North Korea: Following Vietnam’s Model?

Stratfor offered an interesting look at North Korea’s economic strategies recently (subscription required), noting that Kim Jong Il himself has suggested that North Korea might use Vietnam as a benchmark model for reviving its decrepit economy.

“…North Korea is aligned with the goals of the Vietnamese growth model, but it plans to embark on its own strategy — characterized by isolated and strategically located special economic zones (SEZs). Like Vietnam, it wants economic growth without political change, except its desire to prevent the latter is even stronger. Any foreign investor wanting to play inside its borders will have to wear a political straitjacket to gain entry….

….North Korea’s current economic model can best be explained in two stages. The ultimate goal is to attract enough foreign capital inflows and trade to develop into a regional hub similar to many of its Asian neighbors — but one in which all trade takes place inside strictly isolated areas. Setting up various strategically located SEZs is the first step. Attracting foreign capital inflows that Pyongyang can use as it pleases is the second.

The best-known SEZ is Kaesong. Located on the North Korean-South Korean border, this zone is heavy with political implications but offers little attraction to non-South Korean foreign investors, given its inland location. A key feature of the current inter-Korean negotiations, it is populated mostly by small- to medium-sized South Korean-subsidized firms producing low-end consumer products such as clothes, shoes and watches. Its 2006 revenue amounted to $74 million, which boosted the value of inter-Korean commercial transactions. It is mostly underwritten by the South Koreans, who have the most to gain politically from its success.

North Korea learned the importance of geographical location from its very first SEZ, which started in Rajin-Sonbong to the northeast. The isolated location on the Tumen River was accessible only to a handful of Chinese and Russian businessmen. After the SEZ disintegrated into a casino haven, Pyongyang shut it down. The second SEZ sat on the Chinese border, at the mouth of the Yalu River, in a town called Sinuiju. This was a good location, offering easy access to China’s consumer markets and to dependable rail/ship transportation infrastructure. Even Beijing realized the viability of this zone as a potential competitive threat to its own export businesses and put a quick stop to it in 2006 by arresting the Chinese entrepreneur who was the driving force behind it. In spite of this hiccup, Pyongyang has since announced plans to continue with the SEZ’s opening.

Other possible SEZ locations include Wonson, Nampo and Haeju — all of which are industrial port cities strategically located for quick shipment of goods to China or Japan. Pyongyang’s plan is to eventually push all SEZs toward deepwater ports, where it can take fullest advantage of its proximity to some of the world’s busiest trading countries.

….Pyongyang is making a heavy sell of its guaranteed pool of cheap, disciplined labor; central accessibility to road, rail and shipping transportation routes; and a location next door to some of the world’s largest consuming economies.

….The purpose of these SEZs is to bring in investment, technology and training without exposing North Korea’s populace to Western influences, and without more than a trickle of skills and capital seeping out into the wider country. Each zone is walled off from neighboring cities, with workers cordoned off in housing within North Korean government work facilities. Pyongyang maintains maximum political and social control by being the only gateway through which any wage exchange or employee selection is conducted. North Korea will employ handpicked workers who will, in a controlled environment, become more efficient and skilled in manufacturing design and methods. Pyongyang will transfer these skills — but only via workers who are considered the most politically reliable — to workplaces elsewhere in North Korea in order to bring about “indigenous” improvements, or to facilities that train North Korean workers. Foreign investors will have little to no control over their workforces.

Outside of the SEZs, the majority of foreign investors inside North Korea fall into one of these categories:

• Politically driven groups (South Korean government-sponsored businesses)

• High risk-taking individual investors and North Korean political/financial specialists who are seeking opportunities and awaiting a change in the political dynamic

• Joint venture consortium funds that spread the risk of each investment deal among multiple foreign investors

• Oil and natural gas companies hungry to tap the potential wealth of resources (e.g., onshore/offshore oil, uranium, tungsten, gold, etc.) that have yet to be fully explored north of the peninsula.

….Enthusiasm for speculative investing in North Korea began to grow in the early 2000s, and though positive rates of return cannot yet be guaranteed — nor can rates competitive with those found in Vietnam or China — speculation is steadily accumulating. Even Nestle’s CEO is rumored to have made a bid for a North Korean ice cream brand.

Investment funds continue to pop up (such as the U.K.-based Chosun Fund or Global Panel’s North Korea Investment Fund), coming up with innovative ways of insuring against mass expropriation (e.g., investing in individual transactions rather than direct asset ownership).

…With that in mind, there is a high probability that, despite all the talk of SEZs, North Korea will have to rely first on its resource-driven (i.e., mines) and not work-driven projects (i.e., SEZs) to attract foreign capital. Establishing walled-off community compounds that house workers around mining areas — as in South Africa — offers the immediate source of hard cash and relative social isolation Pyongyang wants but without the skills transfer to its labor force.

…But while foreign investment in North Korea is no longer an impossible idea, it is too soon to predict that North Korea will join the next wave of foreign direct investment hot spots in Asia. For now, the only sectors that can be guaranteed both foreign investor interest and entry are energy and raw materials, including oil, gold and timber. In these areas, investors of Swiss, South Korean, British and New Zealand origin already have all jumped onto the exploration bandwagon…”

This entry was posted on Friday, November 2nd, 2007 at 6:56 am and is filed under North Korea, Vietnam.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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