A Case Study on Globalization's Reach into North Korea
It is no secret that China is in many ways the envy of North Korea. China has been able to successfully maintain its communist leadership (so far) while overseeing a burgeoning economy driven by its several, rapidly growing special economic zones. These zones are quite strategically positioned on the east coast, where sea ports have been the mouths of trade for centuries. Combined with the new infrastructure of airports, highways and railways, China has built enough momentum to aggressively cultivate FDI that will further aid in "filling and shrinking the many gaps" that still exist in its heartlands. Its lagging and yet accelerating political reform flows aid this progress. People flows are encouraged in the forms of talent immigration and tourism. Security flows are managed so as to not disrupt the other three flows. In the least, China seems currently satisfied with the status quo on Taiwan (fortunately) and North Korea (unfortunately), if not perhaps illustrating a more diplomatic assertiveness towards a regional security framework through more open cooperative exchanges,in particular with the USA.
Along with the change in China's behavior and fortunes, Kim Jong-Il's trips to China have also changed in terms of itinerary, with the special economic zones becoming priority visits. During a secret visit January 15 of 2001, Kim opted for four days in the Shanghai-Pudong area versus the usually obligatory trip to Beijing. The objects of Kim's attention at this time focused on the symbols of a modernized economy--the Stock Exchange, IT facilities, the Japanese firm NEC, as well as General Motors (Nam, pg 69).
Rajin-Songbong Economic Zone Failures
But the Kim Family's dream of following China's path began much earlier during the 1980's and continued through the 1990's with the Rajin-Songbong Economic Zone projects. These were ultimately failures, but their story provides an indication of how North Korea's thought process has changed since its past mistakes.
Rajin-Songbong was the first location where a specific strategy was applied based on an effort to try and replicate the Chinese model (see map for comparison of location with Kaesong--Rajin is labeled as Najin). The year was 1984, and North Korea initiated the effort by passing joint-venture legislation to attract the necessary FDI in the form of financial capital and advanced technology (Nam, pg 75). To get a sense of the speed of this reform, the Rajin-Songbong area wasn't designated a special economic zone until December 1991. The rational for developing this area was geographically centered, with North Korea marketing the area's natural resources and its logistics potential as a land-sea link bordering Russia, China and Mongolia while facing Japan across the East Sea. On paper this seamed like the ideal location and, at the time, Kim Il-sung invested himself heavily politically by publicly displaying his confidence in exchanges with Cuban and Russian media (Nam, pg 76). His quote at the time reflected this confidence, "The area has already stirred foreign investors’great interest due to its economic potential and favorable location and many countries desire to make investments (Nam, pg 76)."
As the project drove forward, North Korea made an effort to modify the area's business practices so as to mimic a free market system. As such, Rajin-Songbong displayed all the characteristics of the Chinese model in terms of political flows in the form of legislation (Nam, pg 76). However, the desired level of parallel economic flows--FDI--never came to fruition.
Despite foreign companies accepting the extremely high risk of investment, which included that by firms in China, Hong Kong, and Japan, only 10 percent of the $800m in contracts was followed through on--approximately $88m (Nam, 76). What were these firms investing in exactly? The balance of investment was heavily skewed towards infrastructure and service sectors--communications, hotel, transportation, construction and tourism. Investment in actual goods production was limited to a mere 4 percent by 1997 (Nam, pg 77).
Trying to shore up support, North Korea held more than 30 events to lure investors from more than 10 countries, including an investment forum in the Rajin-Songbong Economic Zone itself. As a foundation, the North Korean government sent personnel overseas to be educated on capitalist economic management methods, but these efforts never succeeded in instilling investor confidence as hoped (Nam, pg 77).
Primary Constraints Against Success
North Korea may share in essence China's communist roots, but it is hardly a mini-China and the constraints against success are different, requiring a customized approach. First of all, the legal framework that regulated the flows of FDI capital fell short of expectations held by prospective foreign investors. Perhaps this was caused by North Korea's misguided pride at the highest levels, driving it to be overly optimistic about its attractiveness as an investment location. Combined with an assortment of distracting political obstacles and the passive and rigid attitudes of the North Korean workforce, barriers to entry are significant (Nam, 77). Another layer includes the lack of a consumer market and the poor infrastructure in transportation and communications, ensuring costs will far exceed benefits of any investment. From a supply chain logistics perspective, adding a North Korean hub to any supply chain would throw it out of wack under these conditions, raising the total cost of any goods or services provided to customers.
Key Question: How is a country with a small land area, scarce resources, a 55 year-old autocratic system of government, poor infrastructure, and uncompetitive labor force going to convince supply chain professionals, who would be responsible for the assessment of North Korea as a supply chain hub or node, to include it in a regional or global network of operations?
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