North Korea’s Economic Development Zones (EDZ) and Inter-Korean Economic Cooperation

 

Current Issues and Policies No. 2018-25

December 28, 2018

Dr. Choi Eunjoo

Research Fellow, the Sejong Institute

ej0717@sejong.org

 

 

The year 2018 has been a year with abundant discussions on inter-Korean cooperation more than ever as the inter-Korean relations improved. Particularly, there has been a growing interest in inter-Korean economic cooperation projects that realize the South Korean government’s ‘New economic initiative on the Korean Peninsula’ and propel North Korea’s economic development. North Korea made significant changes in its external economic policy while the inter-Korean economic cooperation was held in abeyance. The policies on designation and investment attraction of economic development zones (EDZs) since 2013 are core factors that determine the projection of inter-Korean economic cooperation. In the same token, the paper deals with the details and characteristics of North Korea’s policy on EDZs and the future orientation and tasks for inter-Korean economic cooperation.

 

North Korea Striving for Economic Development

It seems that North Korea will strive for economic development considering the five-year strategy for national economic development since 2016 and the line of concentrating all efforts on socialist economic construction announced this year. Two aspects confirm such point.

First, Kim Jong-un’s field guidance has been concentrated on the economy this year. Field guidance is one of the North Korean supreme leader’s means of leadership – inspecting the site with his own eyes and providing guidance appropriate for the site. In this regard, field guidance captures where the North Korean leader’s interest lies in at that moment and how he wants to lead North Korea. Recently, North Korea’s state mouthpieces, Korea Central Television (KCTV) and Rodong Sinmun, have reported Chairman Kim Jong-un’s field guidance in detail, unlike the past. According to the data from South Korea’s Ministry of Unification, most of Kim Jong-un’s field guidance has been focused on economy-related locations with the year 2012 as an exception. According to Rodong Sinmun, Kim Jong-un made 93 public appearances this year until December 25, 35 appearances were his field guidance in economy-related sites.

Kim Jong-un’s continued field guidance in the economy-related sites and the legislation of economic measures epitomize the North Korean authorities’ commitment to economic development.

Second, the legislation and revision of codes indicate North Korea’s concentration on the economy. The North Korean authorities have informed the public through legislation of policies – that the current policy orientation will remain in the future. Legislation has provided economic actors the motives to abide by relevant measures, raising policy credibility and raise the possibility of institutions’ success. Especially, the economy-related laws have been continuously legislated. Since Kim Jong-un took power until 2015, 15 of 31 newly-adopted laws and 49 of 106 revised and supplemented laws were related to the economy. The legal codes mainly laid out the actors involved in production and transaction to exercise more rights that suit their views.

 

Characteristics of the EDZ, the Key of North Korea’s External Economic Policy

This trend is also visible in North Korea’s foreign economy sector. In pursuant to the 23 EDZs and the DPRK Law on Economic Development Zones adopted in the Kim Jong-un era, EDZ differs from the existing special economic zones in several aspects.

First, the EDZ entails expandability and openness. It authorized the participation of North Korean state-owned enterprises and agencies and the investors could form joint ventures with nearby North Korean state-owned enterprises and agencies in the EDZ. It established a link that enables the benefits of EDZs to spill over to other parts of the domestic economy. Moreover, the law stipulates the expandability depending on the performance and the North Korean regime expects the EDZ could not only secure insufficient hard currency, but also learn know-how of corporate management and have the effect of technology spread. The EDZs, designated in consideration of the regional land construction plan, will serve as major hubs of balanced regional development.

Equipped with expandability, openness, and practicability, the EDZ, pursued after Kim Jong-un took power, will be the key hub for North Korean economic development and balanced regional development within North Korea.

Second, EDZ has a stronger sense of practicality, factoring in the reality. It covers a small area and each EDZ has its specific development projects. It is designated also with a clear idea of what industry to invite and present concrete development process. As such, the EDZ is able to produce outcomes relatively rapidly with reduced liability on firms and agencies investing in the zone. And the authorities supplied the momentum by empowering the agents responsible for the construction, management, and formulation of the EDZ and simplified procedures. The central guidance organ of special economic zones and the provincial (municipal) people’s committee concerned oversee the EDZs, legislate code of conduct and rules for each EDZs, create an investment-friendly environment, authorize, register, and issues permit for investing and participating corporations.

 

Directions for EDZ Development

Considering North Korea’s EDZ policy renders North Korea’s desired direction of development for EDZ understandable.

First, it is oriented to advance to South Korea and China, viewing the regional distribution of EDZs. More than ten EDZs are located along the border with China, hinting that the DPRK-China cooperation will flourish when Chinese investment into North Korea resumes. Meanwhile, EDZs are also positioned in inter-Korean border area - implying that these zones will be key footholds in establishing ‘west coast joint special economic zone’ and ‘east coast joint special tourism zone’ as agreed in the Pyongyang Joint Declaration, aside from the existing Kaesong Industrial Complex and Mount Kumgang special tourist area.

Second, EDZs prioritize construction of social overhead capital (SOC). North Korea is unable to afford the high demand for SOCs, the physical foundation for economic development. In this aspect, North Korea has prepared incentive mechanisms for firms doing business in the EDZs to invest in SOCs through preferential measures for the firms investing in SOC construction such as granting the priority in choosing the land and exempting lease fees for the land concerned.

Third, EDZs consider both exports and domestic consumption. Hence, these will become key bases of North Korea’s economic development. On seven EDZs including Waudo export processing zones, the North Korean authorities introduce foreign trade as major businesses. They will serve as the frontline bases to attract foreign currency and import cutting edge technology. Moreover, all the products manufactured in the EDZs are permitted to be on sale in the North Korean domestic market. This is expected to boost the development of both EDZs and its vicinities jointly.

Fourth, it also enables outside observers to confirm the industries North Korea focuses on. While the EDZ covers almost all industries as major type of businesses, the tourism sector is particularly worth noting. North Korea previously regarded tourism as merely sightseeing natural reserves and historical sites; but recently, it perceives tourism as an industry, adding the concept of profit. EDZs also incorporated this trend and many EDZs, not to mention the five tourism development zones, include tourism as one major type of business. And those EDZs that have the goal of pursuing research and establishing research complexes mainly assume agricultural and fisheries sector. And currently, North Korea underscores agriculture and light industry in its five-year economic development strategy. It expects the EDZs introduction and development of state-of-the-art technology in relevant sectors to spread across the overall economy.

 

Inter-Korean Economic Cooperation in Consideration with the Characteristics of the EDZs

Once the inter-Korean economic cooperation projects associate with North Korea’s development of EDZs in the future, it should proceed in a manner that satisfies both the plan of each EDZ and interests of South Korean corporations that participate in the cooperation projects. Pursuing inter-Korean economic cooperation in the EDZs should consider factors of production, SOCs, market size, and incentives for investment.

First, the EDZs in the West Sea are well equipped with these factors. Geographically, these areas have favorable conditions for transportation and logistics for export and import of raw materials and products - relatively well-paved railways and roads connecting to China and South Korea and open to international shipping using port facilities such as Nampo port. And these EDZs have access to the workforce and the market as it is close to two cities with a population more than half a million - Pyongyang and Nampo. Nampo port enjoys an environment favorable to stretch to foreign markets as it has direct links with China and Southeast Asia. Likewise, North Korea selected export processing zones concentrated in this region - Waudo, Jindo, and Songrim. Since the two Koreas agreed to develop the ‘west coast joint special economic zone’ in the Pyongyang Joint Declaration last September, the aforementioned zones are potential candidates in the early stages of inter-Korean economic cooperation projects.

Second, the tourism industry is a high value-added industry with high contribution to growth and creation of jobs. It also has a high rate of foreign exchange earnings and investment incentives as it could yield profits without massive capital investment. North Korea has a keen interest in the tourism industry. In 2015, North Korea hosted an investment seminar in the Wonsan-Mt Kumgang international tourist zone. Kim Jong-un included Wonsan-Kalma coastal tourist area and Samjiyon County as major construction projects in his New Year’s address in 2018 and he visited three and six times respectively as field guidance activities - reflecting North Korea’s interest. Mt. Kumgang special tourist zone, Wonsan-Kalma coastal tourist area, and Samjiyon County under the Mubong Special Zone for International Tour are regions that North Korea focuses on building SOC or has SOCs for tourism well-constructed. Major projects in North Korea’s special tourism zone include accommodation services that create added value by linking natural resources and historical sites with tourism and accommodation facilities and tourism projects of leisure-culture that increases the rate of re-visit. Especially, if the two Koreas could harness the potential of ‘east coast joint special tourism zone’ agreed in the Pyongyang Joint Declaration in September, the tourism cooperation could gain momentum.

Noting the four factors to consider in inter-Korean economic development (factors of production, SOCs, market size, and incentives for investment), the EDZs will serve as key bases in the construction of west coast joint special economic zone and east coast joint special tourism zone – the two zones agreed by the two leaders in the Pyongyang Joint Declaration.

 

Tasks for Inter-Korean Economic Cooperation

The largest obstacle to these inter-Korean cooperation projects is the international sanctions regime against North Korea. The UN sanctions against North Korea after 2016 exert pressure on North Korea to the full extent – it even blocks normal functions of North Korea’s external economic relations. Under these conditions, the North Korean government’s EDZ policy cannot reap tangible results. International sanctions against North Korea cannot be lifted in one go. Because the removal of sanctions and problem-solving of the North Korean nuclear issue move in parallel, sanctions and economic cooperation should co-exist for some time.

It is not impossible to have exchange and cooperation projects under the sanctions regime. For example, medical cooperation could have both support and human exchanges. North Korea is known to suffer from difficulties in providing medical services due to a shortage of materials, like other sectors. Particularly, the clinical and experimental support for North Korean medical personnel is as crucial as providing medical equipment and constructing hospitals. If it is difficult to introduce strategic goods, one other way could be having people-to-people interactions in the medical sector in a third country.

If the sanctions and economic cooperation must go in parallel in the denuclearization process, it is imperative to begin with exchanges and cooperation projects that are feasible immediately even under the sanctions regime.

Meanwhile, it is necessary to reduce restraining factors that obstruct inter-Korean economic cooperation. These factors may include a dearth of information, low level of SOC, low level of trust in law and institutions, etc. Inter-Korean exchanges could mitigate these factors and propel bilateral economic cooperation.

First, the dearth of information on North Korean economic situation hinders the economic actors in rational decision-making. North Korea does promote its external policy, such as holding investment seminars and other events, but these are insufficient to attract foreign capital. This issue could be alleviated when the outside investors understand the North Korean economy and its potential through actual exchanges rather than a priori judgments. In the same vein, people-to-people exchanges should be invigorated in economy, science, and technology sector.

The development of science and technology constitute the key policy of North Korea’s line of concentrating all efforts on socialist economic construction and the core sector that drives the qualitative growth of North Korea’s economy. Exchanges among people in the field of science and technology will not only clarify North Korea’s level of technological advancement but also serve as a stepping stone to pursue new forms of inter-Korean economic cooperation projects. Several EDZs suggest the construction of research sites as their main field of business. This is to shorten the time for the process from scientific technology to production and to bring science experts to participate in the manufacturing process through the integration of research & development, and production. North Korea’s investment promotion in cutting-edge technology as well as technological cooperation in agriculture, fisheries, and light industry are expected to enhance production efficiency and have an expansive effect on the overall economy.

Second, since the low level of SOC indicate the shortcomings of material foundation for economic cooperation, cooperation projects to develop SOCs will begin first. The resumed train-related cooperation may be the connection of railways between the two Koreas for the time being, but it could be the starting point for East Asian Railroad Community, the incumbent administration’s initiative. However, the inter-Korean cooperation cannot complete the construction and improvement of SOC projects which requires a large sum of capital, alone. South Korea should choose some SOC projects and concentrate on them. It needs to engage in cooperation projects in selected areas where the South Korean corporations and agencies are likely to invest in.

The stable electricity supply is the key factor that guarantees production. Since it underwent serious electricity shortage in the 1990s, North Korea has continued to endeavor to resolve the issue of electricity shortage – emphasizing the overhaul and construction of power plants and the use of natural energy. While it is known that North Korea’s electricity supply has improved, it is essential to ensure stable energy supply first as the economic development will rapidly increase energy demand. To this end, the previous Roh Moo-hyun administration already offered to provide South Korea’s electricity to North Korea by connecting the transmission line. Nonetheless, mutual trust is a prerequisite for this measure and the outdated North Korean facilities should be revamped first to boost the efficiency of power supply. Cooperation in the energy sector with North Korea may signal the debut for Northeast Asia super grid project – one of the key projects of the South Korean government’s New Northern Policy.

Finally, it is indispensable to strive to raise the reliability of North Korea’s law and institutions. North Korea has made efforts to have legislation ready to attract investment, legislating and amending legal institutions related to foreign direct investment and adopting the law on EDZs. Nonetheless, well-prepared legislative mechanisms do not ensure reliability on rule of law. Those subject to the law should agree to the details of the law; legal judgments should be fairly applied regardless of favorability; and the judgment process should include full respect of those subject to the law. These are conditions to assure the reliability of the law. Particularly, the DPRK Law on External Civil Relations is applicable to foreign nationals, Koreans overseas, foreign agencies and enterprises, it is necessary to make meaningful efforts to gain trust. Against this backdrop, the two Koreas should have legislative exchanges and cooperation. They already have the experience of putting heads together to have legislation necessary in the process of economic cooperation. This will enable the two Koreas to discuss the potential issues in the process of cooperation and interaction and make necessary revisions.

The inter-Korean exchanges and cooperation could curtail the restraining factors in inter-Korean economic cooperation - a dearth of information, low level of SOC, low level of trust in law and institutions, etc.

 

Inter-Korean Economic Cooperation: Impetus for Peace and Prosperity on the Korean Peninsula

All behaviors have resulting costs and benefits. Rational decision-makers choose actions that reduce costs and increase benefits. In the same context, one could deter another from doing certain behaviors by imposing a heavy price on them or raise the benefits for the other when taking an alternative behavior – incentivizing a continuation of or a shift to a certain behavior. If sanctions were imposed to deter North Korea from arming with nuclear weapons, imposing a heavy price for nuclear armament, economic cooperation is a telling measure to entice North Korea, which opted for denuclearization, to economic development.

The inter-Korean economic cooperation is also a measure to realize common values shared between the two Koreas – peace and prosperity. Avoiding the beneficiary-benefactor relations and establishing a supplementary and mutually-beneficial relationship that drives the development of the two economies will realize the co-prosperity of two Koreas. North Korea’s EDZs which began in 2013 embody North Korea’s policy will for economic cooperation and expansion of external economic sector as well as the venue to realize the suspended inter-Korean economic cooperation. The two Koreas should take a step further to actualize the prospects rather than merely forecasting a rosy prospect – that the EDZ will thrivingly develop when the sanctions are eased or removed. It is time for the two Koreas to palliate military tensions surrounding the Korean Peninsula and engage in specific measures to realize peace through inter-Korean economic interaction and cooperation.

 

 

 

This article is based on the author’s personal opinion and does not reflect the views of the Sejong Institute.

 

*Translator’s note: This is an unofficial translation of the original paper which was written in Korean. All references should be made to the original paper.