A Rare Look North Korea's Attempts at Capitalism

The “Special Economic Zone” at North Korea’s northeastern port city of Rason on the borders of both Russia and China has long been seen as a shining example of the country’s failure to attract even the most modest investment from abroad. But times are changing.

Though designated an SEZ in 1991, what little investment there was has been mainly consigned to a few opportunistic Chinese entrepreneurs, some of whom then fell afoul of the law in China and pulled out.. However, in the last year or so, big Chinese companies and the Chinese government have become more proactively involved in the zone’s development. Russia too is cranking up its interest and is in the process of constructing a through-train line between Rason and the Russian border at Tumengang. The physical presence of both neighbors in Rason is palpable, and the city has more hotels per capita than anywhere in the country.

In February 2012, Yonhap news agency reported that Beijing agreed to invest US$3 billion in the city’s infrastructure, including power plants and even a possible direct railway line. While China’s Foreign Ministry refuted certain “details” in the report, the extent of new business activity now visibly taking place in Rason suggests that there are strong commercial and strategic motives guiding the increased Chinese and Russian presence.

But while Rason’s purpose as an SEZ may appear on the cusp of renewal, the scale of infrastructural challenges remain formidable, as is the highly erratic nature of both central and local government policy, which pays lip service to doing business but doesn’t always actually make it bureaucratically easier to do so. Do not expect a budding Shenzhen, at least in the short run. Even under the best of circumstances, Rason remains quite remote from large markets in either of its neighbors, let alone overseas ones.

After crossing the Chinese border at Hunchun, Jilin province, a newly paved road recently built by the Chinese takes visitors through the meandering hillside towards Rason, cutting the journey from a previous three hours to one (paved rural roads are a rarity in this part of the country). The road has enabled a recent surge in the numbers of Chinese day trippers. Many are traders who sell Chinese consumer goods in Rason’s bustling market at windfall profits, returning to China by nightfall with crates of seafood caught in Rason’s clean waters (hairy crabs, shellfish, and sea cucumbers). These can be sold at restaurants in Jilin for over a dozen times the North Korea market price.

Other victors are gamblers who frequent the incongruously opulent Emperor casino, owned by the notorious Hong Kong group of that name, situated beautifully on the coast outside Rason city. While Rason is no Macau, the casino, along with a number of other failed mimic Chinese resorts, is testament to the area’s cavalier entrepreneurialism. Punters pay a minimum US$500 entry fee to gamble in 5-star luxury.

Despite receiving hundreds of visitors each day, the casino’s operations costs are high, requiring a fleet of private generators to keep it going. It was forcibly shut down orders by the Chinese government between 2005-2008 after corrupt local officials lost millions. Open again, it reportedly still struggles to turn a profit perhaps because of poor credit control. The casino’s parking lot has a few idle Hummers that big spenders were forced to leave as security for their losses. Further along the coastline is the skeleton of another Chinese “resort” which was nearing completion but was suddenly abandoned without explanation.

However, the new road to Rason was not built primarily with the day traders and gamblers in mind. More than 150 foreign companies are now said to have a presence in Rason, making new, larger industrial investments and employing local labor. About 80 percent of these companies are Chinese, such as Jilin Yatai, a Shanghai-listed private conglomerate, which is currently constructing a large cement factory. Others have established or are setting up businesses in tobacco, textiles, seafood processing and chemicals.

More remarkably, some Chinese businesses are also beginning to see Rason as a new private consumer market in an otherwise state-dominated economy. The city is slowly making itself more foreign-friendly. Rason’s local bank, the Rajin Triangle Bank, is one of the few places where foreigners can officially exchange foreign currency at the true black market rate of Rmb580 per North Korean won, compared to the official rate of Rmb15 in Pyongyang. This bank is now constructing a sleek new glass and steel complex in the city center. Other sweeteners the city is offering to entice foreign businesses include tax breaks, full foreign ownership for JVs in some industries, and minimum monthly wages set at US$80, roughly half that of China’s.

Indeed, Rason is beginning to display nascent capitalistic streaks, in which a bottom-up market economy is supplementing the rigidities of centralized economic planning. For most citizens, the state provides for most livelihoods, including 90 percent of housing costs and the bulk of utility costs. Health and education services are also largely free. However, income from employment by foreign firms is providing a market for a wider range of Chinese-made utility goods. A new if still small commercial class is emerging to intermediate in the business.

At Rason’s bustling market, thousands of shoes, fresh and processed food products, electronics and assorted accessories and appliances are on sale. Merchants rent stalls from the local government but there is little direct government involvement in the market, where prices are freely negotiated.

On the outskirts of Rason, rows of housing blocks are currently under construction by a Chinese company, which was granted permission to sell each of the building’s 80-sqm, three-bedroom flats at Rmb140,000 each. In downtown Rason, two large plots of land have been cordoned off by wooden fencing, marked by red flags, and dragon-festooned gates. Though construction has yet to commence, Chinese companies are expected to build here a modern style department store in one plot, and a swimming pool/gymnasium complex in the other.

The bigger catch

But for the Chinese government, the main interest in developing Rason’s infrastructure lies in its 400,000 sqm, ice-free port, providing year-round sea access for China’s mineral-rich but landlocked northeastern provinces. This has the potential to significantly lower logistical costs for Chinese companies. One of the port’s three piers has been leased to China since 2005 and is now shipping some 10,000 tons a month mainly Jilin-mined coal to China’s southeast coast. The Chinese government recently offered to build an additional two piers that could each accommodate vessels of up to 70,000 tons. Another pier has been leased to the Russians for 50 years, though they have yet to start using it).

However, China will need to invest for the long term in order to make Rason grow at a higher level. The city still requires massive upgrading to its infrastructure in order to make it a more attractive place for private investors and manufacturers on a larger scale. Rason still grapples with frequent blackouts and scan tindoor heating during winters that go below -20C. Some hotels have almost no regular hot water, and internet access is nowhere to be found -- although officials claim this will change very soon).

China is now considering building direct power transmission lines from China into Rason. However, even then the city would require substantial upgrades to its antiquated electricity grid. A local coal power plant to be built by Chinese companies is also under discussion but no decision has been reached.

China’s increased activity in North Korea may have broader strategic aims, too—China has an interest in increasing its economic leverage in North Korea generally but the border regions in particular. This is ever more so now given the nascence of Kim Jong-un’s regime and the perennial diplomatic problems China has in dealing with North Korean defectors and refugees.

Helping North Korea develop during a period when it appears to want to establish a stronger economic legacy could help Beijing win influence in Pyongyang. China has recently been increasing substantially its direct aid to the North and spending money at Rason may be seen as one way of enticing the new leader to focus on economic development and follow China’s example. There is still huge uncertainty as to whether even modest reform is likely under Kim Jong-un. But if it is for real, expect to hear more about Rason.

(The foregoing was written by a western visitor who was allowed a rare look at faltering attempts to create a market economy in the north.)