Capitalism Holds The Key To Success In The ‘Kingdom’ North Korea Is Seeking Greater Foreign Investment As The Isolated State Succumbs To Market Forces

Capitalism Holds The Key To Success In The ‘Kingdom’ North Korea Is Seeking Greater Foreign Investment As The Isolated State Succumbs To Market Forces

http://www.telegraph.co.uk/ finance/globalbusiness/ 11383204/Capitalism-holds-the- key-to-success-in-the-Kimdom. html

By Andrew Salmon, in Seoul

7:58PM GMT 01 Feb 2015

Bold entrepreneurs seeking the world’s last business frontier need look no further than North Korea – a nation which, defying its pariah-state reputation, is increasingly capitalistic and seeking foreign investment.

“There are lots of opportunities at the small and medium level,” James Min, a vice-president of DHL, which operates in Pyongyang, told a conference at Kyungnam University in Seoul. “But big investments are contingent on political developments.”

Big international brands are holding back due to potential reputational risk and complex international sanctions. This leaves the field to Chinese companies, who make up the bulk of North Korea’s investors and who did $6.39bn (£4.24bn) worth of business in 2014, and to South Korean firms, restricted to a fenced-off enclave at Kaesong, north of the demilitarized zone.

Even so, a few western entrepreneurs and consultants are venturing into North Korea’s $48bn economy.

“Venture capitalism is where three out of 10 projects might be profitable,” said Seoul-based Briton Tony Michell, who established Pyongsu, a profitable Swiss-North Korean joint-venture pharmaceutical firm that sells to aid agencies. North Korea, he continued, represents, “adventure capitalism – where maybe one of 10 might be.”

Barriers are formidable. Would-be investors must first ensure they are sanction-compliant: UN embargoes include weapons, dual-use technologies, luxury goods and certain financial services, while forbidding interaction with blacklisted organisations and individuals. Nations including Japan, South Korea and the US have additional sanctions.

Firms must then secure a local partner, navigate an opaque bureaucracy and operate via crippled infrastructure – power outages, a poor rail network and crumbling roads. They must master communication challenges, for few North Koreans are allowed internet access and foreign phones do not interface with the local mobile network.

North Korea is better known for its military rather than its commercial opportunities
Banking is also problematic. “As soon as you send money to or from North Korea, you trip wires with the US Treasury, which can damage your financial health,” said Michell, who suggested operating in “exotic” currencies.

Natural resources include coal and gold, but Dutch businessman Paul Tjia advises Europeans to investigate knitted clothing and IT. Tjia, who also operates in China, the Philippines and Bangladesh, said that North Korean textile plants were clean and spacious, while the country’s workers were highly skilled, and its wages Asia’s cheapest.

IT is even more promising. Tjia praised North Korean skills and diligence, recalling a European university seeking to digitize its Latin archives. Only North Korean workers were willing to teach themselves the language and do that job, he said.

He added that North Korean software engineers have designed Islamic banking systems for a Middle Eastern bank, and offer (perhaps inevitably) special skills in security software. They are also skilled animators, doing work for European and Chinese firms.

But can a company operate in North Korea with a clean conscience, given that at least some revenue flows to one of the world’s blackest dictatorships?

Briton Simon Cockerell, director of Beijing-based Koryo Tours, which has been taking tourists into North Korea since 1993, insists that tourism supports thousands of North Korean jobs and extends human contact to the deeply isolated state.

“Westerners have negative views of North Koreans and North Koreans have negative views of Westerners,” he said. “When tourists go on picnics or play football with North Koreans, I’d consider that a net gain, and I think people should strive to do these things.”

Despite a perception that North Korea is “communist” or “Stalinist,” the country today is de facto capitalist.

Pyongyang’s state distribution system imploded amid catastrophic famines in the 1990s, leading desperate citizens to seek cross-border trade with China and open survival markets. Primitive, market-based capitalism now extends across the “Kingdom;” defectors estimate most North Koreans rely upon markets, rather than state handouts.

These changes are reflected in Pyongyang, where the elite – some 10pc of its 25m population – are increasingly embracing capitalistic behaviors, with booming markets, fashionable citizens and electronic gadgetry.

The capital holds an annual international trade fair, welcomes European trade delegations and hosts three foreign law firms; the first was established by a Scot, Mike Hay, in 2004.
Official policy is belatedly following these trends. Pundits point to two key reforms being cautiously enacted under Kim Jong-un, who took power in 2012.

One is the opening of special economic zones (SEZs) which offer preferential land leases and tax regimes to foreign investors; there are 24 nationwide. The other is experimental policies freeing farms and factories from state control and permitting them to keep percentages of revenues as profits.

Briton Andray Abrahamian, who heads Chosun Exchange, an NGO providing business training to would-be North Korean entrepreneurs, is bullish on Pyongyang’s pro-business path and urges active international support, instead of the free world’s current “strategic patience,” which anticipates a North Korean regime collapse.

“This policy is being implemented very quietly; at what point will they have enough success that they won’t be able to undo these reforms?” he asked. “I want to see the North Koreans more comfortable with experimenting.”

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