Archive for the ‘Sinuiju Special Administrative Region’ Category

Minerals, railways draw China to North Korea

Friday, November 18th, 2005

From the Asia Times:
By Michael Rank

Chinese companies are venturing into North Korea, and both countries hope to reap the rewards. North Korea’s heavy industry is in a desperate state, but Pyongyang is hoping that Chinese investment will come to its rescue, while China sees the North as a convenient source of minerals, from coal to gold.

China’s increasing investment also means that North Korea is casting off its rigid juche, or self-sufficiency, policy and overcoming its deep historical suspicion of its giant northern neighbor.

Border trade in consumer items from televisions to beer has been booming since the 1990s, but now the focus is turning to the industrial sector. Deals are being reached on mines, railways and leasing a North Korean port to a Chinese company, but North Korea is notoriously secretive and few details have been published outside China. The deals include an agreement to “completely open” North Korea’s railways to a Hong Kong millionaire, as well as moves to revive ailing coal, iron and gold mines.

Tumen-Chongjin rail link rumored
Hong Kong businessman Qian Haomin is reported to have reached a US$3 billion deal with North Korea that also involves the Chinese Railways Ministry building a new rail link between the Chinese border city of Tumen and the North Korean port of Chongjin. The agreement marks an end to long-running tension between the Chinese and North Korean state railway authorities over North Korea’s retention of up to 2,000 Chinese goods wagons and reluctance to repay loans.

The Hong Kong news magazine Yazhou Zhoukan recently reported that these issues had been resolved and that Qian’s grandly named company Hong Kong International has agreed to provide the North Koreans with 500 to 1,000 freight wagons. Qian told the magazine that “after six months of effort, there are now hopes of solving the railway transport bottleneck between China and North Korea”, and this would help to integrate the economy of the entire northeast Asian region.

Qian’s ambitions are not limited to railways. Not only has he expressed interest in investing in a North Korean coal mine, but Yazhou Zhoukan also reported that he hopes to set up a special economic zone in the North Korean border city of Sinuiju. He has clearly not been deterred by the unhappy case of Yang Bin, a Dutch-Chinese multi-millionaire who was made head of a similar development zone in 2002. Before Yang could take up his post, he was arrested by the Chinese authorities for tax evasion and other economic crimes and jailed for 18 years.

Qian, aged 41, is originally from the southern Chinese province of Guangdong and moved to Hong Kong in 1993. He has been involved in North Korea since the early 1990s, and has apparently established a fruitful relationship with Prime Minister Pak Pong-ju. He has said that “to invest in North Korea has been my dream” because three of his uncles fought in the Korean war; one was killed and one was seriously wounded. The Hong Kong investor has signed a plastics, tire and battery recycling agreement with North Korea and has expressed interest in investing in the country’s largest anthracite coal mine, which now produces only 1 million tons a year, compared with 3 million tons at its peak.

Tonghua Steel looks North
Meanwhile, state-owned Tonghua Steel or Tonggang, based in the northeastern city of Tonghua, expects to sign a 7 billion yuan ($865 million), 50-year exploration rights deal with the Musan iron ore mine, said to be North Korea’s largest iron deposit. Tonggang, Jilin province’s largest steelmaker, hopes to receive 10 million tons of iron ore a year from Musan as part of its plans to increase steel production from a projected 5.5 million tons in 2007 to 10 million tons in 2010.

The planned deal reflects China’s immense and growing appetite for steel. Although the country already produces 30% of global output, it is heavily reliant on imports and is concerned about rising prices. A Jilin provincial trade official said importing iron ore from North Korea was attractive because of low transport costs, which would increase Tonghua’s competitiveness.

Tonggang officials say they expect the deal to be signed soon, and that of the 7 billion yuan (US$866.1 million) pledged, 2 billion yuan will be invested in transport and power lines. Company president An Fengcheng said agreement had already been reached with China Development Bank on 800 million yuan worth of soft loans and 1.6 billion yuan of hard loans, while “the remaining investment will come in in stages”.

Rajin deal to give China Sea of Japan access
China’s export boom is one of the great economic success stories of the past 25 years, but it is constrained by a lack of suitable ports. In particular, the country lacks a port on the Sea of Japan, but after attempted deals with Russia came to nought, the inland Chinese border city of Hunchun has reached an agreement for a 50-year lease with the nearby North Korean port of Rajin.

The ceding of Rajin, an ice-free port with a handling capacity of 3 million tons a year, will give access to the sea to inland areas of northeast China which, at present, must send freight long distances by rail to the port of Dalian on the Bohai gulf. The agreement also provides for the construction of a 5-10 square kilometer industrial zone and a 67 kilometer highway, and envisages that the Rajin area will become a processing zone for Chinese goods which will then be re-exported to southeast China.

A Hunchun economic official stressed that the leasing of the port is “a business deal and not a government deal”. The South China Morning Post reported from Hunchun that the man behind the deal is Fan Yingsheng, a property developer from Hunan province who put up half the initial capital investment of 60 million euros (US$70 million). The sum could not be denominated in dollars for political reasons.

The paper quoted the United Nations Development Program as saying this sum would only be enough to build the road to Rajin, and far more would be needed to rejuvenate the port. The deadline for final agreement is December 30, 2006, and it remains to be seen if a final deal will be reached in time.

An unusually frank North Korean trade official noted the possible pitfalls as well as the advantages of such deals. Kim Myong-chol, head of the Korean Council for the Promotion of Foreign Trade, said the deals would have to involve importing “highly advanced technology and equipment”, and added: “These agreements are not easy to put into actual practice and can run into many problems so far as funding and bilateral cooperation are concerned.”

“Because the amount of money involved in these cooperative projects is quite large and [North] Korea will be investing ports, roads, etc, there are rather great risks in such investment, and in addition because the domestic Korean economy and its policies, laws and regulations, etc, are unclear, many problems are likely to arise in carrying out these plans,” Kim told a Chinese website.

Coal and gold
Such concerns may have been in the mind of the president of China Minmetals Corp, Zhou Zhongshu, when he signed “an agreement on setting up a joint venture in the coal sector of the DPRK” [North Korea]. The deal was signed in October when Chinese deputy premier Wu Yi visited Pyongyang, and is said to be the first of its kind. North Korean Vice Minister for Foreign Trade Ri Ryong-nam urged the Chinese side to “provide advanced technology and set up a good model for other joint ventures and cooperation between the two countries”.

North Korea also has substantial gold deposits, and a Chinese company plans to invest in a “semi-paralyzed” North Korean gold mine and refine the metal at its base in Zhaoyuan in Shandong province. Guoda Gold Co Ltd reached a preliminary agreement last year with Sangnongsan gold mine, which is said to have gold deposits totaling at least 150 tons.

Guoda deputy manager Lin Deming said his company was attracted to North Korea because of low labor, energy and transport costs as well as the “highly favorable” investment terms offered, but gave no details. Chinese investment in North Korea is certainly increasing, but final agreement on a number of deals has not yet been reached, and political factors such as uncertainty over Pyongyang’s nuclear weapons program may well discourage Chinese companies from moving too fast.

Michael Rank is a former Reuters correspondent in China, now working in London.


Overview of DPRK economic reform efforts

Tuesday, April 12th, 2005

The BBC offers a summary of economic conditions in the DPRK:

The focus of the international community’s alarm over North Korea is the isolated nation’s nuclear arsenal, and its refusal to talk about it.

An aspect that is sometimes overlooked is the dire state of its economy, and yet this could be at the heart of the nuclear crisis.

The regime, with few allies in the world, cannot appeal to the sort of humanitarian emotions that African or South Asian nations have in the past.

To ensure the flow of food and oil, it must have a bargaining chip, and its nuclear arsenal is that chip.

Therefore Pyongyang’s diplomatic bluster is inextricably linked to its need to keep what remains of its economy propped up by donations.

North Korea has recently attempted limited reforms to its economy, but these have not been comprehensive or well-enough planned to work.

Pushed into reform

North Korea became an independent state in 1953, and has operated a rigid centrally planned, or “command” economy based on that developed by Stalin in the USSR.

Industry and agriculture are planned on a five-year basis, all farms are collectivised, volume is praised over value and most foods and goods are rationed.

This model initially allowed for rapid industrialisation and rebuilding, but it failed to deliver sustainable growth or raise living standards.

The economy began to collapse, and by the mid-1990s the country was in a state of famine. The industrial base and the agricultural sector have been in decline ever since. Beijing, North Korea’s only real ally, decided to act in October 2001 with an economics lesson for North Korean leader Kim Jong-il.

He was shown round a GM plant and a hi-tech factory in Shanghai, and received a lecture about the benefits of Chinese-style reform.

The Chinese were effectively telling Mr Kim that it was time for change – and that they were fed up with the growing number of refugees fleeing over the Chinese border, and increasing demands for aid.

Mr Kim realised he needed to keep China close, and in June 2002 announced a series of economic reforms.

Pyongyang partially ended rationing and reformed the wages and pricing system.

Retail prices shot up – rice by 55,000%, corn 5,000%, electricity 143% and public transport fares 2,000% – but average wages increased by just 1,818% – from 110 won to 2,000 won (US$22) per month.

It also allowed private farmers’ markets to expand – to provide more goods for the consumers this monetary liberalisation had created.

Another major plank of the reforms was the new investment zone in Sinuiju – and another one in Kaesong, agreed as part of Kim Dae-jung’s Sunshine Policy.

These investment zones used foreign investment to create new economic ventures.

But neither the wage and pricing reform, nor the investment zones, have worked.

Scarce resources

The government had hoped that inflation created by the reforms, if kept under control, would “kick-start” the economy.

But this theory assumed there was a mass of underutilised resources waiting to be kick-started. Twenty-five years of decline meant that these resources were now scarce.

More food found its way into the farmers’ markets, but at prices ordinary people could not afford.

This effective legitimisation of private farming and smuggling across the border from China only succeeded in increasing the availability of goods to the elite – those whose wages were protected or had access to foreign currency.

As for the economic zones, Sinuiju’s position, opposite China’s flourishing economic zone in Dandong, annoyed Beijing.

It consequently arrested the Chinese businessman hired to run Sinuiju, imprisoning him for 18 years for tax evasion and effectively ending the project.

Kaesong survives but all the ventures are foreign-owned, with little benefit, therefore, for North Korea.

By the end of 2002, economic growth was estimated at just 1.2% at best, with the average citizen’s purchasing power severely eroded.

For most ordinary North Koreans, the end result of the reforms was further impoverishment and the eroding of any savings they may have been able to build up.

So, in light of the reforms’ failure, North Korea’s alleged announcement in October 2002 that its country was pursuing an enriched uranium programme could be interpreted as a return to its old bargaining tactics.

The international community responded to the announcement by setting up six-party talks in August 2003.

But the diplomacy is failing because North Korea, with no allies but the increasingly exasperated Chinese, and little prospect of economic revitalisation, needs to ensure a continued drip feed of aid.

That means a hard bargaining process, and Mr Kim has one bargaining chip – his nuclear bombs.

Already twice, as far as we know, Beijing has managed by persuasion, and perhaps a little economic pressure, to get Pyongyang back to the table after talks have stalled.

Now Beijing is trying again. Perhaps what Pyongyang wants most is a serious package of economic aid from China.

China may provide it to get the talking started again.

But the price Beijing will need to demand is that Pyongyang restarts economic reform in earnest, and moves away from the continual brink of collapse that forces it to make desperate diplomatic gambles such as the current crisis.

As for the economy today, it has to all intents and purposes collapsed.

The reforms were limited, and benefited just the elite of the country rather than ordinary people.

The basic structure remains in place and continues to erode the economy.

However, as long as the regime can keep the country isolated, it can survive on this drip-feed indefinitely.

The endgame is simple – regime survival. It is a long-term strategy using diplomatic belligerence and military threat to secure enough aid to maintain power and isolation.

The regime may survive, and may under pressure begin another round of tentative reform, but it seems unlikely that life will improve for ordinary North Koreans any time soon.

Read the full story here:
Economy root to N Korea crisis
Paul French


The fall and arrest of Mr. Yang

Sunday, September 7th, 2003

UPDATE 2 (2003-9-7): The BBC reports that Mr. Yang has lost his appeal:

A business tycoon once listed as China’s second richest man has lost an appeal against his 18-year sentence for fraud.

Yang Bin, known as China’s flower king, was found guilty in July of a string of economic crimes including bribery and illegal land use.

The High People’s Court of Liaoning province on Sunday also upheld fines against him and his companies totalling 8.3m yuan ($1m), said the official Xinhua news agency.

Yang is one of a number of high-profile businessmen to have fallen foul of the law in China over the last year.

Before his fall from grace, he was one of China’s most flamboyant businessmen, and was named by North Korea to head a free-market experimental zone across from the Chinese border.

Border arrest

A Dutch citizen, he built a business empire growing tulips amid the industrial decay of north-east China and by 2001 had a fortune close to $1bn.

However, much of Yang’s wealth had, it turned out, been based not on flowers but on illegal property development.

In what may have been a last bid to avoid prosecution, he accepted an offer from the North Korean government to run a new free trade zone inside the Stalinist state.

But last October, as he prepared to cross the border, Chinese police moved in and took him away.

UPDATE 1 (2003-7-14): Mr. Yang has been sentenced to 18 years by a Chinese court. According to the BBC:

A business tycoon once listed as the second richest man in China has been sentenced to 18 years in prison for fraud.
Yang Bin, known as China’s flower king, was found guilty of a string of economic crimes including bribery and illegal land use.

He is one of a number of high-profile businessmen to have fallen foul of the law in China in recent months.

Before his fall from grace, Yang Bin was one of China’s most flamboyant businessmen, and was named by North Korea to head a free-market experimental zone across from the Chinese border.

A Dutch citizen, he built a business empire growing tulips amid the industrial decay of north-east China.

By 2001 he was listed as China’s second richest man, with a fortune close to $1bn.

But with fame came suspicion and soon a government investigation.

Much of Yang’s wealth had, it turned out, been based not on flowers but on illegal property development.

False receipts were used to get his company listed on the stock market. As his empire began to crumble around him, Yang made what may have been a last bid to avoid prosecution.

He accepted an offer from the North Korean government to run a new free trade zone inside the Stalinist state.

But last October, as he prepared to cross the border, Chinese police moved in and took him away.

A spokesman for Yang, chairman of Hong Kong-listed Euro-Asia Agricultural (Holdings), said he planned to appeal.

Read the full story here:
China’s ‘orchid king’ gets 18 years

ORIGINAL POST (2002-10-4): According to the Washington Post, Mr. Yang has been arrested.

Chinese sources, including journalists, said police detained Yang Bin, a 39 year old multimillionaire and flower mogul, on suspicion of tax evasion in the northern Chinese city of Shenyang.

A Chinese source said that the move did not mean China opposed North Korea’s fledgling efforts to reform its economy.  China, he said, was simply against the choice of Yang Bin to head the effort.

Nonetheless, Chinese economists said Yang’s detention constitutes an embarrassment for Kim Jong Il and could threaten reform efforts.

Within the last few days, Chinese journalists say, China’s Ministry of Propaganda has issued three circulars banning China’s press from in depth coverage of Yang.  Analysts in China say they believe this means Beijing is uncomfortable with his new status in North Korea.

The Sinuiju region draws its inspiration from the special economic zones that china established in the 1980s .

Yang said any foreigner could travel to Sinuiju without a visa as long as they had a a visa to return to China (as of Sept 30).  But those plans hit a roadblock on Thursday when North Korean authorities declined to allow foreign correspondents travel with Yang to the Zone.  Yang’s problems then started snowballing when an impromptu news conference he called to explain the visa restrictions was declared “illegal” by Chinese police.

Yang’s shares have been suspended from the Hong Kong Stock Exchange because the company has not made sufficient disclosures.

Yang has been reticent about how he got the North Korean appointment–one of the stranger events in Pyongyang’s checkered attempts to open to the outside world.  In an interview with a Chinese magazine, he said that he had been “Sharing my agricultural technology with the people of North Korea “for more than a year” and that “my selfless help won the trust of the Korean people.”

Yang struck up a friendship with Kim Jong-il several years ago.  Yang took his corporate jet to Pyongyang and worked hard to cultivate Kim.  Kim traveled to Shenyang to meet Yang.  Yang offered to donate greenhouses to North Korea which is desperate for ways to grow food, and Kim accepted.

Some Chinese economists and officials have privately criticized North Korea’s choice of Yang, saying he is emblematic of a type of Chinese businessman who amasses fortunes making use of connections and legal loopholes.

Yang has said he hoped to turn Sinuiju into a trading and manufacturing and trading hub.  Chinese cources, however, said that so far Yang has been approached only by developers looking to turn the area into a gambling and entertainment enclave for Chinese tourists.  Gambling is illegal in China.

The Fall of Mr. Yang
Washington Post
Page A25


Korea Trade Bank in Dandong

Thursday, November 21st, 2002

According to the Chosun Ilbo (2002-11-21):

It has been learned that North Korea recently opened a branch office of the (North) Korea Trade Bank in Dandong, China across the border from Sinuiju, a step tied with the designation of Sinuiju as a special administrative region. The only bank in the North specialized in foreign currency and responsible for exchange rates, the Korea Trade Bank opened its Dandong branch in October under the a judgment that promotion of economic cooperation with Dandong is a prerequisite to success for the Sinuiju capitalism experiment, said South Korean government officials.

The officials saw the step as indicating Pyongyang’s will to develop the Sinuiju SAR despite the detention of Yang Bin, the first administrative officer of the SAR. The Korea Trade Bank is empowered to conclude agreements with foreign financial institutions under accords reached between governments involved. The bank’s recent opening of its branch office in Dandong, accordingly, indicates that China, which originally opposed to the Sinuiju SAR, is in favor of it now.

The Korea Trade Bank’s Dandong branch is expected to handle not only inducement of foreign investments into the Sinuiju SAR, but also North Korean corporations’ exports to China via Dandong, observed the officials.

The article used as a source for this post has since been removed from the Choson Ilbo web page.


North Korea: A Nation in the Dark

Saturday, October 19th, 2002

Donald McIntyre

Lee Mi Young crossed the Tumen River from North Korea into China a month ago. Now she is hiding in a safe house in China, getting help from a Chinese-Korean missionary, and hoping to start a new life. She is terrified to be talking to the first foreigner she has ever seen, more so because she is painting a negative picture of her country. She could be executed in North Korea for this conversation (Lee Mi Young is a pseudonym).

In her mid-30s, with pretty, bright brown eyes and carefully stenciled eyebrows, Lee says she left North Korea because she was tired of never having quite enough to eat. Things are better than they were during the famine of the mid-’90s, but they have begun to deteriorate since July when North Korea announced a series of economic reforms that many observers said signaled the start of a serious effort to fix the country’s collapsed command economy. The government raised the salaries of workers such as miners and teachers, increased the cost of state rations such as rice and allowed the North Korean won to fall to about 150 to the dollar, much closer to its real black-market value than the 2.5 won to the dollar at which it had previously been pegged.

Lee says that in her hometown north of Pyongyang (she prefers we don’t name it) the price of grain in the black market has risen, but people can’t afford to buy it: Although salaries have been raised, the government has only actually paid them once since July. People need to supplement meager government rations with rice bought at exorbitant prices on the black market. “This was a reform for the rich,” says Lee. “Things are worse than before.”

Kim Jung Il is still fully in control of the country, analysts say. There are periodic reports of small signs of dissent — anti-government leaflets and graffiti, for example. Some defectors say family members will complain among themselves and possibly with friends. But North Korean defectors say that everyone is aware that anybody caught protesting publicly will be sent to a harsh prison camp, where they will be joined by members of their family. Lee, the young woman who fled last month, says she saw an old lady standing in line waiting for rations in August who suddenly said: “It is so difficult to live here. I can’t stand this.” Almost immediately, a man came up, tapped her on the shoulder and led her away. Other members of her family later disappeared without explanation.

What has changed in the past few years is the amount of knowledge about the outside world flowing into the country. Hundreds of aid workers have been in and out of the country in recent years, bringing with them new ideas and information. Thousands of North Koreans have crossed across the Tumen River into China attempting to flee or simply looking for food. Many come back not only with food, but also bearing tales of the wonders of China’s booming cities and stores brimming with goods. According to one defector, Chinese-Koreans are bringing cell phones into North Korea, using them along the border and even leaving them behind for relatives to use — in a country where ordinary people don’t have landline phones in their homes.

For impoverished North Koreans, China’s flashy modern cities seem like paradise and many dream of going there. There is much more knowledge about South Korea as well. North Korean propaganda for years portrayed the South as a land of beggars oppressed by a rich elite. Many average North Koreans now know that isn’t true, according to defectors. One reason: North Korean sailors, traders and workers who have been to places like Cuba and Libya come back with video tapes of American action movies. These are secretly circulated, with eager audiences gathering at the house of the very rare family rich enough to have a VCR player, sometimes with an English-speaker on hand to translate the dialogue. A record 600 North Korea defectors arrived in Seoul last year — this year’s figure could top 1,000.

Some analysts argue the clash in the West Sea on June 29 (in which North Korea patrol boats fired on South Korea naval vessels, killing five sailors) was the work of disgruntled military leaders trying to warn Kim Jong Il to keep a lid on change. The conventional wisdom has always been that North Korea is afraid to open the door a crack because the system could unravel so quickly. Some defectors and aid workers report that there is a sense of instability and uncertainty in the country right now. Rather than the start of reform, we may be seeing a country starting to unravel already.

When I visited Pyongyang in August, it looked better than it had even six months earlier. There were open-air restaurants offering grilled meat — just like in Seoul — and people looked healthy and even vibrant. But the capital has always been an oasis reserved for party members and North Koreans loyal to the regime. Aid workers and diplomats say smaller cities lack regular electricity and people still can’t get enough to eat. They probably aren’t starving but malnutrition remains widespread.

North Koreans who live in the countryside may be marginally better-off than their urban cousins, because they are able forage for wild plants in the mountains and are allowed to grow vegetables on small private plots. Life is harsh for city dwellers dependent on the industrial economy. On the road from Pyongyang to the northeast corner of the country, you pass mile after mile of rusting factories — probably less than one third of the country’s factories are actually running.

A Korea-American businessman who visited the city of Kaesong recently was shocked to learn it had had no electricity for 10 days. The only electric lights shining at night in Kaesong those illuminating monuments to the late “Great Leader” Kim Il Sung. Many city have electricity at certain times of the day. Foreign reporters who visited Shinuiju last month, for the unveiling of a plan to turn it into a free economic zone designed to lure investors, were struck by the contrast with the neighboring Chinese city of Dandong. Dandong at night is a blaze of lights; across the river, Shinuiju is in near-total darkness. Apartment blocks in Pyongyang are lit at night these days, but there are few lights outdoors — except, of course, those illuminating the gigantic statue of the “Great Leader.”

To make a go of “special economic zones” such as Shinuiju, North Korea needs to massive foreign investment to rebuild its electrical grid and other key infrastructure. The country has never been self-sufficient in food and needs an industrial economy to make fertilizer to boost agricultural yield and to finance food imports to make up the shortfall. But the disappearance of foreign subsidies following the collapse of the Soviet Union saw a rapid de-industrialization — until the late 1960s, it had been ahead of South Korea economically. North Korea is now dependent on international food aid and donations of fertilizer, and desperately needs to get on the right side of the U.S. in order to get the loans it desperately needs from the World Bank — loans that the U.S. is now blocking. That has many South Korean analysts suggesting that the reason Pyongyang sudden nuclear confession is precisely that it hopes to put its nuclear weapons program on the table and trade it away for economic gains and security guarantees from Washington.


Great summary of recent events: trade, economic reform

Monday, October 14th, 2002

From the Institute for International Economics:

West-Bound Train Leaving the Station: Pyongyang on the Reform Track

Marcus Noland
Institute for International Economics

Paper prepared for the Council on US-Korea Security Studies
Seoul, Korea
October 14-15, 2002


The North Korean economic reforms that began in July 2002 have four components: marketization, inflation, special economic zones, and aid-seeking. Marketization, in turn, has several features.1 The government appears to be attempting to adopt a dual-price strategy similar to what the Chinese have implemented in the industrial sphere. In essence the Chinese instructed their state-owned enterprises to continue to fulfill the plan, but once planned production obligations were fulfilled, the enterprises were free to hire factors and produce products for sale on the open market. In other words, the plan was essentially frozen in time, and marginal growth occurred according to market dictates.

The government has announced a scrapping/downsizing/attenuation of the system of distributing goods and services through rationing (including the public distribution system (PDS) for food), meaning that at the household or retail level, the allocation of goods will increasingly occur through markets and on market terms. (Two exceptions are health care and education that will continue to be supplied gratis by the state.)

One can question the extent to which this is a real policy change and how much this is simply a ratification of system—fraying that had already occurred—there is considerable evidence that most food, for example, was already being distributed through markets, not the PDS. In this respect, the North Korean move could be interpreted as an admission that the genie is out of the bottle.

On the production side, enterprises have been instructed that they are responsible for covering their own costs—that is, no more state subsidies. Modest changes in the organization of production have been introduced in agriculture and there are rumors that more dramatic changes in the agricultural sector are on their way. Yet it is unclear to what extent managers outside of agriculture have been given the power to hire, fire, and promote workers, or to what extent remuneration will be determined by the market. Moreover there has been no mention of the military’s privileged position within the economy and domestic propaganda continues to speak of a “military-first” political path.

The state has administratively raised wage levels, with certain favored groups such as military personnel, party officials, scientists, and coal miners receiving supernormal increases. (For example, while it has been reported that military personnel and miners have received wage increases on the order of 1,500 percent, the increases for office workers and less essential employees are less, and the estimated income increase for agricultural workers may be on the order of 900 percent.) This alteration of real wages across occupational groups could be interpreted as an attempt to enhance the role of material incentives in labor allocation.

The state continues to maintain an administered price structure, though by fiat, the state prices are being brought in line with prices observed in the farmers’ markets. This is problematic (as it has proven in other transitional economies): the state has told the enterprises that they must cover costs, yet it continues to administer prices, and in the absence of any formal bankruptcy or other “exit” mechanism, there is no prescribed method for enterprises that cannot cover costs to cease operations, nor, in the absence of a social safety net, how workers from closed enterprises would survive. What is likely to occur is the maintenance of operations by these enterprises supported by implicit subsidies, either through national or local government budgets or through recourse to a reconstructed banking system. Indeed, the North Koreans have sent officials to China to study the Chinese banking system, which although may well have virtues, is also the primary mechanism through which money-losing state-owned firms are kept alive.


The likelihood is increased by the second component of the economic policy change, the creation of enormous inflation. At the same time the government announced the marketization initiatives, it also announced tremendous administered increases in wages and prices (Table 1). To get a grasp on the magnitude of these price changes, consider this: when China raised the price of grains at the start of its reforms in November 1979, the increase was on the order of 25 percent. In comparison, North Korea has raised the prices of corn and rice by nearly 4,000 percent. In the absence of huge supply responses, the result will be an enormous jump in the price level and possibly even hyperinflation.

Moreover, when China began its reforms in 1979, more than 70 percent of the population was in the agricultural sector. (The same held true for Vietnam when it began reforming the following decade.) In contrast, North Korea has perhaps half that share employed in agriculture. This has two profound implications: first, the population share, which is directly benefiting from the increase in producer prices for agricultural goods, is roughly half as big as in China and Vietnam. This means that reform in North Korea is less likely to be what economists call Pareto-improving (in other words a change in which no one is made worse off) than the cases of China or Vietnam. Instead, reform in North Korea is more likely to create losers and with them the possibility of unrest. Second, the relatively smaller size of the agricultural sector suggests that the positive supply response will not be as great in the North Korean case as compared to China or Vietnam either. Again, this increases the likelihood of reform creating losers and unrest.

In the short run, the initial jump in the price level is usually accompanied by an increase in economic activity, as households and enterprises mistake increases in the overall price level for changes in relative prices. This is likely to be particularly acute in North Korea, where many households and enterprises can be expected to be relatively naïve about market economics, and where significant alterations in the structure of relative prices will be coincident with the rapid increase in the price level. So in the short run, there may be an increase in economic activity.

In the longer run however, once households and enterprises begin to distinguish more clearly between changes in relative and absolute prices, it will become apparent that some parts of the population have experienced real increases in income and wealth, while others have experienced real deteriorations. The North Koreans have not announced any mechanism for periodically adjusting prices, so in all likelihood, disequilibria, possibly severe, will develop over time. Access to foreign currency may act as insurance against inflation, and in fact, the black market value of the North Korean won has dropped approximately 50 percent since the reforms were announced.

Those with access to foreign exchange such as senior party officials will be relatively insulated from this phenomenon. Agricultural workers may benefit from “automatic” pay increases as the price of grain rises, but salaried workers without access to foreign exchange will fall behind. In other words, the process of marketization and inflation will contribute to the exacerbation of existing social differences in North Korea. Given how stressed a society North Korea has become, the implications for “losers” could be quite severe. It would not be at all surprising to observe a significant increase in mortality rates.

Make no mistake about it: North Korea has moved from the realm of elite, to the realm of mass politics. Unlike the diplomatic initiatives of the past several years, these developments will affect the entire population, not just a few elites. And while there is a consensus that marketization is a necessary component of economic revitalization, the inflationary part of the package would appear to be both unnecessary and destructive. (If one wanted to increase the relative wages of coal miners by 40 percent, one could simply give them a 40 percent raise–one does not need to increase the overall price level by a factor of 10, and the nominal wages of coal miners a factor of 14 to effect the same real wage increase.)

So why do it? There are at least three possible explanations. The first, as alluded to above, is the most benign: by creating inflation, the government hopes to provide a short-run kick-start to the economy, the long-run implications be damned. (From the standpoint of North Korean policymakers, Keynes’ aphorism, “in the long run we are all dead” may apply with a rather short time horizon.) Given the extremely low levels of capacity utilization in the North Korean economy, this argument has a certain surface plausibility. Yet the problems of the North Korean economy run far, far deeper than underutilized resources. In large part the economy is geared to produce goods (televisions and radios without tuners, to cite one example, or Scud missiles, to give another) for which there is only limited demand. Unless there is a significant reorientation in the composition of output, it is unlikely that inflation alone will generate a sizeable supply response. Even agriculture is problematic in this regard: North Korean agriculture is highly dependent on industrial inputs (chemical fertilizers and agricultural chemicals, for example) and agriculture could be disrupted if the farmers find themselves getting squeezed on the input side.

A second possibility is that the inflation policy is intentional, and is a product of Kim Jong-il’s reputed antipathy toward private economic activity beyond state control. One effect of inflation is to reduce the value of existing won holdings. (For example, if the price level increases by a factor of 10, the real value of existing won holdings is literally decimated.) Historically, state-administered inflations and their cousins, currency reforms, have been used by socialist governments to wipe out currency “overhangs” (excess monetary stock claims on goods in circulation), more specifically to target black marketers and others engaged in economic activity outside state strictures, who hold large stocks of the domestic currency. (In a currency reform, residents are literally required to turn in their existing holdings—subject to a ceiling, of course—for newly issued notes.) In July it was announced that the blue won (Korean People’s Won) foreign exchange certificates would be replaced by the normal brown won, though it is unclear if these are convertible into foreign currency. In the case of North Korea, the episode that is now unfolding will be the fourth such one in the country’s five-decade history.

The hypothesis has the strength of linking what appears to be a gratuitous economic policy to politics-Kim Jong-il not only rewards favored constituencies by providing them with real income increases and by going the inflation/currency reform route, but he also punishes his enemies. This line of reasoning is not purely speculative: it has been reported that one of the motivations behind unifying prices in the PDS and farmers’ markets has been to reduce the need of consumers to visit farmers’ markets, and to “assist in the prevention of “illegal sales activities” which took place when the price in the farmers’ market was much higher than the state price” (CanKor, 9 August 2002). A number of unconfirmed reports indicate that the government has placed a price ceiling on staple goods in the farmers’ markets as an anti-inflationary device. The increase in the procurement price for grain has reportedly been motivated, at least in part, to counter the supply response of the farmers, who were diverting acreage away from grain to tobacco, and using grain to produce liquor for sale.

The problem with this explanation is that having gone through this experience several times in the past, North Korean traders are not gullible: they quickly get out of won in favor of dollars, yen, and yuan. Indeed, even North Koreans working on cooperative farms reportedly prefer trinkets as a store of value to the local currency. As a consequence, this blow aimed at traders, may fall more squarely on the North Korean masses, especially those in regions and occupations in which opportunities to obtain foreign currencies are limited.

As an economist I am trained to assume rationality, and it is only with reluctance that I propose arguments that presume ignorance. But my personal experience in China suggests one more possible explanation for the North Korean policy. Demand and supply are not quantities or points—they are schedules indicating quantities as a function of prices. Market-determined prices are thus a signal of scarcity value reflecting underlying demand and supply. Conversations with Chinese officials in the early to mid-1980s, during the first stage of the marketizing reforms, however, revealed that fundamental misunderstanding of the nature of markets was widespread, especially among older officials who had spent many years in a planned economy.

The North Koreans have indicated that they are trying to unify (or at least reduce the differences between) state prices and those observed in the farmers’ markets. In a press report, one unnamed official laid out the logic of the price reform: the administered price of rice would be raised to the farmers’ market price, but since no one could afford rice at the market price, everyone’s nominal wages would be increased commensurately. What this official did not seem to grasp was that the amount of won in circulation was instantly increased by a factor of 10 due to the wage increase, unless there was an immediate supply-response, then the government had effectively caused a 900 percent jump in the price level.

Again, political considerations increase the plausibility of this argument. By all reports, the economic policy changes being undertaken in North Korea are being devised by a small number of senior officials. Moreover, North Korea has a political system in which the political space of discussion and dissent is highly constricted, and the penalties for being on the wrong side of a political dispute can be quite severe. So while the logic of too many won chasing too few goods would seem elementary to those of us raised in market economies, under the circumstances that exist in North Korea, the possibility that economic decisions are being made by people who do not grasp the implications of their actions (or are afraid to voice their reservations and instead engage in preference falsification if they do) should not be dismissed too hastily.

Special Economic Zones

The third component of the North Korean economic policy change is the formation of special economic zones of various sorts. The first such zone was established in the Rajin-Sonbong region in the extreme northeast of the country in the mid-1980s. It has proved to be a failure for a variety of reasons including its geographic isolation, poor infrastructure, onerous rules, and interference in enterprise management by party officials. The one major investment has been the establishment of a combination hotel/casino/bank. Given the obvious scope for illicit activity associated with such a horizontally integrated endeavor, the result has been less Hong Kong than Macau North.

The 1998 agreement between North Korea and Hyundai that established the Mt. Kumgang tourist venture also provided for the establishment of an industrial park to be managed and operated by Hyundai. While the tourism project was obviously the centerpiece of the agreement, from the standpoint of revitalizing the North Korean economy, the establishment of the industrial park, which would permit South Korean small- and medium-sized enterprises (SMEs) to invest in the North with Hyundai’s implicit protection, was actually more important. In the long run, South Korean SMEs will be a natural source of investment and transfer of appropriate technology to the North. However, in the absence of physical or legal infrastructure, they are unlikely to invest. The Hyundai-sponsored park would in effect address both issues. (The chaebols, because of their size and political connections, would not be so reliant on formal rules—they could always go to the South Korean government if they encountered trouble in the North.) The subsequent signing of four economic cooperation agreements between the North and South on issues such as taxation and foreign exchange transactions could be regarded as providing the legal infrastructure for economic activity by the politically noninfluential SMEs.

The North Korean government and the South Korean firm then negotiated for 18 months over the location of the zone, with the North Koreans wanting it in Sinuiju, a city of some symbolic political importance in the northwest of the country on the Chinese border, and Hyundai wanting to locate the park in the Haeju district, more easily accessible to South Korea. In the end, it was agreed that the park would be located in Kaesong-a decision that was hailed at the time as reflecting an increased emphasis on economic rationality in North Korea.

The industrial park at Kaesong has not fulfilled its promise, however: Hyundai’s dissolution forced the South Korean parastatal KOLAND to take over the project, and the North Koreans inexplicably failed to open the necessary transportation links to South Korea on their side of the demilitarized zone (DMZ). Hence the September 2002 initiation of activity on the northern side of the DMZ could be an important step in the take-off of the Kaesong industrial park.

In September 2002 the North Korean government announced the establishment of a special administrative region (SAR) at Sinuiju. In certain respects the location of the new zone was not surprising: the North Koreans had been talking about doing something in the Sinuiju area since 1998. Yet in other respects the announcement was extraordinary. The North Koreans announced that the zone would exist completely outside North Korea’s usual legal structures; that it would have its own flag and issue its own passports; and that land could be leased for fifty years.

To top it off, the North Koreans announced that the SAR would be run by Yang Bin, a somewhat shady Chinese—born entrepreneur with Dutch citizenship who was under investigation for tax evasion in China, and had reportedly fled to North Korea-though he does not speak Korean—during two previous investigations. (Among his various business interests, Yang operates a Dutch-style village in Shenyang complete with a windmill and imitations of Amsterdam buildings. Kim Jong-il, who knows a thing or two about fantasylands, has visited it himself.) At the time of Yang’s appointment, trading in shares of his firm, Euro-Asia Agriculture Holdings, had been suspended on the Hong Kong stock exchange after crashing on the suspicion of fraud. When asked about Yang’s appointment, China’s Foreign Ministry spokesperson declined to endorse it. To paraphrase Senator Lloyd Bentsen’s memorable line from the 1988 US Vice Presidential debate, “Mr. Yang, you are no Tung Chee Hwa.” Indeed, Mr. Yang was subsequently arrested by Chinese authorities. Whether the zone will survive his arrest remains to be seen.

Assuming that these are mere growing pains, the question arises as to how important the Sinuiju SAR may prove to be. It should promote economic integration between North Korea and China, though one should keep in mind that China is a big place and that the most economically dynamic parts are in the southern coastal areas far from North Korea. But the North Korean economy is so far down that even integration with a comparative backwater like Dandong could be a boost.

More important is whether the SAR will generate any spillovers. In conventional terms this will depend on whether any lessons from the Sinuiju SAR experiment are generalized to the rest of the economy. (One ray of hope in recent events is the removal of the less than 50 percent foreign ownership ceiling in joint ventures.) More subtly the SAR might have a positive impact if internally it is regarded as giving Kim Jong-il’s unimpeachable imprimatur to the reform process. Bureaucrats and factory managers who have been reluctant to get ahead of the leadership may take this as a sign that change is safe. Conversely, by taking the SAR completely outside of the normal North Korean governing structures, Kim Jong-il can in effect end-run the party and the bureaucracy, and manage the zone directly out of his office.

Uncle Junichiro…

Meanwhile, as exciting as the establishment of the Sinuiju SAR might have been, its long-run significance is probably less than that of an event that had occurred the previous week—a meeting in Pyongyang between Kim Jong-il and Koizumi Junichiro, a manifestation of the fourth component of the economic plan, passing the hat.

At the first-ever meeting between the heads of government of Japan and North Korea, Kim stunned the world by baldly admitting that North Korean agents had kidnapped 12 Japanese citizens and that most of the abductees were dead. Each of the leaders then expressed regrets for their countries’ respective historical sins and agreed to pursue diplomatic normalization. It is expected that normalization will be accompanied by a large financial transfer from Japan to North Korea in the form of grants, subsidized loans, and trade credits. Japanese officials have not denied formulas reported in the press that would put the total value of a multiyear package at approximately $10 billion, despite the shaky state of Japanese public finances. Taking inflation, changes in the value of the yen, differences in population size, and other factors into account, this sum would be in the ballpark of the transfer that Japan made to South Korea in 1965 when the two countries normalized relations. Given the puny size of the North Korean economy, this is a gigantic sum. The critical issue for North Korea is whether these talks will proceed rapidly enough to generate aid inflows before the dislocations of marketization begin to bite. Given the Japanese public’s revulsion at the disclosure of the probable murders of some of the abductees, the process of normalization may be more protracted than either the North Korean or Japanese governments expected.

In connection with this process, there are rumors that the North Koreans intend to establish yet another special economic zone on the east coast, to be oriented toward Japan. Discounting the failed zone at Rajin-Sonbong, this would give the North Koreans three special economic enclaves, one oriented toward South Korea, one toward China, and one toward Japan, diversifying their portfolios so to speak. Again, given the centrality of politics to North Korean thinking, they may well envision playing the three off against each other. In the long run, however, it is integration with South Korea that will be critical to the development of the North Korean economy.

…and Uncle Sam

The Koizumi visit amounted to a kick in the pants to the Bush Administration. It brought to a head the disagreement between the hawks and the moderates in Washington. Assistant Secretary of State James Kelly was sent to Pyongyang with greater alacrity than he otherwise would have had. With its two allies in Northeast Asia moving forward with engagement, the “Axis of Evil” characterization will become increasingly difficult to sustain, and the United States will find its options more constrained.

For example, North Korea’s membership on the list of state sponsors of terrorism prevents the United States from supporting the DPRK for membership in international financial institutions such as the International Monetary Fund, World Bank, or Asian Development Bank. The North Koreans have fulfilled most of the terms set out by the Clinton Administration to secure their removal from the list. A major sticking point has been third-party claims by Japan associated with the Japanese Red Army hijackers and the abductees. If the hijackers are returned to Japan and the North Korean and Japanese governments resolve the abductee issue as now seems likely in the near future, a major obstacle to North Korea getting off the list of state sponsors of terror will have been removed. While it is quite possible that the Bush Administration will insist on keeping them on the list and barring their entry into the international financial institutions, this position will be increasingly hard to sustain in the face of South Korean and Japanese objections.

At the same time, the transfer from Japan to North Korea is the single biggest financial claim that North Korea maintains on the international system and dwarfs anything it could hope to get from the multilateral development banks. Unlike the sorts of carrots that the United States might offer, it also contains an element of irreversibility, and no matter how well conditioned the loans, money is at least partly fungible, raising the understandable worry in Washington that the Japanese settlement could be used for military modernization. The apparent lack of consultation between the United States and Japan in the run-up to the meeting has added to Washington’s concerns.



In the end, to understand the meaning of what has occurred in the last several months, one has to make some kind of assessment of the motivations behind North Korea’s policy changes. One argument put forward by some North Korea-watchers is that Kim Jong-il has long understood that the North Korean system is irretrievably broken, but that it has taken a long time for him to consolidate power and implement these far-reaching changes. This is hard to believe. Kim Jong-il was reputedly running the country on a day-to-day basis for ten years before his father’s death eight years ago. This means he has in effect been running the country for 18 years and was the uncontested supreme leader for the last eight. In a political system as hierarchical as North Korea’s, it is difficult to accept that it has taken him this long to consolidate his position.

Indeed, the opposite interpretation would seem more plausible, namely, that Kim Jong-il has reluctantly concluded that the old methods are inadequate to revive the economy and out of political necessity is embracing marketization, inflation, and the former colonial master in a desperate bid to revitalize a moribund system. If this interpretation is correct, then we should expect hesitancy in the implementation of reforms, and a strong reliance on the international social safety net supplied by the rest of the world. In certain respects the plans put forward thus far appear to be ill-conceived, but a combination of marginal increases in economic activity and international aid inflows may put enough goods on the shelves to keep the population pacified, at least in the short run. Ten billion dollars can buy a lot of transistor radios.

However, the initiatives undertaken in the last several months are qualitatively different from the diplomatic initiatives that the North Koreans undertook over the last several years. Marketization and inflation alter economic, political, and social relations on the ground, and raise far higher stakes internally. While the upside potential may be great, failure could mean the end of the regime. The train has left the station, but where it is headed and if it will derail are open questions—even for the conductor.


Table 1: Price Increases

Product   Reported Price Increase (percent)

Rice   4,000
Corn   3,700
Pork   700

Diesel fuel   3,700
Electricity   5,900

Apartment rent   2,400
Subway ticket   900

Sources: Press reports, private correspondence.



DPRK announces Sinuiju SAR

Wednesday, September 25th, 2002

According to the New York Times (2002-9-25):

In the most significant reversal of economic policy since North Korea was founded, that Communist nation has announced the establishment of an autonomous capitalist investment zone near its border with China.

According to the official Korean Central News Agency, North Korea has adopted legislation mandating the creation of an “international financial, trade, commercial, industrial” zone to be built in the northwestern city of Sinuiju, operating free of central government interference for a period of 50 years.

According to news reports from both North and South Korea, the new zone will seek private capital from China, Japan and South Korea, as well as the West, and will operate its own legal and economic system, and even issue its own passports. Foreigners will reportedly be able to enter without visas, although the government will build walls around the city to control access by North Koreans.

In perhaps the biggest surprise of all, the special economic zone will be run by a Chinese agricultural and manufacturing magnate, Yang Bin, a frequent visitor to North Korea aboard his private jet, and a confidant of the North Korean leader, Kim Jong Il. According to Forbes magazine, Mr. Yang, 39, is China’s second richest man.

A native of Nanjing who has taken Dutch citizenship, Mr. Yang is chairman of Euro-Asia Agriculture Holdings, a grower of orchids and vegetables that was one of China’s most popular stocks with investors until media reports earlier this year raised questions about Mr. Yang’s finances and the firm’s transparency. According to Forbes magazine, his personal fortune is about $900 million.

Mr. Yang has said he will hire Westerners to run the special zone’s legal system along European lines.

“This is an attempt to build Hong Kong north, and it is an extraordinary leap” for North Korea, said Marcus Noland, an expert on the North Korean economy at the Institute for International Economics, in Washington.

Mr. Noland said North Korea had tried to build special economic zones in the past, notably a decade ago in the northeast region of Rajin-Sonbong, but had largely failed because of poor planning and a lack of commitment, perhaps reflecting ambivalence toward a capitalist model so fundamentally at odds with the self-sufficiency and sacrifice preached by North Korea’s Stalinist founder, Kim Il Sung.

The current plans involving a site close to the border with China and right on the rail line to Beijing are, by contrast, ambitious. “The degree of autonomy described in the press reports is greater than the independence granted by the Chinese to their new economic zones in the late 1970’s and early 1980’s,” Mr. Noland said. He called the new venture “an enormous gamble” for Kim Jong Il, who succeeded Kim Il Sung, his father, eight years ago.

North Korea has also toyed recently with building a special economic zone jointly with South Korea, at Kaesong, and granted the Hyundai conglomerate permission to operate there. Hyundai broke up before setting up in the zone, however, and North Korea dragged its feet over opening up rail links there, ostensibly because it got cold feet over allowing South Korea to play such a large direct role in its economy.

Last week, however, the rail link was reconnected for the first time since the end of the Korean War.

The 132-square mile Sinuiju zone lies across the Yalu River from the Chinese city Dandong in a relatively conservative region where the Communist party still holds strong sway, and ethnic Koreans are numerous.

A recent American traveler to the region called Sinuiju “one of the most barren places in Korea.” In bustling Dandong, by contrast, he said, “the railroad station is piled high with fruits, and people are running around with cellphones.”

Nicholas Eberstadt, a Korea expert at the American Enterprise Institute, said: “China’s opening to the outside world was effectuated by a lot of foreign entrepreneurs, members of the diaspora, from Hong Kong and Taiwan. The question has always been where does North Korea get its entrepreneurial talent?

“The obvious answer might seem to be South Korea, but that represents a terrible ideological peril, Mr. Eberstadt said.”They seem to have chosen China.”

Mr. Yang said on Monday that North Korea would build 100,000 greenhouses to grow vegetables for export, with his company handling the sales, the South China Morning Post reported. Although he said work would begin quickly, Mr. Yang did not offer a timetable. The Hong Kong newspaper said the new zone would have no import or export tariffs, and a fixed income tax of 14 percent.

Two months ago, the North Korean government announced a radical overhaul of the exchange rate, wage and price systems. With food production flagging, and industries operating at 10 percent of capacity, according to one diplomat, the government eliminated its food ration system, raised food prices and told factories to make a profit.

“Until recently, you could not even use the word reform, and now not only is it widely accepted, it is always used with a positive connotation,” said a senior United Nations official in Pyongyang, the capital.

Regional political analysts cite a number of factors in the shift. President Bush’s description of North Korea as part of an “axis of evil” may have created a sense of urgency about overcoming isolation, as has China’s irritation over an increasing flow of North Koreans across their mutual border.

South Korea holds crucial presidential elections in December, and North Korea is eager to see a government that favors friendly engagement, rather than isolation.

Until recently, North Korea had treated the doctrine of self-reliance as untouchable, even if dependence on China for food aid and subsidized trade had always made this a partial lie.

“There were a lot of people here in 1995, when the food crisis really began, who said we would rather die than have your food,” an international relief official said in a recent interview in Pyongyang.

After a famine that human rights groups estimate has cost more than two million lives, Kim Jong Il appears to be eager to attract capitalist funds and create a mixed-market communist system like the ones in China and Vietnam.

Last week, Mr. Kim took the surprising step of acknowledging and apologizing for the kidnapping of Japanese in the 1960’s and 1970’s, setting the stage for normalization of relations with wealthy Japan, which in turn apologized for its colonial rule of Korea and is now expected to give $10 billion in aid.

Read the full story here:
North Korea to Let Capitalism Loose in Investment Zone
New York Times
Howard W. French


The BBC reports on more developments at the Sinuiju SAR

Monday, September 23rd, 2002

According to the BBC (2002-9-23):

North Korea’s hardline socialist regime has appointed a Chinese-born entrepreneur to oversee a radical experiment with free-market economics.

Local news agencies reported on Monday that Yang Bin, a 39-year old tycoon listed last year by Forbes magazine as China’s second-richest man, is to run the newly-created ‘special administrative region’ of Sinuiju, next to the border with China.

The North Korean government aims to turn Sinuiju into a capitalist enclave in a country which has until now been cut off from the mainstream global economy.

“It will be a totally capitalist region,” Mr Yang told US cable TV channel CNN.

“It will have its own legislative, judicial and executive powers without any interference from central government.”

Going Dutch

Analysts have said the decision to build a free-market economy in Sinuiju underlines North Korea’s determination to reform after half a century of near-total isolation.

The North Korean government’s choice of chief reform strategist appears to be an astute one.

Born and brought up in China, but now a Dutch citizen, Mr Yang is the founder of a diversified business empire which has amassed him a personal fortune estimated at $900m.

He moved to the Netherlands in the late 1980s and set up a successful textile company before returning to China in the 1990s to start a horticultural business specialising in orchids.

Flower power

Through his Euro-Asia group of companies, Mr Yang now also has interests in tourism and real estate.

Last year, Mr Yang set up a joint venture horticultural company in the North Korean capital Pyongyang which may be the basis for his contacts with the country’s leadership.

However, Mr Yang’s fortunes suffered a temporary setback earlier this year when shares in his Hong Kong listed firm slumped amid investor doubts over its financial position.

The BBC also published this information (2002-9-23):

A Chinese businessman has been chosen to become the chief executive of Sinuiju, a special administrative region created along North Korea’s border with China.

The businessman, Yang Binn, says he will run the area along capitalist lines, creating a free-wheeling capitalist enclave similar to Hong Kong.

He plans to move more than 500,000 people from the 132 square kilometre area along North Korea’s border with China.

There will be a new legal system, possibly based on European law.

There will be elections to a legislature and administrators and judges hired from foreign countries, including the West.

Window to the world

For the hardline socialist state of North Korea, the scope of these changes is unparalleled.

Mr Yang, a Chinese business tycoon, has been hand-picked by North Korea’s leader, Kim Jong-Il.

Mr Yang said Mr Kim had created the project as a window for the rest of the world to see that North Korea is experimenting with change.

However, a wall will be built to keep North Koreans out of the self-governing capitalist zone.

Read the full stories here:
Chinese tycoon to lead North Korea reform

North Korea steps up economic reform
Damian Grammaticas


Sinuiju special administrative region announced

Friday, September 20th, 2002

UPDATE 1: The full statue for the Sinuiju SAR can be found here.

ORIGINAL POST: According to KCNA (2002-9-20):

Basic law of Sinuiju special administrative region

Pyongyang, September 20 (KCNA) — The Sinuiju special administrative region has come into being according to a decree of the Presidium of the Supreme People’s Assembly of the Democratic People’s Republic of Korea. The Presidium of the DPRK Supreme People’s Assembly adopted the basic law of the Sinuiju special administrative region on September 12, Juche 91 (2002). The law consists of six chapters (politics, economy, culture, fundamental rights and duties of residents, structure and emblem and flag of the region) and a total of 101 articles.

According to the law, the region is a special administrative unit under the sovereignty of the DPRK and the state puts the region under the central authority.

The state endues the region with the legislative, executive and judicial power and shall keep the legal system of the region unchanged for 50 years.

The DPRK cabinet, state commissions, ministries and national institutions shall not interfere in the region’s affairs and external affairs concerning the region shall be handled by the state.

The region shall conduct external activities on its own responsibility within the limit approved by the state and can issue its own passports.

The land and natural resources of the region belong to the DPRK and the state allows the region to be turned into an international financial, trade, commercial, industrial, up-to-date science, amusement and tourist centre.

The state shall give the region the rights to develop, use and manage the land and encourage the businesses in the region to hire manpower of the DPRK.

The period of leasing the land of the region shall last until December 31, 2052.

The state shall encourage investments of investors in the region and provide investment environment and conditions for economic activities favorable for businesses.

The DPRK shall encourage the region to properly pursue cultural policies so as to increase its residents’ creativity and meet their demand for cultural and emotional life, introduce up-to-date science and technology and actively develop new domains of science and technology.

The residents shall not be discriminated irrespective of sex, country, nationality, race, language, property status, knowledge, political view and religious belief and foreigners without citizenship shall have the same rights and duties as the residents.

The procedures of moving and travelling to other areas of the DPRK and other countries shall be established by the region.

The legislative council is the legislature of the region and the legislative power shall be exercised by the legislative council.

DPRK citizens of the region can become deputies to the legislative council and foreigners with the right to reside in the region can also hold the same post.

The legislative council shall have chairman and vice-chairmen elected by itself.
The governor shall represent the special administrative region.

The governorship can be taken by a resident of the region who has working ability and enjoys high reputation among the inhabitants.

The governor shall promulgate the decisions of the legislative council and directions of the administration, issue orders and appoint and dismiss members of the administration and the chief of the prosecutor’s office of the region.

The administration is the region’s executive body and general administrative organ.

The chief of the administration is the governor and the posts of department chief of the administration and the chief of the police agency shall be held by residents of the region.

The prosecution affairs of the region shall be undertaken by the prosecutor’s office of the region and the district prosecutor’s offices.

The prosecutor’s office of the region shall be accountable to the governor.

Trial in the region shall be undertaken by the court of the region and district courts. The court of the region is the supreme court.

The region shall use not only the emblem and flag of the DPRK but also its own emblem and flag and the order of their use shall be established by the region.

The region shall apply no other laws but the DPRK laws concerning nationality, emblem, flag, anthem, capital, territorial waters, territorial air and national security.

The Korean version of the article is not available on the KCNA web pages, however, according to the Sijuiju SAR wikipedia page, the Korean name is “신의주 특별 행정구’.

The Wikipedia page for the project is here.