We'll Always have Rason

January 12, 2012 7:00 AM

In response to its economic crisis, North Korea has intensified efforts to attract investment to its Rajin-Sonbong Free Economic and Trade Zone. While this effort to promote the zone represents an important start, the zone clearly has a long way to go before it will be able to attract the type of investment envisioned by its supporters. Lack of infrastructure appears to be a severe impediment to the development of the zone. If the infrastructural hurdle is to be surmounted, it will likely to be due to Chinese interest in developing the zone for transshipment trade associated with the economic development of its Jilin Province which borders the Rajin-Sonbong Free Economic and Trade Zone. Small scale investors in light industry might also be possible. With the development of these two areas relatively small investment in service industries such as hotels and entertainment might also be feasible. Large scale investment, however, will likely remain elusive. If the Rajin-Sonbong Free Economic and Trade Zone ultimately is a success, this is more likely to be due to its demonstration effect and encouragement of further economic opening, than to its direct impact on the North Korean economy.

The words that Gordon Flake and I wrote 15 years ago remain sadly relevant today.  Fifteen years on, the Chinese are building the road linking Hunchun with Rajin (the North Koreans guard the bulldozers at night) and the Russians are refurbishing the rail link.  No word on who if anyone will dredge the harbor. North Korea also claims that China will build a 600,000 kilowatt coal-fired power plant, but corroboratory evidence regarding that claim is elusive. The North is also experimenting with putting the Mangyongbyong, pictured above, the creaky vessel that used to shuttle money, goods, and people between Niigata and Rason (nee Rajin-Sonbong) to ferry tourists to Mt. Kumgang. According to IFES, in December KCNA announced that in the context of agreements with China to develop Hwanggumpyong and Wihwa Islands as special economic zones (SEZs) the Rason SEZ Law had been revised, but did not provide details.

So progress is evident but the real question is whether it will be a springboard to broader reforms.  A simple leading indicator: are off-ramps built on the road between the port and China? If they are, the road could become the main artery of a growth corridor in that part of North Korea.  If not, the highway would be a metaphorical tunnel from China to the sea.  Sure, North Korea will make money off the port, but the project will effectively be an enclave, and not a catalyst for broader development.

The World Bank recently completed a review of the uneven history of SEZs around the world. The report, by Thomas Farole, puts the North Korean developments in broader perspective and is worth quoting:

First, it is important to separate political support from political objectives in zone projects. While strong commitment from government is needed, projects must be carefully designed based on clear strategic plans—the commercial case must be there.  Moreover, that commercial case must be based on sustainable sources of competitiveness. Second, despite the concept of zones as enclaves, in practice their success is almost fully entwined with the competitiveness of the national economy and the national investment environment….Third, putting in place a clear and transparent legal and regulatory framework codifies the program strategy and establishes the “rules of the game” for all stakeholders involved in the process, but de facto implementation is of equal importance. In many SEZs, the authority responsible for developing, promoting, and regulating the program lacks resources and capacity as well as the institutional authority to carry out its mandate.

There is a compelling case for developing Rason.  That fifteen years have passed and we are still talking about paving roads and fixing rail bridges is testimony to the economic ineptitude of the North Korean leadership.  The real issue, however, is once the highway and railroads are completed, will the regime use them as a vehicle to spur development, or simply mechanisms for collecting tolls?

Comments

Sehyek OH

Few days ago,I visited North Korean official webside to attract foreign visiters to there. I found they are very well aware of what business people like to invest their money. I think international communities can help them build their capability in designing their development plans by introducing them to the institutions. at same time this intention is not to change their mind but to strengthen their managing shortcoming and let them know that why investros are reluctant to put money NK. actually this is for them to be safe from their incompetence, which they believe they would be disloged if that country be marketized. for emample, if foregin companies are to give NK government,handing it as the type of tax to government,

Matthew

Great piece, and I must especially agree with your concluding note: "...once the highway and railroads are completed, will the regime use them as a vehicle to spur development, or simply mechanisms for collecting tolls?"I've been to Rason a few times for project scouting and I will make one important adjustment (for lack of another word) to your argument. Although I agree the DPRK's general outlook and management of Rason has not changed all that much, I believe Chinese interest has shifted significantly in the last fifteen years. Let me underscore a couple of points to my "adjustment": 1. Previous Chinese policy towards the DPRK was defined by pure political strategy (aid, containment, tribute and anti-reunification), not economic engagement. However, within the last 15 years I would argue that this has shifted and the CCP is actually interested in using economic engagement measures (as opposed to the aid-tribute exchange) as a political tool in bringing about gradual, monitored change in the DPRK. China has shown that they would like to push their SEZ model in an effort to influence the DPRK (the new investment laws in Rason look exactly like the early laws for China's very own SEZs). 2. The Hexiehao high speed railway lines are currently being extended from Jilin city (already off of the main trunk line from Beijing to Harbin) to Hunchun. China is interested in exploiting the region economically, developing a transport hub for minerals and passengers alike, and seeking investment in Yanbian. Port access in Rajin has become more relevant. Therefore, within the last couple of years the number of Chinese companies and their activities in the region has increased significantly. As of a few months ago, the long-awaited road from Wonjon to Sonbong was looking set for completion relatively soon - I believe Changcheng Jianshe was building a lot in Rason. Best!

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