Eager for trade, North Korea looks to China

[September 06, 2011]  RASON, North Korea (AP) -- A paved Chinese highway edged with telecommunications towers and electricity lines comes to a halt at the border with North Korea, giving way to a landscape seemingly frozen in time.

Oxen plow the fields and cooking smoke rises from farmhouses where fish and tobacco are laid out to dry. A scarecrow lists in a sea of bright green rice plants. In the distance, three men on horseback race toward a small village.

Cutting through this remote idyll is a yellow ribbon of pale dirt that is the start of a Chinese-built road to the port of Rason that North Korean officials envision as a pathway to prosperity bringing in investors, tourists and much-needed hard currency.

The project shows that North Korea is turning to China to revive a moribund economy, relinquishing years of wariness toward its giant neighbor and its market reforms in a sign of desperation.

For China, the road offers a quick route from its landlocked northeast to the ocean, big investment opportunities and a chance to prevent instability in its neighbor.

Chinese travel agents, potential investors and foreign journalists recently traveled into the North to get a look at the special economic zone Pyongyang is promoting in Rason. It lies in the far northeastern tip of North Korea, 600 miles (1,000 kilometers) from Pyongyang, but will be about an hour's drive from China once the road is completed.

Rumbling Chinese cargo trucks already ply the route, churning up plumes of choking dust and ferrying containers of Chinese-made shoes, plastic toys, computer speakers, T-shirts and DVDs to the Rason Free Trade Market.

The market, a 13-year-old experiment in small-scale capitalism, has been so successful that the Chinese managing company, the Tianyu Group, is planning to expand the jam-packed 54,000-square-foot (5,000-square-meter) market to 320,000 square feet (30,000 square meters), Tianyu vice director Zheng Zhexi said.

"As I see it, this is the way of economic development, and it's something that the people want," Zheng said. "I think it's reached a point where it cannot be reversed."

North Korea declared the area a special economic zone 20 years ago. But after a brief flurry of activity and funding from the U.N. Development Program, the project languished without backing from Pyongyang's leadership.

Leader Kim Jong Il had long worried about becoming overly reliant on China, and during a decade of warming ties on the Korean peninsula, he focused on building ties with newly rich South Korea. However, nearly all trade and joint ventures have come to a standstill since President Lee Myung-bak took office in 2008 with a tough policy toward North Korea.

With North Korea's estimated yearly gross domestic product hovering at just $1,800 per person, building the economy is at the core of Kim's current government policy. A succession campaign to groom his son as the country's next leader have added urgency to the economic push.

Rason has benefited from the shift in Pyongyang's priorities. When Zheng arrived in 1997 to set up the market, people were hesitant to get involved. Now Tianyu doesn't have the space to approve even a fraction of the applications from prospective vendors, he said.

"Ordinary people's sense and the awareness of the market, and their views on the economy -- all these have changed a lot," Zheng said.

Foreign journalists, who typically are barred from local markets, were taken on a strictly controlled, 15-minute tour. No photos, no notes, the guide instructed: "Just use your eyes."

Vendors, mostly women, stood behind stands loaded with freshly skinned rabbit and live chickens, as well as goods mostly imported from China: blouses, speakers, refrigerators, sofas, shampoo, playing cards, binoculars.

High heels went for 25 yuan (US$4), a Kim Jong Il-style beige suit for 85 yuan ($13) and a container of sea salt for 3 yuan ($0.47).

North Korean tour guide Mun Ho Yong, 25, said his family shops at the market several times a week to supplement state rations of rice, oil and fish.

Everything Mun wore -- striped dress shirt, belt, polyester trousers and black dress shoes -- was bought at the market except his pin of late President Kim Il Sung attached to his shirt, over his heart.

One major challenge will be to successfully leap from the market's small-scale commerce to full-fledged manufacturing and trade.

Chinese companies are attracted to North Korea's cheap labor, but Rason Vice Mayor Hwang Chol Nam acknowledges that region isn't fully ready for factories: It lacks Internet and mobile phone roaming service and suffers frequent blackouts and train disruptions.

Officials also will have to convince the Chinese it's safe to invest in Rason in the wake of last months' seizure of South Korean assets last month at a resort at Mount Kumgang, or Diamond Mountain.

Hwang promised legal protections and financial benefits.

He said investors will be allowed to fully own businesses in Rason -- an exception in a country where businesses are largely state-owned. Enterprises that invest more than 30 million euros will be tax-exempt for four years, and get a 50 percent break on income tax after that.

"We think it is important to build a good climate for world investors so we are laying the legal foundation and providing favorable conditions for them," said Hwang, who speaks fluent English and Russian.

But paving the road must come first.

"No one is going to invest in a port when getting the goods from port inland is a real trial," said Andray Abrahamian, executive director of Singapore-based Choson Exchange, which facilitates educational exchanges with North Koreans and has been assessing Rason's laws. "The road really has to come first."

Meanwhile, North Korea is fast-tracking tourism through Rason.

It can be notoriously hard for foreigners to get visas to visit North Korea. However, all foreigners can visit Rason visa-free -- if their trips are booked through an approved travel agency, said Park Chol Su, vice chairman of Korea Taepung International Investment Group, a North Korean agency set up to attract foreign investment.

"It's a big change," said Park. "We are completely open."

Still, tourists must leave their cell phones behind in China and remain in their guides' company at all times.

Last week, Taepung tested a new idea: a cruise ship from Rason to scenic Mount Kumgang near the border with South Korea.

Chinese passengers gave the 21-hour trip mixed reviews, saying they enjoyed the scenery but not the facilities aboard the creaky, 1970s-era Mangyongbong ship. Cabins were musty and meals served cafeteria-style on metal trays. There were no showers.

"If they are going to run a cruise like this, there needs to be better facilities and maybe some entertainment, too, for the people on board," said Wang Zhijun, manager of Baishan Hotel in China's Yanji city.

The cruise ended with an embarrassing thud Friday: The ship rammed into the Rason dock, splintering a few yards (meters) of concrete.

No one was injured, but the accident could have been avoided if smaller boats had tugged the ship in, Chinese tour guide Yu Guoli said.

Unfortunately, he said, the port isn't yet capable of providing such services.

[Associated Press; By ALEXA OLESEN]

Associated Press writer Jean H. Lee contributed to this report from Seoul, South Korea.

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