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International Cooperation for Industrial Development in North Korea : Based on the Experience of the Former GDR and Poland
북한의 공업지역개발을 위한 국제협력 방향 연구: 구 동독과 폴란드의 사례를 토대로 Sang-Jun Lee, Won-Bae Kim, Moon-Woun Lee, Wendelin Strubelt, Karl-Peter Schoen
RR 2004-1․March 2004․168 pages․Korean
This collaborative study aims at searching effective methods of international cooperation to develop North Korea's industrial regions based on the lessons from the experience in the development of industrial regions in former East Germany and Polalnd.
The BBR in Germany as a partner institution rendered a great help in this study. In particular, the BBR carried out case studies on Germany and Poland. Professor Gorzelak at the University of Warsaw and Professor Szczpanski at the Tychy Business School provided valuable materials for the case studies on Poland.
The study consists of seven chapters. The first chapter discussed the need of the study with research objectives. The reasons for selecting the former GDR and Poland are twofold. One is the similarity in industrial structure between them and North Korea. The other is that both the former GDR and Poland utilized international cooperation effectively for the development of their industrial regions.
Chapter 2 shows some issues on the industrial development in North Korea. The development of industrial regions usually includes two major components: industrial infrastructure and production facilities. And these components can be discussed by region and by stage. In terms of industrial infrastructure, North Korea's industrial regions are known to suffer greatly from the shortage of electricity and transportation. The expansion of these infrastructure facilities is critical for the recovery and development of industrial regions. Investment in new production plants and equipments is also very much wanted, since most production facilities in the North are dilapidated. In particular, Suncheon and
Dukcheon in Pyongan-do and Cheongjin and Kimchaek in Hamgyeong-do are known to suffer severely from the dilapidated production facilities and the shortage of infrastructure.
In the short to med-term, transportation infrastructure in and around a few major industrial areas is the most urgent item to focus on since the delivery of raw materials and inputs is critical to the normalization of the existing production facilities. In the long term, the infrastructure foundation of the existing industrial regions should be completely overhauled in addition to investment in new production facilities. Region-wide infrastructure networks such as railway, road, and energy distribution should be built when localized infrastructure demands are met.
The renovation of production facilities in the North requires an enormous sum of investment. Given the absolute shortage of investment resources in the North, the participation and assistance of the international community is essential. Such international assistance will not only help financing of infrastructure building but also contribute to the transfer of technologies, management know-how, and professional manpower.
As expected in the closed economy, international cooperation in the industrial development of North Korea has been negligible except for the former Soviet assistance in the early years of industrialization in North Korea. Recently, the North Korean government attempted to host foreign investment in the Rajin-Sonbong economic and trade zone but the result was disappointing. Needless to say, international cooperation is highly unlikely unless North Korea's nuke problem is resolved. Even if we assume a peaceful solution of the nuke problem, there remains an issue of how to (re)develop the industrial regions of North Korea.
In Chapter 3 and 4, the experience of international cooperation in the former GDR and Poland are reviewed. In the renewal of the old industrial regions in the former GDR, the EU programs played a significant role. In particular, the project called, FOCUS(The Future of Industrialized Cities and Regions undergoing Structural Changes) was carried out to help formulate the redevelopment strategies for the mid-east industrial regions. The project recommended a need to cooperate among the old industrial cities and regions to solve their structural problems through the exchanges of their experiences.
A successful example of renewing an industrial region can be found in Riesa, which was an old steel city in Sachsen. At the time of German unification, Riesa had a steel mill, which employed 12,000 workers. The number of workers was reduced to 4,000 after restructuring over four years. The key factor for the success of Riesa lies in the close cooperation among the local, regional, federal actors such as the Riesa Company, the city of Riesa, the county of Riesa, the Lander of Sachsen, and the Labor Ministry of the federal government for the restructuring of the steel mill and their concerted efforts in hosting foreign investment. The financial support from the federal government, the European Union, and the Treuhand for the infrastructure building and employment stabilization was another critical factor for the success of Riesa.
In the case of Poland, the role of the European Union was perhaps greater than that of the former GDR. Two EU programs of STRUDER and PHARE were particularly influential in rebuilding the industrial regions of Poland. These two programs rendered assistance in the areas of training, infrastructure development, environmental preservation, and the development of administrative infrastructure. In addition, Poland received a great help from international financial agencies such as World Bank. Among the energy and transportation projects, the Katowice Heat Supply and Conservation Project supported by IBRD(The International Bank for Reconstruction and Development) helped increase the energy efficiency as well as reduce environmental pollution in the Katowice region.
Another example supported by IBRD is the refurbishment of railways in Poland. The purpose of the project was to reduce surplus labor in the railway operation system and thereby to increase the operational efficiency. Within two years between 2000 and 2002, the number of workers was reduced from 182,000 to 145,000 persons.
Poland also provides a successful example of special economic zone, which has important implications for North Korea. The special economic zones in Poland were implemented as a policy tool to achieve the goals of attracting foreign investment and balanced regional development. As of September 2003, there are 15 special economic zones in Poland and they are given special privileges of tax exemption. The Katowice special economic zone was designated in June 1996 and it has 4 sub-zones consisted of
Gliwice, Tychy, Sosonowiec and Dabrowa, Jastrzebie and Zory. The Katowice special economic zone as the largest one in Poland has thus far hosted 110 enterprises employing 12,500 workers.
In Chapter 5, some lessons from the experience of the former GDR and Poland are defined. North Korea shares similarities with Poland and the former GDR at the initial stage of the latter's reform and opening. For example, all of them share the characteristics of an industrialized socialist economy. North Korea is, however, far behind Poland and the former GDR in terms of reform and opening. Poland and the former GDR had already high levels of reform and opening even before they began a transition to market economies. We can also point out an additional contextual difference: Poland and the former GDR had a more favorable environment than does North Korea right now to seek international assistance. The role of the EU and international financial agencies was significant for Poland and the former GDR, whereas North Korea has not many countries to depend on for its economic survival except for China and partly South Korea.
Therefore, North Korea's economic position will not get better unless the security issue surrounding its nuclear development is resolved.
The major lessons from the experiences of Poland and the former GDR with respect to infrastructure development can be summarized as follows. First, the role of government is essential in infrastructure development. For example, the federal government of Germany rendered a large financial assistance for the expansion of transport, energy and communication facilities in the old industrial regions of the east. Investment in infrastructure building by regional governments was an important factor for the success of the Katowice special economic zone. Therefore, it is a must for North Korea to make an exemplary investment in infrastructure in limited areas to obtain international assistance as well as to attract foreign investment.
Second, North Korea should learn how to utilize international cooperation for its infrastructure development. As indicated in the experiences of Poland and the former GDR, the EU provided an umbrella under which many infrastructure development projects were carried out. The role of the World Bank was substantial for Poland. As shown in
the example of FOCUS, North Korea can learn a great deal about industrial restructuring and infrastructure development from China, in particular, the northeastern provinces and the Russian Far East. Setting up a network with these provinces and sharing information and experiences will help North Korea in developing the strategies to redevelop their old industrial regions.
The third lesson is concerned with the importance of environment. The example of Riesa, where the soil contamination issue in the old industrial sites was thoroughly addressed before the conversion of the sites for new uses, is a reminder for North Korea.
Fourth, North Korean policy makers can learn the importance of social stabilization measures in any restructuring efforts. For both cases of steel mill restructuring in Riesa and railway restructuring in Poland, retraining and reemployment programs helped stabilize unemployment problems arising from restructuring. Fifth, it is more advantageous to utilize the existing industrial areas rather than to build new industrial areas in terms of costs and environmental damages.
A few lessons can also be learned from the experiences of Poland and the former GDR with respect to hosting foreign direct investment. As shown in the examples of Riesa and Katowice, the concerted efforts of central and local governments are essential to attract foreign direct investment. North Korea has to be much more active in marketing their special economic zones in addition to building up physical and institutional infrastructure. As indicated in the example of Katowice, North Korea's policy makers should develop strategies differentiated by zone, e.g., each zone's location, industrial characteristics, etc., in order to host foreign direct investment.
Chapter 6 suggests some policy directions for international cooperation for industrial development in North Korea. Given the dire economic situation of North Korea, North Korea should first seek international cooperation in the redevelopment of its industrial areas. East European experiences suggest, however, that such efforts should be directed to secure an institutional base for international cooperation. In this regard, the INTERREG-CADES of EU could be a good example to emulate. Setting up a program for “Infrastructure Development of Industrial Areas in Northeast Asia” would be useful.
Through this program, North Korea can share experiences of similar industrial areas in China and Russian Far East. Also, it is easier to secure funds through this program from neighboring countries and international agencies than to secure by North Korea alone.
Bilateral cooperation with China, Russia and South Korea rather than multilateral cooperation would be easier in the border areas, where adjoining countries can promote mutual interests with North Korea.
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. This will not only make North Korea able to concentrate its scarce investment resources in a few parks but also raise the likelihood of success in attracting foreign direct investment. Finally, to effectively develop the industrial areas in North Korea, it is necessary to devise a strategy of staged international cooperation by the three parties--North Korean government, foreign enterprises and international agencies. In the early stage, it is desired to pursue infrastructure development by international assistance. At this stage, North Korea can set up a few industrial parks with favorable policy privileges for foreign direct investment.
In the later stages, North Korean government can consider the nation-wide infrastructure development program in consultation with international financial agencies.
