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North Korea’s new special economic zone going nowhere

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In Brief

On 7 June, North Korea announced that it would make two of its islands, Hwanggumphyong and Wihwado, a visa-free zone for foreigners, and subsequently passed a law to this effect.

The new Special Economic Zone (SEZ) aims to attract foreign investors by giving them preferential treatment in the payment of tariffs, taxes and land use. But will this change in policy rescue the North from poverty and change things for the better?

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In an effort to turn the tide of its economy, North Korea decided to set up a SEZ with China. In June 2011, a ceremony was held to launch the DPRK–China joint development and operation project. North Korea and China will jointly hold a fair on economy, trade, culture and tourism between 12 and 17 October in the Chinese border city of Dandong.

It was the late North Korean leader Kim Jong-il, who frequently visited China to solicit economic aid and investment, who decided to develop the abandoned islands into a thriving industrial park. Soon after his death in December 2011, his son and successor, Kim Jong-un, called upon the North Korean citizens ‘to actively do business with China’ and ‘bring in as much cash profit as possible’. As such, the commercial importance of the Hwanggumphyong and Wihwado has increased, raising speculation that it would be turned into a playground for capitalism for North Korea’s centrally planned economy.

In the past Beijing thwarted North Korea’s plans to set up a SEZ in Sinuiju, where Pyongyang had hoped to build a new Hong Kong or Macao-like city. In 2002 Kim Jong-il appointed the Chinese billionaire Yang Bin as governor of the Sinuiju Special Administrative Region, but China was not impressed by the prospect of having another Hong Kong on its northeastern frontier and quickly arrested Yang Bin for tax evasion. The message was clear: any development close to China’s borders must be endorsed by Beijing.

And the lesson has been learnt: this time, the SEZ is the product of an administrative and trade agreement between China and North Korea. Pyongyang’s recent announcement that foreigners will be granted visa-free access and enjoy tax breaks still provides China with full control over movements of people and capital within its territory. And further, China’s control of the areas surrounding the islands ensures that Chinese investors and manufacturers will have the upper hand when it comes to trading in Hwanggumphyong and Wihwado.

North Korea is in no position to bargain. International sanctions make access to international markets and credit increasingly difficult and this, in turn, makes the DPRK more dependent on Beijing than ever. The impoverished country seeks to revitalise its economy through foreign investment in its SEZs. Since China has already invested about US$3 billion in developing port facilities and roads in the Rason Economic and Trade Zone, it is expected it will also funnel significant amounts of capital to the Hwanggumphyong and Wihwado Economic Zone. But it seems unlikely that Chinese investment alone will rescue the North Korean economy — at least not in its current form.

Beijing wants to see Pyongyang follow its example by introducing market-oriented reforms, but North Korea simply cannot come to terms with granting its citizens the many freedoms necessary to achieve such reforms. The North Korean regime continuously feeds lies to its citizens, which has made them fearful of interacting with the rest of the world, particularly with South Korea. If Pyongyang decides to initiate reforms of any kind, these would quickly and inevitably lead to the collapse of the DPRK’s political regime. For this reason the word ‘reform’ is a taboo in North Korea.

The DPRK’s leadership genuinely wants to modernise the economy but does not want to change the existing social and political structures. Pyongyang is constantly searching for shortcuts — such as tiny special economic zones — that will boost its dysfunctional economy without having to conduct comprehensive systemic reforms.

The visa-free regime and tax breaks promised for the Hwanggumphyong and Wihwado Economic Zone are simply measures to lure in a handful of foreign investors, and should not be seen as a sign of change. Neither reform nor economic liberalisation is on the cards, precisely because either of these would jeopardise domestic stability. Pyongyang has reluctantly agreed to SEZs, fearing that anything beyond this may lead to possible ideological contamination which would outweigh associated economic benefits.

The North Korean economy simply cannot develop in a sustainable manner amid ongoing conflict on the Korean Peninsula. Only increased inter-Korean cooperation, where the cutting-edge technologies from the South complement the plentiful resources of the North, is capable of breaking North Korea’s prolonged socio-economic stasis. Such collaboration would also enhance the South Korean economy, opening new markets beyond the Military Demarcation Line and linking the trans-Korean railway to the Eurasian continent.

Leonid Petrov is Lecturer in Korean Studies at the Faculty of Arts and Social Sciences, University of Sydney.

 

One response to “North Korea’s new special economic zone going nowhere”

  1. I find some fundamental contradiction in this article. For example, it argues that “Neither reform nor economic liberalisation is on the cards, precisely because either of these would jeopardise domestic stability. Pyongyang has reluctantly agreed to SEZs, fearing that anything beyond this may lead to possible ideological contamination which would outweigh associated economic benefits.” But in the last paragraph, it states the following “Only increased inter-Korean cooperation, where the cutting-edge technologies from the South complement the plentiful resources of the North, is capable of breaking North Korea’s prolonged socio-economic stasis. Such collaboration would also enhance the South Korean economy, opening new markets beyond the Military Demarcation Line and linking the trans-Korean railway to the Eurasian continent.”
    If the former argument is the case, why should North Korea be interested in and keen to the latter?
    Should North Korea be interested in the latter, why would it not be interested in reforms and give market a much greater role?
    Lastly, whatever South Korea could do to assist the North, why can China not provide that assistance?

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