Open for Business: North Korea Seeks Foreign Money
North Korea’s Kim
Jong Un is using special economic zones and a PR campaign to try to attract
foreign investment. Some are starting to take him seriously.
In early June, North Korean state media posted a video to
YouTube pitching the country as a target for foreign investment. To rousing
orchestral music, the subtitled video offered a litany of reasons outsiders
should invest in the Democratic People’s Republic of Korea, as the nation is
officially known. It specifically highlighted the DPRK’s many special economic
zones (SEZs) as places where joint venture companies can flourish and feel
protected by the rule of law — at least, according to Pyongyang.
In Western media reports on the video, however, most journalists couldn’t
resist calling out the wording of one subtitle’s heading — it introduced the
“peculiar economic zones of Korea.”
Indeed, it’s widely said that one peculiarity of North Korea’s free-trade
zones is the way profits can evade capture, either because a contract has been
shredded or because resources have been appropriated by the state. A number of
high-profile squabbles have been reported since North Korea started courting
foreign investments in the 1990s. Most recently, Chinese mining interest Xiyang
Group accused North Korea of fraud and corruption in a $45 million venture that it called a nightmare.
Despite such debacles, however, the idea of investing in the DPRK — with
its dicey-at-best power supply, crumbling infrastructure and Orwellian
political regime — is not a joke to everyone. Even the stigma of being
associated with a country under severe United Nations sanctions has not
dissuaded some investors, who either believe in engagement as the most
efficient way to seed progress in North Korea, see a business case for it, or
both. To many of them, North Korea is just like China in the 1980s.
“There are huge changes taking place, and many people are pouring in to
take advantage of it,” says legendary investor Jim Rogers, who co-founded the
Quantum Fund with George Soros in the 1970s. “If you can open a business there,
it’s a wonderful, wonderful opportunity.”
Whether real opportunity exists in the pariah state, and whether it should
be pursued, depends on whose version of the modern DPRK story one chooses to
believe. As a caveat to any discussion about investing in North Korea, it must
first be noted that statistics of any sort are in short supply and often
contradictory. The DPRK government stopped publishing data about its economy 50
years ago. South Korea’s central bank believes the North’s gross domestic
income — thought to be $30 billion — grew by 1.3 and 1.1 percent in 2012
and 2013, respectively. Meanwhile, the South Korea–based
Hyundai Research Institute — known for especially optimistic pronouncements —
has predicted a growth rate as high as 7.5 percent this
year.
Some researchers estimate that more than 350 companies opened joint
ventures in North Korea between 2004 and 2011. At least two-thirds of the
outsider companies are thought to be Chinese, many of which are involved in
mining the DPRK’s mineral deposits, which may be worth as much as $6 trillion.
Experts say Pyongyang now wants to reduce its dependence on Chinese trade
and investment. (Relations between the two countries had reportedly been tense
even before Kim Jong Un had his powerful uncle, Jang Song Thaek — who worked
most closely with Chinese interests in the country — executed for being a
greedy traitor, “worse than a dog.”) Companies from the U.K., Germany,
Italy and Singapore, among other countries, are already operating in the DPRK,
and one large industrial park hosts more than 100 South
Korean–run factories. Among the most-notable foreign interests in the country
are Germany’s DHL Express, which has been there for nearly 20 years, and
Egypt’s Global Telecom Holding (formerly Orascom Telecom Holding), majority
owner of North Korean 3G provider Koryolink. A subsidiary of Swiss group
Parazelsus partnered with the DPRK’s Ministry of Public Health to create Pyongsu Pharma,
which operates a chain of ten pharmacies in Pyongyang and Pyongsong.
Contrary to a popular belief, it’s not impossible for U.S. companies or
citizens to invest in North Korea, though few do. Any interested party must
apply for a special license to work in the country and, of course, must avoid
violating sanctions. The U.S., U.N. and European Union sanctions do not create
anything close to a total embargo but rather are designed to block North
Korea’s military expansion and cyberwarfare capabilities. Specific companies,
banks and individuals are blacklisted, and sanctions forbid any contribution to
the country of luxury products and dual-purpose goods, like chemicals or
software, that may have both industrial and military uses. That leaves other
business categories in the clear — sort of.
Even in a “safe” industry, a company that chooses to operate in North Korea
will find banking to be a headache. The U.S. has threatened to blacklist global
banks that deal with DPRK businesses (a response to repeated discoveries of
money laundering), so only smaller Chinese banks will touch North Korea–related
capital.
Most foreign companies that take the chance to enter North Korea are there
for the cheap labor: The rule of thumb is that the DPRK’s wages are half of
China’s. Foreign deals tend to be small and centered on industries like
clothing manufacturing, electronics or basic goods assembly — “stuff that China
would have been a go-to country for a while ago,” says Chad O’Carroll, editor
of NK News and founder of its spin-off information service, NK Consulting.
O’Carroll has noticed that more investors and foreign countries are
“keeping one open eye on what’s happening inside North Korea” in the past few
years, since the current supreme leader, Kim Jong Un, came to power. That’s
because the now-32-year-old Kim quickly declared a policy of byungjin,
or “progress in tandem,” meaning he would ostensibly make the economy and the
military equal priorities. In 2012, Kim introduced economic measures that
reduced the size of agricultural work teams, granted more freedom to farmers to
make decisions about their production methods and allowed them to keep more of
their crops. The same leeway to self-direct business was extended to at least
some managers of state-run enterprises. The young Kim’s administration has marked
off 19 additional SEZs, bringing the total number of special zones (of various
sizes and importance) to 25.
One highly respected academic has recently questioned whether
state factories are adhering to Kim’s new economic rules. Nevertheless, many
North Korea watchers — including Geoffrey See of the Singapore-based Choson
Exchange, a nonprofit that runs business development seminars in the country —
are cautiously optimistic about the rate of consistent change there. North
Korea has tolerated a rapidly growing black market for consumer products
(mainly from China), which is fueling the development of a middle class. Coffee
shops are popping up in the capital. Businesspeople have told See that it’s
become easier for them to run official ventures. Visit “Geoffrey See Is
Training North Koreans to Become Entrepreneurs” for more.
The ethical considerations around investing in North Korea are, of course,
enormous. There are an estimated 120,000 political prisoners in the DPRK’s
notorious labor camps, where torture, beatings and public executions for minor offenses are said to be
common. Access to outside media is prohibited (though illegal USB drives loaded
with South Korean soap operas are in wide circulation),
and while the regime spends money on army, air force and navy equipment — and
a flashy new airport terminal complete with a duty-free
store selling Mars bars — 70 percent of the population lacks consistent access
to food, according to the U.N. Thanks to a historic drought,
the country is now facing the threat of a “a very difficult famine,” according
the UN’s human rights chief.
North Korea is such a closed-off country — where several generations have
been indoctrinated with enforced worship of the godlike Kim family — that even
the human rights group Amnesty International recognizes that investment and
trade could play a role in promoting much-needed development in the nation and
ultimately help open it to the wider world. “We don’t say investment is all
good or all bad,” says Hong Kong–based Amnesty researcher Arnold Fang. (Amnesty
does urge foreign investors in North Korea to implement standards to protect
employees there against unfair labor practices.)
In South Korea, the country most sensitive to the ethics of engagement with
Kim Jong Un, there are mixed feelings about investing in the North. Paul Tjia,
a Dutch consultant specializing in information technology outsourcing, says that at a
conference he spoke at in Seoul last year, more than 400 people showed up to
hear about new business opportunities in the DPRK (organizers had expected
about 100 guests), even though most investing in the North is now illegal. In
2010, after the DPRK was accused of sinking a South Korean navy ship, Seoul
banned any new trade and investment in the DPRK. The Kaesong Industrial Complex, a SEZ just inside the demilitarized
zone where 53,000 North Koreans work, was exempt from the ruling, however. The
South has run factories in Kaesong for more than ten years, generating $9
billion-plus in trade in that time. And that’s not including Choco Pie snacks, popular South Korean cakes that have
become their own form of DPRK currency.
Russia, too, is betting on a brighter future for North Korea: It
recently pledged $25 billion to rebuild the state’s tattered
railway system. (It had already reopened a cross-border rail link leading into North Korea’s
most established SEZ, Rason.)
The most famous single investor in the bullish-on-everything-DPRK corner is
the highly influential Rogers, who last year ran a seminar called “Why Invest in North Korea” at a conference in Seoul.
Rogers, now based in Singapore, is among those who compare the country to China
circa 1980 or Myanmar five years ago. “I’d love to find ways to invest there,”
he tells Institutional Investor. “Unfortunately, I’m a citizen of
the land of the free, only we’re not so free, so it’s difficult as an American
citizen.” Rogers doesn’t do direct investments but suggests that anyone who
knows how to open “a restaurant, dry-cleaning business or anything, really,”
hightail it to Pyongyang.
Rogers’s enthusiasm for North Korea was buoyed by his trip there last
September. He strolled through bustling markets where hundreds of stalls sold
“every imaginable product” to thousands of customers. There were electronics
for sale that were so advanced that he didn’t know what they were. He saw
people using mobile phones (foreign calls are banned) and shopping for liquor
from all over the world — changes that were inconceivable five years ago, he
says. For this ongoing transformation Rogers credits “the kid,” Kim Jong Un.
“He grew up in Switzerland and was educated in Switzerland, so he knows a
different world from what his father and grandfather knew,” Rogers says. “I’m
sure if his father were alive, he’d execute the kid. His grandfather would
torture and then execute the kid.”
(Reports of the kid’s recent purging of senior political officials seem
suspect to Rogers. He and others interviewed for this story insist that many of
the wackiest stories broadcast about North Korea are entirely invented or
distorted.)
Though he’s not sure how it will happen, Rogers is certain that the Koreas
will be reunified “before not too much longer,” creating a new economic
powerhouse in Asia. In the meantime, he feels stuck, watching the Chinese and
Russians positioning themselves to take advantage of that eventuality.
Michael Spavor, a Canadian-born consultant who has been in and out of North
Korea for 14 years, would agree that recent advancements in the country are
astonishing — and says they’re proof that foreign investment and trade are
improving daily life for the average person. Spavor runs Paektu Cultural
Exchange and has strong connections in the DPRK; in fact, he has met Kim Jong
Un a few times, including during former NBA star Dennis Rodman’s second trip to
Pyongyang, which he organized.
In May, Spavor was one of a handful of Westerners at an investment seminar
in Wonsan–Mount Kumgang, a tourism region for which the government is desperate
to attract cash. “It’s in a beautiful area,” Spavor says. “It’s in the
mountains, with one of the best ski resorts in Northeast Asia and five-star
accommodations.” The region had been developed with South Koreans, and now the
North would like to see even more tourism infrastructure, including a bus
station, a power plant, a mud spa, swimming pools and a microbrewery, among
dozens of other projects. A new international airport is under construction
there.
According to Spavor, investors from Hong Kong, Singapore, Taiwan and
Thailand were impressed by presentations made at the May event and signed
memorandums of understanding. “Investment groups there are competing to attract
partners,” he says. “They’re interested in sitting down and talking and
negotiating different types of deals.”
Spavor’s message to potential investors is to visit North Korea to gain a
firsthand sense of what’s possible. “There’s only so much you can learn
online,” he says.
Not everyone is ready to take North Korea that seriously, however. It’s
still a secretive, peculiar place where, according to editor O’Carroll, the
phone line of the Chamber of Commerce in the capital is permanently busy. He
knows North Korea’s economy will explode one day, but right now he believes
that the apparent power struggle in the ruling party last fall, and the fear
potential investors have that almost anything could go awry at any time (as
when Kim abruptly closed the border for four months during the Ebola outbreak),
are still discouraging serious monetary gambles. In North Korea unpredictability
remains the only constant.
