Five things to consider if North Korea opens its economy - Global Trade Magazine
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  July 20th, 2018 | Written by

Five things to consider if North Korea opens its economy

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  • North Korea is one of the world’s most isolated countries.
  • The majority of North Korea’s 25 million residents are impoverished.
  • North Korea GDP per capita is among the lowest in the world.
  • Given Trump’s unpredictable approach to foreign policy, US sanctions could be lifted any day.

Upon his return to the United States after his summit meeting with Kim Jong-un of North Korea, President Donald Trump sent out a triumphal tweet that included the line, “North Korea has great potential for the future!”

If the president is referring to North Korea’s economy, that’s probably an exaggeration. The potential is hard to see.

North Korea is one of the world’s most isolated countries ruled by an untrustworthy dictator whose family has kept a tight grip on the economy for decades. The majority of its 25 million residents are impoverished, and its GDP per capita—estimated at anywhere between $700 and $2,000—is among the lowest in the world.

Still, there signs that Kim wants to move forward economically and lift the country out of crushing poverty. He just completed his third visit to China, which has engineered a remarkable economic turnaround that only began in the 1970s. The summit with Trump could lead to the lifting of economic sanctions against the country. So, it makes sense to discuss a more economically open North Korea. Given President Trump’s unpredictable approach to foreign policy, US sanctions could be lifted any day.

Here, then, are five things to consider if you would like to explore doing business in North Korea.

North Korea lacks the regulatory framework needed for business to be done easily and rapidly in the country. Companies that expand into new international markets want to be confident in the business rules and regulations, especially involving payroll, accounting and taxes. There are no such rules in North Korea. Foreign investment has been done through piecemeal agreements with the Kim regime.

TMF Group issues a compliance complexity index that ranks 84 jurisdictions according to their complexity for corporate compliance. The countries we assess each present a level of risk, opportunity and desirability. North Korea is not even on the list. It’s nearly impossible to evaluate North Korea’s risk or compliance environment, because it has a state-run economy shrouded in secrecy. A framework for foreign investment must be established that isn’t subject to change at the whims of a dictator.

Totalitarian regimes bring a lot of political and compliance uncertainty. There is also uncertainty around the economy itself. North Korea has history of reneging on contracts and seizing assets.

For example, South Korea had two major projects in North Korea: the Mount Kumgang resort complex and the Kaesong Industrial Park. When a South Korean tourist visiting the mountain resort was shot and killed in 2008 by a North Korean soldier after wandering into a military area, South Korea stopped all tours and North Korea took control of the resort, which was built by Hyundai.

At the industrial park in Kaesong, South Korean companies opened factories to produce everything from toys to textiles, using North Korean labor. South Korea shut down the complex in 2016 after accusing North Korea of taking workers’ wages to fund its arms program. The North seized the factories and didn’t allow the factory owners to retrieve equipment and inventory.

These incidents have contributed to a general distrust of the North Korean regime, and until this distrust evaporates—which could take time—many businesses are wary of investing.

While its citizens are poor, North Korea is rich in mineral deposits. The raw materials include iron, coal, limestone, graphite and rare metals that nearby countries need to make smart phones and other high-tech products. Minerals account for about half of North Korea’s export volume to China, its largest trading partner.

I expect, however, that the current regime would not be eagerly open to the idea of foreign entities coming into the nation to drain natural resources. A foreign investor will have to strike a delicate balance of helping a country tap its bounty of raw materials without looking like a colonial power stealing its wealth.

North Korea’s infrastructure is in desperate need of investment. The country can barely keep the lights on. Its railway system is aging. The country’s road system is limited and unpaved. Private cars and trucks are scarce. The country’s airports and ports need to be modernized.

A system of basic improvements may be needed to tempt companies, or investment packages must be structured so that investors organize such upgrades themselves. Private industry in South Korea, for example, teamed up with North Korea’s cheap labor to bring jobs and manufacturing to its neighbor.

There are parallels to Cuba and China, with China being the example of how to successfully transform from an inefficient, inward-looking economy to one of the world’s largest trading nations. China’s gradual economic transformation began in 1978 with the reform of its agricultural sector. The success of its agricultural changes helped support reforms in other areas, including foreign investment, entrepreneurism and privatization.

China and Cuba both recognize the essential contributions that international firms can make to their economic development. But Cuba has been slow to adopt complementary reforms required to make an attractive business climate. One of the challenges we’ve seen with Cuba is that you don’t pay the employees directly. Rather you pay the state, then the state pays the employees, which is inefficient and creates opportunities for corruption. Even companies that recognize the benefits of foreign investment can still be slow to make the changes necessary to attract it.

I do see Kim trying to open the economy in coming years because North Korea relies on China for almost all its trade. Kim desperately needs to diversify the country’s economic partners and grow its trade volume if his goal is to improve the lives of the country’s people. However, he first has to demonstrate that North Korea is a stable place for investors.

Jason Gerlis is head of Americas at TMF Group, a global consultancy with 7,000 employees across 80 countries that advises businesses how to best navigate global business expansion and global current events like NAFTA and China-US trade negotiations.