Rason: Time to Be Contrarian on the Contrarians?

September 12, 2012 7:00 AM

My colleague Marc Noland has been tracking the progress of Rajin/Rason for 20 years, so you can imagine a certain fatigue and world-weariness setting in. In a post earlier in the year,  he quoted an assessment he had done with Gordon Flake over 15 years ago that barely needed editing to reflect current realities. Now Geoffrey See's Choson Exchange, one of the handful of outsiders who really know the place, has weighed in with a reserved assessment called “The Honeymoon Is Over” that is required reading.

But evidence provided by Choson Exchange, as well as visits by long-time Korea-hands such as Bernard Seliger of the Hanns Seidel Foundation and other friends, may be telling a different story. Is it time to be contrarian on the contrarians and say that something positive is going on? Here are three reasons why it may be so.

The first step in any investment scheme is realism. Early “plans” for the islands, Hwanggumpyong and Wihwa Island, envisioned literally billions of dollars flooding into the project. This is a bad sign. As we argued in an assessment of the Jang Song Thaek China visit, the Chinese lowered the expectations with a laundry list of must-dos for anything to happen. Pyongyang has to be thinking hard about the trip, in which no less than Wen Jiabao himself publicly called on the new leadership to get with the reform program. See’s report makes clear that the “honeymoon is over” statement refers to the diminished expectations that large-scale investments will flood into the place. But so what? North Korea’s comparative advantage is likely to be largely in smaller-scale export-oriented manufacturing--look at Kaesong, which continues to hum along despite ongoing North-South tensions—or as a wholesale hub.

A second issue is infrastructure. When we set out to examine cross-border trade and investment through firm-level surveys, we were strongly motivated by the property rights literature: that the lack of stable rules were a major deterrent. We did in fact find this. But the assessment of North Korean infrastructure was even more negative than the assessment of North Korean regulation and dispute settlement.

A 2011 report on the zone by Choson Exchange’s Andray Abrahamian noted that banking and communication remained problems; our respondents cited lack of cellphones as the single major issue they faced. According to Seliger, energy  remains “the major stumbling block for Rason.” He provides interesting pictures of the jerry-rigged efforts to keep old equipment running and to generate power through a small solar array. But there have long been rumors that the Chinese might in the end just run power lines to the zone.

But the 2011 Choson Exchange report details a host of infrastructure investments by both Russia and China in road-widening, the rail link, and the port.  The new report leads with the fact that many of the transport projects are now completed or nearing completion. The Russians have been investing in the rail link, the road is now improved, and the Russians  and Chinese have been using the port, although some uncertainty remains about whether the Chinese have signed a lease agreement or not. But these developments suggest that someone other the North Koreans has put reasonable money into the place and may have established at least the physical conditions for it to work.

Basic infrastructure means more opportunities for Rason to connect to real, functioning markets. Seliger’s trip report talks in detail about the Second Rason Trade Fair. Of particular interest is the fact that the fair seemed to showcase mainly foreign sellers, not North Korean ones. But this is good too; Rason might well be a hub for domestic demand that is not being met through state-trading firms going through Dandong. Moreover, Seliger reports lines of Chinese cars headed south via the new improved road. Someone thinks they can make money.

Investment in infrastructure is not limited to the big projects; Seliger also reports a boom in other construction including a 47,000 square meter mixed-use commercial, retail and residential complex, the Rason International Business Trade Center. Curtis Melvin’s North Korea Economy Watch has an interesting feature on the Center, which apparently is going to be appointed in part by the Pottery Barn and Oneida.  Seliger also witnessed fresh investment in housing.

Finally, rules. The Presidium of the Supreme People’s Assembly amended Rason’s laws in January 2010 and again in December 2011. In the end, these laws are less important than actual behavior, but two things are noteworthy. First, the Choson Exchange report—as well as other reports and visits by friends—suggest that the formal structures do grant somewhat greater autonomy to local officials than might have been expected. For example, the second Choson Exchange report notes that “Rason is administered under the Economic Cooperation Bureau, a semi‐autonomous organization under the city government [rather than under the province], but also under the Joint Venture and Investment Committee (JVIC), which is based in Pyongyang. One official stated that 80% of decision‐making is taken locally and 20% in Pyongyang.” Provinces have strong incentives to forge links because they are less concerned  about the control issues that motivate the central leadership; we know, for example, that the provinces and local governments played a leading role in both the Chinese but particularly the Vietnamese reforms.

Second, at least on paper the legal changes of 2011 appear to be an effort to accommodate Chinese sensibilities, which is exactly what must be done to exploit the zone’s otherwise-unappealing location.

As we have said in our analysis of the reform process more generally, they will be gradual, experimental and not cleave to the Washington consensus model; what we are hoping for is something along the lines of a mixed Chinese path. But the combination of lowered expectations, investment in infrastructure, and North Korean efforts to devise a workable legal structure may be the first steps toward a Kaesong near the Chinese border. Indeed, given the particular sensitivities to South Korean penetration, Rason is likely to be more free-wheeling than its South Korean counterpart, not less.

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