Successful SEZs

With the (temporary?) closure of Kaesong Industrial Complex, the future of special economic zones (SEZ) in North Korea looks grim. In China, where one-stop shops that help investors navigate processes increasingly replace SEZs, what role can SEZs play in North Korea? If North Korea reinvigorates its SEZ policy in the medium term, what does it need to do to make progress? Some ideas:

Execution While the strategic rationale and planning of SEZs is important, studies of SEZs by the World Bank indicate that a lot boils down to the execution of the SEZ concept. Well-executed SEZs produce results, and such zones often require local zone administrators that have the autonomy and the political support to cut through bureaucratic red tape.

Integration Traditionally, SEZs in North Korea have been located far from the key urban centers. The isolation cuts them off from domestic economic activity. However, SEZs that have generated significant externalities for the national economy often benefit from and transfer their advantages through integrating their activities with the regional economy.

Contextualization Overseas investors, for right or wrong reasons, worry about North Korea’s economic and political trajectory. Many are hesitant to commit significant capital to a challenging market. As such, a short-term approach could be to focus SEZs on supporting domestic entrepreneurs. A liberal and credible zone approach could target domestic North Korean entrepreneurs, enabling them to set up companies domestically, rather than offshore, and help develop a set of rules governing the next-generation of domestic companies. These rules can then be rolled out more extensively if successful.

Koryo Song Gyun Gwan Opens

In the DPRK, where legacy counts for so much, a ‘Song Gyun Gwan’ has been “re-founded” in Kaesong. Originally a 10th century school for training high officials, the name has been revived in the form of a college of light industry.

IMG_0160

We saw that the campus was under construction last summer and now a Pyongyang magazine reports that it is finished and now running. The design of the rather large main building contains traditional elements with more contemporary ones.

Reports emphasized the school’s research into traditional products from the region, with ceramics, spinning and weaving, ginseng and food science departments. However, the ‘light industry’ tag and the variety of other more technical departments suggest that the school could operate as a platform for supplying more highly skilled workers for the Kaesong Industrial Complex, perhaps even for the management level.

Assuming that this period of tensions passes and that the Kaesong Industrial Complex reopens and eventually grows, it is not impossible that Kaesong could become something of a light industry hub for the DPRK, with the educational facilities and then employment opportunities to attract people from around the country. However, while it is positive to see a potentially valuable resource being founded outside the capital, it will probably remain marginal at best if the KIC doesn’t survive this period .

Third-wave Coffee hits the DPRK

A very pleasant discovery this March is that there is what you might call a third wave coffeeshop in Pyongyang. (For those of you unfamiliar with the term, ‘third wave’ essentially means thinking about coffee similarly to wine: concern for terroir, freshness and individual, hand-made drinks. It's pretty bougy.) This un-named café is attached to the Pyongyang Hotel View Restaurant. It is the first one in the DPRK with single origin beans, pour-overs and even a small roasting machine, as far as we know. 

This amounts to a quantum leap in coffee quality in the capital city. Espresso is available at certain restaurants and there is an Austrian coffeeshop tantalizingly close to Kim Il Sung Square but sadly, without a view.

The pour-over we had was unfortunately a bit off. The grind was too coarse and the beans slightly out of date by the standards of third wave cafes elsewhere. The espresso, however, was excellent, bursting with caramely and nutty flavors. The cappucino was good, also.

Though we haven't seen it packed yet, the chances of it surviving seem quite high. It is only about three months old and the café has the backing of a successful restaurant. As we’ve noted before, there is a growing market of Pyongyang citizens who are willing to spend $3.50 for a coffee.

Combined with the river view, this should soon enough become the city’s hotspot for tourists and expats who can’t stand another cup of instant coffee.

Air Koryo Anticipating a Big Summer...

There have been rumors of Air Koryo offering more flights than ever before for 2013, but now there is confirmation. Confirmation being a notice on the door at Sunan Airport. As of mid-April, Air Koryo will be running flights to Beijing on Monday and Friday as well as its regular Tuesday/Thursday/Saturday flights. This will bring them into direct competition with the Air China flights on those days, which are more expensive. Moreover, Air China seems to run the route quite reluctantly, especially in the winter, when any dusting of snow seems to be a pretext for cancellation.  Its not hard to see why: during the winter months, capacity is very low.

Anyway, the Air Koryo flight schedule is below:

flight schedule

Rodman in Rodong

So another famous American has gone to Pyongyang and the world scrambles to figure out if it means anything. It seems to mean a handful of things:

- Vice are crafty, crafty fellows. After producing perhaps the worst and most widely watched 'documentary' about North Korea, they found a way to get back into the DPRK. And that way was by taking a famous basketball player. (My opinions on this travel guide and the bellowing, sweaty drunk who put it together can be found in this essay. Incidentally, a much more interesting Vice effort can be found here, covering the DPRK's export of labor to Eastern Russia)

-Pyongyang can make a big deal about it in the media.  Rodong Shinmun, in some ambiguous writing, can mention all the foreign guests present and then how "Long Live!" echoed through the area for Kim Jong Un.

- It fits in with what we keep hearing: that sports have become a national priority. The State Physical Culture and Sports Guidance Commission is headed by Kim Jong Un's uncle, after all. This appears to be a feather in their cap. Having Rodman is no small thing: he is truly a basketball legend, more responsible than Jordan or Pippen for the destruction of the Seattle Sonics in the 1996 NBA finals.

- Kim Jong Un really does love basketball.

- This event also fits in with the friendly, accessible brand he's been crafting as well. He "warmly suggested Rodman sit next to him". In the pictures, he projects the impression that he is eminently relaxed and engaging.

- There is perhaps a message to the US, as the Rodong Shinmun article was full of soft phrases hoping that the two countries could continue sport exchanges such as this one and how enjoyable friendship could be between Koreans and Americans. Unfortunately, most of these were Dennis Rodman quotes, somewhat but not totally dampening the effect of the article: had it been a high-level Korean making such comments, one could construe it as a form of outreach to the United States. Being from an important US citizen, it seems more like a message to the Korean readership. That message might be something like: Korea has demonstrated it has successful space-conquering technology and a nuclear arsenal and now Americans come hoping for friendship and good relations.

Ping Pong diplomacy this ain't, though it was a surprise that Vice pulled off something at such a high level.

Not So Smooth Operators

B-ring B-ring! "Pyongyang imnida!"

"Extension five five five five* please"

"Wait a minute"

... (a minute duly waited)

"Yoboseyo?"

"Hello - is Mr. Choe there please?"

"Hold on a minute please"

Footsteps. Door creaking open. Silence. Conversation in distance. More footsteps. Silence. Footsteps. (this is often two to three minutes)

"Hello, this is Mr. Choe**"

"Mr. Choe, lovely to speak to you! I'm just calling to confirm yadda yadda blah blah"

"Yes, that will be fine. No problem."

"OK, bye bye"

At well over a dollar a minute, a usual phone call to Pyongyang for us consists of four minutes of waiting and two minutes of talking. Calling Pyongyang is not the simple task it is most places. Annoyingly often, after a few minutes of searching, Mr. Choe turns out to be out of the office. Or no one picks up and you're kicked back to the operator. The very idea of calling a city switchboard is something that my generation has only seen in black and white films.

Phones were in the news again last week, as visiting foreigners look set to have mobile internet access soon. We've seen resident foreigners checking email on phones before. And while this is welcome news for people addicted to twitter (I'm lookin' at you, Adam Cathcart!), it remains quarantined from those Koreans tasked with dealing with foreigners. Tour guides will likely have to endure more facebook pictures of bachelor parties and babies and whatnot.

Life and business communications move lightening fast in the 21st century. So now real-time uploads of Kim Il Sung Square to Instagram (OMG! CAN'T BELIEVE I'M HERE RIGHT NOW LOL!) will join the flow, dealing with actual Pyongyangers from abroad remains grindingly slow.

If the DPRK really wants to increase investment and trade, it will have to make communications more fluid for the class of people who already have permission to deal with foreign organizations. This is a narrow class indeed, but is one that could accomplish much more if they could move at a less languid pace .

*of course not really.

**also probably not really.

The Ultimate Frontier Market

Geoffrey wrote a guest column for Wealth Briefing Asia last week. This is an excerpt from the full article: This question must seem utterly contradictory with the recent North Korean nuclear test, coming on the heels of a rocket test, and the likely chorus of think tank voices that will follow calling for increased sanctions. Given the obsessive secrecy that shrouds North Korea and its tendency to be in the news for the wrong reasons, it is unsurprising that most western investors overlook the country. However, niche interest in North Korea is rising among some American, European and Southeast Asian investors, not to mention increasing investments from mainstream Chinese investors. Hedge funds trade defaulted North Korean debt instruments while other investors take stakes in various commodity, property and retail opportunities.

Foreign businesses in North Korea still struggle with weak governance, arbitrary rules and an opaque operating environment. Despite the gap between present performance and long-term potential, I am cautiously optimistic about the next five years.

A critical factor that has escaped the attention of many observers is how mindsets have changed. There is an active entrepreneurial community on the ground in North Korea. This community does not just include the well-documented informal markets where small stall owners peddle a range of products, but also includes ex-government officials or state-owned enterprise managers who set up relatively large businesses in industries ranging from restaurants to property development. A venture capitalist who joined an education programme we conducted in North Korea remarked that this rampant commercialism reminded him of the early years of the Chinese economic take-off.

This entrepreneurial energy if rightly channeled can lead to significant economic growth. The North Korean government has committed itself publicly to developing the country and has been making it easier for investors to navigate the system, albeit at a lethargic pace.

Effective execution is the key to success in the North Korean market, and the companies that we know to have done relatively well in the market tend to share a few characteristics: significant hands-on involvement in operation and governance, boots on the ground, quality relationships with North Koreans who can be trusted, and a broad network in the country that facilitates due diligence and troubleshooting. Unfortunately, successes are still relatively rare, and investors need to go in fully aware of the challenges of this market.

The Path Not Taken

Update: Maybe the US delegation did come about... All eyes are now focused on the present, on North Korea’s recent nuclear test and the sanctions that might follow. While most commentators readily condemn North Korea’s “provocation”, it might be helpful to ask whether things could have turned out differently if a different sequence of events had taken place. To do so, we need to take a step back to late 2012 and ask a belated what-if…

Just prior to North Korea’s rocket launch last year, North Korea attempted to invite a high-level delegation from the US to visit Pyongyang. The visit (apparently) did not appear to take place. It is an interesting but futile exercise to wonder what the message would have been. Could it be an olive branch in which North Korea emphasizes the desire to reset the US-North Korea relationship? Or would it have been a hardline message in which North Korea announces its intention to test its rocket and nuclear capabilities?

Regardless of what might have been, North Korea got a US delegation – the ‘Google’ delegation - after its rocket launch. But it does not seem to be the official delegation North Korea wanted. It was a delegation snubbed by the State Department publicly, in ways that neutered its potential as a mediator or messenger. Perhaps this reflected North Korean policymakers assumption that these prominent individuals would have significant input into US foreign policy.

Would the rocket launch and nuclear test be averted if a different visit had taken place prior to the rocket launch? We would never know now, but these what-ifs remind us how little the world seems to know of Pyongyang’s strategic intentions, worldview, and decision-making processes.

Other interesting commentary (not exhaustive as I have yet have time to cover everything):

Jeffrey Lewis - what can we actually do? NKleadershipwatch - how the test might have been rolled out Elizabeth C. Economy - Picks up on an interesting development that can lead to an interesting idea

Even more hotels

During our cold January visit, we stayed at the Koryo Hotel. One change that was hard to ignore was the huge gaping hole next to the venerable Koryo. Construction for a new hotel was underway and the site was quite busy, with several work teams and plenty of revolutionary music. It is supposedly meant to be a 75 storey structure, though we also heard 45 storeys thrown out. I have previously written about the hotel market in Pyongyang, and short of major changes in how North Korea relates to foreigners, I am still bearish about hotel demand in the medium term.

Cold Pyongyang

When you visit Pyongyang in the winter, you can't help but be struck by how cold it can be. Unless you're from Saskatoon. But let's face it, you're probably not. A few shots from a couple weeks ago:

Cold Space Conquer

Cold Mansudae

Cold Taedonggang

During our visit, we went for an early morning run before sunrise, after a light overnight snowfall. Neighborhood teams - men already dressed in suits for work - were busy sweeping the snow off the streets lest it get packed down and turn to the kind of icy hazard that doesn't abate until March or April.

As John Everard notes in his recent book, Only Beautiful, Please, winters are hard in the DPRK. Heating is a rare luxury in the city, but people are tough and simply buckle down and get on with things. If you live in a place where you can just turn the thermostat up without a thought, its worth remembering that this is a quality of life issue that we take for granted.