Given how we have been occasionally bitched at by North Korean elements for releasing information ahead of its time, this post will instead focus on copying and pasting something from the party newspaper Rodong Sinmun. But its an interesting allegory on land reform, something that foreshadows something that has been in the works for awhile, while stopping short of being an outright policy proclamation.

It Happened before Land Reform

One February day 1946, President Kim Il Sung visited a peasant house in the outskirts of Pyongyang.

Sitting with the peasants who happened to be there, he talked frankly, getting himself well acquainted with their living conditions.
Not aware of who they were talking to, the villagers told him whatever they could think up then and there. Listening carefully to the villagers, the President asked whether they had heard anything about the three-to-seven system of tenancy. The host, somewhat bewildered, looked about his folk, and said, “I’ve heard of it, but I don’t…” he equivocated.

“How much tenant fee did you pay the landlord last year?” asked the President. “You say you paid 50 percent of your harvest as a tenant fee. You know you had to pay 30 percent. Go and take back the amount exceeding the 30 percent.”

The peasants looked a bit surprised because it would be more than they could have the courage to do, they thought it was the last thing they could ever do to bring back the remainder in their tenant fee from the landlord.

Smiling softly, the President said the three-to-seven system was what the state had enforced for the peasants and so there was no reason why they should hesitate to get the remainder back. What the President said seemed not to be understood to the peasants. They suggested that the state should take the excess back for them. The President asked whether a peasant association had been organized in the village or not. There was no reply as the peasants all kept mum. As a matter of fact, a peasant association was there, but it failed to do its bit and the peasants turned their back on it. Some peasants even withdrew from the association for fear that they should be deprived of their tenanted land. The President told them to rally the peasants in the association and fight bravely to get 70 percent of their harvest.

Thanks to the great care and leadership of the President the peasants gradually grew into true masters of land and the masters of the people’s power.

With the (temporary?) closure of Kaesong Industrial Complex, the future of special economic zones (SEZ) in North Korea looks grim. In China, where one-stop shops that help investors navigate processes increasingly replace SEZs, what role can SEZs play in North Korea? If North Korea reinvigorates its SEZ policy in the medium term, what does it need to do to make progress?

Some ideas:

Execution While the strategic rationale and planning of SEZs is important, studies of SEZs by the World Bank indicate that a lot boils down to the execution of the SEZ concept. Well-executed SEZs produce results, and such zones often require local zone administrators that have the autonomy and the political support to cut through bureaucratic red tape.

Integration Traditionally, SEZs in North Korea have been located far from the key urban centers. The isolation cuts them off from domestic economic activity. However, SEZs that have generated significant externalities for the national economy often benefit from and transfer their advantages through integrating their activities with the regional economy.

Contextualization Overseas investors, for right or wrong reasons, worry about North Korea’s economic and political trajectory. Many are hesitant to commit significant capital to a challenging market. As such, a short-term approach could be to focus SEZs on supporting domestic entrepreneurs. A liberal and credible zone approach could target domestic North Korean entrepreneurs, enabling them to set up companies domestically, rather than offshore, and help develop a set of rules governing the next-generation of domestic companies. These rules can then be rolled out more extensively if successful.

Update: Maybe the US delegation did come about…

All eyes are now focused on the present, on North Korea’s recent nuclear test and the sanctions that might follow. While most commentators readily condemn North Korea’s “provocation”, it might be helpful to ask whether things could have turned out differently if a different sequence of events had taken place. To do so, we need to take a step back to late 2012 and ask a belated what-if…

Just prior to North Korea’s rocket launch last year, North Korea attempted to invite a high-level delegation from the US to visit Pyongyang. The visit (apparently) did not appear to take place. It is an interesting but futile exercise to wonder what the message would have been. Could it be an olive branch in which North Korea emphasizes the desire to reset the US-North Korea relationship? Or would it have been a hardline message in which North Korea announces its intention to test its rocket and nuclear capabilities?

Regardless of what might have been, North Korea got a US delegation – the ‘Google’ delegation – after its rocket launch. But it does not seem to be the official delegation North Korea wanted. It was a delegation snubbed by the State Department publicly, in ways that neutered its potential as a mediator or messenger. Perhaps this reflected North Korean policymakers assumption that these prominent individuals would have significant input into US foreign policy.

Would the rocket launch and nuclear test be averted if a different visit had taken place prior to the rocket launch? We would never know now, but these what-ifs remind us how little the world seems to know of Pyongyang’s strategic intentions, worldview, and decision-making processes.

Other interesting commentary (not exhaustive as I have yet have time to cover everything):

Jeffrey Lewis – what can we actually do?
NKleadershipwatch – how the test might have been rolled out
Elizabeth C. Economy – Picks up on an interesting development that can lead to an interesting idea

During our cold January visit, we stayed at the Koryo Hotel. One change that was hard to ignore was the huge gaping hole next to the venerable Koryo. Construction for a new hotel was underway and the site was quite busy, with several work teams and plenty of revolutionary music. It is supposedly meant to be a 75 storey structure, though we also heard 45 storeys thrown out. I have previously written about the hotel market in Pyongyang, and short of major changes in how North Korea relates to foreigners, I am still bearish about hotel demand in the medium term.

One of the small perks of dealing with foreigners for North Koreans is access to the odd small luxuries of life that would otherwise be difficult to obtain in the country. Our newest partner assigned to work with us on the Women in Business program, a recent university graduate, made this point in a very chirpy New Year card.

Last fall on a visit to North Korea, I went with our partners to the new restaurant (run by Hae-mat-chi) at the newly built Moranbong apartment complex. This restaurant had a bakery adjacent to it. When it came to ordering the entrée, our new partner got really excited. She started describing this “French Bread” in vivid terms to the waiter, explained how it had to be sliced meticulously, and how the bread expands to fill the mouth with its flavors. It was even more fun hearing it in Korean as it was full of the onomatopoeias found in the Korean language. The last time she had a baguette was 13 years ago.

When the North Korean interns for our entrepreneurship program were heading back to Pyongyang last year, we had one of them buy a baguette to bring it to our partner. Earlier this year, we received New Year greetings in the mail from Pyongyang and in it were special thanks for the baguette. Our partner described the baguette as “it is too small…but small is beautiful.”

Back in 2011, when many observers were still pessimistic about North Korea’s strategic intentions after the 2006-2009 tightening of North Korean economic policy, Andray and I pointed to how North Korea is shifting the basis of its legitimacy to economic performance. This year’s New Year Address by Kim Jong Un bears this shift out in its strong focus on the economy.

As we have discussed before, North Korea faces significant challenges in developing its economy. Many observers of North Korea conflate intention with capability when it comes to economic development in North Korea. “Intention” deals with the question of whether the leadership in the country considers economic development a priority. “Capability” is about whether North Korea is able to successfully pursue the priority. Andray and I question whether North Korea has the economic policymaking capabilities and institutional capacity to avoid falling into the “resource curse.”

Some observers have argued that North Korea will not pursue a new economic trajectory, as this would risk regime collapse once North Koreans learn more about South Korea’s economy. In making this prediction, these analyses conflate “intention” and “capability,” and assume that North Korean policymakers also share the analysts’ conjectures.

As with any strategy, quality of execution matters. North Korea can prioritize economic development without risking collapse, if it executes well on this approach. People are more apt to compare their present and future to the past than to South Korea. If standards of living are getting better, and people believe it will continue to improve, North Korea can enjoy significant stability for a time. And the mood on the ground (in Pyongyang at least) is definitely one of optimism – people expect things to improve although clear policies supporting economic development have yet to be put into practice (but are being discussed). At the same time, Pyongyang has been using re-defectors to send the message that going to South Korea will not necessarily lead to better lives, and that it just might be better to stay put.

What does all of this mean for Choson Exchange? We first started pursuing the idea for CE in 2007, and launched our first program in 2009/2010 after a currency reform and the sinking of the Cheonan. Despite the gloomy and tough start, over the last 2.5 years, we have impacted over 200 program participants. Next year, we are poised to rapidly grow our program and we are excited that we will be reaching more young North Korean professionals in the 20-40 age range, and reaching more women through our Women in Business in program. We will be covering a wider range of policy and business topics. However the future evolves in the country, North Korea will need young businesspeople and young policymakers who have the skills needed to develop the economy and raise living standards. We are excited for the New Year.

It is probable that through informal channels progressives in South Korea had been communicating a certain progressive victory to contacts in Pyongyang prior to this election. In turn, this feedback loop might have convinced Pyongyang to up the propaganda against president-elect Park Geun Hye. Given the bad relations with Lee Myung Bak and Saenuri over the past few years, this is understandable from Pyongyang’s perspective if tragic.

It is tragic because Pyongyang will now have to deal with a conservative presidency for another 5 years – a presidency it has aggressively attacked over the past few months. This is a presidency that has at least in words (but not yet in actions) promised to resume some form of engagement. As opinion polls showed a narrowed gap, Pyongyang’s message clearly responded to this by moderating its tone. But a potentially better strategy at the start would have been for Pyongyang to hedge its bet against either outcome given how close the race was.

An interesting question to ponder is whether group-think and a self-reinforcing feedback loop might have led those analyzing the situation in Pyongyang to assume that a progressive victory was all but guaranteed (assuming that Moon and Ahn did not split the vote). And the more interesting question is how Pyongyang will respond to the new President-elect.

I recently presented at an annual conference an emerging markets-focused hedge fund (>$1B AUM) held for their investors. They had some (small) exposure to North Korea in their portfolio and felt that it was necessary to learn more about the market, and educate their investors on the place. North Korea is probably ill-defined as an emerging or even frontier market, and until the word for such a market exists, I think it is better classified as a provocative thought exercise for investors.

A point I made at the event is that execution matters far and above most other factors in evaluating opportunities in North Korea. Classifying opportunities by industry in North Korea is one way to study potential opportunities. However, I prefer a framework with different categorizations that better aids financial investors in understanding the challenges of executing in this market. I classify the economy broadly into the following segments:

1. Informal markets: These are the small-scale businesses that have been the focus of much scholarly work. However, given the lack of scalability in most of these businesses, these should not be the focus of most investors.

2. Scalable “private” businesses: These are businesses that are often run with tacit approval from the government, but whose managerial control and decision rights can be traced to specific individuals. These businesses span a range of sectors and have potential to be scaled up.

3. “Complex” industries: Unlike #2, businesses in this sector are not clear opportunities at the moment, but might be so in the unclear future. These are industries where there are no clear regulations or proof-of-concepts, resulting in uncertainty over how the government will treat the business. Examples include advertising or insurance, which faces restrictions that make them unlikely near-term opportunities.

4. State-Owned Enterprises: These entities are increasingly looking for joint-venture partners and like #2, they have the potential to be scaled up. The key differences with #2 are that they carry more legacy issues, have different incentive structures, and generally require more effort to navigate.

Last year, I blogged about testing Orascom’s 3G internet service in Pyongyang after meeting some of Orascom’s employees. The original plan was to roll out the internet service to the expat community in Pyongyang. As far as I can tell, that has yet to happen, although doing so would greatly reduce the costs of existing internet options (ursurious broadband/ satellite internet) with some security trade-offs for users.

However, it appears that Naguib, Chairman of Orascom, might have other ideas. In his words, “Orabank, our banking arm in DPRK, is actively working towards developing mobile-related businesses and projects.” The 3G network provides a platform for a range of other services that emerging market economies would need including remittances and payments through mobile banking and mobile payments. Given the primitive development of the services sector, mobile provides an opportunity for Orascom to upend the services industry in North Korea.

This was something I was originally looking at in North Korea. Payments are currently messy in the country. On a previous trip, I remembered an account of a North Korean trying to pay the handphone bill. Apparently the payment went to the wrong account, and the North Koreans spent the morning calling and shouting at some people to make the mistaken beneficiary return the money so that the payment could go to the right account. For what mobile banking and payments could potentially look like in North Korea, check out M-pesa.

I will be traveling quite a bit over the next month to talk about a topic close to my heart: What is the state of entrepreneurship in North Korea today? Who are the entrepreneurs? How can venture capital provide a structure to support them and accelerate their efforts?

I will be pretty busy in the coming weeks so I won’t be able to answer queries about what time/place these events will be at.

Tufts Fletcher School
Boston
11/20

Oxford Said Business School
Oxford
11/26

Conference organized by Henry Jackson Institute etc.
London
11/28

UC San Diego
San Diego
12/5

Google
Mountainview
12/6

Investor conference for a hedge fund
New York City
12/11