By Lee Kyung-min
South Korea's state-run banks and financial institutions should take the initiative in investing in North Korea to attract more private investors and ensure opening the isolated country is a success, a Seoul-based North Korea expert said Tuesday.
He pointed out that lingering uncertainty over the reclusive regime led by recalcitrant leader Kim Jong-un remains the single greatest issue deterring foreign investment.
Park Hae-sik, a senior research fellow at the North Korea Finance Research Center under the Korea Institute of Finance, suggested the Korea Investment Corp. (KIC) or the Korea Development Bank (KDB) set up a trust fund to promote investment and financing for projects in the North.
“Korea's top two state-controlled financial institutions should be able to set up a North Korea investment fund, given many foreign sovereign wealth funds are open to long-term investments that offer moderate returns,” Park said in a telephone interview with The Korea Times.
“It is not that different from an investment in developing countries. If private investors alone rush to seek profit without partial or full coordination with state-run bodies, they alone bear responsibility for any losses incurred, a reason they need a joint project with a reliable state organization such as the Asian Development Bank.”
He explained that state-run financial firms should, therefore, set up an investment plan under which private investors feel confident that their money will not be lost due to risk factors involving political instability in the North, a country with little to no institutional framework for investment.
“For example, in setting up a special purpose vehicle (SPV), a prerequisite for an investment plan, the government can allow private investors to collect what they are owed before their state-run counterparts.”
The envisioned fund could draw many investors, he added, given that North Korea is undergoing a subtle yet significant change that allows more room to embrace a market economy.
“The North Korean regime has largely failed to provide sufficient funds to its companies in need of stable and constant capital inflow to ensure operations. However, it is gradually becoming open to allowing self-sufficient means to secure funds, discretion that was never _ or rarely _ granted in the past,” he said.
“This is where I see enormous investment potential for global and local banks alike to finance the regime's key industries including railroad building, advanced science technology and agriculture.”
He believes that while the North's political ruling class does not want a market-oriented economy to dominate its people's mindset, the growth in free black markets there could speed up gradual economic reforms, which will entail a substantial return on initial investments.
“Continued influence from the outside could bring about economic change, which would come at an alarming rate, once the regime seeks assistance from international organizations such as the World Bank and International Monetary Fund.”
In order for the North to embrace foreign investment, Park said Pyongyang should be open to the idea of “risk sharing,” achievable by making its own investment in the funds.
“It is one way for North Korea to improve trust with financial institutions,” he said.
Prospects for the opening of the North could grow at a faster-than-expected pace amid the recent fast-warming inter-Korean ties, indicated by the third summit between President Moon and Kim Jong-un from Tuesday through Thursday.
“No one can accurately predict how fast the North's regime would allow banking there, but the possibility has definitely increased. All the bright prospects aside, however, it is expected to be a long shot to achieve tangible results because the international sanctions against the North remain largely intact,” he said.