From Hermit Kingdom to Open for Business Developing a Blueprint for North Korea’s Economic Development KRISHNA B. KUMAR, TROY D. SMITH, DIANA Y. MYERS, TIMOTHY R. GULDEN, NOAH JOHNSON C O R P O R A T I O N For more information on this publication, visit www.rand.org/t/RRA1128-1. About RAND The RAND Corporation is a research organization that develops solutions to public policy challenges to help make communities throughout the world safer and more secure, healthier and more prosperous. RAND is nonprofit, nonpartisan, and committed to the public interest. To learn more about RAND, visit www.rand.org. Research Integrity Our mission to help improve policy and decisionmaking through research and analysis is enabled through our core values of quality and objectivity and our unwavering commitment to the highest level of integrity and ethical behavior. To help ensure our research and analysis are rigorous, objective, and nonpartisan, we subject our research publications to a robust and exacting quality-assurance process; avoid both the appearance and reality of financial and other conflicts of interest through staff training, project screening, and a policy of mandatory disclosure; and pursue transparency in our research engagements through our commitment to the open publication of our research findings and recommendations, disclosure of the source of funding of published research, and policies to ensure intellectual independence. For more information, visit www.rand.org/about/principles. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. Published by the RAND Corporation, Santa Monica, Calif. © 2021 RAND Corporation is a registered trademark. Limited Print and Electronic Distribution Rights This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. Unauthorized posting of this publication online is prohibited. Permission is given to duplicate this document for personal use only, as long as it is unaltered and complete. Permission is required from RAND to reproduce, or reuse in another form, any of its research documents for commercial use. For information on reprint and linking permissions, please visit www.rand.org/pubs/permissions. Preface North Korea is one of the poorest countries in the world, with half its population living in extreme poverty. Much existing literature on North Korea focuses on the security situation in the Korean Peninsula and the paths to peace. We instead focus on blue-sky thinking that is not aimed at recommending political and security processes by which North Korea can get to a state of economic integration, but to contribute to developing a blueprint for economic reforms once the situation in North Korea becomes amenable to it. Toward this end, we develop a roadmap of reforms to enable investment flow into North Korea to create economic growth and development. Having such a blueprint will help the country if and when it gets integrated into the global community. And we entertain the likelihood that a focus on what is possible might even aid attempts at such integration in the first place. This report is likely to be of interest to scholars and policymakers alike who study and deal with North Korea. This study was undertaken by two divisions of the RAND Corporation: RAND Education and Labor and RAND Social and Economic Well-Being. RAND Education and Labor conducts research on early childhood through postsecondary education programs, workforce development, and programs and policies affecting workers, entrepreneurship, and financial literacy and decisionmaking. Questions about RAND Education and Labor should be directed to [email protected]. RAND Social and Economic Well-Being is a division of the RAND Corporation that seeks to actively improve the health and social and economic well- being of populations and communities throughout the world. For more information, email [email protected]. More information about RAND can be found at www.rand.org. Questions about this report should be directed to Krishna B. Kumar at [email protected]. Funding Funding for this research was provided by a grant from the Korea Foundation and by Frederick S. Pardee, whose generous gift in 2013 established the Pardee Initiative for Global Human Progress at the Pardee RAND Graduate School, which is aimed at offering bold new ideas for socioeconomic development and developing countries. iii Contents Preface ............................................................................................................................................ iii Figures............................................................................................................................................. v Tables ............................................................................................................................................. vi Summary ....................................................................................................................................... vii Acknowledgments .......................................................................................................................... xi Abbreviations ................................................................................................................................ xii 1. Introduction ................................................................................................................................. 1 2. An Assessment of North Korea’s Economic Landscape ............................................................ 7 A Brief Timeline of Economic Trends ....................................................................................... 7 Socioeconomic Indicators of North Korea ............................................................................... 11 3. Eye in the Sky: Tracking SEZ Activity Using Satellite Data ................................................... 19 Methodology ............................................................................................................................. 20 Findings .................................................................................................................................... 23 4. Priority Sectors to Target .......................................................................................................... 30 Insights from Trade Data .......................................................................................................... 30 Priority Sectors ......................................................................................................................... 35 5. Lessons for North Korea’s Development from Other Countries ........................................... 39 Similarities and Differences to Other Countries ....................................................................... 40 Reforms in Other Countries ...................................................................................................... 44 6. Frameworks to Attract Foreign Investment .............................................................................. 63 Increased Investment from Neighbors ...................................................................................... 64 Preconditions for Involvement of Multilateral Organizations .................................................. 66 Applying Existing Investment Frameworks to North Korea .................................................... 68 7. Reform Roadmap: A Synthesis ................................................................................................. 75 Prioritized Steps in the Roadmap .............................................................................................. 76 A Priority Ease of Implementation Matrix ............................................................................... 80 Roadmap Steps by Type of Activity ......................................................................................... 81 8. A North Korea Open for Business: Benefits for All ................................................................. 82 Appendix. Constructing Similarity Indexes .................................................................................. 83 References ..................................................................................................................................... 86 iv Figures Figure 2.1. Proliferation of Jangmadang in North Korea ............................................................. 10 Figure 2.2. GDP Growth Rate ....................................................................................................... 14 Figure 2.3. Energy Sources ........................................................................................................... 15 Figure 2.4. Capacity Factors by Generation Type ........................................................................ 16 Figure 2.5. Location of the Kaesong Industrial Complex ............................................................. 17 Figure 3.1. Nighttime Light in October 2019 for North Korea and South Korea ......................... 20 Figure 3.2. Light-Based Estimate of Economic Activity (Left) Compared with Population (Right) ................................................................................................................. 22 Figure 3.3. Four Snapshots of Light-Based Economic Activity for North Korean SEZs ............ 24 Figure 3.4. Light-Based Economic Activity