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Friday
Jan042013

North Korea's New Master Plan

Known under the official misnomer Democratic People’s Republic of Korea (DPRK), North Korea is an inscrutable, unpredictable, armed-to-the-teeth thorn in just about everyone’s side, a pariah ready to lob nukes, starve its own people, or hold out an olive branch, only to yank it back. But now something is going on that reeks of the dreaded phrase, “this time, it’s different”: secret discussions in Germany.

North Korea is seeking the advice of German economists and jurists, the German paper FAZ was told by a source, an academic and one of the presumed experts who has been participating in these hush-hush discussions.

“There is a master plan,” he said. North Korea is planning to open up its economy to foreign investors in 2013. They’re particularly interested in modern investment laws. But they’re not looking at the Chinese model with its special economic zones for foreign investors. Instead, they’re looking at the “Vietnamese blueprint,” the source said, where the government selected foreign companies and investors. The advice of German experts would pave the way for German companies and investors. The lure of the familiar. North Korea had a busy relationship with communist East Germany.

But special economic zones for foreign investors are already under way in North Korea along the Chinese border, including at Rason city, which North Korean officials hyped last September during an investment conference in China as “North Korea’s Shenzhen,” and the islands of Hwanggumphyong and Wihwa in the Yalu river, which would become the “blessed land for investors to get rich.” There would be incentives, such as duty-free imports and a 14% income-tax rate.

Irresistible. Xiyang Group, a large Chinese mining company, invested $40 million in North Korea to build an iron-ore mine. But the government sabotaged the deal, stole its knowhow, and seized the mine, Xiyang claimed last fall. It was a “nightmare” running the place. North Korean managers, when in China, demanded top-shelf alcohol, cars, and pricy prostitutes. Accusations that the North Korean side met with counter accusations. The investment may be lost. So the Chinese are leery. But they know how to slip in and take advantage of opportunities [It Wasn’t Supposed To Be This Way: Chinese Oil Companies Apparent Victors in Post-Saddam Iraq].

There have been other signs—or hopes of signs—of an opening. Kim Jong-un, who was declared Supreme Leader in December, 2011, announced in his New Year’s address last Tuesday, the first such address by a Supreme Leader in 19 years, that 2013 would bring a “radical rerouting” of the country’s economic policies. Agriculture and light industry would be at the center. He had a vision: “An important issue in putting an end to the division of the country and achieving its reunification,” he said, “is to remove confrontation between the north and the south.”

The peace offer was largely brushed off as mere rhetoric. Similar verbal gestures had been made before only to dissolve into missile launches, nuclear tests, and aggressive tirades. But another divided country, Germany, had successfully reunified. It was expensive for West Germans, and a sea change for East Germans. Dissatisfaction in some circles led to the not-always tongue-in-cheek outcry, “We want to have our Wall again.” But Chancellor Merkel is from former East Germany—perhaps a model, or an illusion, for Kim Jong-un, who is young, worldly, and ambitious.

He went to school under an alias in the German-speaking part of Switzerland near the capital Bern. From 1993 to 1998, he attended the private “International School” where English was the school language, then continued until 2000 at a public school where German was spoken. Poor grades and absenteeism dogged his experience. He flunked natural sciences, barely passed math and German—pretty good for a kid in a foreign country where his classes were held in two foreign languages.

So, how serious could Kim be in trying to open up his country and strive for reunification? Now even former governor of New Mexico, Bill Richardson, and Google Executive Chairman, Eric Schmidt are heading to North Korea. Neither publicly divulged his intentions. The State Department expressed its opposition. There were rumors—likely a pretext—that they’d try to disentangle human rights activists Kenneth Bae, an American who’d engaged, according to propaganda outfit Korean Central News Agency, in “hostile acts against the republic.”

The US defense industry would vigorously oppose any resolution of the Korean conflict as it would eliminate a major strategic concern—and the associated taxpayer-funded wealth effect. South Koreans, if they look at Germany, might wonder if they can even afford to pay for reunification. And the Chinese have their own concerns, including the outright collapse of the North Korean regime, and the chaos it would bring.

But the Chinese won’t be discouraged. They’re on a quest for natural resources. Even in places like Africa, where China is going after oil, it surpassed the US and Europe as largest trading partner. Read.... China in Africa: Partners in the Year of the Snake.

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Reader Comments (7)

The main thing is that the regime will try everything to remain in power.

Starting from there some preliminary conclusions can be made:
-reunification is more rhetoric than anything else. Only via a war could that be achieved on Northern terms. And China will never allow such a war and likely cut of the oil and other stuff (so a war can never be won). So realistically in order forr the regime to survive it needs an enemy, but no reunification.
-they need the economy growing, even if only to keep the own population quiet and in order to be able to finance new weapons. And they clearly are not able to do it by themselves;
-the relation with China on economics is imho not nearly as good as most people think. At least at economic level. The Chinese want probably no cheap competition before their front door. The last tax-free zone experiment (set up in cooperation with a Chinese (Dutch-Chinese businessman if I am not mistaken) was killed off by putting the businessman in jail for 20 years. Which is a pretty good sign of having no political approval to do so in China.
-there is a huge difference in things like mining and other business. Especially the Chinese wil be interested in mining so there might be investments in that field.
Where the North could be good at, it has a Western level educated population is high tec stuff. Do not see that happening large scale. Investments are too big and the regime too dodgy, risk is too big.
Arms not likely you donot produce them in another country, but possibly joint venture (North army stuff for the poor of this world (looks a growing market) allthough again huge investment in a dodgy regime. And doesnot fit in this picture.
For local market, doubtful as there is no spending power. Remains making t-shorts and sportshoes and alike (a field with a lot of competition).
-doubtful if they want to redirect resources from the army to the economy. It is their plaything and powerbase, with such a drag you need foreign investment in the real economy.

Doubtful if they can afford chosing companies iso the other way around. They should compete on 70 USD a month wages and that market looks to be overcrowded. probably cies rather go to say Banghla Desh or Africa looks less risky.
January 4, 2013 | Unregistered CommenterRik
"Dissatisfaction in some circles led to the not-always tongue-in-cheek outcry, “We want to have our Wall again.”"

The usual tongue-in-cheek phrase is "They should have ADDED a meter!!"
January 5, 2013 | Unregistered Commenterfatster
Hello Wolf. Question: How safe would the investments be in a country so hell-bent on strict state control? Part of the lure of a capitalistic economy is the inherent promise that as long as one is not doing criminal acts, one revenues and profits are not going to be intercepted by the governing powers. So 'worldly' as Jong-un is...his government is a walled and frightful garden.
January 5, 2013 | Unregistered CommenterAnaneosis
"Everything within the state, nothing outside the state, nothing against the state." This quote from Mussolini accurately defines the objectives of the corporatist superstate that has long been in control of Western foreign policy. Its only interest has been to destroy any attempt to create an economic system beyond their control and spread what Kissinger thought of as a "virus" of independence that would communicate around the globe. This aim is absolutely totalitarian as Mussolini defines it. Of course the Globalists don't give a toss about freedom and democracy. If Kim wants to make what William Burroughs called S++tola for "The Man" no one will care a hoot how dodgy he is.
January 5, 2013 | Unregistered CommenterRoger Yates
Ananeosis - good question. I'd ask the guys at Xiyang Group, the Chinese mining company that invested $40 million in North Korea only to find itself kicked out while its mine was seized and its knowhow stolen.

These kinds of countries (corrupt and arbitrary) are very risky places to do business in. That's why few companies want to make major investments there. It looks like the government is trying to establish a rule book and some laws to settle disputes, etc., but how well they will follow through is anyone's guess.

Even in China, there are still major risks for foreign investors once disputes arise. And giving up your knowhow and IP is now part of the deal. But then, in the US, disputes can be very costly too....
January 5, 2013 | Registered CommenterWolf Richter
I agree Wolf but we do have a chance here, for some sort of redress and we also have copyright and a few others things to wield on our defense. Ask Microsoft and Facebook. (smirk)
January 5, 2013 | Unregistered CommenterAnaneosis
Lot of other aspects to consider as well.
-Xiyang example. If this can happen to a Chinese company (as they are in mining hard to think of as without having some political muscle in China, the country with by far the most leverage there), what could say a Swedish, Australian or Canadian firm hope for.
-Boycot risk. say if you invest in Iran not only nationalisation is an issue, but also not being able to normal business in most of the world (especially with the US sanctions oftern going over borders).
-In countries like China (effectively anywhere but the West), often the political leverage problem is solved by using local partners. Who can you use (basically only a Kim as I see it, meaning you hang for this investment on the current leadership). Difficult to sell at home at best and often simply illegal. It would be a partnership without any other business reason but gaining political protection (read it would be a sort of unofficial extra tax). With the added chance the partner cheats you out lateron as well (also a more or less standard procedure).
-Energy supply a complete disaster overthere like in several other countries.
-DPRK is not China. In the way that totally blocking trade with China is hardly an option with the DPRK it however is.

You need huge returns to make the investment work.
You probably see smaller investments (partly more strategic as well) in order to gain experience. And like before it would take some time to get investments really started. And like before (2 or 3 serious attempt) it will be spoilt by the leadership for political reasons. Imho unless you are in mining and the DPRK gives excellent options (probably protected by being part of the market for the stuff (which should be mainly exported anyway) as well and with relatively low investment) or shooting stuff for the 3rd world hard to see major investments coming in.
January 6, 2013 | Unregistered CommenterRik

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