Made in North Korea: Business in a 'communist monarchy'

The factory where Noko jeans were made

As North Korea marks the birthday of its former leader, the late Kim Jong-il, there is still great uncertainty about the direction in which his son and heir, Kim Jong-un, intends to take the country - but if he aims to breathe new life into the economy, he will find foreign businesses keen to exploit any opportunities.

A few years ago, a young Swedish man crossed the border into North Korea. In his bags were packed spools of sewing thread and large amounts of cash.

Such is the nature of doing business in the world's most closed economy.

Tor Rauden Kallstigen was the fresh faced co-founder of Noko Jeans - the first Western clothing label to brand itself Made in North Korea.

"In North Korea, they don't produce any materials," says Kallstigen. "Any buttons, any threads, any anything - you have to send everything into the country."

And even then, there were still some things that couldn't just be sent in.

"Since it was such a small project, we brought the cash for the production with us because it was too complicated to do it the ordinary bank way," he explains.

North Korea isn't the first place most people would think of setting up a business. Run by a repressive Stalinist regime, with power passed from father to son, it's been called a communist monarchy.

The dirt road to Rason The road from Rason to China is still made of dirt

Ordinary citizens have almost no links with the outside world - internet and international phone lines are officially restricted to the ruling elite.

And if that's not enough to make you think twice, consider the practical difficulties. A domestic economy that has been eaten away by decades of centralised economic planning, with roads in poor repair, an unreliable power supply, and a workforce that is subject to annual food shortages.

That's before you've worked out how to circumvent the sanctions slapped on the country by the United Nations and major economies like the US and South Korea for developing nuclear weapons.

And yet, North Korea is managing to attract foreign investment.

The country keeps its economic data, like so many other things, secret.

But the UN Conference on Trade and Development estimates that foreign direct investment in 2010 was $38m (£24m; 29m euros) and that the total amount invested in North Korea over the past few decades comes to $1.475bn (£940m; 1.13bn euros).

Most of that comes from China.

North Korea sits right on its doorstep and reportedly has vast natural resources - coal and anthracite, timber, iron, gold and copper - that China hungers for.

Start Quote

The North Koreans take some fields and say, 'This is going to be an investment zone' -and expect it to look like Chicago in a few years”

End Quote Paul French Markets analyst and author

Chinese manufacturing companies have also been investing in special economic zones (SEZs) - set up as self-contained bubbles of capitalism along the North Korean-Chinese border.

The oldest of these, at Rason in the far north-east gives a taste of what investing in this creaking economy means in practice.

"All SEZs need sufficient power, transport links and water," says Andray Abrahamian, executive director of the Choson Exchange, a volunteer-based consultancy group that trains North Koreans in business skills.

"The [first] two of those have been problems at Rason for the past 20 years. Imagine that - a special economic zone, which existed for 20 years and they never bothered to pave the road to the [Chinese] border. But it's getting fixed now and that's really important."

It's the Chinese companies themselves who are doing this work, though, and connecting Rason to a power supply across the border, not the North Korean government, says Mr Abrahamian.

"At least when the Chinese say, 'This is going to be an investment zone,' they put in electricity and phone lines and sewers," says Paul French, a China-based markets analyst and author of a history of Korea, The Paranoid Peninsula.

"The North Koreans just take some fields and say, 'This is going to be an investment zone' and expect it to look like Chicago in a few years."

China doesn't publish details of its economic relationship with North Korea, but the Bank of Korea estimates trade between the two Communist nations has been steadily rising, and reached $3.5bn (£2.2bn / 2.7bn euros) in 2010.

South Korea, meanwhile, has set up the Gaesong Industrial Complex with its northern neighbour, which now employs 50,000 people and contributed heavily to $1.7bn (£1.1bn / 1.3bn euros) of trade between the two Koreas last year.

Gaesong

Other countries are interested too. German, Russian, Indian and Thai companies are already trading with North Korea. There are reports of Australian interest in mining and British involvement in finance.

But few talk openly about their business. There are political sensitivities around trading with a country subject to sanctions and named by the former US president, George W Bush, as part of an "Axis of Evil".

Even putting politics to one side, operating in North Korea is hard enough. A recent survey by the Peterson Institute for International Economics of 300 Chinese businesses in North Korea found that their view of the business environment was "generally negative" - even though nearly 90% reported making a profit.

Rauden Kallstigen 'Sometimes you are totally in the dark,' admits Rauden Kallstigen

Among the complaints - a ban on international mobile-phone use, bribery and corruption, the risk of arbitrary changes in rules and lack of reliable adjudication in disputes.

This partly explains why Chinese enterprises generally choose trading over investing, the survey concludes.

But there are signs that the North Korean government is aware of the problem and wants to make things easier.

"In the last couple of years, we've seen legal reforms, which make clear the legal definition of a company, and how a foreign company is allowed to conduct business," says Andray Abrahamian.

The government's tone has also changed in the last couple of years.

"There are a lot more messages about well-being, quality of life, economic development - and they've become more prominent at the expense of military messages," he says.

John Delury, a North Korea specialist at South Korea's Yonsei University, agrees.

"There are things North Korea is doing to be more pragmatic, certainly to open up, to court foreign investment - like ramping up their economic relationship with China, re-opening the SEZs, giving them more autonomy. These are arrows pointing in the direction of some sort of transition," he says.

However, the key question is how the policies are implemented.

Start Quote

Minimum wage in Rason's special economic zone is about $80 a month... In China, the cost of labour has been rising”

End Quote Andray Abrahamian Executive director, Choson Exchange

Tor was in his early twenties when he and his colleagues set up their jeans production in Pyongyang.

"In North Korea it can be really, really hard," he says. "Sometimes you're totally in the dark, and you don't know what's going on. Sometimes you're disconnected from the people who have the actual power. You just have to be persistent and hope for the best."

After the launch of Noko Jeans at a Swedish department store in 2010, a media uproar caused not only the Swedish retailer, but also the North Korean manufacturer to cancel their agreements with Mr Kallstigen's company.

North Korea does have some key things going for it, though, including a cheap, highly literate and disciplined workforce, and low labour costs.

"Minimum wage in Rason's special economic zone is about $80 a month," says Andray Abrahamian. "In Gaesong, it's even less, around $65 a month. In China, the cost of labour has been rising, so that's the advantage."

But, says Paul French, the ravaging of North Korea's economy in recent years has meant less and less left in the country to build from.

"If you go to those border towns along the Yalu River, on the Chinese side, all you see is timber and copper wire and bits of old scrap metal that used to be machines. They're coming out of North Korea and being sold for pennies to Chinese scrap-metal dealers. You're looking at a wholesale 15-year process of asset-stripping the entire country."

The question now, he says, is this: "If you went down there [to North Korea] and signed a contract, is there anyone left sitting there with a factory who could switch the lights on and start the machines running again? I doubt that very much now."

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