Monday, 14 January 2013

NORTH KOREA: '' Economic Opening'': A game Changer opportunity

Pyongyang may be preparing to open up its economy. A report in a prominent newspaper claims the regime has enlisted the economic experts and legal experts to lay the groundwork for foreign investment in North Korean companies. The move could be made as soon as this year.

North Korean leader Kim Jong Un's New Year's address was the most obvious indication that he is prepared to embark on a path different from the one followed by his father, Kim Jong Il. Indeed, even holding such an address was a departure; it marked the first such speech by a North Korean leader since Kim Il Sung held the last one in 1994.

It is believed  that the country is primarily interested in modernizing its laws relating to foreign investment. However, North Korea is not intending to follow the Chinese model, which called for the creation of special economic zones for foreign investors. Rather, they are interested in the Vietnamese model, in which specific companies were chosen as recipients of investments. The country's leadership is in favor of opening up the country to investments from Japanese, South Korean and Western companies.

Such a move would be revolutionionary for North Korea , which has long been largely cut off from the rest of the world by virtue of its heavy-handed regime. The country's economy is in a shambles as a result. But since Kim Jong Un took over from his late father just over a year ago, there have been signs of change.

Rare earth metals can be a game changing bonanza for North Korea. In the end, the North Korean government must determine if the minerals will be a lever to shift political relations in the region, or if it will continue to sell its most valuable asset at a discount.

If North Korea is willing to create conditions for investment, its supply of rare earth metals and its rich mineral sector have tremendous transformative potential. Rare earth metals are highly attractive to Taiwan and Japan, and could override some of the political issues blocking the development of relations between the states. This could change the regional power dynamic in Northeast Asia as North Korea becomes a hub for investment from China, Japan, South Korea and elsewhere.

Rare earth metals are used in the construction of everything from iPods to precision guided missiles. China currently produces more than 95% of the world’s output of these metals. China’s control over these minerals has regional implications for Northeast Asia. For example, in 2010 Japan alleged that China suspended its export of the minerals to Tokyo in response to a territorial dispute between the two countries. The EU, U.S., and Japan also recently brought a case against China at the WTO for unfairly inflating the prices of these minerals.

Beyond the metals, North Korea is known to be a rich source of many minerals including gold, zinc, magnesite, and others. North Korea is dependent on these minerals to support its economy; in previous years as much as 58% of North Korea’s exports were from the mineral sector.

Although these resources represent significant potential export wealth, North Korea’s mineral sector is underdeveloped, and what is produced is sold at a discount. It is estimated that, on average, North Korean mines operate at less than 30% of their capacity. Many mines need to be rehabilitated and lack a reliable power supply. Much of the equipment dates back to the cold war, and is no longer made, let alone used, outside of the North. Other mines were damaged during the environmental collapse of the 1990, and have not yet been reclaimed. North Korea lacks the resources to redevelop these mines domestically; it is dependent on foreign investment to increase mineral production.

China is currently the biggest player in the North Korean mineral market, and the costs it pays for these resources reflect this lack of competition. From the South Korean perspective, however, the Chinese are buying up a resource that belongs to the Korean people at far less than it is worth. South Korea’s mines are largely depleted and it would greatly benefit from access to the North’s mineral sector, particularly the rare earth metals.

Mineral development is generally a multi-generational undertaking. Companies invest with a plan to develop a site, work it for many years, and then close down operations. This means that companies looking to invest in the North Korean mineral sector are wagering that the North Korean state will remain committed to that investment for the lifetime of the project, something that is far from certain given North Korea’s historical ambivalence toward foreign investments. There is also a risk that companies that partner with North Korea might find themselves subject to UN or state-level sanctions.

Finally, if a company should invest in North Korean mining, it should expect to have to fund major infrastructure upgrades to make that development possible. Roads or rail tracks have to be rebuilt, diesel generations have to be imported to power mines, transport equipment needs to be provided, and the mines may have to be rehabilitated.

Although companies may find the North Korean mineral sector too risky to invest in, NGOs and aid organizations may take this as an opportunity for engagement. Sustainable development of the mineral sector and environmentally safe mining techniques are training opportunities to build scientific and technical collaboration with North Korea and lay the groundwork for positive outcomes in the future. Furthermore, training can play a role in acclimating the North Koreans to the expectations that foreign investors will have.

Unless it reforms its economy, the benefit of these projects is not likely to go to the North Korean population and be used to develop the state. It is not the availability of resources that determines a country's prosperity; it is its ability to effectively leverage those resources in the international marketplace that is essential for economic success.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist
Researcher and Author