Invest in North Korea (Really)

♠ Posted by Emmanuel in at 8/16/2007 01:46:00 PM
I was kind of puzzled to find an article on limited but increasing FDI activity in North Korea while perusing the contents of the latest issue of Newsweek. But no, I am not making this stuff up. Set aside snarky thoughts about a "captive labor force" and a "CSR axil of evil." While inexpensive labor is one of North Korea's potential draws--its wages are significantly lower than those in China--North Korea also offers a well-educated labor force with a touted 99% literacy rate, plentiful untapped natural resources, and a favorable geographic location at the heart of Asian commerce.

North Koreans are not too dissimilar from their South Korean counterparts, and deserve better opportunities than those offered by their Dear Leader. Fortunately, Kim Jong-Il has been forced to (gulp!) liberalize the North Korean economy through both international pressure to discard its moniker as a "hermit kingdom" and domestic pressure for viable local sources of income. What can I say? It's a start despite mind-boggling political risk challenges for foreign investors:
Emerging markets have taken a hit over the past couple of weeks, as global market wobbles have prompted a flight from risk. So it's surprising that North Korea—a country that stretches the very definition of emerging market—has been in the news as a target for foreign investment. For example, Egyptian conglomerate Orascom recently spent $115 million to buy a 50 percent stake in a North Korean cement company. The Egyptians are by no means the only ones piling into Pyongyang these days. Since North Korean dictator Kim Jong Il began a program of pseudo-reforms in July 2002, outside investment has increased from places as diverse as Britain, Germany, South Korea and China.

Pyongyang's announcement a few weeks ago that it had shut down North Korea's sole nuclear plant in order to comply with an aid-for-weapons deal has only increased the buzz among investors, who view the country—so far off the standard investment grid—as beyond the usual emerging-market dynamics. While dicey accounting makes concrete figures hard to come by, the Seoul-based Korea Trade Promotion Corp. puts South Korean investment at $800 million, and Chinese FDI at nearly $135 million and rising fast. Other trade experts say European investment (in areas like gas, pharmaceuticals and manufacturing) is certainly in the tens of millions of euros, if not more.

Small figures, but significant considering the risk profile of the country. Investors are willing to take the bet because "this is the last frontier," says Ken Frost, a director of U.K.-based Phoenix Commercial Ventures, an investment firm that brokers deals between North Korea and the West. Current plans include a joint venture to produce DVD players and another to create software and animation. Frost cites untapped resources—the country is rich in a number of commodities, including coal, copper and precious metals—and a highly skilled work force (the literacy rate is 99 percent) as just two of the big draws. Then there's the cost of labor: the average monthly pay in North Korea is $57.50, versus $100 in China. And, says Frost, there's location. "Look at this position—you've got an ideal trade route to Russia, China, South Korea and so on."

Of course, as Aidan Foster-Carter, a senior fellow specializing in modern Korea at Leeds University, points out, "there have been many false dawns when it comes to North Korea." Back in the 1970s, European countries like Sweden extend-ed generous loans—which Pyongyang promptly defaulted on. Later the economy rebounded, thanks in part to massive gold exports. But huge floods in the 1990s plunged it back into crisis, and the death of Kim Il Sung, the Great Leader, in 1994 created chaos. "It became tough for investors to know who was legitimate," notes Colin McAskill, who runs the London-based Chosun Fund, targeted at commodity and financial ventures in the area.

While nobody would call North Korea today a transparent market, investors say things are getting better, in part because the country is starved—literally—for outside help. Orascom, which has cited the possibility of increased foreign aid now that nuke tension is easing as an encouraging sign for investors, was able to forge a Western-style governance agreement in its construction venture.

Likewise, South Korean manufacturers are eager to do more business at the Kaesong Industrial Complex, a special economic zone just north of the border where some 15,000 North Korean workers churn out close to $100 million a year worth of garments, automotive parts and watches in South Korean-owned factories, with productivity levels that top many other emerging markets.

Experts say the zone could grow much bigger if the United States allowed products from the area to carry a made in south korea label. Assuming that this happens, Western investors will have to duke it out with the Chinese, who have signed 10 major commodities deals with Pyongyang in the past year alone. Clearly, Egyptian cement makers aren't the only ones thinking about first-mover advantage.