Leapfrogging Style Economic
Reform in North Korea and the role
of Foreign Capital
북한의 ‘단번도약’ 가능성과
남한의 역할
Keun LEE 李根
Professor of economics
Seoul National University
([email protected])
Purposes of the paper
• To assess the possibility of economic catchup by North Korea as a late-comer
transition economy.
• To provide policy suggestions, with focus
on the role of foreign capital and technology,
for North Korea (“Reformers” in
Weingartner’s term) to achieve such catchup or leapfrogging.
Origin of the Idea of Leapfrogging
• Gerschenkron (1962): advantages of the latecomers,
• ‘big push’ argument in development economics to
move out of a poverty trap.
• Idea of leapfrogging by Perez and Soete (1988);
every country is a beginner in terms of the newly
emerging techno-economic paradigm that can
serve as a window of opportunity for leapfrogging
by late-comers like NIEs.
Leapfrogging mentioned in North Korea
• In the 2001 January 7th day editorial of the
Nodong sinmun (the official newspaper of the
Workers’ Party of North Korea) that the idea of
“leapfrogging (dan-bun do-yak)” was first
mentioned and emphasized.
• The editorial stated that “let us introduce the
“world-best things” in one time to achieve some
jumps;
• examples of leapfrogging:
“Gwang-Myung no. 1 satellite” in 1998;
post-war land reform in North Korea.
Types and Paths of Catch-up and Leapfrogging
Part A: The case of Industrial Catch-up
Path of the Forerunner:
stage A --> stage B --> stage C --> stage D
Path-Following Catch-up: stage A --> stage B --> stage C --> stage D
Stage-skipping Catch-up: stage A ---------------> stage C --> stage D
(leap-frogging I)
Path-Creating Catch-up:
(leap-frogging II)
stage A --> stage B --> stage C' --> stage D'
(at stage, C 와 C‘ represent two alternative paths)
source: Keun Lee, and C, Lim (Research Policy 2001).
Alternative Models for Reform in North Korea
• China model: a typical case of gradualism with substantial
performance differences among provinces, and there is a
huge difference from North Korea in terms of size and
regional heterogeneity.
• Vietnam: comparable in terms of size but there was no role
by overseas Vietnamese or capitalist Vietnam; economic
reform started after unification of two Vietnams; more
agriculture oriented than North Korea.
• German model: rapid integration; no applicability to North
Korea
• Developmental dictatorship model in the past South Korea
under Park Chung Hee: in this model, US market played a
critical role; no role by the overseas Koreans.
Leapfrogging Style Reform in North Korea:
benchmarking Fujian Province in China
• Fujian is a province facing Taiwan across the
straits and thus home of many overseas Chinese
• Used to be most backward during the pre-reform period
owing to the avoidance of any big investment by the central
government
• Since the opening, Fujian has attracted a huge sum
of FDI from Taiwan and achieved a remarkable
catch-up with other provinces.
• 1980, per capital GDP of Fujian: 75% of the
average; surpassed the national average in 1989;
in 2000, reached 165 of the average.
Trend of GDP per Capita in China, Fujian, and Guangdong
Constant 2000 US$
Compared with National Average (%)
National
Average
Fujian
Guangdong
Fujian/
National Average
Guangdong/
National Average
1980
173.17
154.31
171.17
75.65
104.35
1981
179.92
175.91
183.32
85.07
112.27
1982
193.42
189.10
201.75
86.88
119.96
1983
211.41
197.42
213.06
83.68
115.81
1984
240.37
229.60
242.66
85.04
118.99
1985
268.97
263.81
282.03
86.20
119.88
1986
288.34
275.68
313.44
84.62
122.18
1987
316.60
308.21
366.92
90.57
131.46
1988
346.67
347.05
420.95
99.56
144.72
1989
355.34
368.22
444.12
105.09
152.58
1990
363.51
385.53
482.66
107.89
155.26
1995
603.31
857.84
1057.47
139.82
175.01
2000
855.00
1401.36
1556.46
163.90
182.04
Year
Exports (current million US$)
Year
Exports/GDP (%)
National
National
National
Total
Average
Fujian
Guangdong
Total
Fujian
Guangdong
1980
18120
600
360
2200
6.0
6.3
13.2
1981
22010
730
400
7.7
6.5
1982
22320
740
180
8.0
2.9
1983
22230
740
190
7.4
3.0
1984
26140
870
390
8.5
5.8
1985
27350
910
560
2950
9.0
8.2
15.0
1986
30940
1030
690
6900
10.5
10.7
35.7
1987
39440
1310
900
10140
12.3
12.0
44.6
1988
47520
1580
1420
14820
11.8
13.8
47.7
1989
52540
1750
1830
18110
11.7
15.0
49.4
1990
62090
2070
2450
22220
16.0
22.4
68.2
1995
148780
4960
7910
56590
21.2
30.8
82.4
1996
151050
5040
8380
59350
18.5
27.2
75.7
1997
182790
5900
10260
74560
20.3
28.6
84.5
1998
183710
5930
9960
75620
19.4
25.1
79.1
1999
194930
6290
10350
77710
19.7
24.1
76.0
2000
249200
8040
12910
91920
23.1
27.3
78.8
FDI (current million US$)
Year
FDI/GDP (%)
National
National
National
Total
Average
Fujian
Guangdong
Total
Fujian
Guangdong
1980
195
7
4
123
0.06
0.06
0.74
1981
375
13
2
173
0.13
0.02
1.02
1982
440
15
1
171
0.16
0.02
0.95
1983
636
21
14
245
0.21
0.22
1.31
1984
1258
42
48
542
0.41
0.72
2.75
1985
1661
55
118
515
0.54
1.73
2.62
1986
1874
62
61
644
0.63
0.95
3.33
1987
2314
77
51
594
0.72
0.68
2.61
1988
3194
106
130
919
0.80
1.26
2.96
1989
3392
113
329
1156
0.76
2.70
3.15
1990
3487
116
290
1460
0.90
2.66
4.48
1995
37521
1251
4039
10180
5.36
15.72
14.83
1996
41725
1391
4079
11624
5.11
13.25
14.82
1997
45257
1460
4197
11711
5.04
11.70
13.27
1998
45463
1467
4212
12020
4.80
10.61
12.57
1999
40319
1301
4024
12203
4.07
9.38
11.93
2000
40715
1313
3804
12237
3.77
8.03
10.48
Export/import of DPRK
unit;billion US dollar
2001
2002
2003
2004
Imort
1.62
1.52
1.61
1.84
Export
0.65
0.74
0.78
1.02
share in GNI(%)
4.1%
4.4%
4.2%
4.9%
total volume of trade
2.27
2.26
2.39
2.86
GNI (10mill.$)
15.7
17
18.4
20.8
share in GNI (%)
14.46
13.29
12.99
13.75
source; Bank of Korea
<Aid to DPRK>
2001
704,500
64,940
135,390
2002
837,500
51,170
134,920
357,250
257,680
139,320
163,230
145,640
492,640
15,700,000
3.14
392,600
17,000,000
2.31
296,950
18,400,000
1.61
419,430
20,800,000
2.02
358,180
N/A
N/A
Foreign Aid to DPRK
South Korea
unit; thousand US dollar
2003
2004
2005
87,020
115,120
123,880
70,610
141,080
88,660
157,630
256,200
212,540
Government
Private
Total(A)
International society
(B)
Total volume of foreign aid
(A+B)
GNI
share in GNI (%)
Source: Ministry of Unification & BOK
<Investment to DPRK>
FDI
Economic Cooperation project
Gaesung complex project
Total.
Investment of China to DPRK
Investment of China and South Korea to DPRK
share GNI (%)
Source: Ministry of Unification & BOK
2001
2000
2002
55900
2003
5100
2000
3000
5000
0.03
55900
700
56600
0.33
5100
1000
6100
0.03
unit; thousand US dollar
2004
2005
28130
5030
5135
14020.3
33265
19050.3
50000
100000
83265
119050.3
0.40
N/A
Leapfrogging Style Reform in North Korea:
benchmarking Fujian Province in China 2
• FDI/GDP ratio of current days of North Korea is
comparable to that of Fujian in the early 1980s.;
• trade (exports)/GDP ratio, about 13% in the early 2000s of
North Korea, comparable to that of Fujian in the mid 1980s.
• Fujian was backward but soon caught up with other
provinces, owing to economic engagement with Taiwanese.
• current North Korea is comparable to that of Fujian in the
early to mid 1980s in terms of its openness.
• if North Korea could sustain the current level of openness,
accompanied by steady open door policy, it can also
achieve a similar catch-up like that of Fujian.
Possibility of Leapfrogging with Foreign
Capital in North Korea
1)
FDI from South Korea, a most critical factor;
cf) in China, more than 65% of FDI from
overseas Chinese, even higher in Fujian
2) South Korea has already emerged as one of the
two largest investors in North Korea, following
China; South Koreans are much eager to help
North Korea whereas Taiwan authorities tended
to maintain restrictive policies toward FDI into
mainland.
3) North Korea is an attractive alternative to China as
a site for FDI from S. Korea
Types and Paths of Catch-up and Leapfrogging
Part B: The case of economic transition and outward-oriented growth
Utilization of
Foreign capital
Leapfrogging
ODA -> Commercial Borrowing ->FDI -> Capital Market/PEF
combination of the above 4 stages into one
Stages of
export-oriented growth
Leapfrogging
OEM  ODM  OBM
combination of the above three
(with help from South Korea)
(* Design (ODM) and brand power of South Korean firms can be combined with
processing (OEM) capacity of North Korean sides in the South-North economic
cooperation, and all the rents or profits fall into the hands of Koreans or Korean
peninsula )
Strategic Thinking on
how to Utilize FDI for Leapfrogging 1
•
Costs and benefits of FDI in host economies are
still subject to debates in economics.
eg. recent policy debates in China
** North Korea, free from such policy dilemma at least
with regard to FDI from South Korea, compared
with FDI from other foreign countries, to the extent
that they consider South Korean firms as
‘domestic rather than foreign’ companies in view
of eventual integration of two Koreas
** while foreign companies are reluctant to transfer
technologies and know-how to host countries,
that is generally not the attitudes of South Korean
firms toward the North Korean economy.
Strategic Thinking on
how to Utilize FDI for Leapfrogging 2
•
•
•
In China, no restriction on the maximum cap on
foreign equity in most of consumer goods sectors,
whereas still (even after WTO) maintained equity
restrictions on FDI in strategic sectors including
automobiles, telecommunication services, banking.
North Korean authorities might not have to bother
with such restrictions with regard to South Korea
investors. A practical solution is to maintain the
restriction on foreign equity in FDI in certain
strategic sectors but consider South Koreans as
locals rather than foreigners.
This kind of “local treatment” policy is consistent
with the current practice of inter-Korean trading
considered as domestic trading with no tariffs.
•
•
•
Strategic Thinking on
how to Utilize FDI for Leapfrogging 3
But, with regard to general foreign FDI, it
might be good to declare a predictable
time-table such that they would abolish
such restrictions in the future.
Allowances of tax exemptions or reductions
during certain initial period of investment are
to be given to all foreign investment.
Important not to give monopoly or exclusive
rights to any South Korean investors, so as
not to discard positive effects from
competition among South Korean investors.
(but, already given to some Chinese co. in
mining)
Diverse Modes of Inducing Foreign Capitals
1)
2)
3)
4)
5)
6)
BOT (Built, Operate and Transfer), BLT (Built Lease Transfer) and etc
where foreign investors build some facility, operate or least that facility for
a while to recover the initial investment expenses) and transfer the
ownership to the host country;
diverse modes of project financing, including PFI (private finance initiative)
or PPP (pubic-private partnership);
processing using local labor without equity investment;
wholly-foreign owned investment; and joint ventures;
licensing of foreign technology based on fees;
purchasing of foreign technology.
* Decide in consideration of its own capability (absorption or
management capabilities), rivalry among possible foreign
investors, implications for market structure (monopoly or more
competition), nature of target technologies or facilities,
opportunity for learning and transfer, and so forth.
Diverse Sources of Foreign Capital
1)
best to get funding from international financial institutions like the
World Bank, IDA, IMF, ADB and so on.
2) other multi-lateral or national sources of funds.
examples: the Northeast Asia Development Funds, with a
concrete example of the NADFC (Northeast Asia Development
Finance Cooperation) with tripartite participation of the KDB
(Korea Development Bank), the CDB (China Development Bank)
and Mizuho Bank in Japan (K. Park 2006).
3) possibility of creating a private equity funds (PEF) to invest
commercial projects in North Korea.
eg) an UK based PEF called “Chosun Development and
Investment Funds.” on permission of UK financial service
authorities on May 19 2006 with a view to invest in infrastructure
projects in North Korea. Reported to have set a target of raising
50 million US dollars with a option of increasing by another 50
million
Conclusions: Pre-Conditions for Leapfrogging 1
Argument: possible for North Korea, a late-comer transition
economy, to achieve a leapfrogging style economic catch-up if it
promotes sustained economic opening.
Question: why such catch-up not happening today:= Two problems.
The first problem leadership of North Korea who is not taking a
decisive step toward real leapfrogging although it mentioned such
term itself. Rather they have been taking advantage of good will of
South Koreans to gain petite pecuniary benefits and thereby just
extending the current status quo.
N.K. Have to realize that decisive deepening of economic
engagement and integration with S. Korea is one of the best safe
guard against possible military intervention by the US and one of the
best guarantee for their survival.(maybe better than missile show-off)
(more presence of foreign investments and factories, less
likelihood of military situations)
Conclusions: Pre-Conditions for Leapfrogging 2
The second problem = USA who does not want to
coexist with North Korea but just want it to disappear.
The US should consider seriously the realistic option
of one-to-one exchange giving North Korea a guarantee
for regime continuity while getting control over North
Korean nuclear facility.
(In this regards, I think that Mr. Frank made in the
morning session a very sensible assessment of costs
and benefits of sanctions vs. assistance)