What comes to your mind, when you think of the North Korea (N.K.)? You probably imagine a dangerous nation with Nuclear weapons, a despotic state and starvation. N.K. has been recognized as a notorious nation for the last fifty years.
However, the world's biggest conglomerates regarding N.K. as a potential market. The Loxley Group of Bangkok, for example, expanded their mobile communication service from the Rajin-Sonbong free trade area to Pyongyang.
Pyongyang is a socialist state with a planned economy; so it is hard to make profits. But why is the world showing interests in the N.K. market?
The Dongguk Post met with Lee Chang-hak, an assistant manager (North Korea Dept.) at the Korea Trade-Investment Promotion Agency (KOTRA), to analyze the N.K. market.
N.K. as a Potential Market.
"Because of its geographical position, and easy to access South Korea, China and Japan's market, N.K. can be a headquarters of distribution industries. Moreover, if the Trans-Korea Railway (TKR) is attached to the Trans-Siberian Railway (TSR), it could also be a key distribution hub. For these reasons, N.K. is being wooed by investors," Lee explained.
The advantage of the N.K. market is the regulatory flexibility. Since Pyongyang only had business experiences with multinational companies, it doesn't have existing regulations for foreign investors.
When South Korea (R.O.K.) established a factory in N.K.. the produced goods were classified as duty-free because they were regarded as domestic products.
Lee analyzed the potential economy of N.K: "The multinational companies are showing keen high interest in N.K. because when the Korean peninsula unifies FDI will be promoted by the OECD and southern companies."
The World's Movement Toward N.K.
Foreign investors are allowed to invest only in Rajin-Sonbong free-trade area in N.K.. The area was established at Hamgyong-bukdo in 1991, to cope with the Tumen River Area Development Program (TRADP).
The investors are free to establish or cooperate with a company in the area, and they are blessed with reduced taxes. In the North, foreign tourists are closely watched by tourist guides, but investors are guaranteed exceptionally good treatment and are free to move around without guides. As a result, the Emperor group of Hongkong started hotel and casino businesses and other multinational groups established their companies at the Rajin-Sonbong free trade area.
However, the actual rate of capital investment in the area is low. In 1997, 111 contracts were signed but when Pyongyang announced the blueprint of the free trade area only 77 contracts were signed. And the actual amount of investments was $6,242 million.
Lee explained the two reasons why investors deject the area: "After the Geneva Convention (1994) N.K. failed to build up relationships that are necessary to attract foreign capital.
The Second reason was a negative attitude from Japan and Russia which are the actual source of funds at TRADP and related to the area. Because Russia was suffering from economic difficulties and Japan had to settle the kidnapping and nuclear issue with N.K.."
R.O.K.'s Movement Toward N.K.
Part of the North-South economic cooperation has to do with constructing roads and railways in N.K. starting from Sept. 18. 2002.
Korea Land Corporation and Hyundai Asan is developing the Geaseong Industrial Complex. After its completion, we can expect more cooperation with N.K.,"
Lee emphasized the necessity of North-South trade and he explained the government's strategy towards N.K.: "Through trading with N.K. we can gain price competitiveness (part of light industry goods) and also loosen the political tension between the South and the North."
Because of the high inflation rate in R.O.K., companies are losing their price competitiveness. So the minor enterprises are in a hurry to establish their factories in N.K.. Since the mid 1990s such non-official trade has increased gradually.
According to the research of N.K.'s trade rates in 1998, R.O.K. holds 22.3% of its total, which is five times bigger than in 1991 (3.9%).
Outlook on the N.K. Market
"N.K. is slow to change and won't open its market to the world quickly. Actually, it doesn't understand the principals of a market economy. If N.K. really wants to develop its economy through restructing, it must first construct the legal and systematic base of economic cooperation.
To attract foreign capital, N.K. must build up relationships with other countries. In line with this, N.K. must end the political crisis over its nuclear program." said Mr. Lee.
According to Mr. Lee, N.K. is an attractive market to the R.O.K. companies. Since the South doesn't charge tax on the North's products, investors should take advantage of the low distribution expenses, which lead to higher profits.
If you consider the overland transport system of roads and railways and the discharge facility of the North harbors, investment in N.K. could be very promising.
Both the R.O.K. and N.K. have to draw up blueprints for their prosperity. For example, we can relocated the labor-intensive industry to the North.
"No one is making an actual profit out of the market. They are barely keeping their factories in N.K. open. But the market is filled with latent potential."
Kim Hyung-jong email@example.com
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