Subterfuge, corruption cloud North Korea's experiment with capitalism

North Korea is planning to expand its experiment with capitalism, but subterfuge and corruption cloud the regime's true intentions

PUBLISHED : Wednesday, 11 December, 2013, 9:15pm
UPDATED : Thursday, 12 December, 2013, 2:51am

Although there are traffic lights in other North Korean cities, the ones in the Rason Special Economic Zone actually light up.

The avenues are broad and paved, and along the main street, decorative lights outline building edges. Foreign-owned or funded industries and businesses including a casino - one of only two in the country - have helped create an oasis of light in a countryside otherwise inky black and largely empty.

The zone, some two decades old, is intended to be a petri dish of capitalism, and North Korea's leaders plan to expand the experiment all over the country. It isn't the only one of its kind in North Korea, but it's the oldest, most vibrant and, experts say, the most promising.

Last month, North Korea announced plans to create economic zones in every province. The North also recently laid out new laws to encourage foreign tourism and investment. The laws give investors special incentives and guarantees, while giving local leaders greater autonomy to promote themselves and handle business decisions.

But it's unclear how far Pyongyang is willing to go to build its economy. It has shown no willingness to abandon its nuclear weapons, which could free it of international trade sanctions. Monday's announcement that Jang Song-thaek, the No 2 leader and reportedly a supporter of Chinese-style economic reforms, has been purged for corruption adds uncertainty to the regime's intentions.

A look at Rason suggests that -even with top-level support for the zone experiment - the country is not so desperate to revive its moribund economy that it will risk changes that might jeopardise the political status quo.

Rather than a golden goose ... the zone idea might turn out to be a dead duck

Journalists were allowed to visit the zone but were denied access to some areas, including what might be the front line of North Korean grassroots capitalism, a bustling public bazaar where small-time entrepreneurs rent stalls from the government to hawk their wares in free-market style.

In appearance, Rason remains in every way an outpost city, albeit one that is better off than most in the North. Its showcase enterprises - the Sonbong Textile Factory, a seafood processing plant, a sprawling but seemingly yet-to-open chemical production complex - are hardly cutting-edge or transformative.

At the textile factory, row upon row of workers, almost all of them women, toil silently at sewing machines below plastic sunflowers and big blue posters that say simply, "Without a Rest". No words are spoken.

This year, the factory will produce one million pieces of clothing, twice its output just five years ago, says Pak Mi-kum, a no-nonsense woman who worked for 10 years as a seamstress before becoming manager. Chinese contractors supply the raw materials, then take the finished goods home for sale or export, tagged "Made in China".

The Rason zone combines two small cities, Rajin and Sonbong, just a short hop from the Chinese and Russian borders. It's been around since the early 1990s, when international relations appeared to be improving slightly, but they have since sputtered over North Korea's nuclear programme.

Rason now hosts 150 foreign companies from 20 countries. Experts say North Korea's lack of commitment to establishing a legal framework and financial guarantees has discouraged more investment.

But farther out along the coast sits the revamped five-star Emperor Hotel and casino, replete with blackjack tables, karaoke and massage rooms. Hong Kong money is behind that one, and it is generally populated by Chinese gamblers.

But requests to go inside are denied. Instead, they offer a grand, optimistic spiel in the conference room of the Pipa Tourist Hotel. It begins with a short video presentation after Kim Yong-nam, the first vice-chairman of the Rason Economic and Trade Zone Administrative Committee, and Kim Hyong-pil, head of the Rason Investment Service Office, take their seats in large overstuffed armchairs.

The video, shown in English on a large flat-screen TV, touts Rason's port and rugged but scenic seashore. It has a number to call at the end, although vice-chairman Kim acknowledges the number probably won't work for international callers because North Korea tightly restricts outside communications.

Undaunted, he launches into spiel about his vision, which involves developing Rason to be "like the port of Singapore".

Like most of North Korea, Rason has a chronic shortage of energy. But Kim says Chinese electricity and Russian coal should be coming soon.

His sales pitch concludes with what he sees as Rason's - and North Korea's - real ace in the hole. Labour is cheap, reliable and literate. Crime is not an issue.

Stability? "Ours is the most stable country in the world," he says. "The situation in our country is very safe and comfortable. More than you think. If you find any foreign investors, please ask them to come in. We will welcome them."

The success of the plan hinges on China, and there are reasons to believe Beijing wants to help. China has begun an ambitious effort to develop its relatively poor northeastern provinces. Using Rason more could reduce transport costs for exports and consumer goods headed down the Chinese coast. Economic involvement in Rason has the added bonus for China of strengthening its influence over North Korea and - the Chinese hope - improving stability.

The purge of Jang, Kim Jong-un's uncle, could have a chilling effect on the zones, since he had close ties to China and was seen as a moderate who supported the zoning concept. In announcing his removal, the party slammed him for being overly influenced by capitalist ideas and "doing enormous harm to the efforts to build a thriving nation and improve the standard of people's living".

North Korea's push to create more zones comes as its Kaesong Industrial Complex, opened in 2004 with heavy investment from Seoul, is struggling back to life after the North pulled all 53,000 of its workers for months over what it called political and military provocations.

For investors from most of the global economy, including the US and Japan, North Korea's nuclear programme could doom the zones from the start.

Connie Carter, a professor of law and international business at Royal Roads University in Victoria, Canada, attended a rare international economic symposium in Pyongyang last month. She says that while special economic zones could be "powerful and potentially useful", North Korea shows no sign of enacting the kind of broad reforms that have generated growth in countries such as China, Myanmar and Vietnam.

"I'm afraid that rather than being the golden goose, in its current form, the DPRK's special economic zone idea might turn out to be a dead duck," she says.

Mitsuhiro Mimura, a senior fellow at the Economic Research Institute of Northeast Asia based in Japan, says the proposal for the zones reflects Pyongyang's desire to appear in control of changes that are already well under way. That includes the expansion of trade with China along the border and the spread of marketplaces like the one in Rason, where people can buy food and other goods to augment what the government gives them.

Mimura says he expects Jang's purge to cause no more than short-term hiccups. He says he believes the North's leaders know they must improve the quality of life and the efficiency of their centralised, command economy. But leaders also fear that by creating more wealth and a middle class, citizens could demand more freedom.

"It's a dangerous gamble for the leaders," he says. "They need to figure out how to hit the brakes if they need to. How will they lead if the market system succeeds?"