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Design of Infrastructure Development in North Korea: A Practical Approach March 2008 Kim, Won Design of Infrastructure Development in North Korea: A Practical Approach March 2008 Kim, Won Bae KRIHS 1

1. Rationale for Development Assistance To bring North Korea into dialogue so as to 1. Rationale for Development Assistance To bring North Korea into dialogue so as to seek a peaceful solution for nuclear problems l To induce North Korea to reform by helping the recovery of the North Korean economy l To facilitate inter-Korean economic cooperation and to build an integrated economy in the Korean peninsula l To promote regional economic cooperation and develop infrastructure networks in Northeast Asia l 2

2. Preconditions for Infrastructure Assistance North Korea must give up its nuclear ambition (the 2. Preconditions for Infrastructure Assistance North Korea must give up its nuclear ambition (the six-party-talks should render development assistance to North Korea) l North Korea embarks economic reforms and opening policy. l North Korea establishes genuine coexistence with South Korea. l North Korea, however, can maintain its polity and retains self-defense capability at least until 2020. l 3

3. The importance of infrastructure in the North Korean economy Food, energy and transportation 3. The importance of infrastructure in the North Korean economy Food, energy and transportation are three shortages l Food shortage can be relieved through institutional reform and other measures (UN and NGOs role would be significant here) l Energy shortage needs to be addressed quickly in order to make production activities normal l 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 l 4

3. 1 Status of infrastructure in North Korea Rail: Composed of east and west 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, 000 k. W, 100 million k. Wh) Type S. Korea N. Korea South/North ratio Port capacity 53, 278 3, 690 14. 4 Road & rail Generation capacity & volume Rail Road Rail 100, 278 3, 374 25, 185 5, 235 4. 0 0. 6 Capacity Volume 5, 996 3, 421 777 206 7. 7 16. 6 5 Source: NSO. 2005. 「Comparison of South and North Korea’s Socio-Economic Profile」.

3. 2 Assessment of Infrastructure in the North Huge gaps between the South and 3. 2 Assessment of Infrastructure in the North Huge gaps between the South and the North in terms of quantity and quality of infrastructure l Infrastructure stock value of NK is less than 1% of SK according to our estimation l On the whole, North Korea’s level approximates South Korea’s mid 1970 s l This poses a great obstacle to the recovery of the North Korean economy and to the construction of infrastructure networks in Northeast Asia l 6

4. Demand for Infrastructure l Three types of demands l Type I: Bilateral exchanges 4. Demand for Infrastructure l Three types of demands l Type I: Bilateral exchanges such as SK- NK and NK-China l Type II: Transit trade such as China or Russia using NK transport facilities to trade with third countries l Type III: Domestic demand 7

4. 1 Demand Assessment Demand Type III Transport Existing in a few crossborder areas 4. 1 Demand Assessment Demand Type III Transport Existing in a few crossborder areas Mainly in Rajin Not strong yet area Energy Existing in a few crossborder areas Russia’s interest area Badly needed for industrial production and daily life Communication Existing in a few crossborder areas Emerge in the long run Needed in major cities 8

5. Practical Approach to Infrastructure Collaborative approach is more effective l Two or three-way 5. Practical Approach to Infrastructure Collaborative approach is more effective l Two or three-way collaboration first under the six-party-talks framework and then multilateral collaboration l Encourage international consortium of public and/or private firms l International financial institutions’ support and private project financing when North Korea embarks on major reforms l 9

5. 1 Interests in Infrastructure Development Assistance by Country Prerequisites Country Commitment S. Korea 5. 1 Interests in Infrastructure Development Assistance by Country Prerequisites Country Commitment S. Korea U. S. China Japan Already participating Peaceful coexistence Security issue, human rights, etc. Conditional, indirect participation Security & regional stability Nuke Already participating Conditional, part of compensation Reg. Stability & influence Reg. Stability & econ. interests Very likely in rail & energy Reg. stability and Nuke, coexistence of S. & N. Korea Nuke, missile, abduction Russia EU IFI&UN Motivation Nuke econ. interests Nuke, human rights Conditional, likely thru a multilateral structure Reg. Stability & econ. interests Nuke, international norms Conditional, loans & special funds Responsible member 10

5. 2 Inter-Korean Projects in progress Inter-Korean cooperation projects include rail and road connections 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 l Any further infrastructure investments in North Korea require strong economic justifications and national consensus in SK l 11

5. 2. 1 Projects suggested by 2007 Inter. Korean Summit 12 5. 2. 1 Projects suggested by 2007 Inter. Korean Summit 12

5. 3 China-N. Korea Projects under discussion l Rajin port development l Rajin-Hunchun road 5. 3 China-N. Korea Projects under discussion l Rajin port development l Rajin-Hunchun road l New bridge over the Aprok river l Pyongyang thermo power plant l Most of these projects are related to China’s needs and some are packaged with natural resources development in NK 13

5. 4 Russia-N. Korea Projects under discussion l l l Khasan-Rajin rail renovation Oil 5. 4 Russia-N. Korea Projects under discussion l l l 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 Russia’s interest in earning income by exporting oil, electricity and natural gas as well as by using its transport facilities in the RFE 14

5. 5 Problems of Bilateral Approach l Rent-seeking by Pyongyang regime l Unnecessary competition 5. 5 Problems of Bilateral Approach l Rent-seeking by Pyongyang regime l Unnecessary competition and duplication of efforts by neighboring countries l Fragmented projects without coordination and loss of efficiency l Not conducive to forging regional cooperation in NEA 15

6. Economic Justifications for Infrastructure Development l In the short run, insufficient demand for 6. Economic Justifications for Infrastructure Development l In the short run, insufficient demand for most projects except for a few smallscale cross-border transport projects l Benefit-cost ratio unlikely to exceed 1 l When NK embarks major economic reforms and opening, BC ratio will increase due to the rise of inter- and intra-country demand for infrastructure 16

7. Basic Directions for Infrastructure Building Multilateral approach combined with bilateral approach l Demand-serving 7. Basic Directions for Infrastructure Building Multilateral approach combined with bilateral approach l Demand-serving and yet considering the supply-side effects l Flexible approach taking into account of larger issues and changing circumstances l Matching with SK’s long-term territorial development goals l 17

7. 1 Basic Design for Infrastructure l H-design composed of four corners (six later) 7. 1 Basic Design for Infrastructure l 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 l Six pockets of growth points to push the economy forward 18

7. 2 Phased Approach 1 st phase: four corners and partial connection with neighbors 7. 2 Phased Approach 1 st phase: four corners and partial connection with neighbors l 2 nd phase: completion of three axes and six growth points l 3 rd phase: completion of networks l Timetable would be 2008 -2012 for the 1 st, 2013 -2020 for the 2 nd, 2021 - for the 3 rd phase. But this timetable may change depending on the conditions to be satisfied or not l 19

7. 3 Reasons for Phased Approach l It is assumed that security issues will 7. 3 Reasons for Phased Approach l It is assumed that security issues will be resolved one way or another by 2012 l 2012 is the year of presidential election in S. Korea l Even small-scale projects takes minimum of 4 -5 years to complete l 2020 is the target year of S. Korea’s 4 th territorial development plan 20

7. 4 H-Design Infrastructure 21 7. 4 H-Design Infrastructure 21

8. Lifting up the Economy with Four Corners Shinuiju, Kaesong, Guemgangsan, and Rason are 8. Lifting up the Economy with Four Corners Shinuiju, Kaesong, Guemgangsan, and Rason are the four corners where crossborder exchanges have been occurring l These are natural anchor points to lift NK economy in the first stage and they have a special status l Neighboring countries have some interest in these areas l Bold measures are required to give them sufficient momentum l 22

8. 1 Reinventing the Four Corners l Shinuiju: gateway city to China l Kaesong: 8. 1 Reinventing the Four Corners l Shinuiju: gateway city to China l Kaesong: international enterprise zone (mostly for S Koreans now) l Guemgangsan: international tourist zone (mostly for S Koreans now) l Rason: transit trade center 23

8. 2 Two Additional Growth Points l Nampo: export-processing zone that will be turned 8. 2 Two Additional Growth Points l Nampo: export-processing zone that will be turned into a hi-tech center (esp, environment technology) l Wonsan: a center of logistics and shipbuilding in the east sea rim as well as a hinterland city for Guemgang. Seorak international tourist zone 24

8. 3 Assumptions in the H-design Even if North Korea takes a bold switchover, 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 l In this basic design, we assume the best possible scenario, i. e. , a successful economic transition l t 0 t 6 t 24 Successful reform Failed reform 25

8. 4 Corresponding industrial development in the North Phases of industrial development in the 8. 4 Corresponding industrial development in the North Phases of industrial development in the North are assumed to follow: l Export of light industry goods, primary goods and tourism and transit trade in the first phase (border cities) l Export of selected heavy industry goods with some technology, international logistics, and IT-related services in the second phase (coastal cities) l Export of intermediate goods with knowledge components and knowledge services in the third phase (large cities) l 26

9. Selecting Priority Projects l Given the variable constraints, e. g. , political and 9. Selecting Priority Projects l Given the variable constraints, e. g. , political and financial, priority projects need to be identified l Priority projects should satisfy multiple purposes of infrastructure building l Selected projects should play a catalyst role for NEA infrastructure networks building 27

9. 1 Selection Criteria for Priority Projects l l l l Revealed or potential 9. 1 Selection Criteria for Priority Projects l l l l Revealed or potential demand (C 1) Economic effects on the NK economy (C 2) Geo-economic integration of the peninsula (C 3) Contributions to regional cooperation (C 4) Ease of acceptance by NK (C 5) Acceptability and willingness of assistance by neighbors (C 6) Possibility of financing (C 7) 28

9. 2 Priority Projects and Assessment H: high, M: medium, L: low 29 9. 2 Priority Projects and Assessment H: high, M: medium, L: low 29

9. 2 Priority Projects and Assessment H: high, M: medium, L: low 30 9. 2 Priority Projects and Assessment H: high, M: medium, L: low 30

9. 2 Priority Projects l l l l st (1 Phase) Infrastructure development in 9. 2 Priority Projects l l l l st (1 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 31

9. 3 Catalyst Projects For multi-party collaboration Ƹ Rajin-Khasan and Rajin-Tumen rail renovation plus 9. 3 Catalyst Projects For multi-party collaboration Ƹ Rajin-Khasan and Rajin-Tumen rail renovation plus oil delivery, Rajin port renovation and industrial park (costing about $0. 5 bil. ) Ƹ Sinuiju special zone, new bridge and expansion of electricity supply ($0. 7 bil) l Inter-Korean projects Ƹ 2 nd phase Kaesong industrial park ($0. 5 bil), Mt. Baekdu tourism, Anbyun shipbuilding, and mineral resources development l 32

9. 3. 1 Tumen River Area - Rail and road connections among China, NK, 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 - 33

9. 3. 2 Crude Oil Delivery thru Rail 56 km rail renovation from Khasan 9. 3. 2 Crude Oil Delivery thru Rail 56 km rail renovation from Khasan to Rajin costing about $ 200 mil. - Russia supplies crude oil and imports refined products - 34

9. 3. 2 Sinuiju Special Zone -Special zone, new bridge, and increased electricity supply 9. 3. 2 Sinuiju Special Zone -Special zone, new bridge, and increased electricity supply from Soopoong dam - costing about $700 mil. 35

10. Investment Needs for Infrastructure Construction Estimates vary depending on assumptions, ranges from $20 10. Investment Needs for Infrastructure Construction Estimates vary depending on assumptions, ranges from $20 bil. to 700 bil. l KRIHS study adopted two methods (ratio of infrastructure stock over GNI and ICOR) l Over 14 year period (2007 -2020), estimates for investment needs for infrastructure range between $18 - 42 bil. dollars (1. 3 – 3 bil. per year) l 36

10. 1 Public Capital Mobilization $3 - 4 billion possible per year at least 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 l Compare with the costs of Iraq war 37 l

11. Institutional Arrangements for Infrastructure Projects l l l Maximize the opportunities for collaboration 11. Institutional Arrangements for Infrastructure Projects l l l 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 38

11. 1 KIEDO Structure KIEDO 6 PT members IFIs & IOs ROK: Chair & 11. 1 KIEDO Structure KIEDO 6 PT members IFIs & IOs ROK: Chair & Secretariat Private funds/firms Industry & economy Energy Transport & comm EU & other Countries Environment Training 39

10. 1 Institutional Arrangement for the 1 st Phase 6 -Party Talks Inter. Korean 10. 1 Institutional Arrangement for the 1 st Phase 6 -Party Talks Inter. Korean cooperation KIEDO Infra building in NK Other bilateral dev. assistance US Japan S. Korea EU + China & Russia TRADP Private Firms/NGOs 40

10. 2 Institutional Arrangement for the transition between 2 nd and 3 rd Phase 10. 2 Institutional Arrangement for the transition between 2 nd and 3 rd Phase Inter. Korean Cooperation Japan’s ODA Other bilateral dev. assistance 6 -Party Talks KIEDO Infra building in NK World Bank -led Consultative Group Project financing Special fund 41

10. 2 Institutional Arrangement for the 3 rd Stage NEA Security Organization Inter. Korean 10. 2 Institutional Arrangement for the 3 rd Stage NEA Security Organization Inter. Korean Cooperation Bilateral dev. assistance NEAIDO Infrastruct ure building in NK & NEA Project financing NEADB 42

11. Remaining Issues l Needs assessment reflecting NK’s reality and priorities l Synchronizing with 11. Remaining Issues l Needs assessment reflecting NK’s reality and priorities l Synchronizing with NK’s economic reform and opening policy l Coordinating bilateral projects l Setting up a channel for establishing KIEDO in the 6 PT 43

Thank you for your attention “Narrow path, thick brush and evening dew will not 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 44