In a North Korean port city, foreign investment starts to flow

September 26, 2011

In the northeastern tip of North Korea, Chinese and Russian construction crews are racing to build transportation lines to a long-neglected port city that may become an oasis for foreign investment.

Chinese workers, living in roadside tents, are widening and paving a 31-mile road whose condition was once so mangled that trucks needed three hours to travel it. Russians, meantime, are finishing a $200 million renovation of a 34-mile stretch of railroad.

The road starts in Hunchun, China, and the railway starts in Khasan, Russia, but both pathways end at the same spot: a seaside city known as Rason, where North Korea is experimenting with the economic reforms it has consistently resisted.

Twenty years ago North Korea designated Rason as a special economic zone, but the leadership in Pyongyang, ambivalent about loosening its state-run economy, spent the subsequent 19 years ignoring Rason’s potential. Only this year have North Korean officials delivered a new message, touting Rason as their mini-Singapore — a business-friendly hub with cheap labor, low taxes and a soon-to-arrive Internet connection for foreigners.

“It’s a test period,” said Cho Bong-hyun, a researcher at Seoul’s IBK Economic Research Institute. “If this investment takes off, I think North Korea will try to expand this kind of cooperation.”


China and Russia want to use Rason’s three ports, which give the trade giants more efficient access to Japan and South Korea. But experts note that China and Russia, by upping their investment in Rason, also are taking a risk: Corruption infests business, discouraging major investments, even when they’re government-backed. Those who conduct business in North Korea speak of arbitrary rule changes, with no legal system fit for handling disagreements.

The broader concern is that Rason is at the mercy of backing from Pyongyang, and foreign investment there doubles as a bet that Kim Jong Il, 69, is willing to open up his country in exchange for hard currency. Kim needs all the money he can get, particularly ahead of a 2012 celebration — the 100th anniversary of the birth of founder Kim Il Sung — where propaganda promises full economic prosperity. Kim also wants to nurture the support of Beijing and Moscow as he cedes power to his youngest son, Kim Jong Eun. Still, the North Korean system depends on tight social controls, which outside influence undermines.

“I do think North Korea is serious this time” about developing Rason, said Marcus Noland, a North Korea researcher at the Washington-based Peterson Institute for International Economics. “Why do I say that? Because we can actually see them paving the road. But the deeper issue is, what do they do with the road? Does the government want an enclave that will not affect the fundamental economy of the country? Or do they see it as a potential spur?”

Answers might take years to emerge, Noland said. But other analysts see signs of budding support, at least for small-scale capitalism in Rason, which by car is 20 hours north of the capital Pyongyang.

Kim Jong Il recently appointed Ri Chol to lead a new foreign investment committee. Ri is a former ambassador to Switzerland, serving as de facto guardian for the Swiss-educated Kim Jong Eun during the heir apparent’s teenage years. And this month, a North Korean delegation traveled to China’s northeastern Jilin Province to drum up interest in Rason. According to reports from the trade exposition, North Korean officials said that income tax in Rason would be 14 percent — 11 percentage points lower than in other parts of the country. The minimum wage is $80 per month, half the rate in China.

But Rason shows signs of its decades of neglect. It lacks adequate electricity for full-scale industry, and Pyongyang only recently opened talks with China to provide new power lines. According to Andray Abrahamian, head of a Singaporean nonprofit who visited Rason in August, the area doesn’t have sufficient banking services. And foreigners still cannot use the local cellphone network.

Rason has a market, about the size of a Wal-Mart, where locals can buy and sell everything from shampoo to computers. Many of the products, Abrahamian said, come from China. On a recent trip, foreigners were banned from taking photos of the stalls.

“So, clearly changes are afoot in Rason,” Abrahamian said. “They’re taking this seriously as a free economic zone. On the other hand, they’re still uneasy about the fact that they have markets where the vast majority of trade is done” in Chinese renminbi.

Some experts in Seoul and Washington describe the recent moves in Rason as a natural extension of political pressures. Facing U.N. sanctions and reduced inter-Korean aid from conservative South Korean President Lee Myung-bak, North Korea has grown more reliant on its traditional allies — first China solely, then Russia as a counterbalance to China.More recently, Russia and North Korea have discussed the construction of a pipeline that would span the country, delivering gas to South Korea. Pyongyang stands to profit by charging handling fees, but Russia, analysts said, could predicate any agreement on political cooperation.

Either Beijing or Moscow could use its influence with Pyongyang to help re-start six-party talks, the stalled process aimed to curb North Korea’s nuclear program.

“I look at the infrastructure, particularly the Chinese infrastructure, that is going on,” said Jack Pritchard, president of the Korea Economic Institute. “Once that construction is complete, we’ll have a legitimate roadway that is safe to travel even in winter. And I think we’ll see increasing influence by the Chinese in that area.”

Special correspondent Yoonjung Seo in Seoul contributed to this report.

Chico Harlan covers personal economics as part of The Post's financial team.
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