Despite its isolationist circumstances, North Korea has been developing an informal market economy on the back of its highly educated labour force. But the state's ambivalence about foreign investment and its geopolitical intransigence make it difficult to know how far the inroads made by outside investment can reach.
An isolationist, rogue nuclear state; an axis of evil. At best, North Korea’s leadership is depicted as unpredictable, a place where no one in their right mind would want to do business.
Editor's choice
More on North Korea
More on Asia-Pacific
The recent high-profile visits of Google’s executive chairman Eric Schmidt and basketballer Dennis Rodman added to the country’s intrigue and many speculated North Korea could be ready to open up to the rest of the world. Since then, though, there has been an escalation in tensions on the Korean peninsula, an extra round of UN and US sanctions, and North Korea has threatened a pre-emptive nuclear attack against the US.
Despite the uncertainty and instability, there are still foreigners who are doing business in North Korea. The Democratic People’s Republic of Korea (DPRK), as it is officially known, is in a strategic location, has trillions of dollars’ worth of minerals and has a relatively cheap and highly educated labour force. Could North Korea be described as an emerging market?
“No,” says Marcus Noland, senior fellow and director of studies at The Peterson Institute for International Economics. “North Korea has a really dysfunctional economy. Inflation is more than 100%, it has an extremely weak business environment and is extremely corrupt,” he says.
Risk of expropriation
Dr Bernhard Seliger, resident representative of the Hanns Seidel Foundation, says that North Korea could be described as a “proto-emerging market”. “There is a possibility that, later on, low labour costs make it attractive for investment, but not now. From the political side, the risks far outweigh the opportunities, in particular the risk of expropriation,” says Mr Seliger.
There are a handful of business people, though, who believe doing business in the DPRK is worth the risk. Remy Lardinois, is one such expatriate, who is managing director of PyongSu Pharma, a joint venture with North Korea’s Pyongyang Pharmaceutical Company and Hong Kong-based Parazelsus Group.
“North Korea is an emerging market. A number of pharmaceutical companies, mostly generics, are already here, mostly through wholesaling. In the very near future, PyongSu shall also represent some multinationals,” says Mr Lardinois.
Mr Lardinois adds that in the four years he has managed PyongSu, he has noticed a substantial increase in the number of cars, construction sites and stores. “Today, some supermarkets in Pyongyang offer fresh ham, Norwegian salmon, French cheese and other delicacies that were unavailable just two years ago. Our steadily increasing sales income is also a good indicator of the development of the country's economy,” he says.
Informal market economy
Felix Abt, former managing director of PyongSu Pharma and author ofA Capitalist in North Korea, lived in North Korea for seven years and argues that a middle class has emerged over the past decade. “After the big famine in the 1990s, where the public food rationing and distribution collapsed, an informal market economy emerged. Most North Koreans started engaging in some kind of trade and other business to make ends meet,” he says.
“Today, more than 1.5 million North Koreans have a mobile phone. More and more have computers and other electronic devices. Shops and markets sell platform and high-heel shoes, Minnie Mouse bras and DVDs with Western cartoons. I'm now living in Vietnam and watch rising sales of products made in Vietnam in North Korea, from edible oil to instant noodles to shirts to shoes to cigarettes,” says Mr Abt.
There has been speculation the North Korean authorities plan to open up the economy to foreign investment, but such a move could threaten the existence of the regime itself. Of North Korea’s leaders, Andray Abrahamian, executive director at Choson Exchange, an organisation that trains North Korean professionals and policy makers, notes: “In terms of policy, there is clearly an ambivalence about what direction they want to take the economy.”
Wook Yoo, an attorney at Seoul-based law firm Bae, Kim and Lee, compares the current business environment with China in the 1980s, which was also a period of trial and error for socioeconomic reform. “Although North Korea made certain efforts to entice foreign investments through its legislation of approximately 20 laws aimed at promoting foreign investments and establishing special economic zones such as the Rason Economic and Trade Zone, its attempts at triggering economic growth through foreign investment have been unsuccessful due to North Korea’s failure to deliver an investor-friendly business environment,” he says.
Precedent with China's past
Mr Abt describes doing business in North Korea as a déjà vu experience for those who worked in China or Vietnam when those countries were opening up. “Like in China or Vietnam in the past, the business failure rate is relatively high, but I observed an improvement over the past five years. I'm a shareholder at joint venture companies in North Korea and they generate some profit, which is not huge, but the longer-term potential of these investments looks good,” he says.
Of the business opportunities in North Korea, Mr Abt says: “With rising labour and other input cost in China, North Korea has become very competitive for its processing activities in garments, shoes and bags. There has been a significant increase of Chinese companies moving production capacities to North Korea,” he says.
“Low to medium technology items, encompassing the manufacturing of artificial flowers, dentures, furniture and toys, can be a profitable investment as well. Indeed, such items are already being produced on behalf of foreign investors. Higher energy cost and cost due to infrastructure shortcomings are largely offset by low-cost labour and a fast-increasing productivity thanks to very diligent and fast-learning workers,” says Mr Abt.
Niche openings
Mr Seliger notes there are openings in the DPRK for niche trades. “There are certain opportunities for highly specialised companies. Like in the field of raw materials, or for Chinese companies in certain markets, like fisheries, but even these businesses have to constantly cope with political interventions. Also, the lack of channels of legal finance is very difficult to cope with and most transactions are in cash for that reason, which is certainly not helpful,” he says.
Some official reports list China as North Korea’s top trading partner, accounting for about 70% of the DPRK’s trade. Such lists, though, do not include South Korea, which skews the weighting of the trade figures in China’s favour. Mr Noland explains this is because data from South Korea’s trade agency counts trade with the DPRK as domestic, not cross-border, trade.
According to a local news report, citing figures from the Korea International Trade Association, North Korea’s trade with China totalled $4.96bn between January and October 2012, an increase of 6.3% from the same period in 2011.
Perhaps the most well-known foreign company in the DPRK is the Egyptian conglomerate Orascom. In January 2008 Orascom Telecom gained a commercial licence to operate the country’s first mobile phone network. It also opened Ora Bank, a joint venture between Orascom Telecom and the DPRK’s state-owned Foreign Trade Bank.
Global disconnect
Mr Yoo explains there are no commercial banks in North Korea, apart from those with foreign investors. “However, such banks are disconnected from the international banking system. Although the Foreign-invested Bank Act provides that such banks engage in typical banking services, including accepting deposits, granting loans, engaging in foreign exchange transactions and other types of services, in reality, their services are known to be quite restricted and limited in scope,” he says.
International sanctions make banking in North Korea extremely problematic. Many observers point to the case of Banco Delta Asia (BDA), a Macao-based bank that had its assets frozen by the US Treasury in 2005 and was accused of money laundering and being a “willing pawn for the North Korean government to engage in corrupt financial activities”. The bank’s assets were frozen and were not released until 2007. The action had ramifications for other parties, including Pyongyang-based Daedong Credit Bank, which was an account holder at BDA.
Mr Noland explains that since the BDA case, North Korea has diversified its international financial linkages and has established banks and relationships with small banks in China.
The US is targeting any financial connection with the DPRK nuclear weapons programme, and any company doing legitimate business faces the risk of its operations being quashed by the sanctions.
In the latest round of sanctions, in March 2013, the US Treasury targeted the state-owned Foreign Trade Bank, North Korea’s primary foreign exchange bank. The treasury identified Foreign Trade Bank as a “key financial node” in North Korea’s weapons of mass destruction apparatus and cut it off from the US financial system.
Such action, in the context of escalating tensions between the US, and also between the two Koreas, casts a shadow over those seeking to do business in North Korea and delays the country’s emergence as Asia’s next frontier market.
