How Not to Invest in a DPRK Special Economic Zone: The Case of Rason

By | July 15, 2015 | No Comments

The city of Rason | Image: Wikicommons

The city of Rajin (Rason) | Image: Wikicommons

In 2010 and 2011, Kim Jong-il appeared to be making strides toward a more full economic integration with the region of northeast Asia. Travelling to China with a frequency which would be familiar to men like Henry Paulson, Kim Jong-il stimulated Chinese news media to report that North Korean Special Economic Zones would indeed create a “North Korean Shenzhen.” Five years later, Special Economic Zones and Economic Development Zones have indeed proliferated in the DPRK, but they still largely remain conceptual. A handful of investors and entrepreneurs, however, continue to participate in smaller events and trade fairs in and around North Korea, with seminars and international conferences about SEZ laws and norms taking place in Pyongyang and Rason. Théo Clément, having presented at one such symposium in Pyongyang and travelled to Rajin-Sonbong, brings several of the major issues into focus by looking at Rason, the North Korean SEZ currently subject to a great deal of analytic focus. — Adam Cathcart, Editor-in-Chief

How Not to Invest in a DPRK Special Economic Zone: The Case of Rason

by Théo Clément

It has become topical, and maybe stereotypical, for researchers to introduce papers by stating that the DPRK is a “secretive” or “isolated” country. While this might be true to some extent, it certainly does not capture the current opening trend of the DPRK, and more particularly of its Special Economic Zones (SEZ), as narrated by the experienced Koreanist Rüdiger Frank. During a recent visit to the Rajin-Sonbong Special Economic Zone (the SEZ more commonly referred to as “Rason”) I could not but notice that North Korean diplomats and officials had indeed made substantial efforts to facilitate our visit to the Zone, including a 4-hour long ride in their personal car and a small welcoming speech in French.

While they are certainly much easier to access, these Special Economic Zones, and the DPRK in general, still cannot be considered an investors’ heaven. Many internal and international hurdles (such as an unreliable legal system and financial sanctions, respectively) prevent enhanced economic integration of North Korea with the rest of the world. While these issues are certainly relevant to some extent, I use in this essay the example of the Rajin-Sonbong SEZ to argue that potential foreign partners are not only deterred by Pyongyang’s behavior, but are also not willing to enhance economic cooperation with the DPRK.

High Potential, Low Investment: The Context | There are now more than twenty Special Economic Zones in the northern part of the Korean peninsula. Experts and scholars have been paying a great deal of attention to these zones as they have been considered as major vectors for North Korean reform. But investors, by contrast, have been less than keen in showing their interest in the DPRK’s SEZs. There are several elements that could explain the lack of business attention to the North Korean SEZs. The most obvious one is age: The overwhelming majority of North Korean Special Economic Zones are still very young, with nineteen out of twenty five[1] having sprung up since the end of 2013. With the notable exception of the Shenzhen SEZ, facing Hong Kong in Guangdong province, whose success makes it a textbook example of how to manage an SEZ, the first generation of Chinese zones also lived quiet lives before investment started to flow in. All gathered rather mixed results[2] at first (at least compared to Shenzhen). The comparison between Chinese and North Korean SEZs, however, stops here. Regarding the national business environment, demographic structure, or the role of the zones in the economy, SEZs in the PRC and the DPRK bear substantial differences. A more international perspective brings even more contrast; while important regional economic powers like the US were very supportive of Beijing’s gradual economic opening strategy, the same cannot be said of US stance on North Korea’s SEZs—it is lukewarm, at best.

The ongoing inter-Korean industrial zone at Kaesong surely requires some discussion in any investigation of North Korea’s approach to foreign investment. In some ways, Kaesong could be compared to some Chinese Economic Zones as it is fueled by capital, resources, and technology coming from the other side of the DMZ; this is not so unlike the Shenzhen, Zhuhai, or Shantou SEZs, which were at first targeted mostly by investors from Hong Kong, Macau, and Taiwan. But even the Kaesong Industrial Complex, by far the most successful DPRK SEZ in terms of foreign investment, has its ups and downs, mostly because of the very tense geopolitical realities of Northeast Asia and the Korean peninsula in particular[3].

Kaesong belongs to the second generation of North Korean Special Economic Zones which appeared on the map more than ten years after the opening of the Rajin-Sonbong SEZ in 1991. Located on the northeastern tip of the Korean peninsula, the Rason SEZ borders China and Russia and is the oldest and the largest SEZ in North Korea. At 746km², it is eleven times the land area of Kaesong. Its age and size have not led to conventional success. Although up-to-date figures on foreign direct investment (FDI) in North Korean SEZs are not available, Rason does not seem to be a very attractive place for investors. With the collapse of the Soviet Union, Chinese investors (mostly from Liaoning and Jilin provinces[4]) gained a partial monopoly on trade and investment in the zone, but the economic difficulties of the 1990s and the North Korean economy’s slow recovery dramatically reduced opportunities for large scale economic cooperation between Chinese investors and Koreans partners. Even if most Westerners would qualify the business environment in the Rajin-Sonbong SEZ as non-optimal, we should nonetheless be aware that North Korean authorities made great efforts to attract foreign investment, with moderate success.

The Law of the DPRK on the Rason Economic and Trade Zone, which was first approved by the Standing Committee of the Supreme Popular Assembly in 1993in order to regulate potential FDI inflows in the Zone, has been amended no less than six times, and unprecedented efforts (in the North Korean context) have been made to decentralize some decisions to the local authorities.[5] Kim Jong-il visited the zone at the end of 2009, and the SEZ was made a “special city” at the beginning of 2010. Tours of the zone, and especially of its local market or informal talks with officials, reveal the local eagerness to gain importance as an export-processing hub. As confirmed by several discussions with Korean-Chinese entrepreneurs or Koreans from the diaspora doing business there, Kim Jong-il’s visit to the SEZ proved very effective as it put Rason back under the spotlight and revealed renewed interest from Pyongyang to the zone and, more generally, to the principles of economic opening.

1-garment-factory

A garment factory in Rajin-sonbong | Image: Théo Clément

On the other hand, it might be said that even if the DPRK had the most detailed and attractive code for investors in the world, there still would be little success in its SEZs, as Pyongyang‘s refusal to share basic economic statistics or reliable information, not to mention its unreliable legal system, is a strong deterrent for investors and prevents confidence-building. Chinese businessmen doing trade or investment in the DPRK often mention lack of confidence as a hurdle that prevents enhanced economic interaction. Here, looking back at the Chinese experience with special economic zones and the Kaesong example, we find two salient points. First, the most important FDI receiver in the world, China, was able to import foreign investment even before its WTO accession in 2001, that is, before its legal system was coherent or reliable (it arguably still remains underdeveloped). As Clarke et al. argue in 2008, ”the experience of the reform era in China seems to refute the proposition that a necessary condition for growth is that the legal system provide secure property and contract rights.”[6] The local and central governments in China still actively intervene in the economy to a degree that would make many Western economists squirm with discomfort. The second point is that a lack of confidence did not prevent Kaesong from becoming an extremely lucrative SEZ, thanks to, among other things, backing from political groups in South Korea.

Obviously, the DPRK as a whole is no paradise for investors. Even still, some experts do consider the Rason SEZ to be a high potential zone, perhaps the most promising zone after Kaesong. The zone only has a moderate potential as a tourism hub (one can find more enjoyable beaches or scenic spots in other parts of the DPRK), but it does have several other cards to play in order to attract investment, most notably its ideal location. The Rajin-sonbong SEZ not only shares territorial borders with Russia and China, it also has the northernmost ice-free port facilities of East Asia, the three piers of Rajin being usable all year-round.

From a longer-term perspective, the upcoming opening of new arctic maritime sea routes would provide new opportunities for Rason, as the shortest way from Asia to Europe will run by the coast of Rason. Giving Northeastern China (Dongbei, 东北; or the three northeastern provinces, 东北三省) access to the sea it has been lacking since the unequal treaties of the Qing and Romanov Empires in 1858 and 1860, Rason reduces shipping times of Dongbeimanufactured products to Japan significantly and therefore attracts considerable interest by Chinese businessmen and, to a certain extent, the Chinese central and local governments.

The Rajin-Sonbong SEZ also offers an interesting window of opportunity for the Chinese Northeastern “rust belt.” Whereas Manchuria was one of the most industrialized and wealthiest regions of China before the 1949 revolution, the three Northeastern Chinese provinces (Heilongjiang, Jilin, and Liaoning) suffered consecutive major economic blows with the Sino-Soviet split, the rise of exporting provinces in Southern China (Guangdong, Fujian), and the massive restructuring of the public sector during and after the Deng era.[7]

The Chinese leadership is well aware of the “Dongbei phenomenon” [东北现像], and has been trying, at least since Hu Jintao’s administration, to overhaul China’s old industrial base. The “northeast old industrial base revitalization” plan [振兴东北老工业基地], articulated in 2006, emphasizes the need for the region to not only accelerate the pace of economic reform, but also to develop existing infrastructure to better integrate the Dongbei economy within the wider regional economy of northeast Asia. As the official text of the plan explains (see the original Chinese) one of the objectives is to enhance linkage with the whole region, including the DPRK:

We must enhance urban infrastructure and international logistics corridors construction in major border cities and actively develop corridors for inter-regional transport of domestically traded commodities and cross-country railway-water combined transport, push forward the construction of roads, ports and economic cooperative zones at areas bordering Russia, Mongolia and Democratic People’s Republic of Korea. We must open up wider in development zones.

The creation of transport corridors leading to the East Sea (Sea of Japan) through Rason is explicitly mentioned in the text’s section on “construction of ports corridors:”

Priorities of construction should be given to railway from Suifenhe to Vladivostock, from Huichun to Kamesova at the border with Russia, railway from Arshan to Qiaobashan at the border with Mongolia, and Nanping port for transportation of iron ore powder, as well as railway from Mudanjiang to Luojin at the border with North Korea.[8]

The Chinese side has indeed undertaken efforts to strengthen the transportation infrastructure of Jilin province and transform the wider region into a transportation hub, amplifying work by United Nations Development Programme (UNDP) through both the Greater Tumen Initiative[9] and other local programs. Regarding access to the Rason SEZ in particular, the Chinese side already renovated the railroad leading to the border and, in 2010, built a highway connecting Jilin’s capital city Changchun to the border city of Hunchun. The Quanhe-Wonjong border bridge, whose construction was also funded by China, is soon to doubled by a newer, bigger, more durable structure.

On the other side of the border, however, renovation of infrastructure has proceeded at a snail’s pace. Facilities and infrastructure in Rason are in much poorer shape than those in northeastern China. The railroad running from Namyang (facing Chinese city of Tumen) to the Rajin port, for example, dates back from the Japanese colonization, and as recent visitors in the Rason port can observe, is still unusable for freight.

Rajin port’s pier no. 2

Rajin port’s pier no. 2 | Image: Théo Clément

Infrastructure in North Korean SEZs (other than Kaesong) is either basically nonexistent (see: Manpho, Hwanggumphyong, and Wiwha) or severely deteriorated (Rason). There is an urgent need to inject large sums of capital inside the DPRK before economic cooperation projects can really flourish. While investors, especially of the venture sort, can be bold, it is unlikely that businessmen will even consider projects in a zone that suffers from intermittent power shortages or that is poorly connected to neighboring countries and the rest of the DPRK. Even if the needs are crystal clear and North Korea seems willing to receive FDI, it may be that Pyongyang is not ready to pay the tab for its strategic economical opening, as indicated by a series of calls for (foreign) investment in the zones’ most basic infrastructure (power generation, roads and railroads, and sewer systems) published after Kim Jong-il’s 2010 visit to Rajin.

Who Want to Pinch In? | Regarding initial infrastructure investment in North Korean SEZs, it seems that Pyongyang is willing to compromise on economic opening only if the (short-term) result is worth the effort.[10] And by “effort” it is meant willingness to receive foreign investment and to offer cheap labor but no expenditure of financial resources to strengthen the zones’ processing or exporting capacities. As revealed by a series of calls for investment issued by the Economic Corporation Bureau of Rason’s People’s Committee, it seems that even the most basic infrastructure of the northeastern SEZ will not benefit from Pyongyang’s expenditures. The Sonbong thermal power plant, the only power plant of the SEZ, dates back to 1972; it is now totally obsolete. Due to overuse and lack of renovation, the consumption of crude oil per kW/h has dropped from 250g (in 1972) to 340g now.[11] Rason authorities are considering wind power plant technology in the zone, but even in the best-case scenarios, a boost in capacity from wind power is years away.[12]

In an economy desperately lacking of energy fuel, the renovation of the Sonbong power plant can hardly be considered a luxury if Pyongyang wants to attract more foreign investment, and especially energy-consuming industries. The investment feasibility report estimates the total cost of the renovation to be slightly less than 13 million euros, while the construction of a whole new heavy oil power plant is estimated at more than 50 million euros. The Rason authorities are counting on foreign investment (or foreign electricity supplies). Interestingly, authorities in Rason explain in their call for offers that while any kind of investment is welcome, they provide special financial incentives to encourage entrepreneurs to also invest in a nearby coal mine (Gyongheun), thus offering the opportunity to make back the initial investment in form of coal for exports.

North Korea seems unwilling or unable to implement such initial investments. This does not necessarily mean there is a lack of political will, since the legislative organs of the DPRK have been discussing the law about SEZs for some time, focusing on strengthening the legal framework for foreign investment in North Korea. What is most striking is that, whereas historical cases of economic opening in socialist economies (especially China) have proven to be major opportunities for engagement (and diffusion of market-friendly ideology), there are very few international actors actually willing to invest in the DPRK’s SEZs.

International organizations like the UNDP used to pay attention to Rason, but interviews conducted with former high-profile UNDP officers clearly reveal that the UN development agency, mainly because of political pressure, must steer clear of North Korea’s Special Economic Zones.[13] The UNDP’s budget for North Korea (80 million dollars) is indeed a rather small budget, even for a country with a population of only 24 million.

China, North Korea’s main economic partner, is the biggest investor in North Korea (in or outside the SEZs, sans Kaesong). However, Chinese investment in the Northern half of the Peninsula and its SEZs, at least if compared with other neighboring countries with a (more or less) equal level of development (Laos, Myanmar) is still very low. While Chinese economic cooperation with countries like Myanmar or Laos is steadily increasing, China-DPRK economic ties, considered from a Chinese perspective, are not particularly strong, as shown by Drew Thompson in a 2011 report. It even appears that China’s attitude regarding investment in infrastructure in North Korea is very different than its cooperation policies with other countries, especially sub-Saharan African countries.

Whereas Chinese companies (especially State-Owned Enterprises, SOEs) have been financially supportive of infrastructure building in several African countries (Sudan, Zambia, Democratic Republic of Congo), and are even pushing for the opening of SEZs (in Zambia and Mauritius), it seems that the PRC leadership has developed a “politics first” approach towards North Korea. Investment and economic cooperation is led by small-scale Chinese businesses (the overwhelming majority of which are non-state actors), which suggests two things: Either Beijing is very cautious, or it is trying to “teach North Korea a lesson” by letting North Korea’s institutional partners interact with profit-seeking businessmen; in other words, “to attract investment, you need to change.” Since there are no friends in business, it is paradoxically easier for Beijing to influence Pyongyang by using “Track II Diplomacy” via businessmen that have little interest in the so-called “blood cemented relationship” rather than through official channels. The effectiveness of this approach, however, still has to be proven.

Revealingly, but unsurprisingly, China seems to be willing to invest in transportation infrastructure that would connect South and North Korea, via Kaesong. Chinese bullishness with regard to prospects for a Sinuiju-Kaesong high-speed railroad might be explained by the fact that infrastructure is by far in a better state than other SEZs at the Chinese border. In other words, China is willing to invest a lot of capital in a very remote SEZ bordering South Korea but has become more cautious when it comes to investing on the other side of the Yalu or Tumen rivers.

The Rajin Microbrewery, a Czech joint-venture with its Russian customers (picture: Théo Clément)

The Rajin Microbrewery, a Czech joint-venture, with its Russian customers | Image: Théo Clément

Compared to China, Russia’s new attitude regarding investment in North Korea and its SEZ can be unexpectedly described as promising. The Pyongyang-Moscow relations have fluctuated since the USSR collapsed, but renewed Russian interest in the Rajin-Khasan railway project and Moscow’s leading role in Russia-Koreas trilateral economic cooperation seems to be cultivating a closer relationship. Recent reports suggest President Putin is willing to provide political and diplomatic cover to Pyongyang making Russia a useful ally (once again) for North Korea. Backing from Moscow removes some political pressure from sanction-supporting countries and an increasingly weary Beijing and opens the door for increased economic cooperation with a major regional and global power. Even if Russia is acting entirely out of self-interest in Northeast Asia, it might be easier for Pyongyang to cooperate with Russia, a former close ally which has intersecting interests with North Korea, than with Beijing, whose ambivalent attitude towards North Korea (the PRC as a reluctant political and economic supporter) is source of frustration for the DPRK.

 


[1] There is an epic debate on the exact number of SEZs, some of them (especially Sinuiju) having an ambivalent status. As if to compound to the argument, a few weeks ago, the KCNA announced the opening of a very new tourism-focused zone, in Samjiyon county. See “DPRK to establish 2nd int’l tourist zone,” Xinhua, April 24 2015.

[2] Yeung Yue-man, Joanna Lee, and Gordon Kee, “China’s Special Economic Zones at 30,” Eurasian Geography and Economics 50 no. 2 (2009): 222-240.

[3] Scholars Jamie Doucette and Lee Seung-ook recently published a fascinating paper with a wholly different approach on this particular issue. See: Doucetee, Jamie and Lee Seung-ook, Experimental territoriality: Assembling the Kaesong Industrial Complex in North Korea, Political Geography no. 47 (2015): 53-63.

[4] This report gives an extremely useful synthesis of Chinese investment in North Korea. However, regarding ethnicity of investors, we believe (based on fieldwork done in the Yanbian Korean Autonomous Prefecture) that investment is no longer done mostly by ethnic Koreans in China; or, at least that things are quickly changing.

[5] While this move was aimed at bringing more flexibility, it seems that it also triggers important conflicts of competence among DPRK institutions. See: Andray Abrahamian, and Geoffrey K. See, and Xinyu Wang, “The ABCs of North Korea’s SEZ,” U.S.-Korea Institute at SAIS (2014).

[6] Donald Clarke, Peter Murrell, and Susan Whiting, “The Role of Law in China’s Economic Development,” in Loren Brandt and Thomas Rawski (eds), China’s Great Economic Transformation (Cambridge University Press, Cambridge, 2008), 400.

[7] See Brandt, Rawski, and Sutton’s contribution in China’s Great Economic Transformation.

[8] In the text “Luojin” (罗津) refers to the Chinese pronunciation of Rajin.

[9] The GTI is formerly known as Tumen River Area Development Plan.

[10] The reader interested in more theoretical development on this peculiar attitude would certainly enjoy the reading of Samir Amin’s La Déconnexion (no English translation available), where the French-Egyptian economist advocate the need for Third-world countries to submit their external economic relations to national accumulation (and not vice-versa). English-speaking readers interested in Amin’s theories on economic cooperation can read his Accumulation on a World Scale; A Critique of the Theory of Underdevelopment.

[11] Invest Feasibility Report for Reconstruction & Modernization of Sonbong Thermal Power Plant, Economic Corporation Bureau of Rason People’s Committee of D.P.R. Korea (2010).

[12] Invest Feasibility Report for Wind Power Plant Investment, Economic Corporation Bureau of Rason People’s Committee of D.P.R. Korea (2010).

[13] The UNDP used to pay interest in Rason, at the end of the 1990s, but no projects are currently running inside the zones. See D.P.R. Korea’s Rajin-Songbong Economic Trade Zone, Investment and Business Guide, United Nations Development Program (1998).

 

 

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