • Pukchong agricultural development zone
  • Wiwon development zone
  • Orang agricultural development zone
  • Songrim export processing zone

 

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