North Korean Economy Watch

Andray Abrahamin and John Kim worte a comprehensive summary of the current state of Rason. The article appears in The Diplomat:

In 1991, the North Korean government dubbed Rajin-Sonbong (Rason) a free trade zone to attract foreign capital. However, less than a decade later, the zone lost its free trade status. According to local businessmen, the party secretary of Rason, a relative of the late Kim Jong-il himself, was charged with corruption and eventually executed, a harbinger for the long period of isolation ahead. Since the end of 2009, signs of renewed commitment to Rason have sprouted. While it may be too early to say whether the region will succeed in drawing investment and reform, our recent trips to Rason lead us to believe that developments on the ground may eventually warrant a shift in foreign policy by governments around the globe.

China has long eyed Rason as a potential import/export center for the landlocked provinces of Jilin and Heilongjiang. However, from Rason’s inception, the Middle Kingdom held little influence or interest in the region’s success. In 2002, North Korea establishedanother special economic zone in Shinuiju and instated businessman Yang Bin, then China’s second richest man, as the SEZ’s Chief Executive. The Chinese authorities promptly placed Yang Bin under house arrest. Perhaps as a lesson learned from this episode, the North Koreans have made the Chinese government a major stakeholder in Rason’s development.

The Chinese have moved 80,000 metric tons of coal this year through a pier they leased at the Rajin port.They are also reportedly sending regular delegations of senior officials, including the Chairman of the China Development Bank, and they have invested $30 million to repave the road from the border town of Wonjong to the Rajin Port. This road was 60 percent paved during a visit in October, and recent reports from businessmen inside the region confirm that the road is now 95 percent paved, allowing for large trucks to pass through. The Chinese have also constructed a new road on their side of the border, part of the support this area has received after the Chinese central government designated it “The Changjitu Development Region” in November of 2009.Officials from the North explained that the Chinese will have a say in everything from zoning of real estate to port customs and investment policies.

Though Russia’s involvement doesn’t run as deep, it also maintains a keen interest in Rason’s ice-free port and has pledged an investment of $200 million to refurbish a railway from the border town of Khasan and to upgrade pier three at the Rajin port, which it has leased for 49 years. Rason’s third port at Oongsang was once a major exporter of lumber from the Soviet Union, and though Oongsang looks far from reviving the Soviet involvement of its heyday, Russia clearly has an interest in Rason’s success as well.

In addition to neighboring countries’ newfound interest in the zone’s success, the North Korean leadership has also shown a renewed desire in luring investment into the region. In December 2009, Kim Jong-il made a visit to the area, sent his former trade minister to run the region as party secretary, and reinstated Rason’s status as a special city, wresting it out of provincial control. Any potential investor who visits the SEZ would experience the thirst of the local government to develop the region, as reflected by the words of an official with the Rason Economic Cooperation Bureau, Rhee Sung Hye: “The future of my career depends on how much investment I can bring.”

At the national level there are also signs that the regime is increasing its focus on economic development as a source of legitimacy. In 2009, the Joint Venture Investment Commission was formed as a one stop shop for foreign investors, while the Taepung Group and State Development Bank were created to attract foreign investment. In the first half of 2011, Kim Jong-il made more appearances related to the economy and less related to defense than in prior years, and a focus on improving lives through focus on light industry and agriculture was emphasized in joint editorials that signaled policy direction at the beginning of 2010 and 2011.

The alignment of simultaneous commitment from North Korea, China, and Russia sets the scene for a North Korean special economic zone with higher chances of success than perhaps ever before. However, interest and desire may not necessarily translate into results without knowledge of markets and how to create a stable investment environment. After a recent tour of his 200MW fuel oil powered generation facility, the President of Songbong Power, Rhee Kang Chul, expressed that the reason for his plant’s inactivity and the subsequent blackouts in the region was the rise in feedstock costs. When asked about mechanisms for electricity pricing, Rhee responded that the government had set power prices at 6.5 euro cents/kwh, but he couldn’t provide further details on how the number was arrived at and when it might change again. Though Rhee was clearly an expert on the technical aspects of power generation, he hadn’t had the chance to consider that potential investors, after getting comfortable with country risk, would have little clarity on the revenue side of their equation. When this was expressed to the Vice Mayor of Rason, he replied, “We can change the price of electricity here. Rason is not under the same restrictions as the rest of the country.”

North Korea could theoretically piggyback off the market knowledge that their Chinese partners have gained over the last 30 years, but Rason’s neighbors are only likely to share when it suits their interests. In the case of Sonbong Power, Kang told us that every Chinese official who has visited stated that the most effective solution would be to pipe in power from the Chinese grid. “We plan to have a power line installed from the border by the end of 2013.” As power is as strategic asset like food or water, dependence on Chinese power clearly leaves the North Koreans in a vulnerable position.

China is clearly North Korea’s closest ally, but their relationship has a thorny history and Pyongyang is acutely aware of its reliance on big brother Beijing. With China’s rise, many other countries in the region are increasingly dependent on trade but increasingly cautious of dependence, welcoming a stronger presence from the United States, which is in the midst of a strategic pivot towards Asia.

In December 2009, the Asia Society and the Institute on Global Conflict and Cooperation published a report arguing that economic engagement of Pyongyang by the United States would result in creation of vested interests in continued reform, a changed perception of self-interest and a less confrontational foreign policy from North Korea. Against the backdrop of a more uncertain domestic environment after the death of Kim Jong-il, and the shifting dynamics in Asia generally, a North Korea that trades more and engages with the outside world may necessitate a change in foreign policy of governments around the world, most specifically the United States, South Korea, and Japan.

The Rajin-Sonbong SEZ has a checkered past and it would be naïve to say that North Korea is embarking on late 1970’s style Chinese economic reforms. However, we believe that the unprecedented alignment of interests in the region make it a likely starting point for any lasting directional change, which is why the world should watch Rason.

Read the full story here:
Why World Should Watch Rason
The Diplomat
John Kim & Andray Abrahamian
2011-12-22

Institute for Far Eastern Studies (IFES)
2011-11-30

Pyongyang International Trade Fair is held every spring and fall. The exhibition is increasing in size and attracting European and other foreign investments.

Japan-based newspaper, the Choson Sinbo reported on November 22 that during the period of the exhibition, over hundreds of business talks went back and forth between the North Korean and foreign companies and over 50 trade contracts and investment agreements were reportedly signed, with total amount of trade reaching in the millions in USD. At the Seventh Pyongyang Autumn International Trade Fair, held from October 17–20, one contract between a European company was reported to have been over 10 million USD alone.

Initially, the trade fair drew about 100 participating companies with just about 100 trade items. This year, however, roughly 300 companies had participated and over a thousand goods were on display.

It was also reported that “The items presented at the fair represented all sectors of social economic development with machineries, electronic goods, building materials, transportation, chemicals, clothing, food, medical and other consumer goods. In addition to these items, trade items are transitioning from light industry and consumer goods to the state-of-the-art products with CNC technology.”

Recently, multinational companies are exploring ways to enter into the North Korean markets through such international trade fairs.

According to the North Korean press, Chinese companies such as Haier, manufacturer of home appliances, and electronics and television manufacturer Changhong are in attendance at every trade fair held in Pyongyang. This time, particular attention was paid to European companies seeking investment opportunities in North Korea, such as a German paper manufacturing company, French flooring company, and Sweden’s GIA Industries, which is known as a mining equipment supplier.

The trade fair, which used to be held once a year in the spring, is now also being held in the autumn season to meet the increasing interests from multinational companies doing trade in Pyongyang. The scale of the fair has been upgraded as well. Normally the event was held only at the first two floors of the Three-Revolution Exhibition House; but to accommodate for growing size, discussion for building an international exhibition center is currently underway.

In the North Korean analysis, certain factors point to the success of the trade fair: 1) North Korea’s economic revitalization policy that focused on modernization of the people’s economy with large-scale construction projects, as these are gaining attention from overseas companies; and 2) North Korea’s assertive trade goals with economic modernization in mind and the hosting of international trade fairs, which are resulting in long-term trade contracts and an increasing amount of trade.

Additional Information:
1. Previous posts on the Pyongyang International Trade Fair can be found here.

2. Rason (Rajin-Sonbong) also recently held its first international trade fair.

UPDATE 6 (2011-10-19): I finally received a list of companies participating in the first Rason International Trade Fair. Below is a picture of the names of participating companies listed on a display at the show and a PDF of their names (in English). I apologize for any typos:

Here is a PDF of the company names in English.

Most are obviously Chinese companies, though there appears to be at least one American company listed in the mix, White Stone Corporation Co., Inc. USA!

UPDATE 5 (2011-8-22): KCTV produced video footage from the fair.

UPDATE 4 (2011-8-25): KCNA announces the closing of the first Rason International Trade Fair:

First Rason International Trade Fair in DPRK Closes

Rason, August 25 (KCNA) — The first Rason International Trade Fair was closed with due ceremony on Thursday.

Present there were Jo Jong Ho, chairman of the Rason City People’s Committee, officials concerned and exhibitors of different countries and regions.

In a speech a speaker referred to the fact that the fair was successfully progressed and an advance was made in conformity in favor of mutual interests in economy, exchange of science and technology and trade through wide-ranging contacts.

Diplomas were awarded to the exhibitors who presented excellent goods at the closing ceremony.

UPDATE 3 (2011-8-25)): KCNA publishes a short article advertising the economic advantages of Rason:

Rason Economic, Trade Zone with Bright Prospect of Development

Pyongyang, August 25 (KCNA) — Rason City, the DPRK, is situated in an important area which can link China’s three northeast provinces and Russia’s Far East region, both full of natural resources, and many Asia-Pacific nations with each other.

Rajin, Sonbong and Ungsang ports in Rason and Chongjin Port adjacent to the area provide good conditions for transit trade for Northeast Asia and other continents.

The sea off the ports does not freeze in winter, so they are not subject to seasonal restriction.

The reconstruction projects of the Rajin-Khasan railway and Rajin Port launched in Juche 97 (2008) will make it possible to reduce the transport distance from Asia to Europe, sharply cutting down the transport fee.

The Rajin-Khasan railway will serve as a transport route between the DPRK and Russia and between Asia-Pacific and European nations.

Rason City has seafood, agricultural product and wild vegetable processing bases operated by Korean trading companies. The city also boasts of many ponds, lakes and bays favorable for fresh-water fish culture and offshore farm.

Its natural and geographical environment is suitable to an international tourist resort. There are sea-bird, seal and other animal sanctuaries in the area with beautiful islets, like Pipha and Sol.

Some foreigners have already launched business in the area and an increasing number of investors are interested in the zone.

Rason City with amazing geographical and economic conditions is likely to greatly contribute to the development and prosperity of Northeast Asian nations.

UPDATE 2 (2011-8-21): The first Rason International Trade Fair opens Monday. Some interesting information below:

Pictured above (Google Earth): The Rason International Trade Fair Exhibition Hall (See in Google Maps here)

Also, a reader sent in this promotional flyer which is full of information on the trade fair:

See images of the flyer here: Part 1, Part 2, Part 3.

Video footage of the trade fair can be seen here.

UPDATE 1 (2011-8-17): The First “Rason International Product Exhibition” to be Held in Rajin-Sonbong Special Economic Zone
Institute for Far Eastern Studies (IFES)

Rajin-Sonbong or “Rason Special Economic Zone” is a co-development project developed by North Korea and China. The Rason SEZ International Product Exhibition is scheduled to take place from August 22nd to 25th — an exhibition targeted to attract foreign investors to the region.

According to the KCNA article released on August 14, “The exhibition will display a wide array of items from various countries including vehicles, pharmaceutical and clothing products.” It was said that the exhibition promises be an important event to encourage cooperation and exchange with various countries in trade, economic and science, and technology sectors.

This event is expected to not only bring Chinese but also European and other foreign companies into the economic zone, pushing investment into the area.

There is also talk of developing Rason into an international tourism zone to attract tourists from China, Russia, and Japan.

After the closing ceremony of the exhibition, visits to Rajin Harbor, Mangyongbong ferry, and the amusement park are scheduled in order to provide sightseeing tours for the participants to the exhibition.

Mangyongbong ferry, well-known in the past for transporting North Koreans living in Japan back to North Korea, is gaining special attention itself as a new tourist attraction. This cargo-passenger ferry is expected to be utilized further for tourism in the near future, including bringing Chinese tourists from Dairen and other harbors in China to Nampo Harbor close to Pyongyang.

In the late 1950s, Mangyongbong ferry began to shuttle North Koreans in Japan from Niigata Harbor to Wonsan Harbor near Pyongyang. From 1984, it was used to transport cargo into Japan, but this was halted in 2006 due to economic sanctions against North Korea which followed in response to North Korea’s missile and nuclear tests.

There are two ferries in North Korea with the name Mangyongbong. The Mangyongbong-92 will be introduced in Rajin Harbor to maximize the demonstration effect. The Mangyongbong, weighing 3,500 tons, is much smaller and older and inadequate to be used as a ferry.

The Mangyongbong-92 was built in 1992 to commemorate the 80th birthday of Kim Il Sung. The ship was built with funds collected from Chongryon (i.e., the General Association of Korean Residents in Japan). It was estimated to cost over 4 billion JPY at the time, weighing about 9,700 ton with a capacity to hold 350 passengers.

On another note, the fourteenth annual Pyongyang Spring International Product Exhibition held this May hosted over 280 companies from 10 countries. 100 Chinese companies participated in the exhibition. Since then, Chinese corporations from Liaoning and Dandong are reported to have placed contract orders worth 800,000 USD.

ORIGINAL POST (2011-8-15):

Pictured above (Google Earth): Rason geographic border (in red) and security perimeter fence (Yellow).

According to KCNA:

First Rason International Trade Fair to Be Held

Pyongyang, August 14 (KCNA) — The first Rason International Trade Fair will be held in the DPRK from August 22 to 25.

Vehicles, medicines, garments, etc. presented by companies of different countries and regions including the DPRK will be displayed at the fair.

The fair will contribute to boosting cooperation and exchange among countries and regions in fields of trade, economy, science and technology.

The DPRK is no stranger to trade fairs. By my calculations, the DPRK has hosted the Pyongyang Spring International Trade Fair since 1998 and the Pyongyang Autumn International Trade Fair since 2005. These events, which draw vendors from across the planet, are held at the Three Revolutions Exhibition in Pyongyang.

This is the first trade fair of which I am aware that is being held outside of Pyongyang. The Rajin-Sonbong area was the site of the DPRK’s first experiment with special economic zones. Although it did not generate the expected level of interest, North Korean authorities are hoping that this time around they will be able to capitalize on their proximity to the Chinese market (see here and here).

Additional Information:

1. Previous posts on Rason here.

2. Previous Posts on the Pyongyang International Trade Fair here.

3. The Chinese have been upgrading the road that links the Rason port with the Chinese border.

4. A few days ago I posted a preliminary list of DPRK trade companies published in Foreign Trade magazine. I imagine that more than one of them will have a presence at the trade fair.

38 North
Andray Abrahamian
2011-8-29

A bus bumps and bruises its way along the unpaved road, carrying would-be investors to Rason’s First Rason International Trade Exhibition which ran from August 21-25, 2011, in Sonbong. The windows are open, until a crimson humvee barrels past, its powerful suspension dancing on the road, leaving behind a plume of beige dust. The bus windows snap shut, the still air quickly gets hot and more than one of the passengers wishes we were Chinese high-rollers, being whisked to the Emperor Casino and Hotel, which sits beautifully on Korea’s East Sea, overlooking Bipa Island and flanked by lush green mountains and crystal waters.

The passengers of the humvee-part of the casino’s fleet-will long be checked in and gambling their fortunes away by the time we complete our two and a half hour journey. However, it won’t always be this way. Rason’s 50km road to the border is finally being upgraded. Indeed, the 2.5 hour journey took 3.5 hours in June. Since then, the road has been widened, the first stage of the construction plan, allowing for traffic to flow both directions more easily and smaller passenger vehicles to overtake the more cumbersome truckers who ply the road.

Its construction is an important sign in the development of the Rason Special Economic Zone. Rason, an amalgamation of the names of the area’s two biggest cities, Rajin and Sonbong, could theoretically be a vibrant hub for both logistics and manufacturing. It is located in the far Northeast of the Democratic People’s Republic of Korea, bordering Russia and China. It has abundant, cheap labor and the region’s northernmost ice-free port. It has been a legal entity since the early 1991, but has struggled to reach its potential in the face of ambivalence from Pyongyang and difficult geopolitical circumstances.

Local administrators have bold plans for this experiment in economic opening-up and to develop as the Rason Municipal People’s Committee has imagined, an efficient road link with China’s Northeastern provinces is vital. For about a decade, improvements to the road have been “under discussion” and “coming soon,” but it is now undeniably underway. Work began in May of this year…READ MORE HERE