Academic journal article North Korean Review

Reasons for Investing in North Korea

Academic journal article North Korean Review

Reasons for Investing in North Korea

Article excerpt

Introduction

Assistance from the United States to North Korea has fallen sharply over the past few years, as shown in Table 1. Food aid has been scrutinized due to restrictions on donor agencies by the North Korean government. Furthermore, the two most important donors of food aid to North Korea, South Korea and China, have little or no monitoring system in place (Manyin, 2006). This may explain why, in the summer of 2005, the North Korean government announced that it would no longer need humanitarian assistance from the United Nations, the primary channel for U.S. food aid.

Furthermore, the United States, its allies, and the United Nations have increasingly imposed tougher economic sanctions against North Korea in recent years, as the communist country has developed more advanced weapons of mass destruction. On September 12, 2005, the U.S. Department of the Treasury designated Banco Delta Asia (BDA), a bank in Macau at which North Korean entities maintained accounts, as a "primary money laundering concern" and proposed rules to restrict U.S. financial institutions from engaging in financial transactions with it. On October 9, 2006, North Korea set off its first nuclear test. The UN Security Council voted unanimously on October 14 to slap North Korea with trade, travel, and other sanctions as punishment for its claimed nuclear weapons test.

To overcome economic problems caused by falling humanitarian assistance and economic sanctions, North Korea has worked very hard in recent years to improve the business climate for foreign companies and individual investors, in an effort to boost its sagging economy. Although the improved business climate by itself is not sufficient reason for doing business, it is a necessary ingredient for business relations. No external investors or traders will do business with North Korea or any other country unless reasonable opportunities exist for making money.

Evidence indicates that Pyongyang will continue to improve its business climate so that foreign companies and investors can make money in this impoverished country. If the business climate in North Korea continues to improve, as expected, several reasons surface for doing business with the country. First, in July 2002, North Korea introduced the most significant liberalization measures-called "the July 2002 Economic Reform"-since the start of communist rule in 1948. Second, the denuclearization agreement of February 13, 2007, is expected to lead to the easing of a number of stringent economic sanctions against North Korea imposed by the United States, its allies, and the United Nations. Third, North Korea has recently established four special economic zones as its survival strategy. Fourth, there are a number of favorable factors for foreign investment in North Korea.

The July 2002 Reforms in North Korea

On July 1, 2002, North Korea carried out an all-out reform of its economic system in order to manage its economy better. Given the drastic changes in the economic management prescribed by the government in the internal document sent to state bodies at all levels on June 1, 2002, the "North Korean style economic reform" is expected to have an enormous impact on not only the economy but also the regime itself. The comprehensive initiative toward practical and decentralized policies for economic recovery was indeed a historic decision for the socialist country, which had adhered to its inflexible centrally planned economic policies despite the worst economic crises ever in food, foreign currency, and energy in the years following 1995.

Five years have now passed since North Korea introduced its historic economic reforms, and there are already signs that the reforms have improved the country's economy and investment climate (Nam, 2007). First, the overall price increase of all products has given the masses a "new recognition of money." Although prices have soared 18 times higher on average, wages have been raised discriminately, according to the different occupations. …

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