When it comes to emerging markets, every year
seems to bring a new frontier. A change of leadership, policy or even growth
metric pushes hitherto unknown investment destinations into the spotlight. A
couple of years ago, it was Myanmar. The military junta there declared Myanmar
open for business, President Barack Obama visited and suddenly a place which
previously was better known for George Orwell’s, “Burmese Days” became
somewhere people were looking for investment opportunities on the ground.
To this list of emerging nations, we can add
North Korea. China’s Ministry of Commerce in Beijing publishes guidelines on
business in almost every global destination: among them, countries like
Afghanistan and North Korea. According to the guide, the Chinese Development
Bank has a “working team” operating out of North Korean capital Pyongyang,
which will advise Chinese business on how to obtain credit[1].
The guidebook goes on to talk about two Special Economic Zones (SEZ) just
inside the border with China.
Apparently, the Chinese Ministry of Commerce
aren’t the only ones getting in on the action, either. Famed investor Jim
Rogers told Forbes Magazine a little under a year ago that he was also looking
to dip his toes into North Korea. In an interview, Rogers told the magazine,
“what you’ll have is a country of 70 odd million people with cheap, educated,
disciplined labor in the North, vast natural resources . .with a big capital pool and management capability
in the South. It will be a powerhouse.”[2]
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| Pyongyang: Investment haven. |
The resources that Rogers referred to include
huge mines with vast quantities of anthracite (coal), iron ore and rare earth
minerals, most of which have been swallowed up by Chinese resource mining
companies. With precious few investment opportunities left in this sector (the
North Koreans weren’t going to let it lie unused, even if they do preach
communism), opportunities lie in some of the Chinese companies that have access to the resources
and stand to capitalize on them.
However, it’s not just these large, industrial
scale businesses which are providing returns. In essence, every sector in the
economy has the potential to benefit from the catch-up effect (“convergence”).
In North Korea, this is more real an economic phenomenon than anywhere else.
The catch-up effect is the hypothesis that incomes in underdeveloped economies
will tend to grow faster than those in their more developed counterparts. In layman’s terms, this is another way of
saying that these economies have more “low-hanging fruit.”
The “low-hanging fruit” argument seems to make
more sense for North Korea than most other emerging economies on the surface,
at least. It shares borders with two countries: China and South Korea and has
ample coastline to develop trade. In 2011, its GDP per capita was estimated at
around $1,800 – or a little over 5% of the equivalent metric in South Korea[3].
Cleary, sharing a border doesn’t guarantee growth (look at the US and Mexico)
but it’s not a bad place to start.
According to Chinese academics in Yanbian,
between 40 and 50% of North Korean families operate directly in the underground
markets of North Korea, with most of the country’s economic activity taking
place within the semi-legal sphere. A broadening consensus is that this is the
stream of economic activity which will turn into a flood[4]. This
will only increase now that there is a high-speed train line coming from North
Korea or that mobile communications networks are in place.
In fact, on that very point – mobile
communications – an opportunity for indirectly investing in North Korea
presents itself in the form of Orascom (see here), an Egyptian mobile telecoms
provider which caters to the 1 million North Korean mobile phone users.[5] As
we know, if there’s one thing that promises to grow quickly once mobile
telecommunications has arrived, is trade (illegal and legal). The government
can interfere with the network, but realistically, one gets the feeling that
North Korea is ready to make a move forward.
Obviously, western investors should be weary.
“Contracts don’t hold much weight,” says a senior fellow from the Council on
Foreign Relations. Likewise, never underestimate cultural barriers,
particularly when dealing in an area which has been cut off from the rest of
the world for so long. Likewise, in the mid-term at least, you can forget a
stable currency or a predictable legal environment. But these are typical
characteristics of such markets and it would be naïve to expect anything else.
“This place is like China in the 1980s,” one
Chinese serial investor told Forbes in 2014. It’s a nice sound bite but there
may be something more to it; investment opportunities are arising in North
Korea far faster than one might think. Establishing reliable contacts on the
ground (no easy thing), investing indirectly through Chinese consumer and
mining firms and finding niches (as with any market) currently present the best
opportunities. North Korea represents an opportunity for investors one way or
the other – of that, there is little doubt.
[2] http://www.forbes.com/sites/gordonchang/2014/03/23/jim-rogers-wants-to-put-all-his-money-into-this-country-is-it-the-next-china/
[5] http://www.wsj.com/articles/SB10001424052702304458604577487572176127932
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