Can North Korea make SEZs work?

 Recent workshop on SEZ development in Wonsan with participants from many of the East Coast provinces

Recent workshop on SEZ development in Wonsan with participants from many of the East Coast provinces

 

When the Special Economic Zone policy (SEZ) rolled out throughout 2013, I admit to being initially skeptical of its odds for success. We first heard about the policy in March 2013, when it was on the verge of being passed. In May, Choson Sinbo leaked details of the policy, which was followed by an international conference on SEZs in October unveiling the policy to the Western press. Since 2013, we have conducted 4 workshops related to SEZ setup and development and interviewed over 30 persons from multiple provinces involved in the SEZ effort. Chatting with them has given me some cause for cautious optimism.

 

My initial skepticism kicked in because the investment amounts North Korea suggested they were going to attract for these zones looked unrealistic, making me wonder how much of the lessons of the past 20 years have sunk in. Finding enough investments for Rason and Hwanggumppyong has been a challenge, much less for the proposed 14 zones. Furthermore, it seemed unlikely that the North Korean government could provide the infrastructure for so many zones - infrastructure needed to make these zones attractive to foreign investors. Rason had to depend on Chinese support to pave its road to the border.

 

North Korea’s prior approach to SEZs also leaves much to be desired. In particular, SEZs' value in driving economic growth comes in part from their integration with the rest of the economy (e.g. through domestic companies supplying to the zones). In Rason, North Korea fenced off the zone, figuratively and literally. The SEZ was meant to be a self-sustaining bubble. Additionally, the creation of a new organization to manage SEZ investment reminded me of the proliferation of investment attraction bodies in North Korea, many of which are now defunct.


 Cooped-up workshop leader practices mattress jumping in Wonsan

Cooped-up workshop leader practices mattress jumping in Wonsan

However, chatting with zone administrators and policymakers, it does seem that there is value to the SEZ policy. Experimentation is clearly on people’s minds, perhaps more so than investments. In one example, a 'spot' SEZ  allows deviation from prescribed agricultural methods, allowing adaptation of agricultural production to local conditions. This is important in North Korea's context as tinkering with highly politicized and nationally-set agricultural methods has gotten people into trouble in the past.

 

I also speculate that the new zones will be much more connected to the domestic economy through various mechanisms. Fencing off zones at the corners of North Korea is possible, but doing so for “spot zones” of 2-3 square kilometers, all around North Korea, seems a lot harder. The spatial characteristics of these zones favor linkages with their hinterland, whether by design or accident.

 

Thought appears to have been given to attracting not just foreign investments, but also domestic investments. This is another linkage between the zones and the broader Korean economy. I hope that the SEZs will provide a more favorable environment to domestic entrepreneurs, by providing them with flexibility and security in building new businesses (which is already happening), and eventually giving official and legal sanction to do so.