This study aims to develop strategic approaches to special economic zones in North Korea focusing on the demand and supply factors. In this study, the demand and supply factors were largely defined by inter-Korean economic cooperation and the economic cooperation in Northeast Asia.
The study consists of seven chapters. The first chapter discusses the background and need of the study together with research objectives and methods. This chapter also briefly examines some major results of previous research related with the topic of. This study focuses on Gaesung Industrial Complex, Geumgangsan Tourist Zone, Najin-Sunbong Economic Trade Zone, Shinuiju Special Administration Zone, Wonsan City and Nampo City. Although special economic zones not exist in Nampo and Wonsan, these cities have high potential as new special economic zones. To identify the strengths and weaknesses of special economic zones in North Korea, survey methods are utilized to analyze the market's general assessment on the potential opportunities for SEZs and the major obstacles to developing SEZs in North Korea.
In Chapter 2, achievements and problems of the special economic zones in North Korea are discussed. Confronted with economic difficulties, the North Korean regime has to devise ways to introduce foreign capital and technology through the establishment of SEZs and improved foreign relations. North Korea has endeavored to establish special economic zones in the Najin-Seonbong area since the early 1990s as China did, but the result is insignificant. It is because North Korea has borrowed the form not the substance
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Strategic Approaches to Special Economic Zones in North Korea in the Era of Economic Cooperation in Northeast Asia
: Focusing on the Demand and Supply Factors
동북아 협력시대의 북한 경제특구 활용전략:
경제특구의 수요 및 공급요인 분석을 토대로 Sang-Jun Lee, Won-Bae Kim, Young-Bong Kim, Sung-Su Lee
RR 2004-17․December 2004․378 pages․Korean
of the Chinese special economic zones. Therefore, it is necessary for North Korea to meet the institutional requirements for special economic zones.
North Korea has announced the Shinuiju Special Administration Zone, Geumgangsan Tourist Zone and Gaesung Industrial Zone in 2002 as special economic zones mainly for investment from South Korea and other countries. These moves are aimed at realizing economic gains and the stability of its regime by demonstrating its willingness internally and externally to open its doors to the outside world. At the same time, they signified the North's intention to expand inter-Korean exchange and cooperation. What has been lacking in North Korea's efforts to modernize economic management to date is attention to the role of incentives. To overcome and correct these deficiencies of the North Korean economy, SEZs should be operated and managed with economic rationale and market principles.
There are many lessons that North Korea can learn from other countries' experiences in developing SEZs. Chapter 3 reviews the lessons of transition economies focusing on the demand and supply factors. Two special economic zones of Poland and China are reviewed. In this study, the demand and supply factors of special economic zones of Poland and China are defined as the main factors introducing policy implications for North Korea. Two cases provide a successful example of special economic zone, which has important implications for North Korea. Special economic zones in Poland and China were implemented as a policy tool to achieve the goals of attracting foreign investment.
The Katowice special economic zone in Poland and Shenzhen special economic zone in China give some policy implications for North Korea as follows. First, investment demands of foreign companies must be considered as one of the most important factors for developing special economic zones in North Korea. Second, the active role of the North Korean government is an important factor for the success of the special economic zones. The North Korean government must render a large financial assistance for the development of transport, energy and communication facilities in special economic zones.
North Korea has to be much more active in marketing their special economic zones in addition to building up physical and institutional infrastructure. In order to attract foreign direct investment, it would be better to develop small and medium sized industrial parks in the areas, where infrastructure is relatively well endowed, rather than large-scale special economic zones. Also, they show that adequate infrastructure and locations are important to success of special economic zones.
Chapter 4 assesses development potentials of the special economic zones in North Korea. As opportunities for SEZs North Korea is an emerging market in Northeast Asia.
North Korea is actively searching for measures to promote cooperation with China, Russia and the other countries in Northeast Asia in a range of economic fields. With the volume of Sino-North Korean exchanges exceeding 1 billion 23 million US dollars in 2003, China continues to be North Korea's largest trading partner. The North Korean regime must take into consideration the importance of the linkages between Shinuiju and China in the development of the Shinuiju SEZ.
With respect to locational merits of Shinuiju, the city has the potential to develop thriving SEZs through subregional economic cooperation with the Chinese city of Dandong. The development potential of Shinuiju and Rajin-Seonbong can be found in their geographical advantage. Compared to other areas of North Korea, Shinuiju and Rajin-Seonbong have the high possibility for the successful development of SEZs because of their geographical proximity to China and Russia. Countries with high investment potential for Shinuiju and Rajin-Sonbong are China and Russia. The North Korean regime must have considered potential investor candidates.
Weaknesses of SEZs in North Korea are the lack of hard infrastructure, lack of global standards and institutions. The majority of respondents in survey cited resolving nuclear problem(50%), improving hard infrastructure(23%) and legal issues(15%) as largest hindrance to the success of SEZs in North Korea. North Korea is in competition with regions in Southeast Asia and China to attract foreign investment. However, the general investment conditions in North Korea are extremely weak in comparison to those of Southeast Asia and China. Nonetheless, it is difficult for North Korea to improve its poor
investment conditions in a short period of time and create an investment environment that possesses a competitive edge. Under these disadvantageous circumstances, it is important that North Korea utilizes a distinctive strategy for attracting foreign direct investment and the entry of South Korean firms to North Korea.
New policy directions and development strategies on special economic zones in North Korea according to the demand for special economic zones are suggested in Chapter 5.
Basic directions for the development of SEZs in North Korea are as follows. First, SEZs should be developed by utilizing investment demands for industrial infrastructure in Northeast Asia. Second, efforts should be made to maximize the advantage of geo-economic potentials of each site. Third, the development of SEZs should be linked to the development of infrastructure in Northeast Asia. Fourth, the development of industrial sites should be a model of restructuring industrial structure in North Korea.
Fifth, adequate functions and size should be considered in developing SEZs.
Strategies for mobilizing foreign investment to SEZs in North Korea should take into consideration how to create an attractive environment for investment as well as how to capitalize the momentum of inter-Korean economic cooperation and the economic cooperation in-Northeast Asia. The Rajin-Seonbong Free Economic and Trade Zone(FETZ) should be redeveloped as a new center for international trade and logistics.
Enhancing the infrastructure should be the first priority for the success of the Rajin-Seonbong FETZ. The Shinuiju SEZ should be developed as a regional center for trade and logistics. In the long run, Shinuiju and the neighbor city, Dandong can be developed as an international trade center together.
Based on the new strategies, Chapter 6 suggests some policy issues of developing special economic zones and South-North cooperation. Preferential treatment should be given to foreign firms entering North Korea and efforts should be made to legally and institutionally guarantee investment incentives provided by policy statements in North Korea. Major obstacles to attracting foreign investments in North Korea such as the high cost of transport, unreliable power supply and telecommunications should be removed.
In the short-term, policy efforts should focus on making adequate legal provisions for rent or lease of assets such as land, buildings and equipment. What will be necessary is to create basic conditions to attract investment: some transparency, a reasonably clear operating environment, ability to bring money and out of the country, essential financial services, provisions on the arbitration of disputes, etc. The North Korean regime should establish and revise foreign investment-related laws and some special laws for SEZs.
The success of a special economic zone is not guaranteed solely by its geographical advantages. Vigorous efforts of a host country for foreign investment and efficient management of the SEZ should be followed. In this regard, North Korea should accept some elements of market economy especially to SEZs. A free market and private business activities should be allowed in SEZs. In order to invigorate inter-Korean economic cooperation and lure foreign investors into the SEZs, a stable inter-Korean and international relations must be established through mutual trust.
North Korea also experienced the failure of its first SEZ, the Rajin-Seonbong Free Economic and Trade Zone, in the 1990s. In this regard, Shinuiju and Gaeseong should create investment environments that are more attractive than those of competing neighboring regions in China and Southeast Asia. Indeed, there should be a concerted effort by Pyongyang to reduce security instability, which is regarded as a major hindrance to the inflows of foreign investment toward North Korea.
If the North Korean regime is unable to change its negative international image through improving foreign relations, the objectives of establishing SEZs cannot be realized. Therefore, North Korea must show consistency in the process of policy adjustment and economic reform. The successful development of the Gaeseong industrial park and the Shinuiju SEZ would result in a major boost to inter-Korean economic cooperation and create a spillover effect for the rest of North Korea.
North Korea will not be able to mobilize the finances it needs without joining the international financial system. There is no doubt that the North's nuclear weapons program will play a critical role in developing special economic zones. North Korea should drop its nuclear weapons program. Many US officials have said that the US is
willing to help the North if it abandons its nuclear weapons program.
In Chapter 7, major findings of this study are summarized and some concluding remarks are suggested. In order to induce foreign capital to special economic zones, North Korea should make more progress in reform and opening policies in the future. North Korea's efforts to attract foreign investors and increase the management efficiency of the special economic zone are also important for the success of special economic zones of North Korea.
