World has changed around North

On the last day of the Peace Odyssey, we arrived at Fangchuan, where the Tumen River flows into the East Sea, at the border of North Korea, China and Russia. I was here during the winter 21 years ago, walking the same path. It was good to see that the mountains and the river stayed the same, but I felt mixed emotions that the tensions between the two Koreas also stayed the same.

One thing, however, has changed. China has changed. The narrow road leading to Fangchuan from Hunchun along the Tumen River 21 years ago has become a straight highway. High-speed rail is also connected to Hunchun.

In 1994, China’s gross domestic product per capita was only $472, but it grew to $7,400 in 2014. From the northern tip of Dandong to the southern city of Guangzhou, China’s east coast has become the world’s largest manufacturing base. South Korea and China are now the closest economic partners. The economic landscape surrounding China and the Korean Peninsula has changed. After witnessing China’s change, Kim Jong-il once quoted an old Korean saying: “Mulberry plantations have changed into a sea.”

What’s important is that the economic value of North Korea has skyrocketed. Although the North has not changed much, the outside environment has. The residents of China’s East Coast near the North are earning nearly $20,000 in per capita income. The South has also become one of the world’s largest economies.

The areas in the North between Kaesong and Nampo, Pyongyang and Sinuiju are the only undeveloped parts of Northeast Asia. It’s like a farmer who refused to accept the changes in the world, while the areas surrounding his farm grew into a city with apartment complexes.

This is an important development. Whether the North seeks to change itself or whether the South and the international community succeed in leading a change in the North, the conditions are still
important.

The cheap labor of the North is already an object of competition between the South and China. In the Kaesong Industrial Complex, 54,000 North Korean laborers are working, and another 40,000 are also working at the factories in China near the border. The workers in China are receiving about $400 a month, more than double the salary of $150 for those at the Kaesong Industrial Complex, because the wages in China have skyrocketed in recent years.

North Korean land will also be important. When the North becomes a reliable place to invest and the necessary infrastructure is completed, the land between Kaesong and Sinuiju will have the same value as China’s coastal areas, which offer similar logistics conditions. Over the past decades, land prices in Chinese coastal areas have skyrocketed. At the same time, the potential value of North Korean land has also increased.

When Chinese land prices go up, the potential of North Korean land also goes up. After China opened up, its land prices became a reference to the future prices of North Korean land. But in both countries, land is state property. It can be an important breakthrough for concerns about the cost of unification.

In November 2014, the Financial Services Commission said about $140 billion will be required to develop infrastructure in North Korea over the next 20 years. It is an enormous amount and concerns are high about how to come up with the resources.

For example, building a highway linking Kaesong to Sinuiju should be paid for by collecting tolls, but the period will be too long and the profitability low.

But when we change perspective, we can see a new way. North Korea is the last untouched land in the manufacturing hub of Northeast Asia. When roads are built to link the South, the North and China, the price of the land along the roads will go up as high as the Chinese coastal areas. In other words, the true profit of building a highway will not come from collecting toll fees, but from the increased land
prices.

Normally, landowners would benefit, but fortunately, property is state-owned in the North. This mechanism should be used. Bonds based on the projected profits from increased land prices should be issued to fund the construction and repaid when the land prices go up. The more the North is developed, the higher land prices will go. The cost of unification will not be an issue.

In fact, China operates this way, and the government collected $600 billion by renting state-owned lands in 2014 alone. That is four times higher than the cost of the North’s infrastructure investments over the next two decades.

The main driving force of changing the North must be found inside the North. Political motivation may be uncertain, but there is more than enough economic potential. China’s rise and the market principle of scarcity are heightening North Korea’s economic value day by day. It is not the time to have unfounded concerns about unification costs. It is time to observe the changes and collect wisdom.

Translation by the Korea JoongAng Daily staff

JoongAng Ilbo, Sept. 25, Page 33

*The author is a research fellow of the Korea Institute of Finance.

by Jee Man-soo