The development plan for North Korea should focus on “infrastructure connectivity” to link the isolated country to the surrounding region of Northeast Asia – which, along with Western Europe and North America, is one of the world’s top three zones of economic activity – while providing corridors of development within the nation.

This was the proposal put forward by Professor Naoyuki Yoshino, head of the Asian Development Bank Institute in Tokyo, who spoke on Friday at the Foreign Correspondents Club of Japan on “North Korea – the ‘Next Big Thing’ for the East Asian Economy.”

In fact, this proposal significantly mirrors a proposal laid out in a USB and given to North Korean leader Kim Jong-un by South Korean President Moon Jae-in during their April summit.

An optimist’s outlook

Yoshino is an optimist.  He described how North Korea today reminded him of his first visits to China in the early 1990s – though he says Pyongyang is more developed than Beijing was back then.  Indeed, he expects that within 20-25 years, North Korea will reach China’s current level.

He proposed a development scheme for North Korean centering on ‘infrastructure connectivity’ – the idea being to build highways and railways in North Korea and connect them to South Korea and China.  Besides expanding North Korean imports and exports, which he said will lead to economic development, he also suggested building businesses, hotels, restaurants and the like along the infrastructure corridors, providing an economic spillover effect.

The resulting tax revenues – along with user charges – would be enough, he argued, to pay for the infrastructure loans to the North Korean government that finance the original and subsequent construction.

But how North Korea will develop a local and national taxation system to handle and efficiently disperse the aforementioned tax bounty was left unclear. At present, North Korea has no national tax system.

Yoshino favored outside loans – from both government and private investors – rather than grants or subsidies, and 15-20 year payback periods. Loans, he suggested, create a certain discipline – and a requirement to perform.

Dictatorship and transformation

Yoshino noted the importance of stability to allow economic development and proposed “10, maybe 20, maybe 30 years” of continued dictatorship in North Korea – while the economy becomes market-oriented. He admitted, though, that South Korean audiences disagree with him on this point.

As for transforming North Korean minds, he believes education and incentives are essential.

Yoshino pushed the idea of cultural exchanges aiding North Korea’s transformation – with Western nations inviting North Korean students and teachers to go and learn about their countries, systems and technologies. He compared this transformative effect to what happened to the PRC when Chinese students started going overseas from the early 1990s. In 10-15 years, he said, this could make a real difference.

And North Koreans could gradually join international organizations such as the World Bank and IMF, further exposing them to mainstream thinking – and further transforming the country.

The professor pointed out – without apparent irony – that North Korea had many engineers well versed in military and nuclear fields and they might be repurposed to teach non-military engineering subjects.

As for transforming North Korea’s socialist economy and state-owned enterprises (SOEs), the solution was in injecting employee incentives to include bonuses for better performing workers and managers, he said.  This, he argued, leads to gradual change away from command economy thinking and to better governance structures.

The professor cited the need to address North Korea’s currency if economic development was to happen and proposed a gradual shift to a “basket approach” using a selection of differently weighted foreign currencies, such as the Korean won, the euro, the yen, the US dollar and the Chinese yuan.

While a markedly changed North Korea is hard for many observers to imagine, Professor Yoshino suggested looking at the progress China and Southeast Asian nations had made over the last 25 years. He claimed North Korea could achieve similar economic and physical transformations.

Investment, risk or gamble?

But when asked how much this kind of transformation might cost, the professor was unclear. Given the political risk inherent in doing business with North Korea, he suggested that international organizations and Asian governments, rather than corporates or banks, would have to shoulder the burden of funding.  However, he cited North Korea’s mineral resources as possible collateral for foreign lenders.

He also noted that a legal framework for all the above would be essential.

Asked whether Kim Jong-un could be a “North Korean Deng Xiaoping,” Yonshino responded: “If Kim allows the market to be more capitalist, than he will be Deng.”

He also recommended a stance against the current North Korean obsession with Special Economic Zones, suggesting it is better to seek economic development along infrastructure corridors, aiming for an “economic spillover.” This would require local governments to work with companies coming in.

Still, there was some cynicism among the audience.

Recalling American boxer Mike Tyson’s comments about everyone having a plan until they get punched in the nose, one German attendee noted that before German re-unification there were multiple plans for how things would play out – but few things worked as expected once the Berlin Wall fell.

An American lawyer and business advisor with long experience in frontier markets warned of even greater challenges with North Korea.

“For a country to be considered a frontier market … there must be some rudimentary legal system that recognizes property rights and enforceable contracts,” he said. “Without some foundational acceptance by North Korea of the rule of law, an investor is unable to evaluate its unique risk factors such as lack of electricity, the possibility that export products produced by prison gulag labor will be barred from other markets, or the likely re-imposition of sanctions.”

This means that the risks facing North Korea far exceed those in other frontier markets.

“For a country that has been ruled for decades at the whim of a single individual – commercial law concepts are literally unheard of,” he said. “[Investors are] better advised to invest in games of chance in Macau – where if they beat the odds, the rules allow them to retain their winnings from the house, [but] there are no such rules against ‘the house’ in North Korea.”