North Korea, experiencing chronic economic hardship, has been attempting to make partial policy changes to expand external economic relations and to attract foreign investors since the early 2000s. For the expansion of trade and foreign investment, the North Korean regime attempted to establish special industrial zones in 2000s and took some reform measures in their legislations and administrative system. In 2002, North Korea announced expansion of special economic zones as a follow-up measure from the ‘July 1st Economic Reform Measures.’ Starting with the announcement of Sinuiju Special Administrative Zone in September of 2002, the country designated and announced the Mt Kumgang Tourism District in October and the Gaesong Industrial Zone in November as new special industrial zones in the same year. In June 2011, North Korea and China’s joint development plan was announced with the groundbreaking ceremony for Rasun Special Zone and Hwanggeumpyeong area near Sinuiju. Indeed, since the mid-2000s, legislation related to foreign investment was revised. For example, International Trade Arbitration Committee was first formed under the trade department in 2004, and law firms were opened for foreign legal consultancy within North Korea, which in turn is for resolving legal issues regarding investment in North Korea.
In addition to the changed attitude and increased interest of the North Korean regime towards foreign direct investment, foreign companies’ interest in investing in North Korea grew in the 2000s with such reasons of development of natural resources, utilization of cheap labor and/or sales of their products in North Korea. Although the volume of foreign investment flow into North Korea has been very low compared to most transitional economies like Vietnam and Third World developing countries, both quantitative and qualitative change has taken place in North Korea’s foreign investment attraction since the early 2000s. Centered on resource development area, North Korea attracted foreign investments in such areas as manufacturing, finance, product distribution, telecommunications, and construction. Foreign companies including Chinese, European, and South Korean, not only moved into special industrial zones of Gaesung Industrial Complex and Rajin Seonbong District, but also to major cities such as Pyeongyang, Nampo and Cheongjin. Because of the increase in the volume of investment, number of foreign companies and investment area, the impact of foreigners’ investment on the North Korean economy has increased.
The most significant feature in North Korea’s recent foreign investment policy and performance is that Chinese investment in North Korea has largely increased and North Korea’s economic dependence on China has further deepened. Chinese investment in North Korea, which remained in operations of restaurants and retail shops by small businessmen and traders in the past, emerged as the largest foreign investing country since the full-scale advance into the development of natural resource by Chinese state-owned enterprises in the mid-2000s. Chinese companies also invest in such areas as manufacturing, domestic sales and service industry. Moreover, in the connection of the development plans of the three Northeastern provinces in China, China’s investment in industrial infrastructure of Sino-North Korea border area has recently been visualized. In 2011, North Korea and China announced their plan for the joint development and management of Rasun and Hwanggeumpyeong districts as special economic zones. As a part of implementing Changjitu development plans by Jilin Province of China, China seeks to secure the right to use the Rajin port and Chongjin port in North Korea. In return, North Korea pursued to construct and develop the infrastructure facilities within Rasun area. China is developing Hwanggeumpyeong district in connection with economic development projects of Liaoning province as well, and in return, North Korea has provided development rights of its Hwanggeumpyeong district to China.
There are both positive and negative aspects in the increase in China’s investment towards North Korea and the expansion of North Korea and China’s bilateral economic cooperation. When the transportation infrastructure of North Korea and China’s border is improved through China’s investment in Rasun and Sinuiju areas, the potential for regional development in these areas will increase significantly. In addition, when the Rasun and Sinuiju areas become developed through a joint management with the Chinese authority, there is a possibility that the economic cooperation of North Korea and China will bring positive impact to the recovery and marketization of the North Korean economy.
However, North Korea’s large reliance to China’s investment has taken place during the ongoing deterioration of North Korea’s foreign relations due to its nuclear problem. The close economic relations between North Korea and China could create negative consequences by subordinating the North Korean economy to China in terms of its economic structure. In the early 2000s, the North Korean regime attempted to promote partial economic opening and pushed for diversification in economic cooperation by improved relations with South Korea and several European countries. But, due to its continued nuclear ambition, North Korea’s international isolation has once again intensified. Moreover, inter-Korean relations became idle with series of incidents like North Korea’s Yeonpyeong Island shelling. As a consequence of the decreased investment in North Korea by the South following the worsened relations in the late 2000s, North Korea’s dependence of foreign investments to China has been growing. North Korea’s heavy reliance on China has caused the problem of limiting North Korea’s political and economic cooperation with one particular country, China.
Foreign investment environment in North Korea is still very poor. Foreign companies’ movement into North Korea is being limited due to North Korea’s absence of reform in the internal economic system, outdated industrial infrastructure, poor legal system, rigid administrative system, etc. Though there has been an increase in the investment by foreign companies in 2000s, North Korea’s system of attracting foreign investors shows problems. It is known that foreign companies who considered or implemented investment in North Korea often experienced conflicts with North Korean partners. The reasons behind the deferred or withdrawal of investments by South Korean, Chinese, and European companies who have entered into contract with North Korean mining companies was found to be excessive payment demands by the North Korean authority in the return for the exclusive rights for the development of mines, and incidental expenses for foreign companies entering into North Korea. In addition, there have been several cases where investments were terminated or investing foreign companies withdrew from North Korea with such reasons as conflict with related North Korean agencies, limitation of communication and transportation, and low production quality. Above all, North Korea’s delay in resolving nuclear problem and the economic sanctions from the international community are the major obstacles in expanding and diversifying foreign investments in North Korea. Therefore, the most urgent issues that remain as a challenge for North Korea, the country in need of foreign investments, are the improvement of foreign relations through North Korea’s resumption of six-party talks and denuclearization.
There is limit in specific and comprehensive study on current North Korea’s policy for foreign investments even with the greater academic and policy interest in changes in North Korea’s policy for attracting foreign investors and its implications for inter-Korean economic cooperation. An analysis of the current status of North Korea’s investment policies and the current status of foreign investment in North Korea is important as it is closely connected to the future reform orientation of North Korea. This study examines the changes and characteristics of North Korean policies for foreign investment during the 2000s. It analyzes North Korea’s current management system, legislations and government organizations related to foreign investments. This study then evaluates the status and performance of foreign companies who entered North Korea in the 2000s. In addition, this report specifically examines the actual conditions of Rasun District and Hwangguempyeong of Sinuiju, the areas that China will implement development projects and discuss its future prospects, which are the forefront areas in North Korea’s promotion for foreign investments. The last part of the report studies the future direction of North Korea’s promotion for foreign investments, and it discusses the direction and tasks of inter-Korean economic cooperation. This study on North Korea’s policies in foreign investment could contribute to the increase in our understanding of the North Korean economy and to the development of inter-Korean economic cooperation.
- 북한의 투자유치 정책변화와 남북경협 방향
- 정형곤; 김지연; 이종운; 홍익표
북한의 투자유치 정책변화와 남북경협 방향
[서울] : 대외경제정책연구원
|Series Title; No||연구보고서 / 11-21|
|Subject Country||North Korea(Asia and Pacific)
South Korea(Asia and Pacific)
|Subject||Economy < Economic Administration|
|Holding||Korea Institute Economic Policy|