Special Economic Zone

A Special Economic Zone (SEZ, 경제특구/經濟特區) is a geographical region which are oriented to free trade and fee economic activities by law. So nationwide laws are suspended inside such special economic zone. The category 'SEZ' includes Free Trade Zones (FTZ), Export Processing Zones (EPZ), Industrial Parks (IP), Free Ports and others. Usually the goal of a structure is to increase foreign direct investment (FDI) by foreign investors.

In South Korea, it is called the Free Economic Zone (FEZ, 경제자유구역/經濟自由區域). FEZs were designated by law to facilitate foreign investment, and thereby to strengthen national competitiveness and seek balanced development among regions by improving the business environment for foreign-invested enterprises and living conditions for foreigners.

It is believed that China has been successful in introducing SEZ systems like Shenzhen to open the Chinese economy. So North Korea has been eager to learn and follow the China's SEZ model.

Key words
special economic zone, Rajin-Sunbong, Geumgang Tourism Zone, Gaeseong Industrial Complex

Success and failure of SEZs in North Korea
In 1984, referring to the successful precedents in China, North Korea enacted the Contractual Joint Venture Act to induce foreign capital only to fail. In December 1991, North Korea tried to follow suit of Chinese special economic zones like Shenzhen by establishing Rajin-Sunbong (abbreviated to "Rasun") as its first SEZ. Contrary to its expectation, Rasun SEZ failed to attract foreign investors even though the North Korean authorities allowed a considerable part of market economy system in the Rasun area.

In 2002, North Korea established again the Sinuiju Special Administrative Region in September, the Geumgangsan Tourism Zone and the Gaeseong Industrial Complex in November, respectively in accordance with the relevant SEZ acts. The Sinuiju SEZ proect fizzled out after its initiator Yang Bin was arrested by the Chinese authority on accout of large amount of tax evasion.

But the Geumgangsan Tourism Zone and the Gaeseong Industrial Zone were constructed by South Korean companies including Hyundai Asan and the Korean Land Corporation. Upon completion, these two SEZs contributed to the North Korean economy by attracting stable hard currency cash flows from investors and tourists largely from South Korea. Though the Geumgangsan Tourism Zone was abruptly shut down after a Korean tourist was shot dead by a North Korean soldier in July 2008, the Gaeseong Industrial Zone has survived a number of geo-political issues. As of September 2012, a total of 121 South Korean companies which employed more than 53 thousand North Korean laborers were in operation.

In the early 2012, Hwangeumpyeong (황금평) district in the Yalu near Sinuiju was designated as a new SEZ exclusively for Chinese investors.

Prospects of North Korean SEZs
As explained before, the Equity Joint Venture Act and the Rasun Free Trade and Economic Zone have changed the nature of operation of the socialist economy and foreign investment laws.

North Korea has designated a number of special economic zones modeling Chinese special economic zones such as Guangdong and Hainan. The Chinese special economic zones were constructed in the late 1970s, as an effective window toward the rapidly changing world, and a test bed for the experiment of combining of Western capital and technology with the local labor and resources.

At present, China has successfully expanded SEZs even to remote inland areas. The Pyongyang regime established Chinese-style legislation regarding SEZ, the first case of which was the Rasun Free Trade Zone, and delegated the authority to build Sinuiju Special Administrative Region under the model of Hong Kong or Shenzhen to a Chinese Dutch entrepreneur, Yang Bin.

But this master plan came to stalemate when Yang Bin was arrested on charges of tax evasion and violation of laws regarding real estate development in China. On the other hand, special economic zones at Mt. Geumgang and Gaeseong initiated by South Korean industrialist Chung Ju-yung were constructed as scheduled with the financial and technological assistance of the South Korean public corporations, i.e., the Korea National Tourism Organization and Korea Land Corporation. These special economic zones have been developed to invite not only South Korean citizens but also Korean residents in foreign countries and foreigners in general.

Though North Korean SEZs are characteristically aiming at building up social overhead capital with the help of external capital and resources, when compared with the Chinese precedents, it remains to be seen whether North Korean SEZs could absorb external investments to some extent.

Whether the North Korean SEZs are successful will depend on how the administrative organization could function on the self-regulatory basis adjusting to between the investment efficiency required by the North Korean authorities and the highly expected income by South Korean investors. The key must be well-organized infrastructure of SEZs, including relevant laws and regulations with fairness and transparency, which ensures safe investment and operation by foreign investors.