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Without sponsors, can North Korea grow?
China’s disapproval, Western outrage, Russia’s economy give Pyongyang few investment options
December 29th, 2014 Andrei Lankov
On the surface, the year 2014 has been relatively uneventful for North Korea. No member of the ruling family was purged and subsequently executed, no American city has been threatened with a missile attack and, of course, no South Korean warships have been sunk by plucky North Korean submariners.
However, this was certainly a year of serious, if subterranean, change. Amid comparative calm on the international scene, domestically the North Korean leadership has seemingly embarked upon the long, winding and perilous road of reform. The reformist tendencies of the new leadership should be welcomed but, alas, the international environment is significantly more foreboding now than it was a year ago. Admittedly, the problems that the North Korean government now faces on the international stage are largely of its own making, but a stroke of bad luck also has contributed much to this sorry situation.
The major problem is, of course, with China. Relations between China and North Korea have not suffered such a serious crisis since at least 1992; a time when the Chinese government was normalizing relations with North Korea’s archenemy, South Korea. This year, relations again hit a nadir, and in a telling gesture President Xi Jinping became the first Chinese leader to pay his first official visit to Seoul, not Pyongyang. However, it is the economic dimension of the current crisis in Sino-North Korean relations that is most important.
UNMISTAKABLE SIGNS
A recent visit to the borderlands left the present author in no doubt: the Chinese authorities meant business when, in 2013, they hinted at the possibility of countermeasures against North Korea. The Chinese measures are not openly discussed, but by now the contours of China’s new policy toward Pyongyang are clear. The central government does not mind private trade and investment activities by local administrative bodies and companies, but it has decided to stop subsidizing all major projects related to the development of North Korean infrastructure which were at least partially funded by the central government budget.
The most remarkable example of this new line is the new Dandong bridge on the lower Yalu river. The bridge, designed to become the major conduit of trade between the two countries, is almost complete, but on the North Korean side it ends abruptly just after it reaches the bank. According to rumor, the Chinese side was expecting the North Korean side to build all the necessary road connections to the bridge. Predictably, the North Koreans are dragging their feet; in the past, the Chinese would probably have picked up the tab, but now they seem very reluctant to do so.
Another example is that of the power line going from the Chinese city of Hunchon to the North Korean Rason SEZ (where the electricity supply is quite unreliable). Construction began in 2012, but about a year ago the project was frozen. Therefore, while masts have been installed, no cables are connected.
The list of such frozen projects also includes a railway connection with Rason and some other joint ventures in mining and transport.
One can often hear that these changes in China’s attitude were triggered by two events in 2013: the third nuclear test that February and the purge of Jang Song Thaek that December. Indeed China, as a member of an exclusive club of nuclear powers, was not happy about the test and proliferation in general. Jang’s purge was a serious matter, too: It damaged the ability of Chinese companies to operate in the North Korean environment where connections to the right people are vital to survival. Indeed, this is something that the present author has heard from many Chinese companies.
A COMPLICATED RELATIONSHIP
Nonetheless, things are probably not quite simple as they may initially appear. Whatever the media might sometimes say, there has never been much love and solidarity between Pyongyang and Beijing; the relations between which have, even at the best of times, been a marriage of convenience. Indeed, Beijing needs a stable and divided Korean Peninsula, preferably with a reasonably friendly, or at least anti-American, regime controlling its northern part. This is geopolitics, pure and simple, and one could reasonably expect that such strategic considerations will be overcame by any ideological problems and petty business concerns. We have seen this a number of times, and there are good reasons to expect that reconciliation between the two sides will occur again. However, it has not happened yet.
It seems that the North Korean side also exacerbated tensions in its relationship with China. Indeed, the last few years have been marked by a number of completely unnecessary provocations by North Korea against its giant neighbor. These include, for example, a direct critique of the allegedly unequal agreements concluded by purged Jang with a “foreign power” everybody understood to be China. Also, one can mention the confiscation of the iron ore mine that was operated by the Chinese Xiyang group and, generally speaking, the much harsher treatment of Chinese investment in North Korea.
Of course, it is easy to be an armchair strategist, since there might be some valid reasons that lead North Korea to distance itself from China. However, one cannot avoid the impression that this attitude is driven not so much by cool-minded calculations, but rather by the young leader’s disgust for things Chinese and his inflated estimates of his own country’s abilities and potential, as well as by his misplaced belief in the possible substitutes for Chinese investment.
Recently, hopes for an alternative to China have suffered a major blow, and one might expect another bitter disappoint to be just around the corner.
INTERVIEW FALLOUT
The blow is none other than the current standoff with the United States that resulted from the hack at Sony Pictures. On the one hand, North Korea’s outrage over the film, The Interview, is understandable: after all, the assassination of a real life person is not something to be glamorized in movies. It is possible that the hacking raid looked like a completely reasonable and justified response (frankly, the present author is quite sympathetic to such an opinion).
However, the U.S. side is taking the situation very seriously, and with good reason: cyber warfare is considered to be a growing threat worldwide, and if the U.S. government did not respond, this would be taken as a sign of weakness and potentially would set a dangerous precedent. Therefore, one might expect a new round of sanctions, including sanctions related to North Korean overseas financial activities – the only kind of U.S.-imposed sanctions liable to have any significant consequences for the North Korean economy.
“The Interview Affair” can be understood as a stroke of bad luck because all participants were acting in their own interests, but the general outcome is highly unfavorable for both the North Koreans and Sony.
So far, it seems that North Korea has pinned its hopes on Russia. But such hopes are rather misplaced. Even before the current financial crisis in Russia, it was widely understood by outside observers (though obviously not by the North Korean foreign policy establishment), that Russia is not interested in playing fairy godmother for their one-time satellite. Russia is happy to engage real business, so long as profits come soon and risks are low. Contrary to North Korean hopes, though, Russian companies and the Russian state have no desire to invest in long-term projects with uncertain outcomes, let alone provide North Korea with aid for its anti-American rhetoric. Needless to say, the ongoing collapse in the value of the rouble will make the prospects for investment in the North grimmer still.
However, the North Korean side, finally serious about reform, is badly in need of foreign investment. They can improve their agriculture by introducing de facto private ownership of land; they can also improve the legal situation for business and de facto private commerce. But they can do very little about their dilapidated and anachronistic infrastructure. Unfortunately, their major potential investor China has become remarkably hostile, and another crisis in relations with the West could not come at a worse time.
