Absence of Modern Institutions a Drag on the North Korean Economy

Marcus Noland (PIIE)



Ploughing through the six linear feet of mail that had accumulated on my desk, I came across a very interesting paper by Wang YaoHui, “Investing in the World’s Most Isolated Country: Challenges Faced by Chinese Private Investors in North Korea,” in the North Korea Review.  The paper, based on interviews with 60 Chinese private investors, businessmen, officials and smugglers in the border region between 2014 and 2016, can be read as an update and complement to an earlier formal survey of Chinese firms that Steph Haggard and I conducted (here and here). The main takeaway is that the absence of modern institutions continues to limit cross-border exchange and imposes costs on North Korea. The country could integrate with the rest of the world on better terms if it strengthened its institutional framework.

As did the Chinese firms in our earlier survey, Yao’s respondents indicate that infrastructure problems pose a significant barrier to doing business in the DPRK. The lack of reliable electricity is a first-order problem with 96 percent of the investors describing the problem as “very severe.” Yao reports that many Chinese businessmen pay bribes for preferential access to power, yet even with bribery and the importation of generating equipment, the electrical supply is inadequate. (And either our respondents were real pikers, or things have gotten worse: we found bribe costs accounted for about 10 percent of revenues; Yao’s interviewees were devoting 30-37 percent of revenues to bribery!) One respondent whose seafood processing facility failed because of power supply problems responded by shifting into import-export. In fact, because of the power problems, the seafood processors have largely chosen to simply import the raw seafood for processing in facilities located in China. Paralleling our own findings, Yao concludes that the impact of the infrastructure and bribe problems has been to discourage investment in North Korea in favor of less exposed trading activity. 

The country could integrate with the rest of the world on better terms if it strengthened its institutional framework.

Yet even trading is not without its risks: Yao reports that accounts of Chinese businessmen being defrauded by their North Korean counterparties are common. Language and culture seem to matter: ethnic Korean Chinese from the border region appear to navigate the North Korean business environment most successfully, followed by Han Chinese from the border region, with Han Chinese from southern China encountering the most problems. Yao reports that many of the non-local Chinese businessmen are forced to rely on partners from the border region and that the incidence of locals defrauding out-of-towners, sometimes in cahoots with the North Koreans, is on the rise. And contrary to the prevailing myth of the guiding state, the Chinese government does little to support these firms. 

Given the lack of internal competition, if one can avoid such mishaps, Yao finds, just as Steph and I did in our earlier work, that Chinese firms can earn super-normal profits in North Korea. It’s the ultimate frontier economy with lousy infrastructure and no real protection of property rights or rule of law. That might be good for savvy Chinese businessmen, but it is a burden born by the people of North Korea, whose economy is less globalized, and on worse terms, than it would otherwise under more enlightened leadership.

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