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DONG Yong-Sueng

North Korea's Open-door Policy

DONG Yong-Sueng

May 17, 2006

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North Korea began seeking foreign investment from the West from the early and mid 1970s. In the first opening phase, it sought a large amount of investment to develop its economy. However, it soon defaulted on its loans after the oil shocks of 1973-74 and 1978-80.

In September 1984, Pyongyang again tried opening doors to foreign investment following the promulgation of a joint venture law. In the second phase of opening, it allowed foreign businesses to establish joint ventures with North Korean companies in their territory. Despite these efforts, however, the so-called "foreign" investments came mostly from pro-North Korean companies in Japan. Thus, the "foreign" investment was actually part of remittance from North Koreans overseas, not a bona fide foreign investment.

In the first phase of opening, North Korea focused on attracting foreign capital. In the second phase, the emphasis went to attracting foreign companies. In the third phase of opening, the North began limited opening of some of its restricted areas for foreign investment. On 28 December 1991, Pyongyang announced the creation of its first special economic zone in the northeastern cities of Rajin and Seonbong, next to China and Russia.

It was the North's only special economic zone until three more such zones opened in Kaesong, the Kumgang Mountain, and Sinuiju. In the following decade, it removed the word "free" and renamed the Rajin-Seonbong as an "Economic Trade Zone." When the two cities of Rajin and Seonbong were combined into one city as Raseon, the area's name was shortened to "Raseon Economic Trade Zone." The North's ambition to develop it as a free economic hub in Northeast Asia has thus failed.

Later in September 2002, the North announced its plan to set up a special economic zone in the border city of Sinuiju, and appointed Yang Bin, a Chinese businessman with Dutch citizenship, as its chief executive officer. Whereupon, China arrested Yang on charges of tax evasion, frustrating the plan.

Unlike the aborted project in Sinuiju, industrial parks sponsored by the South Korean Hyundai Asan Corporation in the Kumgang Mountain and Kaesong have steadily grown. These projects were first implemented in the late 1990s, but they were officially designated as special zones only in October and November 2002.

The North's special economic zones have the following three features.

First, the North has delegated management of such zones to foreign organizations. Management of the Kumgang Mountain tour operation and Kaesong Industrial Park was placed under the control of Hyundai Asan Corporation based in Seoul.

The border city of Sinuiju was going to be developed under the leadership of Chinese businessman Yang Bin. Since the Raseon Economic Trade Zone was the only industrial park under its direct operation, the North appeared anxious to borrow managerial skills from foreign operators. If it has direct control over a special economic zone, the North Korean regime itself could face criticism if negative side effects rose from the economic opening moves.

But if foreign companies ran these parks, the regime can be spared from incurring direct responsibility for problems arising from their operation.

Second, Pyongyang has set up two special economic zones in Kaesong and the Kumgang Mountain, close to the border with the South, to draw investment from South Korea. The two additional special economic zones set up in Raseon and Sinuiju up in the north were designed to attract investment from China and Russia , the North's immediate neighbors.

Third, the North has opened border cities and outlying areas, but kept the central region closed, indicating that the regime wants to benefit from foreign investment, but remains anxious to minimize its negative side effects.

The North is unlikely to radically change its policies on special economic zones, even though the regime has resumed its efforts to promote Sinuiju. It has already been designated as a special administrative region; what it needs is the right man to guide its development.

When the North gets used to opening its economy, and successfully restores railways and roads connecting Sinuiju with Kaesong, and railways linking Raseon with the Kumgang Mountain, it can expect to spread the benefits of open-door policy to the rest of North Korea. It is still premature for the North to fully open all of its territory to foreign economic activities as China did decades ago. Considering internal and external conditions, the regime still stands to lose more than it gains from a far-flung open-door policy.

The writer formerly headed the Economic Security Team at the Samsung Economic Research Institute. He is now vice president of Trinity Capital Development Partners, Inc. The views expressed are his own and do not reflect those of the publication that carries them.
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