Special Economic Zones in the DPRK

Originally Published January 2014
Authored by Daniel Wertz

Updated April 2024
Updated by Troy Stangarone

The Kaesong Industrial Complex, via Wikimedia Commons

The Kaesong Industrial Complex, via Wikimedia Commons

Introduction

Since the 1990s, North Korea has periodically attempted to bolster its economy through the creation of special economic zones (SEZs). However, outside of those established with South Korea, they have largely failed to attract international investment or boost the North Korean economy. With the closure of South Korea’s SEZs, the implementation of international sanctions, and the pandemic, the development of SEZs in North Korea has largely stalled.

For a country like North Korea, SEZs can be a good way to begin the process of economic reform. SEZs are specially designated areas where companies do not have to follow the normal rules within an economy. They are often used by transitioning or developing countries to attract foreign direct investment, allow for experimenting with new economic policies before extending them to the broader economy, and help workers and firms gain new skills and technology1. In the case of North Korea, they also allow the regime to limit the population’s exposure to outside ideas while boosting productivity.

 

History of SEZs in North Korea

North Korea’s interest in SEZs dates back to the 1980s, perhaps as early as a visit by Kim Jong Il to China in 1983, and the idea of “open cities” begins appearing in public remarks by Kim Il Sung in 1984. North Korea’s initial attempt to develop an SEZ would not take place, however, until the establishment of the Rajin-Sonbong Free Economic and Trade Zone (later contracted to the Rason Economic and Trade Zone) in the far northeast of the country in 1991. Since the opening of Rason, North Korea has opened an estimated 27 SEZs. These SEZs can largely be divided into two groups. The first group of SEZs include those established prior to Kim Jong Un coming to power in 2012 and were developed with the cooperation of either China or South Korea. The second set, those established under Kim Jong Un, are purely North Korean initiatives without foreign partners2.

North Korea's Initial SEZs

After the establishment of Rason in 1991, North Korea would not pursue any additional SEZs for nearly a decade. In 1998, North Korea began opening to tourists from South Korea at Mount Kumgang3. To handle the influx of tourists from the South, North Korea established the Mount Kumgang Tourist Region in 2002. That same year, North Korea announced plans to establish a special administrative region at Sinuiju, a city near the mouth of the Yalu River. In 2004, it would launch its most successful SEZ, the Kaesong Industrial Complex, an industrial zone just across the border from South Korea.

These initial efforts at developing SEZs were done with support from China and South Korea, which have taken different approaches to investment in North Korea. China’s approach to economic engagement projects with North Korea has been to take a more market driven approach with small firms often taking the lead and preferring trade over investment4. While China has invested in some infrastructure, such as a bridge between Dandong and Sinuiju, North Korea has often lagged in developing the necessary infrastructure on its side5.

In contrast, South Korea’s approach has been much more state driven. South Korea developed the infrastructure necessary for Kaesong, including the necessary roads, water, and sewage treatment facilities. It also provided power from the South Korean side of the border. South Korea also provided incentives for firms to set up shop in Kaesong including low interest loans, political risk insurance, and access to states subsidies available for domestic South Korean firms6.

North Korea’s first SEZ at Rason was established several years after North Korea initially introduced laws allowing foreign investment. Located in the far northeast of the country near the borders with China and Russia, the zone offered an ice-free port which could potentially connect China’s landlocked northeastern provinces to the sea. In 1993, the DPRK designated Rason as a “directly governed city” and issued laws governing foreign investment in the zone. In its first two decades, Rason attracted only a modest amount of foreign investment – reportedly under $150 million from its establishment through 2010, including a Hong Kong-invested hotel and casino catering to Chinese tourists7. The lack of transportation, energy, and communications infrastructure was a major impediment to early investment in Rason, and only recently has this infrastructure deficit begun to be addressed in a systematic fashion8.

In the early 2010s, North Korea demonstrated a renewed interest in attracting foreign investment to Rason, overhauling its administration and deepening its regional linkages. These changes began with Rason’s designation as a “special city” in early 2010 (its previous status as a directly-governed city lapsed in 2004, putting it back under provincial control) 9. The investment laws for Rason were also revised in 2010 and 2012, granting the zone greater autonomy in attracting and managing foreign investments, and establishing a China-DPRK Joint Management Committee to oversee the zone10.

North Korea has also partnered with China and Russia to build the infrastructure necessary for linking the zone to the broader region. In tandem with its 2009 Changjitu plan for developing its northeastern provinces, China began repaving roads in Rason and constructing new railways and roads in its northeastern provinces connecting to the border with North Korea11. Chinese companies have also leased two of Rason port’s three piers12. A Russian company signed a 49-year contract to lease and develop Rason’s third pier in 200813 and a DPRK-Russian joint venture completed construction of a new rail link from Rason to the Russian border town of Khasan in September 201314. In November of that year, the ROK government signed a memorandum of understanding with Russia allowing several South Korean companies to invest in the Russian railway and port project, although such investment has not yet taken place15.

By 2016, reports indicated that China had completed work on transmission towers to provide electricity to Rason16 and North Korean officials claimed that FDI in Rason had risen to $500 million17. However, Rason has faced challenges since. Reports indicate that by 2018 production in Rason had declined due to the implementation of UN sanctions18 and in 2023 North Korea decided to transform portions of the zone into a tourist zone19.

In addition to Rason, North Korea attempted to develop two other SEZs along the Chinese border in the period before Kim Jong Un came to power. In 2002, North Korea granted an unprecedented degree of independence to a zone in Sinuiju and put a Sino-Dutch businessman, Yang Bin, in charge. However, shortly after Sinuiju’s new status was announced, Bin was arrested in China over tax fraud and plans for the zone fell by the wayside. In 2013, a second attempt was made at developing an SEZ at Sinuiju and it was rebranded the Sinuiju International Economic Zone20. The project has largely languished, but there were indications early in the pandemic that North Korea was preparing to finish the infrastructure on its end and satellite imagery suggests they will move forward with the project in 202321.

The last SEZ to begin development along the Chinese border prior to Kim Jong Un coming to power is the Hwanggumpyong and Wihwa SEZ. In 2011, North Korea and China announced plans to jointly develop new special economic zones on Hwanggumpyong and Wihwa islands, two largely undeveloped sites in the Yalu River estuary. In an August 2012 meeting between North Korea’s Jang Song Taek and Chinese Minister of Commerce Chen Deming, the two sides signed agreements on administrative and infrastructure cooperation at the two island zones and Rason22. The SEZ was classified under North Korea’s developer enterprise law where the companies operating in the zone are responsible for the development of infrastructure and North Korea provides the labor. This is similar to the arrangements at the Kaesong Industrial Complex. While designed for light manufacturing, only trading offices have been established23. Though prior to the pandemic, China promised to build access roads to the New Yalu Bridge for the zone and to provide support for the zone’s construction24.

The two Koreas have also established two joint economic zones in the North, the Kaesong Industrial Complex (KIC) and the Mount Kumgang Tourist Region. The KIC was North Korea’s largest SEZ until its closure in 2016 in response to a North Korean long-range missile and nuclear weapons test25, while the resort at Mount Kumgang was closed in 2008 after a North Korean soldier fatally shot a South Korean tourist26.

While Kaesong remains closed, at its height in 2015 the KIC housed 125 companies, including one German firm27, employing 54,988 North Koreans with production valued at over $560 million.28

Initially endorsed by the two Koreas during the first inter-Korean summit in 2000, KIC was meant to develop in three phases, eventually employing more than 350,000 North Koreans on a 5,000 acre campus surrounded by a joint economic and tourism zone. However, the KIC stalled in its first phase. During the 2007 Summit between ROK President Roh Moo Hyun and DPRK leader Kim Jong Il, both pledged to complete the first phase of construction and begin the second phase, as well as to build new transportation infrastructure linking the two Koreas29. They also discussed opening another SEZ in Haeju, near the coast along the disputed inter-Korean maritime border30. However, none of these initiatives were realized, and Kaesong never expanded as originally envisioned.

The Mount Kumgang Tourist Zone, which opened in 1998 with investment from an arm of the Hyundai group[TS1] , is another inter-Korean SEZ. Nearly two million tourists, mostly from South Korea, visited the zone, before tours were suspended in 200831. Beginning in 2011, North Korea confiscated South Korean assets at the resort and began bringing tourists from Rajin port to Mt. Kumgang via ferry, but with little success32.

In 2019, Kim Jong Un called the facilities at Mount Kumgang “backward” and “shabby,” suggesting that they should be rebuilt in a modern and coherent style33. However, North Korea did not begin dismantling facilities at the Mount Kumgang resort until 202234.

SEZs Under Kim Jong Un

In contrast to the SEZs planned and developed before Kim Jong Un came to power, those since 2013 are solely North Korean initiatives and for the most part have a focus on a specific economic sector. For example, the zone in Unjong on the outskirts of Pyongyang is a high-tech zone affiliated with the State Academy of Sciences, while the Kangryong International Green Model zone in South Hwanghae Province focuses on sustainable agricultural development utilizing clean energy technology.

Other SEZs established under Kim Jong Un focus on light industry, chemicals, agriculture, the mining industry, and tourism. In the case of tourism, the Mount Kumgang Tourism Zone has been folded into the Wonsan-Mount Kumgang International Tourism Zone and groups together tourist and cultural sites in Kangwon Province35.

There is little indication that North Korea’s newer SEZs, however, have been able to attract investment. According to data from the United Nations Conference on Trade and Development, North Korea as a whole only attracted $120 million in FDI in 2013 and has seen FDI largely come to a halt due to UN sanctions.

Subsequent UN sanctions have inhibited North Korea’s ability to attract additional FDI, but an uncertain business environment plays a role as well. Egyptian firm Orascom is the most significant foreign investor in North Korea. It invested an estimated $200 million developing a 3G network in North Korea36, but was unable to repatriate an estimated $400 million in profits37.

 

Sanctions Constraints on North Korean SEZs

Sanctions are a constraint on North Korea’s efforts to develop SEZs. In response to an accelerated pace of nuclear weapons and ballistic missile tests under Kim Jong Un, the UN put in place a series of sanctions beginning in 2016 that inhibit North Korea’s ability to engage in a wide range of financial and economic transactions.

In the case of special economic zones, which are often designed to attract foreign investment and export goods produced, the UN sanctions - in addition to prohibiting the establishment of new or maintenance of existing joint ventures in North Korea38 - are particularly restrictive to the financial infrastructure needed to develop SEZs. The resolutions prohibit states from providing public or private financial support for trade with North Korea39, the use of financial services or the transfer of assets to include bulk cash40, and require the closure of bank representative offices and bank accounts in North Korea40.

In addition to inhibiting the financial infrastructure needed for the development of SEZs, many of the potential exports of North Korean SEZs are prohibited. These include machinery, electrical equipment, textiles, agriculture products, and seafood41.

In addition to UN sanctions, the United States and South Korea also maintain sanctions on North Korea that would inhibit the development of SEZs. In 2016, the United States designated North Korea a jurisdiction of “primary money laundering concern.” Under the rules issued by U.S. Department of the Treasury’s Financial Crimes Enforcement Network, U.S. financial institutions are prohibited from engaging in transactions with North Korea and required to engage in due diligence to ensure that North Korea does not gain improper indirect access to U.S. accounts42. As transactions in Kaesong were conducted through the bulk transfer of U.S. dollars43, the KIC would face both U.S. and UN financial prohibitions. In practice, since most global transactions are conducted in U.S. dollars44, North Korea faces both UN financial sanctions and a prohibition on the use of the U.S. dollar.

South Korea, which ran North Korea’s most successful SEZ in North Korea, also has sanctions that would limit its ability to engage in SEZs outside of the KIC and Mount Kumgang. After the sinking of the Cheonan by North Korea, South Korea prohibited all trade and investment outside of those two projects. Though, the Moon administration suggested in 2020 that those sanctions were no longer in effect despite not being repealed45. The legal status of these sanctions would need to be resolved, in conjunction with UN sanctions, before South Korea could consider new investments in North Korea.

However, despite UN sanctions, Russia has demonstrated an increasing willingness to engage with North Korea economically. Shortly after the summit meeting between Kim Jong-un and Vladimir Putin in September 2023, Russian and North Korean officials met to discuss deeper economic cooperation46. There has also been reporting that economic activity between Russia and North Korea has increased since the summit47. In the near term, Russia may be the most likely partner for future investments in North Korean SEZs.

Graphics designed by Faith Quist, Communications Intern at the Korea Economic Institute. 

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