Special economic zones

In early June it was officially declared that North Korea is opening two special economic zones (SEZs) on its border with China.

By Andrei Lankov

In early June it was officially declared that North Korea is opening two special economic zones (SEZs) on its border with China.

Actually, the twin port cities of Rajin and Seonbong (now technically fused into the city of Raseon) had been promoted to the status of special economic zone in 1991, even though the development there was slow. Another SEZ is located in the vicinity of Sinuiju, the largest city on the Sino-Korean border. Actually this is the second attempt ― North Korea came very close to establishing a zone in Sinuiju area in 2002, but cancelled the initial plan.

What should we expect from this development?

With the Raseon SEZ things appear to be quite straight forward ― it’s about reducing the cost of shipping. Northeast China, often referred to as Manchuria, is landlocked. Only a narrow strip of Russian and Korean territory, nearly 10 kilometers wide, divides it from the waters of the Pacific. Nonetheless, this is enough to create a logistical nightmare for Chinese business, in order to ship something overseas they have to first transport the goods to the nearest Chinese sea port, which is some 1000 km away. It is far more expensive to move things by land than by sea, so easy access to a North Korean seaport and shorter land routes would save a small fortune for Chinese business.

Talks of a coming Chinese takeover of Raseon have been around for almost a decade. Now it seems that things have finally begun to move. So with some luck, Raseon might eventually develop into the major sea link for Chinese Manchuria, a huge area with a population of some 100 million people.

It is not that clear yet what will happen in the Sinuiju area. It seems now that its only comparative advantage is cheap labor.

Generally speaking there are only three economic reasons which make China more or less interested in dealing with North Korea. First, its transportation links – the opportunity to save money by using North Korean seaports (as mentioned above), followed by mineral resources, which are of value to the resource hungry Chinese economy. And the third reason is cheap labor.

It is commonly assumed that labor in China is very cheap; this is true to a certain extent, but nowadays it is strikingly less cheap than it was a decade ago. Chinese workers are not going to spend 10 hours a day in a dusty workshop for the price of a few bowls of rice. The average monthly wages of a semi-skilled worker in Manchuria now exceeds $100. This is good news for China (and, frankly for humanity itself), but bad news for Chinese industrialists, especially those who produce cheap consumer items.

At the same time, the official North Korean monthly salary is roughly equivalent to $2. Of course, virtually no one survives on such a meager salary: the North Koreans earn money from all kinds of market activities. Nonetheless, a salary of $15-20 a month is seen by North Korean workers as perfectly acceptable. Their skills might be inferior to those of Chinese workers, but they are by no means hopeless.

One should not be surprised that a number of Chinese companies over the last decade have outsourced some production to North Korea. Usually they don’t make much noise about their North Korean operations and mark the products of their North Korean factories with the usual ‘Made in China’ label.

It seems that the Chinese and North Koreans anticipate that Sinuiju will become the major area for Chinese outsourcing. It does however remain to be seen whether the plan will succeed.

Frankly, the track record of North Korean SEZs is disappointing. The Raseon SEZ was launched in 1991 with much fanfare and great expectations. However, foreign investors soon had these expectations dashed by the virtual absence of infrastructure (there was only one short paved road in the area), countless administrative and political restrictions, and occasional bouts of uncooperativeness from North Korean officials.

So for two decades the Raseon SEZ has remained dormant, being essentially a large market place where North Korean merchants have been able to buy Chinese goods for further resale in the inner regions of North Korea. For a brief time it also served as a gambling enclave for the rich Chinese, but after some ugly embezzlement incidents, the Chinese demanded the local casino to be closed. The North Korean authorities had no choice but to oblige, and afterwards the Raseon SEZ slipped into obscurity again.

Optimists might cite the Gaeseong industrial zone as a success story, but this is a very different case. The Gaeseong Zone is operated by South Korean companies and is heavily subsidized by Seoul. It’s highly unlikely that China is going to show similar generosity.

So the future of the newly established Sinuiju SEZ remains uncertain. Nonetheless, let’s hope it will succeed because in the long run its success will be good for North Korea and East Asia.

Prof. Andrei Lankov was born in St. Petersburg, Russia, and now teaches at Kookmin University in Seoul. He can be reached at anlankov@yahoo.com.