I've previously mentioned the latest FDI fashion of investing in North Korea despite the clear and present dangers of "political risk." What's driving North Korean investment? In a nutshell:While inexpensive labor is one of North Korea's potential draws--its wages are significantly lower than those in China--North Korea also offers a well-educated labor force with a touted 99% literacy rate, plentiful untapped natural resources, and a favorable geographic location at the heart of Asian commerce.
TIME has a feature in its most recent issue adding more color to the North Korea as emerging market story. In a nice bit of hyperbole, they call the DPRK "the world's most dangerous investment" [isn't that CDOs full of subprime loans?] I guess it's a small world after all...
A few years ago, Chris Devonshire-Ellis, a Beijing-based business and tax consultant, was in the bar at Pyongyang's Koryo Hotel when he ran into another foreigner. "The guy's name was Vlad," Devonshire-Ellis says. "He'd come from Moscow on a train to sell tractors to the North Koreans. He had all these guys around him. Turns out, they were his team of bodyguards. The North Koreans paid him in cash — 1 million in U.S. dollars — and that's why he needed the bodyguards. He was comfortable doing business with the North Koreans. He said they always paid. But I must say, the guards with machine guns may be a bit much for the average Western businessman."Such is the parlous state of commerce in the world's last Stalinist holdout. In recent months, North Korea's dictator, Kim Jong Il, has agreed to a rare meeting with South Korea's President and allowed international inspectors to examine the country's nuclear facilities, raising faint hopes that diplomatic progress in the effort to get Kim to abandon nuclear weapons, along with an easing of the country's self-imposed isolation, might ultimately lead to economic reforms. And for foreign investors lured by what Devonshire-Ellis calls the "barren romance" of the place, North Korea holds obvious, if modest, attractions: a highly literate workforce with average daily wages that are about half what Chinese earn; abundant mineral resources, including coal, iron ore and gold; a cash-on-the-barrel economy; and virtually no competition. It's not hard to gain a first-mover advantage, after all, if everyone else is standing still.
North Korea would be an economic basket case if only it could afford the basket. Once the industrial engine of the Korean peninsula, decades of disastrous central planning have left its infrastructure in a state of advanced decrepitude and its citizens in de facto peonage. The U.S. government estimates the North's per capita GDP to be about $1,800, which is roughly the same as Zimbabwe's. Per capita exports are around $60 a year — less than 1% of South Korea's. Aside from fishing, mining and cement production, the North has only a hodgepodge of functional industries, including, weirdly enough, its animation studios, which have been used by several European companies. One of the few export industries to flourish, meanwhile, has been the international trade in military hardware, drugs and counterfeit products, which, some Western experts estimate, may net Kim's regime up to $1 billion a year — equivalent to one-fourth of the country's legitimate exports.
Yet in spite of the depressing circumstances, North Korea continues to receive commercial support from neighboring countries, which hold out hope that Kim's hostile kingdom can be enlightened through greater integration with the global economy. China, North Korea's biggest trading partner, has increased its dealings with the North: according to the most recent figures available, trade between the two countries was up 5.4% in the first 11 months of 2006, to around $1.54 billion. Much of that commerce was one-way — Chinese food and electronics moving into the North — but about 150 Chinese companies are doing business there. "Once the political situation stabilizes and medium-sized enterprises begin to discover North Korea, it will have a dramatic impact," says Alexandre Mansourov, a professor at the Asia-Pacific Center for Security Studies in Honolulu and a former Soviet diplomat in Pyongyang. "I don't see why North Korea should be an exception to the economic miracle in which every country around China is benefiting from Chinese economic growth."
North Korea is already benefiting, a little. In 2005, Chinese trading company Tianjin Digital invested $650,000 to open a joint-venture bicycle plant in Pyongyang. "The conditions are really favorable," says Tianjin manager Liang Tongjun, whose company was granted a 20-year monopoly on bicycle manufacturing in the North. To eliminate competition, Kim's government even banned the import of second-hand bikes from Japan. A month after the factory opened, the Dear Leader himself paid a visit.
China's links to its neighbor and ally consist mainly of investments by individual companies. But in South Korea, economic engagement with the D.P.R.K. — the Democratic People's Republic of Korea, as the North calls itself — is government policy. South Korea has invested heavily in two well-known public-private development projects: a resort area at Mount Kumgang and an industrial zone in Kaesong, located about 10 km north of the Demilitarized Zone. There, 13,300 North Korean workers earning $70 a month churn out exports in conditions one former Western diplomat compares to a labor camp. So far, 15 South Korean companies have opened factories at Kaesong, producing shoes, watches, mufflers and other low-end consumer goods; another 150 have signed on to the project. Largely because of Kaesong, North Korean exports to the South shot up 63.3% in the first half of 2007. Hyundai Asan, the South Korean conglomerate that manages and has invested nearly $1 billion in the two projects, is convinced that North Korea is ready to embrace capitalism. "The North Koreans are really studying the market-oriented system," says Jang Whan Bin, Hyundai Asan's senior vice-president of international business and investor relations. Such optimism is essential for South Koreans, for whom investment in the North is less an overture for integration than a hedge against their neighbor's collapse. Better, perhaps, to nudge the D.P.R.K. toward prosperity now than to inherit a ruined state later.
Roger Barrett, founder of the Beijing-based Korea Business Consultants and one of the few Westerners to regularly do business in Pyongyang, says that the North seems eager to court new investment. "The D.P.R.K. government is very keen to demonstrate that joint ventures are welcomed," he says. Barrett, who has been facilitating business deals in the North for more than a decade, compares the country's current condition to that of South Korea before it emerged from military rule to become one of the world's export powerhouses. "You start to see how North Korea can move along in similar ways," he says. If it does, Barrett will be ready: last year, he even arranged a golf tournament — that indispensable ritual of international business culture — to attract new investors to Pyongyang.
A few other pioneers are already there. Orascom, an Egyptian conglomerate, recently signed a $115 million deal to buy a stake in a North Korean cement company. And later this month, a British firm will begin offering subscriptions for the first-ever D.P.R.K.-focused investment fund. Colin McAskill, the fund's director, says it will concentrate on pumping capital into the mining industry. "You have to think off the wall in North Korea, because nothing conventional has ever worked there," he says.
Deals in the North do have a marked tendency to go south. For example, a Thai telecom's plan to develop a mobile-phone network faltered after Kim's regime banned cell phones in 2004. South Korea's Unification Ministry has estimated that 1,000 South Korean ventures in the North have gone bust. Kelvin Chia, a Singapore-based lawyer who has worked with North Korean joint ventures since 2004, says many investors were spooked by the country's October 2006 nuclear test and its international fallout. "One of my clients was looking at going ahead with a substantial investment in a mineral-processing project," Chia says. "Before he went in, he had an indication from financiers it was doable. But then the nuclear issue blew up, and it became impossible."
To be sure, there's considerable political risk in partnering with a charter member of the "axis of evil." Consider the case of British American Tobacco. In 2001, the cigarette giant entered into a joint venture with a state-owned North Korean conglomerate to operate a factory in the North. But BAT pulled out of the arrangement after a British newspaper revealed details of the deal. Other companies have been scared off by the U.S. trade embargo. "There's already a reasonable amount of investment," says Devonshire-Ellis, who helped the North Korean government rewrite its foreign-investment regulations. "But companies try to keep it very, very quiet. I know one high-end Japanese brand is having clothing finished in North Korea. Another European men's fashion house is getting shirts finished there. The truth is, business executives in New York and Washington are walking around wearing expensive shirts made in North Korea."
Pyongyang has flirted with economic reform before, liberalizing prices and even encouraging some small measure of private enterprise by allowing farmer's markets. But the North's development schemes have often come to naught. Casting about for new investors after the collapse of the Soviet Union, the D.P.R.K. in the 1990s started a free-trade zone in Rajin-Sonbong, a remote area near the country's northeastern frontier. The experiment failed: the zone didn't attract much beyond a few hotels and a casino catering to Chinese tourists. Another special economic zone in Sinuiju, across the Yalu River from the Chinese city of Dandong, faltered in 2002 after the Chinese-Dutch orchid entrepreneur handpicked by Kim Jong Il to run the place was arrested by China for fraud.
The North was emulating an obvious precedent: Shenzhen, the special economic zone where China first experimented with capitalism. In January 2006, Kim Jong Il made a rare foreign visit, traveling by train — he reportedly abhors flying — to the booming south China city. Kim may see China as more than a path to prosperity. "To him it's an assuring message," says Mansourov. "Even if you open up economically, you can still maintain political control for his regime and his family."
Yet just as often as North Korea has opened a crack, it has slammed the door shut. In 2005, for instance, the government suddenly reversed its decision to allow private markets, forcing many North Koreans back into its food-rationing system. And at April's meeting of the Supreme People's Assembly, Kim's government sacked Prime Minister Pak Pong Ju, who had previously led a Cabinet-level economic think tank, and who was seen by some as friendly to reformers. (Pak and his deputies were reportedly trundled off for re-education.) "All of a sudden the wind seems to have gone out of the sail," says Brad Babson, a former North Korea specialist at the World Bank. "The economic reformers were back-benched, and something shifted internally so they got back into this military adventurousness."
Real reform, Babson says, would require North Korea to abandon its pipe dream of agricultural self-sufficiency — with a dearth of arable land, the country is literally dirt poor — and invest in labor-intensive manufacturing. But rebuilding the country's roads and ports and installing a reliable electrical grid would take billions of dollars in international loans — hardly a bright prospect given the country's history of defaulting on its obligations. Even then, by some estimates it will take a decade of investment to bring North Korean incomes up to a mere 55% of South Korea's.
Skeptics, meanwhile, see North Korea's current eagerness for investment as another in Kim's endless series of feints designed to keep his opponents off balance — and the aid handouts flowing. The country relies on foreign aid to feed as much as a third of its population. "The North Korean economic approach has always been to extract resources from outsiders," says Nicholas Eberstadt, a political economist at the American Enterprise Institute and the author of The North Korean Economy. "It's like what they say about champagne: in success, you feel like you deserve it; in failure, you need it."
And the possibility of failure is omnipresent. According to South Korea's central Bank of Korea, the D.P.R.K.'s economy shrank by 1.1% in 2006 after eight years of moderate growth. Under pressure from international sanctions, nearly every sector of the North's Lilliputian economy contracted, with new construction plummeting 11.5%. Torrential rains in August, meanwhile, destroyed an estimated 11% of the country's rice and corn crops, again raising the specter of mass famine like the one that killed up to a million people in the mid-1990s.
Small surprise, then, that Kim seems suddenly amenable to dealing with his erstwhile enemies in Washington and Seoul. Last week, the D.P.R.K. allowed an international team of inspectors to visit its Yongbyon nuclear facility. After the regime promised to shutter its nuclear program, China donated 50,000 tons of heavy fuel oil. The U.S. could follow suit with a similarly sized shipment. And at next month's summit between Kim and South Korean President Roh Moo Hyun, the South could offer North Korea a development-aid package that some experts speculate could be worth $20 billion — no small potatoes to a country in which one of the leading industries is, in fact, potatoes.
But a business opportunity in the North is still far from assured. Should Pyongyang renege on its program to dismantle its nuclear program, crippling U.S. sanctions will almost certainly continue. And South Korean presidential elections in December could usher in a new government with a less conciliatory stance toward its deadbeat neighbor. To see just how far North Korea still has to go, you need only visit the Sino-Korean Friendship Bridge linking the booming Chinese metropolis of Dandong with the sooty failed economic zone of Sinuiju. Commerce between the two nations is limited to a trickle of trucks on the bridge's single lane. At night, the contrast is vividly instructive: Dandong's bustling waterfront turns into a riot of neon, while Sinuiju is pitched into near-total blackness. How will North Korea ever pull itself out of the dark ages if it can't even keep the lights on?
