How do you explain concepts like transparency and corporate governance to the citizens of a famously secretive state? And how do you begin to illustrate market pricing or the idea of a return on investment to those who have lived in a centrally controlled economy (outside of its large black markets) since 1948?
These are questions that Geoffrey See, CEO and founder of the nonprofit educational training company Choson Exchange, has had to answer in his six years running business seminars in North Korea. Now that the country is actively seeking foreign investment, people like See believe its time to press harder to support the Democratic Peoples Republic of Koreas nascent domestic business culture.
Choson, which is incorporated in Singapore and New York, focuses its work on small and medium enterprises (SMEs). Its seminars cover such topics as business management, economic policy and rule of law, and are attended by policymakers and businesspeople alike. Part of Chosons work is research, so Sees team also compiles reports on North Koreas changing economy for academics as well as the occasional hedge fund.
In a separate but related project, See, who has a BS in economics from the University of Pennsylvanias Wharton School and an MA in East Asian studies from Yale University, is also establishing a business incubator in the DPRK, in a special economic zone north of Pyongyang. It will invite international experts to lead seminars, not on new mobile apps but on brick-and-mortar industries. We recently spoke with See from Singapore to discuss his work and the enormous changes hes seeing in North Korea.
Institutional Investor: How would you describe the evolution of North Koreas economy since you started Choson Exchange?
See: We started in 2009, but Id say that since 2012 weve seen much more consistent and positive developments on the economic front. In 2012 the government announced a set of reforms related to agriculture. Well, maybe reform is too strong a word for it; lets say economic experiments. They said they were going to share the crops with farmers. That was a positive step. And what were hearing from North Korean businesspeople on the ground is that it has become a lot easier to set up businesses. There has also been increased trade with China, pretty much from 2010 onward. Last year it stalled a bit, but it had been consistently growing for six or seven years until then.
What would people be surprised to learn about North Koreas economy?
People understand North Korea as a state-run economy. But at the grassroots level, theres an informal market where people are essentially running private businesses on a small scale. That is well studied. Whats understudied are the small and medium enterprises that in many ways resemble privately owned companies. The SMEs are affiliates of state-owned enterprises, and the managers of the affiliates have a huge degree of discretion about how they want to run the business. They take a share of the profits. In some cases they can keep a majority share of the profits.
How are these unlike private companies?
One of the key differences is the legal structure. Affiliates cant show ownership over a business, which means the incentive is not to keep cash in the business and keep it going but to take the profits out as fast as possible. Because if you get transferred or theres a restructuring, for example, you wouldnt have official ownership, so you wouldnt get the benefits. Thats a huge hindrance to investors looking at this kind of thing. Otherwise the SMEs have potential these are the businesses that are scalable. They have an incentive structure.
Do you have an example?
We could look at restaurants. On my first trip to North Korea, when I went to see the restaurants, I was really surprised. They are well stocked. Its a very competitive market. They have a lot of innovation; a lot of new shops are coming up.
What typical questions do foreigners ask about North Korea?
Two years ago people often asked whether Kim Jong Un was a reformer or not. But the questions now are a lot more practical theyre about how to do business in North Korea.
How do you answer the question about Kim Jong Un?
I say, Ive never met him. You might want to check with Dennis Rodman. But in general our sense is that the change is consistent but slow. Politically, its still extremely restricted.
What sectors are foreign investors asking you about these days?
With rising incomes theres more consumption, so were seeing more retail spaces coming up. People are expressing interest in shopping centers, malls and things, but real estate is still risky. Also, the government is pushing very hard for tourism. While theres huge potential, the challenge is that its an industry that needs capital. Whether tourism can be successful will depend on the Norths relationships with China, Japan and South Korea.
A video the state media recently made to promote foreign investment in the DPRK includes a map showing links between North Korea and countries in Europe and the Middle East. Are these places investing in the DPRK?
I think theres more noise than signals in this area. Theres a degree of interest from various parts of the world in the North Korea market, people believe the underlying potential is there, but in terms of actual investment results, theres not a lot. The legal structure is inadequate and poorly evolved, and because of that there is much less investing than what there could be with a more transparent system.
Is the Kim regime interested in solving these problems?
One of the huge challenges of working with North Korea is the lack of frequent communication and interaction with international society. So theres a big gap between what they see as the challenges to pulling in investors and what we think is the problem. Some people there will blame sanctions for the lack of investments, even though U.S. and U.N. sanctions are not embargoes. So while thats an issue, its not the main problem. Foreigners are much more frustrated by arbitrary laws and general opacity, lack of labor mobility and so on. But theres a growing awareness about this.
How do you handle the ethical issues around working in the DPRK?
I think you have to make sure youre contributing to making the system more transparent, and make sure that youre working with partners who are not under sanctions, of course. At the end of the day, the exposure that North Koreans get to the way the rest of the world operates is important for improving the domestic environment. Were not talking about working with the existing system. Were saying, if youre serious, this is how its done in other places.
Can you tell us about your women-in-business seminars?
Its our longest-running program, and were very proud of it. We focus on women for a couple of reasons. For one thing, in the 1990s when the famine happened and the economy collapsed, a lot of women were the ones who went out to the market to run businesses. Its a patriarchal society, so men had to stay in government-appointed jobs. On the other hand, its still a very patriarchal place and women dont receive the same access to training and networks that male counterparts get, so thats why were trying to focus on women through the program.
What are the economic ideas that are most challenging for your trainees to understand?
Pricing, especially land pricing. One thing people find confusing is that the market sets the price; you dont set a price range. For some North Koreans this is a foreign concept. The idea that you can change your job if you dont like what youre doing and move to another job is also alien. People are used to being tied to the workplace. This has a lot of implications because people dont think in terms of planning their career, not in the sense that we do.
What is your plan for the business incubator? What kinds of start-ups do you hope to launch?
The incubator will overlap with Choson Exchange in that some people who go through our training will be able to do something launch a start-up at the end. Were thinking of providing seed financing to get these businesses started; then well put them through an accelerator program, three months of training on something specific to the business theyre trying to set up. We havent made any decisions about what to fund, but theres a guy whos interested in creating dishwashing soap and wants to get it distributed across North Korea. Someone else came to us with the design for a window that has a solar panel that adjusts based on the angle of the sun. These are examples of the feel on the ground, what people are excited about.
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