KCNA and NKnews recently reported on the designation of six new special economic zones (SEZ) in North Korea. This brings the total to… a lot. We are not dwelling on the exact numbers as this policy is still evolving, and we are likely to see more zones spring up.
The article does not mention whether these are the ‘spot SEZs’ of 2-3 square kilometers or the larger ones of 200 square kilometers. We are leaning towards the ’spot SEZs’ guess, at least for some of these areas, as we had local officials from those places attend training earlier these year. It was clear at that point that some of these local zone requests were being processed.
Another positive news that may be coming up, which we recently heard about, is changes to the law that would allow wholly-owned foreign enterprises (WOFE) in the SEZs. Previously, only Rason allowed WOFE set-up. This has not prevented some enterprising service-focused firms to set up in Rason and operate outside of the area.
Some things we would like to clarity if and when this law surfaces, include
a. How will WOFE in these zones interact with the economy outside of the zones?
Are there rules in place to allow interaction across boundaries? We were told that Rason has pioneered some of these rules, so we hope to see it rolled out across the other zones. As many observers have mentioned, self-contained zones are of limited interest to investors, and provide limited benefit (positive externalities) to the domestic economy.
b. Will enterprising locals “roundtrip”?
That is, will they partner with foreign investors to set up their own companies in the zones using the foreigners’ name? This would allow individual North Koreans to own companies, potentially provide them with more security over their assets, and reduce their tax rates. While the state might frown on such an activity, one cannot help but sympathize with local entrepreneurs who face onerous and fluctuating calls for “donations”, and an uncertain legal framework. In China’s case, supporting local enterprise, and providing loopholes, apparently pays off for the economy in the long run.
c. Will the law eventually be extended to provide the same opportunities to enterprising locals, allowing them to (belatedly) own their own companies?
We believe that making the business environment more conductive for domestic entrepreneurs is important for reviving the economy and for creating domestic companies that can eventually be competitive regionally.