Revolution on the Margins? Surveying the Trade Environment in Rason

By | May 25, 2012 | No Comments

Revolution on the Margins? Surveying the Trade Environment in Rason

by Sabine van Ameijden

In the midst of turbulent times, the death of Kim Jong-Il, a broken nuclear deal with the United States and a failed satellite launch, North Korea remains in the global spotlight. Parallel to these media-attracting events, North Korea’s economic development bears steady monitoring, as it is in this area where many opportunities for actual change are arising.

In the Rason Special Economic Zone, where the North Korean authorities have set up a promising battery of goals, foreign observers have witnessed significant progress since 2009. While it is certain that Rason has huge potential, as always, North Korea needs to turn its words into action. Due particularly to the fact that foreign investors are involved, North Korea needs to demonstrate its credibility as a trading partner. As analyst Scott Bruce has noted, North Korean firms have the tendency to renege on deals all too often, scattering the goodwill of foreign investors.

What kind of business environment do foreign investors and advisors encounter in Rason? Does this Special Economic Zone represent a national economic policy shift, or is it simply an experiment on the margins? And what are key challenges that need to be spoken to, like infrastructure and power supply? All of these questions need to be addressed in order to evaluate what the opportunities and risks are for foreign investors.

Background | Rason was established in 1991 as a Special Economic Zone (SEZ) as an ostensible focal point for free trade, foreign investment and the establishment of foreign businesses or joint ventures. However, until 2009, very little progress was actually achieved in this north eastern tip of the DPRK. In that year, two large investment groups, Daepung International Investment Group and the State Development Bank committed to Rason, and the establishment of the Joint Venture and Investment Committee followed. These businesses and the governmental body then sought to attract foreign investment to Rason.

Simultaneously, China launched its Changjitu Plan in order to develop neighbouring Jilin Province. Rason’s economic potential and geographic location have therefore made China invest time and resources to develop this region, especially in terms of infrastructure. Besides the Chinese, the Russians are also interested in Rason. While Chinese companies have leased two piers of the Rajin port, the Russians have leased a third. Another large investment by the Chinese is a paved highway from Rason to the Chinese border city of Wonjong, which was for 90% completed at the end of 2011. Additionally, the railway from Rajin to Tumen is to be repaired and improved.

Power Supply | While relative advancement has been seen in the area of infrastructure, power supply in Rason remains a stumbling block. Power shortages are a national problem in the DPRK – even Pyongyang still suffers occasionally – and power supply is a basic necessity for an attractive investment environment. The 200,000 kilowatts-generating oil power plant in Sonbong is the main power supplier in the zone. At the moment, Rason’s “Victory Chemical Plant” hardly lives up to its name, standing idle.

There is a plan to import Chinese coal generated electricity. A Chinese power company will build the lines and through a joint venture supply company the electricity will be transported. Furthermore, in the beginning of this year, China and North Korea allegedly agreed that China will build an airfield and a thermal power plant and in exchange China can use three piers in Rason. However, both these deals still need to be confirmed.  The very quiet visit by Yun Gongmin, the head of China’s Huadian Power Co. to Pyongyang last October (described in SinoNK.com’s Document Dossier #3) would appear to have been a further step in the direction of solving the power problems in Rason, but no agreements were reached or publicised.

Hanns Seidel and Choson Exhange in Rason | While endeavouring to solve the power issues, North Korea is also drawing in policy and business advisors from abroad. In 2010 the German Hanns Seidel Foundation concluded partnerships with two farms in Rason and has welcomed its first North Korean delegation to its School of Agriculture in Pingdu, China.

The Singapore-based Choson Exchange aims at business education in North Korea through their training programmes and workshops, and both these organisations have been able to closely monitor the developments in Rason through their regular visits. In August 2011, representatives from the Hanns Seidel Foundation and Choson Exchange visited Rason together.

Choson Exchange and Hanns Seidel Foundation in Rason

Rason as Lab for Bold Innovation, or Ideological Dead End? | North Korea has been the subject of the repeated and somewhat simplistic argument that the DPRK needs to open up the way China did in the late 1970s. This argument overlooks multiple fundamental differences between the PRC and DPRK, both historically and in terms of current conditions and systems. Nevertheless, we should keep in mind that Deng Xiaopeng’s pragmatic and successful economic reforms included similar SEZ’s like Rason.

North Korea is still experimenting with economic reforms and these designated zones allow this process to remain containable. As to the question of sustainable, through-going economic reforms, the nation has been suffering from failing crops, food shortages and starvation, and many material sacrifices have been made to sustain the military-first policy.  Clearly the regime continues to be reluctant to economic reform towards a market economy. (For a remarkable survey of institutional and personality-driven questions surrounding economic reform in the DPRK, see Stephan Haggard, Luke Herman and Jaesyung Ryu, “The Supreme People’s Assembly and ‘Cabinet Responsibility’: An Economic Reform Debate?,” April 20, 2012.)

Considering North Korea’s flexible use of the term Juche (주체), which translates itself as ‘self-reliance’, we might look at the increased number of Kim Jong Il’s guidance tours to economic sites in 2011, in contrast with a decrease in the number of visits to military ones. In 2010, the Rason SEZ received more local administrative autonomy, which has increased efficiency in terms of decision making, while Pyongyang remains in charge of the most important decisions. Furthermore, the zone now has its own Business School, which further illustrates the North Korean regime’s commitment. “Juche” as cover for full-scale economic reform it is not, but these steps do illustrate the regime’s ability to take forward steps economically even as their hostile “military-first” rhetoric continues unimpinged.

A final problem remains:  North Korea does not have the reputation of a reliable business partner, and is known for its unpredictable behaviour. Increasing the ambiguity for foreign investors, Rason’s legal code of 2010 states that business licenses can be revoked if North Korean law is “seriously” violated. Adding the role of corruption in North Korean industries to the equation, foreign investments face severe risks.

There are two sides to the Rason Special Economic Zone, the opportunities and the risks. Some risks can be regarded as challenges, such as the development of infrastructure and power supply. These issues can be improved and Chinese companies are already moving ahead with investments in these areas. Unfortunately, the present risks may be insoluble. The North Korean political and, therefore, business characteristics are generally not favourable; the distrust is generated by the DPRK’s unreliable reputation and will trail it for years to come. At the same time, foreign investment in North Korean economic development can be an opportunity to stimulate free market policy reforms and in the long-term shape the DPRK into a wealthier and, possibly, more politically stable nation.

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