(Leonid Petrov, The University of Sydney) Last week, North Korea announced to the world that it would make its two islands, Hwanggumphyong and Wihwado, a visa-free zone for foreigners. A special law has been adopted in the DPRK to attract foreign investors and give them preferential treatment in the payment of tariffs, taxes and land use. Will this recent change in policy rescue the North from poverty and change things for the better?
Those who are familiar with Korean history will remember the Wihwado Retreat (위화도 회군) of the 14th century. In 1388, General Yi Seonggye of the Koryo kingdom was ordered to march north with his army and invade the Liaodong peninsula, which was under the control of Ming China. However, when his troops reached Wihwado Island in the estuary of the Amnok (Yalu) River, General Yi suddenly changed his mind. With the support of high-ranking government officials and the army, Yi Seonggye decided to return to the capital, Kaesŏng, and trigger a coup d’état. He toppled the Koryo King and ascended the throne himself as King Taejo, the founder of Joseon Dynasty.
King Taejo’s change of heart comes to mind in the context of the situation. In an effort to turn the tide of its economic development, North Korea selected the islands of Wihwado and Hwanggumphyong as the future site of the country’s Special Economic Zone with China. Although the move goes against the grain of North Korea’s traditional tendency to isolate itself, the islands lie at the mouth of the Amnok River, which has served as a natural border between the two countries since the time of Yi Seong-gye. Its location, just opposite the cities of Sinuiju on the DPRK side and Dandong on the PRC side, adds strategic importance to this historic place. In June 2011, a start-up ceremony took place on the island in recognition of the DPRK-China joint development and operation project.
The executive decision to develop the abandoned islands into a thriving industrial park had been made by the North Korean leader Kim Jong-Il who frequently visited China to solicit economic aid and investment. Soon after his demise in December 2011, his son and successor, Kim Jong-Un, called upon the citizens of the DPRK “to actively do business with China” and “bring in as much cash profit as possible”. As such, the commercial importance of Wihwado and Hwanggumphyong Economic Zone has only increased, raising speculations that it would be turned into the playground of capitalism for North Korea’s centrally-planned and autarkic economy.
The earlier experience of joint development and cooperation in the Rason (Rajin-Seonbong) Economic and Trade Zone showed that neighbouring China was keen on aggressively investing in infrastructure and manufacturing sectors provided they could be guaranteed an upper hand in competition against Russian, Japanese or South Korean investors. China’s access to the East Sea (Sea of Japan) is cut short by the 17 kilometre-long DPRK-Russian border, rendering the industrial base of Jilin and Heilongjing landlocked. On the contrary, the Wihwado and Hwanggumphyong Economic Zone, located at the mouth of the Yalu (Amnok) River, which flows into the Yellow (East) Sea, seems to be a more attractive option for China.
Beijing has once thwarted North Korea’s plans to set up a Special Economic Zone in Sinuiju, where Pyongyang intended to create a new Hong Kong or Macao. The Chinese billionaire, Yang Bin, was appointed by Kim Jong-il as the governor of Sinuiju Special Administrative Region in 2002. That same year the DPRK government enacted a new economic policy on wage and pricing systems based on self-accounting management, known as the “July 1 Measures”. To the North’s dismay, China was not impressed by the prospects of having another Hong Kong on its northeastern frontier and quickly arrested Yang Bin for tax evasion. The message was clear: any development close to China’s borders must be endorsed by Bejing.
This time, Hwanggumphyong and Wihwado Economic Zone is the product of a Sino-North Korean administrative and trade agreement. Even the recent announcement that foreigners would be granted visa-free access and enjoy tax breaks still manages to provide China with full control over the movement of people and capital within its territory. Pyongyang’s official news agency, KCNA reported that, “upon presentation of passports or other equivalent documentation, foreigners and vehicles may enter or leave the zone through the designated route without a visa.” It also promised that “customs duties will not be levied on materials brought into the zone for processing, or on finished goods.” China’s control of the surrounding geography means that Chinese investors and manufacturers will have an upper hand in trade.
North Korea is in no position to bargain. Pyongyang’s dependence on Beijing is growing as international sanctions over its nuclear and missile programmes make it increasingly difficult for the North to access international markets and credit. The impoverished country is striving to revitalise its economy through foreign investment in its economic zones. Since China has already invested about US$3 billion in developing port facilities and roads in the Rason Economic and Trade Zone, Beijing might decide to funnel significant capital to the Hwanggumphyong and Wihwado Economic Zone too. But will this contemporary “Wihwado Retreat” rescue the North Korean economy?
Beijing would love to see Pyongyang follow its example by introducing market-oriented reforms, but North Korea simply cannot come to terms with granting its population the many freedoms necessary to make such a reform successful. Even the Chinese-style reform of the late 1970s required some basic liberties (freedom of movement, information, association, etc.). This is simply impossible in the conditions of an ongoing Korean War, in which North Korean society is continuously fed lies by the regime and inherently fears interaction with the rest of the world, particularly, South Korea. If Pyongyang decides to initiate reform, Chinese-style or otherwise, it would inevitably and quickly lead to the collapse of DPRK’s political regime. Therefore, the very word “reform” is a taboo in North Korea.
The DPRK leadership genuinely wants to modernise the country’s economy but does not want to change its social and political life. Pyongyang is constantly searching for shortcuts that could boost its dysfunctional economy without having to conduct a systemic reform. The new North Korean leader, despite of his young age, is surrounded by conservative older family members and elites who have no visionary plan for developing the country. Setting up tiny special economic zones, which would generate foreign exchange without bringing about any change to the rest of the country, is a preferable way forward. As a result of this half-hearted policy, the ordinary North Koreans will eat and dress better; they might even own PCs and mobile phones, but they will continue to live in the same paranoid state of fear and dependency on the Great Leader’s decisions.
The visa-free regime and tax holidays, which are promised for the Wihwado and Hwanggumphyong Economic Zone, are simply measures to lure a handful of random foreign investors and should not be seen as a sign of change in the economic thinking of Kim Jong-Un. Neither reform nor economic liberalisation is on the cards because either of these would immediately jeopardise domestic stability. The zones of economic cooperation are reluctantly permitted by the North Koreans with apprehension that possible ideological contamination might cost more to the regime than economic benefit.
Given the circumstances of the ongoing inter-Korean conflict, the sustainable development of the North Korean economy is impossible. The regime is locked in a security dilemma and is reluctant to experiment. Only peaceful co-existence and economic collaboration between Seoul and Pyongyang would remove fears and re-build trust. Increased inter-Korean cooperation, where the plentiful resources of the North are complemented by the cutting-edge technologies from the South, is capable of bringing North Korea back from its prolonged socio-economic crisis. Such collaboration would also enhance the powerhouse of South Korea, opening new markets beyond the Military Demarcation Line and linking the trans-Korean railway to the Eurasian continent.
This article can be read in Korean here… 위화도. 황금평 경제개발이 주는 의미는?
This article was also published as “Pyongyang’s newest SEZ just another shortcut” (AsiaTimes On-line, 22 June 2012)