Center for Asia Pacific Strategy

Practitioner to Practitioner Series

Talking Points: North Korea
Part 2

Talking Points on Private Foreign Investment and Special Economic Zones

January 01, 2024

Editor’s Note:

The three-part “Talking Points: North Korea” series is the inaugural publication in the Center for Asia Pacific Strategy’s “Practitioner to Practitioner” series, which seeks to provide practical and actionable policy recommendations for practitioners from practitioners.

Talking Points: North Korea Series
by Ambassador Thomas Schäfer

Part 1:
Encouraging A Different Mindset In North Korea: Introduction And Recommended Talking Points On Agriculture, Food Security, Private Economic Activities, And The Enterprise Reform

Part 2:
Talking Points On Private Foreign Investment And Special Economic Zones

Part 3:
Talking Points On Military Spending, Objectives Of Nuclear Armament, Nuclear Negotiations, “Hostile Policy,” A Peace Treaty, And An End-Of-War Declaration

Introduction
In the last twenty years, DPRK at times seemed to welcome private foreign investment, but then rejected it. At the (second) inter-Korean summit in 2007, Kim Jong Il and the South Korean President Roh Moo-hyun agreed upon the prospect of comprehensive South Korean aid and investment, but only months later, the use of foreign capital and technology was declared undesirable by Pyongyang. DPRK has also repeatedly agreed to a rail link from the Chinese to the inter-Korean border, which would be beneficial to all three countries involved, but nothing came of it. The new Chinese built highway bridge across the Yalu River remains unused. Why does DPRK not open up to investment? Why this wavering? Provided that sanctions were lifted, DPRK could develop fast with foreign capital on the basis of a more forthcoming DPRK attitude.

Of course, other conditions would have to be met, e.g. foreign investment and access or travel restrictions are not compatible. Working conditions of North Korean workers would have to meet certain standards.

Special economic zones:
For a time, it seemed that DPRK wanted to attract foreign investment to special economic zones. During the first years of Kim Jong Un’s reign, the provinces were allowed to designate new zones. But the existing zones encountered difficulties: The Diamond mountains zone was closed in 2008, the Kaesong Industrial Zone experienced closures by the military in 2009 and 2013, and was definitely closed in 2016. The zone at the Chinese border near Dandong with existing Chinese built infrastructure and the highway bridge nearby were never inaugurated. Kim Jong Un has never promoted one of these zones through a visit. Except in the Wonsan Tourist Zone, there has been hardly any DPRK investment. The DPRK commitment seems half-hearted at best. Why is that? How do you hope to attract investors in that way?

Background:

Discussion about foreign investment in general:
Since the turn of the century until about 2015/16, the DPRK leadership has discussed time and again whether the country should be open to cooperation, trade, foreign investment. Repeatedly, timid reform steps alternated with measures to again tighten state control, depending on whether reform-minded people or their opponents in the leadership were more influential. In 2007 such a discussion was taking place even after Kim Jong Il clearly appeared to have set the course through his agreement with the South Korean President. The result of the discussions in the leadership at that time was presented in the joint commentary of the important newspapers on New Year’s Day 2008. It said that the existing planned economic system should be maintained without compromise. Economic development “based on our own strength, technology and resources” and raising living standards were deemed the main tasks. The pursuit of profit and an increase in exchanges with foreign countries were considered the right thing to do—this was a positive novelty in a commentary of this sort. However, there was no longer any mention of the procurement of foreign technology or capital. It was also said that the indoctrination of the population should be stepped up as compensation for the ideologically dangerous contacts with foreign countries.

Discussion about special economic zones:
There were four special economic zones at the beginning of Kim Jong Un’s reign. Rason, founded in the early 1990s and bordering China and Russia, had mainly received Chinese investment. It served Chinese companies as an extended workbench. The Kaesong Industrial Zone on the inter-Korean border operated from 2004 to 2016. South Korean companies employed more than 50,000 North Korean workers in contract manufacturing during Kim Jong Un’s time. The 2002 established Diamond Mountains tourism zone, also in the border area with South Korea, had been effectively closed in 2008 after a South Korean tourist was shot dead by a North Korean border guard. In 2011, some basic infrastructure was built by China on the North Korean islands of Hwangumpyong and Wiwha in the Yalu river near the Chinese city of Dandong; however, companies had not settled there. The infrastructure in Rason had been largely paid for by China and Russia; in Kaesong and the Diamond Mountains it had been paid by South Korea. The zones were supplied with electricity by China and South Korea. Apart from providing the workforce, North Korea’s contribution was minimal in all zones.

In 2013, the Central Committee of the Workers’ Party decided to allow the provinces to create more special economic zones to attract foreign investment. A total of around twenty new special economic zones were designated. They were different in size and purpose (tourism, agriculture, technology, contract manufacturing, etc). What they all had in common—other than the Wonsan tourism zone – was that the foreign investor was expected to provide capital, technology, and markets and build the infrastructure, including energy, water, and transport. North Korea would provide nothing but a plot of land and the workforce. Even more relevant was the fact that the concept of special economic zones was not supported by the whole leadership: In 2013, only a few weeks after the decision to allow new zones, the North Korean armed forces closed the Kaesong Industrial Zone for several months in clear contradiction to the Workers’ Party line. The controversy in the leadership was also manifest by the fact that the country’s leaders have made no public gestures of support (e.g. through a visit by Kim Jong Un) for the special economic zones since the transition from Kim Jong Il to Kim Jong Un.

Tug-of-war in the leadership between 2008 and 2015/16:
Right after Kim Jong Il’s stroke in 2008, a shift towards more conservative positions in internal, external, economic policy as well as ideology occurred. Conservative forces were empowered as a physically and politically weakened Kim Jong Il had to pay a political price to the armed forces and other members of the elite to accept Kim Jong Un as successor. But not all members of the elite were happy with the conservative shift and pushed back. The years from 2008 to 2015/16 were a transition period characterized by a confrontation within the leadership about the course the country should take. Differences of opinion were notable in nuclear policy (mainly as to the speed with which nuclear armament should be pursued), budget priorities (military vs. civilian sector; heavy vs. light industry), Pyongyang’s South Korea policy, the attitude towards economic reforms, the degree of self-isolation. To be sure: There was also large consensus in basic questions as, for example, the maintenance of the Stalinist system and control of the population, by, among other things, increasing supervision and indoctrination efforts. The hardliners give more importance to these political objectives than economic growth and see in aid, foreign investment, special economic zones, and other forms of economic cooperation less of an opportunity than a risk to the regime’s stability.

After Kim Jong Il’s death at the end of 2011, the power struggle in the leadership intensified. Discussions about nuclear policy continued as became evident with the breakdown of the Leap Day Agreement in 2012 and the adoption of the Policy of Parallel Development that gave rise to a further increase in military spending to the detriment of the civilian economy. Other examples include the closure of the Kaesong Industrial Zone in 2013, preparations for an inter-Korean family meeting in 2014, the attempt in October the same year to improve relations with Seoul and the inter-Korean “mine incident” in August 2015. It was evident – and in private talks sometimes admitted even by high level officials – that there were divergent views within the leadership about the political direction North Korea should take. Since 2016, there have hardly been any signs of a power struggle within the leadership: the hardliners have prevailed.

H.E. Thomas Schäfer hails from Oldenburg, Germany and he is a member of the Board of Advisors to the Center for Asia Pacific Strategy. During his career in the German Foreign Office, he was posted several times to East Asia and is the former German Ambassador to North Korea (2007-2010 and 2013-2018), and Guatemala (2010-2013). He has PhD in German history from the University of Kiel in 1985. He is the author of the book, From Kim Jong Il to Kim Jong Un: How the Hardliners Prevailed: On the Political History of North Korea (2007-2020).