The only SEZ which really works is the Kaesong Industrial Complex, writes Lankov [Reuters]

North Korea once again indicated that it takes Special Economic Zones (SEZs) very seriously; KCNA, the country’s official wire agency, reported that plans for thirteen SEZs have just been announced.

From the North Korean government’s point of view, this drive makes sense. The North Korean elite understands that they need to find ways to earn a hard currency income, but they are afraid that such zones will spread dangerously liberal ideas among their people. So the SEZ, fenced off and controlled, looks like a perfect idea; the zones are expected to become small islands of foreign infestation, profitable, but easy to control.

However, North Korea’s past experiences with the SEZs are not all that encouraging — so far, all attempts to use the SEZ strategy have ended

North Korea once again indicated that it takes Special Economic Zones (SEZs) very seriously; KCNA, the country’s official wire agency, reported that plans for 13 SEZs have just been announced.

From the North Korean government’s point of view, this drive makes sense. The North Korean elite understands that they need to find ways to earn a hard currency income, but they are afraid that such zones will spread dangerously liberal ideas among their people. So the SEZ, fenced off and controlled, looks like a perfect idea; the zones are expected to become small islands of foreign infestation, profitable, but easy to control.

However, North Korea’s past experiences with the SEZs are not all that encouraging — so far, all attempts to use the SEZ strategy have ended in nought.

The first attempt occurred in 1991, when the North Korean government tried to establish an SEZ in an area now known as Rason. This is a remote northeastern corner of the country where the borders of North Korea, China, and Russia meet.

Triangle of wealth

At the time, it was argued that this place was going to become a “golden triangle of wealth” because of its favourable location, but it seems that the North Korean leadership wanted to keep the hotbed of free market debauchery as far away from the major population centres as possible.

The world’s business community was, at first, relatively positive about the venture, but it soon became clear that nobody was going to invest in an area that had vintage 1940s infrastructure. Until recently, there were no paved roads in the Rason region and relatively reliable transport links — a highway to China and a reasonably modern railway to Russia — only appeared there in the last few years. While electricity supply is still a big problem.

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Thus, for most of its 23-year history, the Rason SEZ served as a large wholesale market where Chinese merchants sold their goods.

Due to its Emperor casino hotel, it gathered some notoriety as a minor gambling resort as well.

Recently, the Russian railway company rebuilt an ancient railway and port facilities, and began to use the area to ship coal to South Korea and elsewhere, but that’s about it.

The story of the Sinuiju SEZ, another similar project, is more colourful. The Sinuiju SEZ was launched in 2002, amid great fanfare.

Sinuiju is also located on the Chinese border, but on its southern end — which is more heavily populated and developed. In September 2002, the North Korean rubber stamp parliament passed the “Basic Law of the Sinuiju Special Economic Region”.

The summer of 2002 was a time when the North Korean government was seemingly quite serious about reforms. But even by the standards of those times, the plans were really radical.

The proposed Sinuiju SEZ was to become a state-within-a-state, with its own set of laws and even its own emblem and flag. It was assumed that a significant portion of the native population would be removed and replaced with specially selected workers, chosen for their industriousness and political reliability.

Foreign rule

The situation became all the more peculiar when the North Korean government declared that the new SEZ would be ruled by a foreigner. Their choice was Yang Bin, a Chinese real estate tycoon with good relations with Pyongyang.

It seems that the idea was to imitate Hong Kong’s Special Administrative Region (SAR) in China, and the North Korean vice minister for foreign trade would become a “new historic miracle”. It all collapsed within a couple of months.

Given Yang Bin’s background, the Chinese authorities were obviously fearful that the proposed SEZ might become Yang’s quasi-feudal kingdom and, more worryingly, a large gambling heaven.

To an extent, the project ran aground due to concerns of Chinese who were not warned by their troublesome neighbours about the grand plan.

Given Yang Bin’s background, the Chinese authorities were obviously fearful that the proposed SEZ might become Yang’s quasi-feudal kingdom and, more worryingly, a large gambling heaven.

Yang, already under investigation, was promptly arrested and handed a large custodial sentence, disappearing into the Chinese prison system — yet to emerge. At the same time, the zeal for reforms in Pyongyang suddenly evaporated, and the ambitious project was promptly abandoned.

These are the two best known SEZs, but there have been some smaller attempts by the North Korean government that have also ended in failure. The only SEZ which really works is the Kaesong Industrial Complex, where North Koreans work at the factories owned by the small South Korean firms.

However, Kaesong survival has always been possible due to the generosity of the South Korean taxpayers — and Seoul has political reasons to keep it afloat.

With other projects, the pattern was the same; after a short period of hype, proposed SEZs waxed on the vine because no foreign business was interested in investing there.

The North Korean side expected foreigners not merely to invest in production facilities and worker training, but also to build a transport and other infrastructure, often from the scratch.

Potential foreign investors soon came to realise that due to political concerns, the North Korea government would not give them the freedom to hire and fire local personnel at will, and will not even necessarily allow foreign resident managers. So, they usually prefer to invest in China, with better conditions and a much larger market.

This time, though, things might be different. The new leadership in Pyongyang has a somewhat better understanding of how the international market works, and it is not impossible that they will attract some capital to the SEZs this time.

However, one has to be cautious; the past experience shows that North Korea is not good at enticing foreign investors to take the plunge.