Sino-NK

It would now be hard to find a single serious analyst who believes that Chinese aid is not central to keeping the DPRK afloat. But despite the huge influx of Chinese capital into North Korea, many Chinese investors continue to harbor serious doubts about the reliability of investments in North Korea. In this essay, Alan Ferrie, an international economics analyst based in Puget Sound, Washington, assesses the development plans for two special economic zones, Hwanggumpyong Island and Wihwa Island, scheduled for joint Chinese-North Korean development. – Managing Editor

Evaluation of the Development Plan for Hwanggumpyong Island and Wihwa Island

by Alan Ferrie

The Hwanggumpyong Island Development Plan was originally a component of the Greater Tumen Initiative (GTI).  The GTI was established in 2005 under the Changchun Agreement whereby China, Mongolia, South Korea and Russia had extended a previously established co-operation agreement for an additional ten years and adopted the GTI Strategic Action Plan 2006-2015.  However, North Korea (DPRK) withdrew from the GTI because of their disappointment with the amount of investment.

In June of last year, China and North Korea agreed to establish three Special Economic Zones (SEZ) to promote economic development and trade between the two countries.  The first SEZ encompasses the undeveloped island of Hwanggumpyong, the second SEZ is located near the Tumen River at the North Korea border city of Rajin-Sonbong (Rason), and the third SEZ is located on another undeveloped island named Wihwa.  Having dealt with Rajin-Sonbong in a previous piece for SinoNK.com, this essay focuses only on the two islands (SEZ 1 and SEZ 3).  These islands are located near the mouth of the Yalu River in the northwest region of North Korea, and are situated close to the Chinese city of Dandong.

Outline of Zone Attributes | The government of North Korea wants high-tech Chinese companies to establish factories on Hwanggumpyong Island, and eventually hopes to be able to transfer some of the innovative capabilities to its domestic firms.  Included in the development plans for the island are an amusement park, a 20,000 square meter free-trade area, and an import-export processing zone.  To facilitate trade with North Korea, a tax-free zone of 10 square kilometers will be established in Dandong as well.  Chinese officials expect that companies involved in a wide range of sectors, including marine engineering, specialty steel production and the manufacturing of car radios, will establish facilities in Hwanggumpyong Island and Dandong city.

To encourage development in the SEZs, construction of a six kilometer bridge is currently underway and is expected to be completed within three years.  This bridge has an estimated cost of 1.7 billion yuan (270 million USD) and is being financed entirely by the government of China.  This is only the second road bridge linking the two countries across the Yalu River.  The new bridge is situated 10 kilometers downstream from an existing bridge built in the 1930s.  The bridge will be linked to the Dongbiandao railway as well as the Trans-Siberian Railway.  A railway network connecting the major countries in Northeast Asia will be created as a result.

Factors Conducive to Attracting Foreign Direct Investment | The North Korean government appears to be very supportive of these special economic zones.  When North Korean Cabinet Premier Choe Yong Rim visited China in September of last year, he stated that North Korea is strongly motivated to strengthen trade and co-operation with China, especially with respect to improvements in infrastructure.  He promised to provide special accommodations to encourage more investment by Chinese companies.  North Korea and China have signed a 50 year-lease agreement to develop the Hwanggumpyong Island in which China has exclusive and autonomous development and management rights based upon Chinese capital.

After proposing changes to the 50 year-lease agreement, North Korea enacted a new law in December of last year with the intent of reassuring potential Chinese investors of the stability of the investment climate in North Korea.  This new law is said to contain provisions incorporating the successful elements utilized in the development of China’s own special economic zones.

As mentioned previously, a six kilometer bridge is currently being constructed which will link the two special economic zones to China.  After completion in three years, the economic potential of the area will be greatly increased.  With labor rates in this zone being much lower than those across the Yalu River, these special economic zones definitely have considerable advantages.

Factors Detrimental to Attracting Foreign Direct Investment | Based upon the plethora of failed projects in North Korea over the past twenty years, foreign investors will naturally be very skeptical.  Tang Longwen, an associate professor at the Dandong Party School stated that “the North’s plan to develop the two islands by leasing them to Chinese enterprises costs too much.”  He goes on to state that the islands do not have abundant resources and are not worth developing.  He questions whether North Korea genuinely intends to open the islands or will instead open and close the islands arbitrarily.  He noted North Korea’s habitual disregard for international norms.

In terms of priorities, China is more interested in the Rajin-Sonbong area which will provide China with access to the East Sea.  The Chinese government has made it clear that co-operation must be based on market principals.  In spite of encouragement from the Chinese government, Chinese investors have not rushed to invest in the zone and investors from other countries are even more cautious.

As a testament to the reluctance of businesses to invest in the zone, little construction has commenced even though a large opening ceremony took place in June of last year.

Future Outlook | Unlike the Rason SEZ, the Hwanggumpyong and Wihwa Island SEZs are not of strategic importance to the government of China and Russia.  Furthermore, in spite of large investments by the Chinese and Russian governments, the development of the Rason SEZ is many years behind schedule.  Therefore, the government of North Korea must provide reassurances that the investment climate will be more favorable in the Island SEZs than it has been in the Rason SEZ in order to spur development.

The government of North Korea will need to thoroughly examine the problems associated with the development of the Rason SEZ and make the necessary changes, where possible, to the Island SEZs.  Along with encouraging investment through promises of cheap labor and high profit margins, the government of North Korea will also need to demonstrate that market forces and the rule of law will be consistently applied in the Island SEZs.

The North Korean government must also find a way to build confidence and trust with potential Chinese investors, and can do so primarily by demonstrating that the 50-year lease agreement will be honored for the full duration without any unilateral changes being made to the contract.