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Korea
Jun 21, 2011
North Korea not quite in the zone
By Andrei Lankov
In early June, the governments of China and North Korea declared that they would work to develop two new special economic zones (SEZs). One zone is to be situated in the small port city of Raseon, on the eastern coast of South Korea, just 20 kilometers from the nearest crossing to China. Another zone will be developed on the unremarkable sandy island of Hwanggumpyong, in the vicinity of Sinuiju, the largest city on the border (some three quarters of trade between the two countries pass through this city).
One cannot be surprised by this initiative as talk of new SEZs "soon to be established" has been around for over a decade. There is little doubt that the North Korean government is very interested in the idea of SEZs. Unfortunately, this interest does not necessary mean that the North Korean authorities are willing to make the concessions that would allow the SEZs to operate efficiently.
The history of North Korean SEZs is essentially the history of frequent failures and occasional partial successes. The first attempt to create a SEZ took place in 1991, when the North Korean government established a SEZ in the remote northwestern corner of the country. The Raseon SEZ, as it has now become known, is located where the borders of China, Russia and North Korea meet.
News of the establishment of North Korea's first SEZ produced much enthusiasm in the international media. As usual, there was no shortage of pundits who saw the decision as a sure sign that Chinese-style reforms would soon be launched in North Korea.
There had been talk of such a move since at least 1984, when the North Korean rubber-stamp parliament passed a joint ventures law, and more or less every change of Pyongyang policies was interpreted by optimists as a sign of impending reforms. Needless to say, no reforms have happened so far, after three decades of waiting (and unlikely to happen any time soon).
Raseon SEZ was not a sign of reform. Neither was it a success. By 2000, the total volume of foreign investment in the area was a paltry US$ 35 million, even though initially there was talk of about $2 billion in investment.
The major problem was the location - an underdeveloped area even by meager North Korean standards. The only paved road in the area connects Rajin and Sonbong, and even this is only a single lane. It takes some 40 minutes to travel 17 kilometers along the area’s best road. The bridge that connects the area with China has remained unchanged since colonial days.
Obviously, Pyongyang expected that rich foreign investors would pay to upgrade infrastructure. They did, but only on a very limited scale.
So for two decades the Raseon SEZ has largely remained dormant, being essentially a large market place where North Korean merchants have been able to buy Chinese goods for resale in the inner regions of North Korea.
For a brief time it also served as a gambling enclave for rich Chinese, but after some ugly embezzlement incidents the Chinese demanded the local casino to be closed. The North Korean authorities had no choice but to oblige, and afterwards the Raseon SEZ slipped into relative obscurity again.
Why did North Korea's decision-makers choose such an inhospitable setting for their first experiment with a SEZ? It seems that from their perspective, the remoteness was not a disadvantage, but rather an advantage. As was shown by subsequent events, North Korean authorities are driven by two mutually incompatible impulses: they want to develop SEZs to produce hard currency income, but they also want to minimize their impact on North Korean society.
So is the SEZ was far away from major population centers, it would be easier to control and supervise, and it would not become a source of the forbidden knowledge about the outside world (to be more precise, about prosperity and individual freedom enjoyed by the citizens of neighboring countries).
The North Korean state (or at least some important faction within it) has long come to realize that the North Korean economic system is hopelessly inefficient. However, they also understand that the peculiar situation of the country prevents it from emulating the successful Chinese approach.
The root of all North Korean political problems is the existence of liberal and filthy rich South Korea. Chinese-style reforms, if ever attempted, would expose the North Korean population (still largely unaware about the outside world), to the stark images of South Korean prosperity.
Reforms would also bring with them an unavoidable relaxation of societal controls. The net result of these changes would likely be a grave crisis in the regime’s legitimacy and, perhaps, its complete collapse. In a sense, reforms in China were possible because no capitalist, democratic and affluent South China existed (Taiwan is far too small to be of significant concern to Beijing).
However, the North Korean leaders still want to do something about the dire economic situation - as long as this "something" does not look too dangerous politically. So, the North Korean leaders continue to use ideological mobilizations (but this horse has long died). They have also attempted to find miracle technologies, notably related to information technology. And they have pinned some expectations on SEZs.
SEZs are acceptable to the North Korean government because they are relatively easy to control. So far, all North Korean SEZs have been fenced off with barbed wire and all visitors have had their IDs carefully studied at checkpoints.
The North Korean government obviously hopes that small areas of controlled capitalism will generate enough income to make a difference - or at least to keep afloat the long-decaying economy.
So despite the near total failure of the Raseon SEZ, in the early 2000s the North Korean government undertook two further attempts to establish SEZs. One of these attempts took place in the border land city of Sinuiju, in whose vicinity the recently announced Hwanggumpyong SEZ is supposed to operate.
The 2002 plan had some twists that made it appear, well, a bit too North Korean. It was stated that the entire population of Sinuiju, some 350,000 people, would be relocated. These people were not good enough to enjoy the fruits of capitalism. They were to be replaced by 200,000 model workers, hand-picked by the authorities for their skill and perceived political reliability.
The most unusual act was the decision to appoint a foreigner as the SEZ governor - Yang Bin, a Chinese entrepreneur with Dutch citizenship and then reputedly the second-richest man in China. He was then 39 years old.
On September 12, 2002, the Supreme People's Assembly, the North Korean pseudo-parliament, adopted the Basic Law of the Sinuiju Special Administrative Region. The law consisted of six chapters (government, economy, culture, fundamental rights and duties of residents, structure, and the emblem and flag of the region), and an impressive total of 101 articles. The law - essentially, a quasi-constitution - even envisioned that the SEZ would have its own flag.
The Basic Law proclaimed that the legal system would remain unchanged for 50 years, and that foreigners would enjoy the same rights as North Koreans in the area. Foreign judges were to be invited to solve disputes and oversee the enforcement of laws. It looked too good to be true, so for a while it was all the media usual hype about a "breakthrough". The North Korean vice minister for foreign trade called the SEZ "a new historical miracle".
However, the miracle at Sinuiju hardly lasted 50 weeks, let alone the promised 50 years, and its flag is nowhere to be seen.
It was probably the Chinese who sank the project. Beijing was not amused by the turn of events. There are at least two known reasons for their unease. First, Yang Bin wanted to transform the city into a gambling center, a Macau of the North. This was not welcomed. It is also likely that China did not want competition between Sinuiju and its northeastern cities. It did not help that the North Koreans, following their modus operandi, did not bother to liaise with the Chinese beforehand.
Yang Bin was already under investigation at that time. Soon after he was arrested for fraud and sentenced to 18 years in prison. Nothing was heard about the Sinuiju SEZ for another decade - until early this month, that is (well, technically the Hwanggumpyong SEZ is a new undertaking, and nobody talks of inviting foreign judges any more).
At about the same time, the North Koreans undertook what can be described as their only successful experiment in SEZ-building. They developed the Kaesong Industrial Zone (KIZ) in the southern part of North Korea. Unlike earlier projects, the zone specifically targets South Korean business.
The idea of the KIZ is based on the assumption that the interests of both Koreas can be served by a combination of Southern capital and technologies with the cheap labor of North Korea. The plan, as initially conceived and eventually realized, envisioned the creation of an industrial park in the vicinity of the demilitarized zone. The South Korean companies would employ North Korean workers who, laboring under the supervision of South Korean managers, would produce cheap items for sale in South Korea and overseas.
The KIZ's construction began in 2003, and by late 2004 the first production lines began. Generally, South Korean big business did not show much interest in the idea, with only small- and medium-sized companies moving in.
The South Korean government provided generous inducements to those pioneers, including cheap loans and guarantees. The latter were especially important since even in 2003-04 when North-South relations went through a short honeymoon, South Korean businessmen were afraid that over-investing in the KIZ would one day make them hostage to the policies of both Seoul and Pyongyang.
Contrary to earlier worries, the KIZ was successful. By late 2010, some 120 South Korean companies operated there with 47,000 North Korean workers. In 2010, KIZ-based companies produced goods worth $323.3 million (slightly over half consisted of textile and clothing). For the mammoth South Korean economy, this was small change, but for the North it was significant enough.
Theoretically, the South Korean companies pay their North Korean workers the agreed basic monthly wages of $61 (as of 2010), but this figure does not include overtime premiums and special incentives, so the actual monthly payment seems to be close to $90-100 per worker.
However, this salary is paid to a North Korean government agency that makes a number of deductions, so less than a third reaches the workers' pockets. This allowed critics of the project to describe it as a "slave labor camp". The description is grossly unfair: even after the deductions, the KIZ jobs are by far the best paid regular jobs in Kim Jong-il's North Korea, so locals strives hard to be accepted into a KIZ-based factory.
The success of KIZ might seem encouraging, but it is actually a very special case. It is viable because the South Korean government is willing to go to great lengths to support it. It has subsidized industrial development and has provided adventurous developers and companies with generous subsidies and guarantees that made the entire undertaking possible. This willingness is driven by a multitude of political considerations. Frankly, it is doubtful whether the Chinese side would be equally interested in subsidizing a similar undertaking by Chinese companies in Sinuiju.
What will happen to these two planned new SEZs? The fate of Raseon seems pretty certain. As indicated by published documents, it is largely about transportation links. Chinese Manchuria is landlocked, so Chinese companies will save a small fortune on transportation costs if they are given access to a seaport on the Eastern coast of the Korean Peninsula. If this is what happens in Raseon, it has a relatively bright future.
The future of Sinuiju (officially Hwanggumpyong) SEZ is far less certain. Obviously Chinese businesses want to do there what their South Korean counterparts did in Kaesong, take advantage of low labor costs in North Korea. Even though Chinese labor is cheap, North Korean labor is much cheaper still, since $15-20 a month would be seen by the average North Korean worker as a good wage. For the same labor, they would have to pay a Chinese worker between $100 and $150 a month.
But that said, the business reputation of North Korean managers leaves much to be desired. They are likely to intervene in operations - partially as a way to extort bribes, but largely because they will worry about excessive exposure of their population to dangerous Chinese influences. South Korean businesses in Kaesong accept such interference, but they are backed by the South Korean government. It remains to be seen whether the same situation will develop in a Chinese-led zone.
If the past is an indicator, the chances of success are not high. Further Chinese penetration of the North Korean economy may concern South Korean and especially American policy planners, but on balance this is a good thing for North Koreans. They will earn a living and they will also learn something of the outside world from which they have largely been isolated for nearly 60 years.
Andrei Lankov is an associate professor at Kookmin University in Seoul, and adjunct research fellow at the Research School of Pacifica and Asian Studies, Australian National University. He graduated from Leningrad State University with a PhD in Far Eastern history and China, with emphasis on Korea. He has published books and articles on Korea and North Asia.
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