What to Look for in the New Year: The Push for Foreign Investment

January 13, 2014 7:00 AM

Last week, we discussed in detail an important piece by Park Hyeong-ung on the course of economic reform under Kim Jong Un (Part 1Part 2). One of the core findings was that while the reforms were serious if incremental in their formulation, they quickly ran into resource constraints. Managers could not be held accountable for the performance of state-owned enterprise in the absence of inputs and in the face of rising food prices that put pressure on wages.

Our hypothesis: the leadership has shifted to a new approach that prioritizes the foreign sector as a substitute—rather than complement—to domestic policy changes. The evidence for this is now ample, and includes the announcement of the possible creation of zones at the provincial level, which we discussed in an earlier post. This announcement was accompanied by a highly-unusual conference on foreign investment organized by University of British Columbia professor Park Kyun-ae which hosted participants from 13 countries including the US, Canada, India, China, Malaysia and Vietnam as well as 60 North Korean participants.

But a number of other stories over the last several months also provide evidence of new push in this area, some of them involving unexpected help from South Korea:

  • Upon the reopening of Kaesong, the Park Geun Hye administration agreed to discuss the “internationalization” of the zone. In mid-December, Seoul brought a group of officials from the G-20 countries to the zone and proposed an "expo" to bring other outside investors into the KIC.
  • The KIC survived the sinking of the Cheonan, but the subsequent sanctions effectively closed down North-South trade and investment outside it. In the wake of the Park-Putin summit, however, the South Korean administration signaled it was willing to allow South Korean investment into Rason via a Russian joint venture. Last week, the Korea Railroad Corporation announced it would pursue the possibility in line with President Park’s “Eurasia initiative.” Could other South Korean investment follow?
  • Jang Song Thaek took a leading role in the development of the Hwanggeumpyeong and Wihwa Island projects. Even though they have been slow to develop, North Korea has clearly been sending signals designed to calm Chinese concerns about the post-Jang investment climate:
    • The day after Jang was removed, China's Global Times gave prominent coverage to the creation of a new economic zone at Onsong in North Hamkyung province with support from the city of Tumen; Onsong was identified as one of the 14 new zones created under the provincial initiative. In November, North Korea signed a contract with investors from Singapore, Hong Kong, and China to invest in Kangryong Green Development Zone in South Hwanghae Province and the Sinuiju Special Zone is expected to break ground on a major project in February.
    • North Korea published the full text of the law on Hwanggeumpyeong and Wihwa, passed two years ago and running to seven chapters and 74 clauses. The speculation: the regime wanted to signal commitment both to the zones and to the rules governing them.
    • Pyongyang reached an agreement with China on a 380-kilometer high-speed railway to connect Sinuiju, through Pyongyang to Kaesong; the link would effectively extend China’s domestic high-speed rail network. South Korea has decided to stay out, but this would constitute one of the largest foreign investments in North Korea to date.
    • A small delegation of Chinese official and investors attended the Rodman basketball extravaganza.
  • The Korea Friendship Association, a pro-Pyongyang organization based in Spain, has managed to round up a delegation of seven European and Asian investors (from Australia, Italy, Spain, Taiwan, Thailand and the U.K.) who will visit in February. The North Koreans are looking for investments in a variety of projects, from mining (at least € 1 million) to herbal medicine. Whether this delegation is credible is far from clear, but reaching out to Europe suggests an all-points blitz.

We have repeatedly emphasized how foreign direct investment rests on a credible policy environment. Among the recent cases that have cast government intentions in doubt have been questions about Orascom's ability to repatriate profits, conflicts with Chinese investors, and the closing of Kaesong, which only reopened in September. But none of those factors preclude an effort to try again, particularly if domestic policy changes are stalled.

Comments

Roland

South Korean President Park Geun Hye today in an interview with bloomberg concerning steps to reunification: (quote) "we can .. marry South Korea´s technology and capital with Noth Korea´s manpower and resources .. Unification would also bring about opportunities for undertaking huge SOC projects."
Very interesting political development gaining speed this year. Stay tuned.

Adam Cathcart

Re: The Daily NK piece: The Chinese Ambassador to DPRK, Liu Hongcai, sat prominently just behind Kim and Rodman at the game in Pyongyang, not quite close enough to listen in, but in a place of honor anyway. Of course it's a pattern to make up for commercial chaos to the Chinese via a photo op (think about the Kim Jong-un and white-knuckled Auntie Kim with Liu on the amusement park ride in summer 2012, in the middle of the Xiyang contract destruction). But good for them, certainly there's plenty to talk about. The Onsung thing is very curious, and I think the Hwanggumpyeong project is still very problematic. Sino-NK did a small amount of translation on both issues here:
http://sinonk.com/2013/12/30/special-economic-zones-after-the-purge/
The Economist also did a piece on 21 December 2013 that spent a bit of time dealing with North Korea's SEZ strategy in the aftermath of the purge. Incidentally, what is the point of "breaking ground" on a new Sinuiju SEZ when the "old one" hasn't even opened yet? You wouldn't call this North Korean hedging on Hwanggumpyeong before it gets off the ground (or rather, goes underwater)?

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