Another zone will be developed on the island of Hwanggumpyong, in the vicinity of Sinuiju, the largest North Korean city on the border (some three quarters of trade between the two countries pass through this city).
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. Unfortunately, this interest does not necessarily mean that the North Korean authorities are willing to make the concessions that would allow the SEZs to operate efficiently.
The North Korean state (or at least some important faction within it) has long come to realise 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. In addition to attempts to find miracle technologies, notably related to information technology, they have pinned expectations on SEZs.
SEZs are acceptable to the North Korean government because they are relatively easy to control. 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.
Similar SEZs with China to those recently declared have been attempted before. At Raseon a major problem was its isolated location and underdeveloped transport infrastructure, even by meagre North Korean standards. At Sinuiju there were numerous problems. One was North Korea’s choice of the Chinese entrepreneur Yang Bin to lead the project as he wanted to transform the city into a gambling centre, a Macau of the North. This was not welcomed by the Chinese government. Also, it did not help that the North Koreans, following their modus operandi, did not bother to liaise with the Chinese beforehand.
In contrast to the failed Chinese SEZs, the North Koreans developed with South Korea the Kaesong Industrial Zone (KIZ) in the southern part of North Korea. 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 labour of North Korea. 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. For the mammoth South Korean economy, this was small change, but for the North it was significant enough.
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 subsidised 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 subsidising a similar undertaking by Chinese companies in Sinuiju.
What will happen to these two planned new SEZs? The fate of Raseon seems pretty certain. Available evidence indicates 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 the 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 labour costs in North Korea. Even though Chinese labour is cheap, North Korean labour is much cheaper still, since US$15-20 a month would be seen by the average North Korean worker as a good wage. For the same labour, they would have to pay a Chinese worker between US$100 and US$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 Australian National University.
An earlier version of this article first appeared here at the Asia Times Online.