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NORTH KOREA NEWSLETTER NO. 230 (October 4, 2012)
*** TOPIC OF THE WEEK (Part 1)

N. Korea, China Hold Investment Conference on N. Korea's Economic Zones

SEOUL (Yonhap) -- The possibility of economic reform in North Korea has been gaining attention as the socialist country has shown signs of notable steps under its new leader to overcome poverty amid international isolation resulting from its nuclear ambitions and provocative behavior.

   Specifically, North Korea and China have recently ramped up their joint development of the North's economic zones. Last week, the two allied countries held an investment seminar in Beijing to promote Chinese investment opportunities in the North's special economic zones.

   Some 36 North Korean officials introduced 43 projects, whereas China vowed to help investors in North Korea's economic zones. At the conference, representatives from the trade zones introduced their investment environments to participating enterprises.

   During the seminar held at a Beijing hotel from Sept. 26 to 27, China said it will support firms seeking to invest in North Korea's two special economic zones co-developed by the neighboring countries in a bid to help boost Pyongyang's faltering economy.

   China's Ministry of Commerce said it will actively encourage both domestic and foreign enterprises to invest in the North Korean economic zones. "We will support (such investment) with strength, willingness and sincerity. We will work together to create a better tomorrow for the economic and trade cooperation between China and the Democratic People's Republic of Korea (DPRK/North Korea)," said Chen Jian, vice minister of commerce, in a statement posted on the government's Web site.

   Chen said that through the two countries' joint efforts, the Rason Economic and Trade Zone, and Hwanggumphyong and Wihwa Islands Economic Zone in the DPRK have produced positive results. He urged both sides to strengthen cooperation and coordination to explore practical and innovative models.

   The Rason Economic and Trade Zone, located in northeast North Korea, adjacent to Yanbian Prefecture in China's Jilin Province, will focus on the development of raw materials, equipment, high-tech products, the light industry, the service sector and modern agriculture, according to officials from both countries.

   The Hwanggumphyong and Wihwa Islands Economic Zone, located near the estuary of the Yalu River, will focus on the development of the information industry, tourism, modern agriculture and garment manufacturing.

   Chen stressed China is willing to work together with North Korea according to the consensus made between the leaders of the two countries, with a principle of enterprise-based market operations. "We will make sure the cooperative works are mutually beneficial for China and North Korea," he said.

   Speculation has risen that North Korea will take legal steps to start economic reforms as new leader Kim Jong-un is seen to be seeking to consolidate his power partly through fixing the sickly economy.

   At the seminar, both countries reportedly agreed to use both currencies of the two countries as a tool for their financial settlement within the economic zones and that both countries will allow branch offices of their banks to be stationed in the economic zones.

   Experts explained that North Koreans have now experienced the benefit and power of foreign currency, particularly Chinese yuan.

   North Korean officials reportedly told the investment conference that they would not put limitations on the offshore remittance of business profits by investors in the economic zones.

   Pyongyang's desire for economic reform has been detected in a flurry of recent media reports and academic documents. The front page of a recent edition of Rodong Sinmun, the daily of the North's ruling Workers' Party, was filled with economy-related articles while pushing an article on Kim Jong-un, to the second page ― an exceptionally unusual article arrangement.

   In August, the North introduced a set of research papers by its scholars concerning topics ranging from the state control over the financial sector to the importance of currency circulation. They raised the prospect for possible financial reform.

   More recently, the chief North Korean delegation to the United Nations Foreign Ministers' meeting of the G-77 made a speech on his country's ongoing efforts for restructuring economic improvement measures.

   Pak Kil-yon, North Korea's vice foreign minister, said that, in order to enhance the joint action capabilities of the G-77/China, it is indispensable to put in place a mode of economic development that suits the trend of the global economy and specific conditions of developing countries.

   The ever worsening global North-South divide in international economic relations demands that the G-77/China exert more active efforts to revitalize South-South cooperation, he said.

   "Following the trend of global economy towards sustainable development and green growth, our country is continuously improving and strengthening the economic structure and development methodology to suit our conditions and is actively encouraging international exchanges and cooperation in this area," Pak said.

   "The government of the DPRK will, in the future, too, continue to actively contribute to achieving the common cause of the G-77/China for the establishment of new economic relations based on justice, equality and impartiality," he added.

   In recent months, positive signs have been sprouting from the impoverished state. Expectations rose that the country would produce market reforms, as there have been signals that the closed socialist state is undergoing economic changes.

   Rumors have abounded that Kim Jong-un, who has emphasized improving living conditions, is preparing to introduce the changes as early as October.

   Under the June 28 measures, farmers would keep surplus food to sell at market rather than having to hand it all over to the state. Some reports have put the percentage of crops citizens can keep at 30 percent.

   The so-called June 28 measures could also allow factory enterprises to set their own prices for goods and give them more room to decide on matters such as production and distribution of profits.

   North Korean farmers who have long been required to turn most of their crops over to the state may instead be allowed to keep their surplus food to sell or barter in what could be the most significant economic change enacted by young leader Kim Jong-un since he came to power last December following his father Kim Jong-il's death.

   The proposed directive appears aimed at boosting productivity at collective farms that have struggled for decades to provide for the country's 24 million people. By giving farmers such an incentive to grow more food, North Korea could be starting down the same path as China when it first began experimenting with a market-based economy.

   Under the new rules, they would be able to keep any surplus after they have fulfilled state-mandated quotas improving morale and giving farmers more of a chance to manage their plots and use the crops as a commodity.

   In his first public speech in April, Kim Jong-un openly acknowledged the economic hardship in North Korea, and pledged to raise the standard of living, saying that North Koreans should never have to "tighten their belts again."

   The young leader, who is the third-generation of his family to lead North Korea since his grandfather Kim Il-sung founded the socialist state in 1948, has already made some significant changes. He dismissed his father's army chief and promoted a younger general.

   North Korea has a per capita GDP of US$1,800 per year, according to the U.S. State Department, far below that of its neighbors in Northeast Asia, and its rocky, mountainous terrain and history of natural disasters has long challenged the Kim regime to provide enough food for all its people.

   North Korea has flirted with radical economic shifts before. The 17-year rule of Kim Jong-il included market experiments in 2002, and a devastating currency devaluation in 2009 that stripped millions of people of their savings.

   Nearly all the changes were rolled back amid internal disputes, and fears among the ruling elite that they could lead to demands for change that could spiral beyond the state's control. Faced with an economy on the verge of collapse, the elder Kim's regime eventually allowed small-scale markets to take root.

   After reportedly suffering a stroke in 2008 and picking his youngest son as his heir, Kim Jong-il announced a renewed focus on the economy and made a push to draw foreign investment and trade, particularly from China.

   If the latest reform reports are true, they would almost certainly be driven in part by China. Beijing has long pressed Pyongyang to enact reforms similar to its own first steps toward a market economy.

   But when the reports began leaking out in recent weeks about the agricultural reforms, the North Korean government response made few things clear. An unidentified government official told the state news agency KCNA that expecting reform "is nothing but a foolish and silly dream," but added that North Korea is pursuing "new innovations and creations in order to make its people enjoy modern and a highly civilized life and live in luxury and comfort."

   In another reform measures to shore up the moribund economy, North Korea is moving to introduce a full-scale cash-payment system for transactions among light-industry state firms.

   The measure, seen as aimed at boosting industrial efficiency by ensuring greater autonomy for non-backbone businesses, could pose risks by loosening the long-standing state control, analysts say.

   The adoption of cash transactions marks a departure from the long-held "scriptural-money" system in which each firm uses an account at the central bank when it transacts with others to secure raw materials, electricity, machines and other means of production.

   In its economic reform of July 2002, Pyongyang partially introduced cash transactions among companies in a controlled production-material exchange market. But the new measure seeks a full-scale adoption of cash payments, the source said.