Report

How North Korea Could Go From Hermit Kingdom to Factory Hub

A new report provides the most detailed look yet at how a sanctions-free Pyongyang could strike it rich.

North Korean leader Kim Jong Un celebrates the successful test-fire of the intercontinental ballistic missile Hwasong-14 at an undisclosed location in July 2017.
STR/AFP/Getty Images
North Korean leader Kim Jong Un celebrates the successful test-fire of the intercontinental ballistic missile Hwasong-14 at an undisclosed location in July 2017. STR/AFP/Getty Images

This month’s summit in Singapore between U.S. President Donald Trump and North Korean leader Kim Jong Un sparked hopes that the two men can solve a decades-old impasse and open up one of the world’s most closed economies.

Those visions may not be a pipe dream after all, says a painstakingly researched new report by South Korean analysts just released in English. The summit, and the prospect of an end to international economic sanctions, could lead to a flood of foreign capital that could transform North Korea from a hermit kingdom into an economic juggernaut, concludes the study by Samsung Securities.

“If South Korea combines its wealth and industrialization knowhow with North Korea’s human and natural resources, the economies of both nations could make a quantum leap over the long term,” the authors write.

The report offers a nearly 200-page blueprint detailing how foreign capital could revamp North Korea’s battered infrastructure, strengthen its mining sector, and turn a nearly autarkic economy into a manufacturing and logistics hub thanks to its privileged position between some of the world’s biggest economies. The report riffs on the U.S. demand for “complete, verifiable, and irreversible dismantlement” of North Korea’s nuclear program to argue instead for “complete, visible, irreversible prosperity.”

Granted, realizing the report’s vision will require overcoming a formidable list of obstacles, including a wide-ranging sanctions regime against Pyongyang, corporate reluctance to jump into an economy rife with illicit activity, and heavy-handed state control over nearly all aspects of the economy.

Iran’s disappointing bid to attract foreign investment after winning its own sanctions relief in 2016 as part of the nuclear deal is a case in point, said Jonathan Schanzer, a sanctions expert at the Foundation for Defense of Democracies, a hawkish Washington think tank.

Iran continued a wide range of illicit activities, including cyberattacks, human rights abuses, and regional proxy wars, that ensured foreign investment fell short of the level envisioned by Tehran and the architects of the nuclear deal. North Korea, whose economy is vastly less integrated into the world’s than Iran’s, would be an even tougher nut to crack.

“It’s hard to imagine that they’ve thought through all of the reputational, legal, and sanctions risks that come along with dealing with a rogue state,” Schanzer said.

Still, the summit has raised hopes that the long-closed North Korean economy might be ready for a reboot. Trump promised that pursuing detente with the United States would eventually make the country “rich,” and he chatted up Kim on the real-estate potential of North Korea’s coastline.

“They have great beaches. You see that whenever they’re exploding their cannons into the ocean, right?” Trump said in a press conference after his meeting with Kim. “I said, ‘Boy, look at the view. Wouldn’t that make a great condo?’”

And Kim himself has made gestures that suggest the regime is growing more receptive to the idea of a slightly more open economy. In April, Kim signaled a “new strategic line” in a speech to the Central Committee of the Workers’ Party of Korea, a shift from prioritizing nuclear weapons to a focusing on economic development.

And just after he returned from Singapore, Korean Central TV aired a fascinating 45-minute documentary that served as an extended advertisement for Kim’s economic reforms. The North Korean leader was pictured waltzing through the glitzy urban landscape of Singapore, taking in the sights appreciatively before his convoy paid a visit to Singapore’s bustling port.

The Samsung report underscores some of the advantages North Korea has if it pursues economic opening. The country is ringed by major economies, has plentiful natural resources, especially minerals, and has a literate and highly skilled workforce.

Initially, foreign capital would flow into so-called special economic zones, areas where the Kim regime has experimented with limited economic liberalization, including in Kim’s hometown of Wonsan, where he has ordered the construction of tourist facilities. In the first phase, investment would have to focus on rebuilding North Korea’s battered infrastructure, including power generation and rail, road, and port upgrades.

The Kaesong industrial zone — a sprawling border factory park that is a joint venture with South Korea — would be quickly reopened, along with some tourist sites in the North, the report suggests.

But those initial steps would be far from sufficient. To transform North Korea into a manufacturing hub, there would have to be fundamental economic reforms, according to an analysis by William Brown, a former East Asia expert at the CIA. At the top of the list: viable currency and financial systems, property rights, and “a single price system that bridges the enormous gap between state dictated and market prices, wages, interest rates, and exchange rates.”

Brown argues that a commitment to such reform could put North Korea on the path to membership in the World Trade Organization, a more open trading relationship with the world, and a possible realization of the wild vision presented by Samsung: North Korea as an automobile and IT assembly line and logistics center for Northeast Asia.

But those visions are themselves dependent on Washington and Pyongyang making progress in ongoing talks — and such hopes have been dashed before. For decades, North Korea and the United States have seemed close to resolving the international community’s concerns over the regime’s weapons programs, only to see Pyongyang backslide and resume its bad behavior.

U.S. Secretary of State Mike Pompeo is set to visit Pyongyang next week as American diplomats attempt to put meat on the bones of the vague agreement signed in Singapore. Though Trump has pledged rapid progress on the Korean nuclear file, Pompeo is now downplaying expectations, telling CNN that he won’t put a timeline on negotiations.

“We hope that we will have an ongoing process of making progress,” Pompeo told the network Sunday.

Trump administration officials have emphasized that sanctions against North Korea will remain in place, but the flurry of good feelings following the Singapore meeting has resulted in an inevitable diplomatic opening. After a period of unprecedented isolation, Kim is entertaining additional summit meetings with a range of world leaders, to include Russian President Vladimir Putin.

Moscow, for example, will be eyeing the construction of a gas pipeline that would link eastern Russia with North Korea — a possible project explored in some detail by the Samsung report.

Projects such as that pipeline have boosted hopes that the diplomatic opening could be accompanied by economic liberalization, but that reality still remains a long way off.

“It certainly makes sense to think about the long term, but the short and medium term really look very dismal from my perspective,” Schanzer said.

“It’s hard to imagine any right-minded financial analyst walking away thinking otherwise.”

Elias Groll is a staff writer at Foreign Policy covering cyberspace. @EliasGroll

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