From Hermit Kingdom to Open for Business

Developing a Blueprint for North Korea's Economic Development

by Krishna B. Kumar, Troy D. Smith, Diana Y. Myers, Timothy R. Gulden, Noah Johnson

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Research Questions

  1. When the situation in North Korea becomes conducive to foreign investment and development, what will the country's greatest economic needs be?
  2. Which economic sectors offer the best chance for North Korea to kick-start its development?
  3. What lessons from history can the country learn, especially from the development paths of other countries?
  4. What are the conditions under which foreign capital is likely to flow into North Korea?
  5. Given the large-scale need for reforms, which ones should be prioritized?

It is difficult to guess when the situation in North Korea will become conducive to foreign investment and development. When it does, however, the country will need to find a path for economic development. The authors describe such a blueprint using foreign investment as an organizational framework, basing their roadmap of recommended reforms on an assessment of North Korea's current socioeconomic conditions; identification of priority sectors based on need and where the country might have a comparative advantage; lessons from the development trajectories of Vietnam, China, South Korea, Poland, Russia, and India; and existing investment frameworks adapted to North Korea.

Key Findings

  • The sectors that need early attention to kick-start North Korea's economic development are agricultural production, mining, light manufacturing, electricity, and transportation and logistics.
  • Attracting foreign investment is critical for structuring economic reforms in North Korea.
  • Improving special economic zone (SEZ) operability and developing a dispute settlement framework will attract investment from neighboring countries.
  • Understanding reforms that worked well in comparison countries, such as Vietnam, China, South Korea, Poland, Russia, and India, would allow better application of existing investment frameworks to North Korea, setting the stage for an examination of reforms needed for investment to flow into the country.
  • If North Korea takes the necessary steps to join the International Monetary Fund (IMF), the World Bank, the World Trade Organization (WTO), and other international financial institutions (IFIs), it will be able to access development capital and obtain technical assistance.

Recommendations

  • North Korea should improve SEZ operability and develop a dispute settlement framework to attract investment from neighboring countries in existing facilities.
  • North Korea should take the necessary steps to join the IMF, the World Bank, the WTO, and other IFIs to access development capital and obtain technical assistance.
  • North Korea should make improvements in infrastructure and electricity.
  • North Korea should use international investment agreements as a stepping stone to developing a full-fledged national investment law to induce investment from developing and developed country multinational companies.
  • North Korea should recognize Jangmadang (informal markets) as legal. Regulating them lightly will further unleash this entrepreneurship and will allow broader-based economic development rather than a concentration of economic activity within the SEZs.
  • North Korea should undertake national investment laws for investor protection to improve governance and to attract foreign direct investment.
  • North Korea should build skills for value chain development; improve access to finance, technology, and markets; and address inequality.
  • North Korea should take caution from the Russian example and mitigate issues of potential government corruption to prevent an oligarchy from emerging in North Korea.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    An Assessment of North Korea's Economic Landscape

  • Chapter Three

    Eye in the Sky: Tracking SEZ Activity Using Satellite Data

  • Chapter Four

    Priority Sectors to Target

  • Chapter Five

    Lessons for North Korea's Development from Other Countries

  • Chapter Six

    Frameworks to Attract Foreign Investment

  • Chapter Seven

    Reform Roadmap: A Synthesis

  • Chapter Eight

    A North Korea Open for Business: Benefits for All

  • Appendix

    Constructing Similarity Indexes

Funding for this research was provided by a grant from the Korea Foundation and by Frederick S. Pardee. The research was conducted by RAND Education and Labor and RAND Social and Economic Well-Being.

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