Design of Infrastructure Development in North Korea: A Practical Approach

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Design of Infrastructure Development in North
Korea A Practical Approach

• March 2008
• Kim, Won Bae
• KRIHS

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1. Rationale for Development Assistance

• To bring North Korea into dialogue so as to seek
  a peaceful solution for nuclear problems
• To induce North Korea to reform by helping the
  recovery of the North Korean economy
• To facilitate inter-Korean economic cooperation
  and to build an integrated economy in the Korean
  peninsula
• To promote regional economic cooperation and
  develop infrastructure networks in Northeast Asia

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2. Preconditions for Infrastructure Assistance

• North Korea must give up its nuclear ambition
  (the six-party-talks should render development
  assistance to North Korea)
• North Korea embarks economic reforms and opening
  policy.
• North Korea establishes genuine coexistence with
  South Korea.
• North Korea, however, can maintain its polity and
  retains self-defense capability at least until
  2020.

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3. The importance of infrastructure in the North
Korean economy

• Food, energy and transportation are three
  shortages
• Food shortage can be relieved through
  institutional reform and other measures (UN and
  NGOs role would be significant here)
• Energy shortage needs to be addressed quickly in
  order to make production activities normal
• Transportation is essential for the development
  of the North Korean economy and it is critical
  for the integration of North Korea into the
  regional economy

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3.1 Status of infrastructure in North Korea

• Rail Composed of east and west lines due to
  topography, 10 arterial railways
• Road Composed of five axes, supplementing the
  rail system
• Ports Underdeveloped and 8 major trade ports
• Airports 33 airports but only one international
  airport
• Energy Dilapidated facilities with
  inefficiencies
• Communication Networks centered on Pyongyang,
  mostly manual exchange system

(Units 10,000 ton, Km , 10,000kW, 100 million
kWh)
Source NSO. 2005. ?Comparison of South and North
Koreas Socio-Economic Profile?.
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3.2 Assessment of Infrastructure in the North

• Huge gaps between the South and the North in
  terms of quantity and quality of infrastructure
• Infrastructure stock value of NK is less than 1
  of SK according to our estimation
• On the whole, North Koreas level approximates
  South Koreas mid 1970s
• This poses a great obstacle to the recovery of
  the North Korean economy and to the construction
  of infrastructure networks in Northeast Asia

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4. Demand for Infrastructure

• Three types of demands
• Type I Bilateral exchanges such as SK-NK and
  NK-China
• Type II Transit trade such as China or Russia
  using NK transport facilities to trade with third
  countries
• Type III Domestic demand

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4.1 Demand Assessment
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5. Practical Approach to Infrastructure

• Collaborative approach is more effective
• Two or three-way collaboration first under the
  six-party-talks framework and then multilateral
  collaboration
• Encourage international consortium of public
  and/or private firms
• International financial institutions support and
  private project financing when North Korea
  embarks on major reforms

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5.1 Interests in Infrastructure Development
Assistance by Country
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5.2 Inter-Korean Projects in progress

• Inter-Korean cooperation projects include rail
  and road connections at Gyeongui and Donghae
  lines, Kaesong industrial park, and Guemgangsan
  tourism area
• - 2007 Inter-Korean Summit added a few more
  projects
• Any further infrastructure investments in North
  Korea require strong economic justifications and
  national consensus in SK

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5.2.1 Projects suggested by 2007 Inter-Korean
Summit
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5.3 China-N. Korea Projects under discussion

• Rajin port development
• Rajin-Hunchun road
• New bridge over the Aprok river
• Pyongyang thermo power plant
• Most of these projects are related to Chinas
  needs and some are packaged with natural
  resources development in NK

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5.4 Russia-N. Korea Projects under discussion

• Khasan-Rajin rail renovation
• Oil delivery through rail and refining at Sonbong
• Vladivostok-Chongjin electricity
• In the longer term, oil and natural gas pipelines
  and TSR-TKR connection
• Most of these projects are related to Russias
  interest in earning income by exporting oil,
  electricity and natural gas as well as by using
  its transport facilities in the RFE

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5.5 Problems of Bilateral Approach

• Rent-seeking by Pyongyang regime
• Unnecessary competition and duplication of
  efforts by neighboring countries
• Fragmented projects without coordination and loss
  of efficiency
• Not conducive to forging regional cooperation in
  NEA

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6. Economic Justifications for Infrastructure
Development

• In the short run, insufficient demand for most
  projects except for a few small-scale
  cross-border transport projects
• Benefit-cost ratio unlikely to exceed 1
• When NK embarks major economic reforms and
  opening, BC ratio will increase due to the rise
  of inter- and intra-country demand for
  infrastructure

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7. Basic Directions for Infrastructure Building

• Multilateral approach combined with bilateral
  approach
• Demand-serving and yet considering the
  supply-side effects
• Flexible approach taking into account of larger
  issues and changing circumstances
• Matching with SKs long-term territorial
  development goals

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7.1 Basic Design for Infrastructure

• H-design composed of four corners (six later) and
  three transport axes (east, west, and horizontal)
  to lift up the North Korean economy and connect
  to the regional economies of NEA
• Six pockets of growth points to push the economy
  forward

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7.2 Phased Approach

• 1st phase four corners and partial connection
  with neighbors
• 2nd phase completion of three axes and six
  growth points
• 3rd phase completion of networks
• Timetable would be 2008-2012 for the 1st,
  2013-2020 for the 2nd, 2021- for the 3rd phase.
  But this timetable may change depending on the
  conditions to be satisfied or not

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7.3 Reasons for Phased Approach

• It is assumed that security issues will be
  resolved one way or another by 2012
• 2012 is the year of presidential election in S.
  Korea
• Even small-scale projects takes minimum of 4-5
  years to complete
• 2020 is the target year of S. Koreas 4th
  territorial development plan

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7.4 H-Design Infrastructure
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8. Lifting up the Economy with Four Corners

• Shinuiju, Kaesong, Guemgangsan, and Rason are the
  four corners where cross-border exchanges have
  been occurring
• These are natural anchor points to lift NK
  economy in the first stage and they have a
  special status
• Neighboring countries have some interest in these
  areas
• Bold measures are required to give them
  sufficient momentum

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8.1 Reinventing the Four Corners

• Shinuiju gateway city to China
• Kaesong international enterprise zone (mostly
  for S Koreans now)
• Guemgangsan international tourist zone (mostly
  for S Koreans now)
• Rason transit trade center

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8.2 Two Additional Growth Points

• Nampo export-processing zone that will be turned
  into a hi-tech center (esp, environment
  technology)
• Wonsan a center of logistics and shipbuilding in
  the east sea rim as well as a hinterland city for
  Guemgang-Seorak international tourist zone

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8.3 Assumptions in the H-design

• Even if North Korea takes a bold switchover, its
  economy would not grow rapidly if major economic
  reforms are not taken. Furthermore, reforms may
  not guarantee a success
• In this basic design, we assume the best possible
  scenario, i.e., a successful economic transition

t0
t6
t24
Successful reform
Failed reform
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8.4 Corresponding industrial development in the
North

• Phases of industrial development in the North are
  assumed to follow
• Export of light industry goods, primary goods and
  tourism and transit trade in the first phase
  (border cities)
• Export of selected heavy industry goods with some
  technology, international logistics, and
  IT-related services in the second phase (coastal
  cities)
• Export of intermediate goods with knowledge
  components and knowledge services in the third
  phase (large cities)

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9. Selecting Priority Projects

• Given the variable constraints, e.g., political
  and financial, priority projects need to be
  identified
• Priority projects should satisfy multiple
  purposes of infrastructure building
• Selected projects should play a catalyst role for
  NEA infrastructure networks building

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9.1 Selection Criteria for Priority Projects

• Revealed or potential demand (C1)
• Economic effects on the NK economy (C2)
• Geo-economic integration of the peninsula (C3)
• Contributions to regional cooperation (C4)
• Ease of acceptance by NK (C5)
• Acceptability and willingness of assistance by
  neighbors (C6)
• Possibility of financing (C7)

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9.2 Priority Projects and Assessment
H high, M medium, L low
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9.2 Priority Projects and Assessment
H high, M medium, L low
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9.2 Priority Projects (1st Phase)

• Infrastructure development in the nodal points
• Rajin- Hunchun/Khasan road
• Rajin-Khasan rail, Khasan-Rajin oil delivery and
  Sungri petro-plant
• Rajin port renovation
• Dandong-Sinuiju new bridge electricity
• Vladivostok-Cheongjin electricity
• Second stage Kaesong Industrial Park
• Anbyun Shipbuilding yard

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9.3 Catalyst Projects

• For multi-party collaboration
• ? Rajin-Khasan and Rajin-Tumen rail renovation
  plus oil delivery, Rajin port renovation and
  industrial park (costing about 0.5 bil.)
• ? Sinuiju special zone, new bridge and
  expansion of electricity supply (0.7 bil)
• Inter-Korean projects
• ? 2nd phase Kaesong industrial park (0.5
  bil), Mt. Baekdu tourism, Anbyun shipbuilding,
  and mineral resources development

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9.3.1 Tumen River Area

• - Rail and road connections among China, NK, and
  Russia
• Rajin as a logistic hub for Tumen River area
• TRADP as a useful mechanism

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9.3.2 Crude Oil Delivery thru Rail

• 56km rail renovation from Khasan to Rajin
  costing about 200 mil.
• Russia supplies crude oil and imports refined
  products

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9.3.2 Sinuiju Special Zone
-Special zone, new bridge, and increased
electricity supply from Soopoong dam - costing
about 700 mil.
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10. Investment Needs for Infrastructure
Construction

• Estimates vary depending on assumptions, ranges
  from 20 bil. to 700 bil.
• KRIHS study adopted two methods (ratio of
  infrastructure stock over GNI and ICOR)
• Over 14 year period (2007-2020), estimates for
  investment needs for infrastructure range between
  18 - 42 bil. dollars (1.3 3 bil.per year)

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10.1 Public Capital Mobilization

• 3 - 4 billion possible per year at least for 10
  years if NK takes a bold switch-over policy
• - SK 1-2 billion
• - Japan 1 billion
• - US a few hundred million
• - Other six party members a few hundred
  million
• - EU and other countries a few hundred
  million
• Compare with the costs of Iraq war

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11. Institutional Arrangements for Infrastructure
Projects

• Maximize the opportunities for collaboration with
  neighboring countries (i.e., UNDP TRADP)
• KIEDO (Korean Peninsula Infrastructure
  Economic Dev. Org.) can be considered during the
  resolution process of security issues (in the
  first phase)
• Special trust fund can be set up at the World
  Bank in the second stage to coordinate
  infrastructure and development assistance to NK
• In the long run, ideas of NEADB or NEAIC can be
  considered for the NEA region including North
  Korea
• Or international financial institutions can be
  utilized when North Korea meets the requirements

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11.1 KIEDO Structure
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10.1 Institutional Arrangement for the 1st Phase
TRADP
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10.2 Institutional Arrangement for the transition
between 2nd and 3rd Phase

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10.2 Institutional Arrangement for the 3rd Stage

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11. Remaining Issues

• Needs assessment reflecting NKs reality and
  priorities
• Synchronizing with NKs economic reform and
  opening policy
• Coordinating bilateral projects
• Setting up a channel for establishing KIEDO in
  the 6PT

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Thank you for your attention

• Narrow path, thick brush and evening dew will
  not deter us as long as we believe we are not
  wrong
• From Tao Yuanming