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North Korea needs more reform to win China investment: South
SEOUL (Reuters) - North Korea needs to make it far easier to invest in its destitute economy if it is to have much hope of tempting in Chinese money, South Korea's central bank said on Thursday.
The isolated North's new leadership has been signaling in recent weeks plans to repair an economy brought to its knees by decades of mismanagement and international sanctions, but will rely heavily on neighboring ally China to do so.
A study released by the Bank of Korea, one of the few sources of information on the North's economy, said that if successful, manufacturing investment from China could help transform a country whose national output in real terms is estimated by the United Nations to be smaller than it was some 20 years ago.
But the report warned that the North still had a long way to go to emulate the legal reforms undertaken by China in modernizing its centrally planned economy, something that Chinese premier Wen Jiabao raised with the North's effective second-in-command on a recent visit to Beijing.
"China indicated that for the special (economic) zones to become active, a more market-friendly regulatory system is needed," the central bank report said.
"This is apparent in the comments by Premier Wen Jiabao at his meeting with Jang Song-thaek that North Korea must present a more favorable set of conditions to companies by incorporating market principles in supporting regulations such as in real estate and taxation."
Jang, the uncle of young and inexperienced leader Kim Jong-un, visited Beijing earlier this month and asked China to agree to a formal state visit by the North's 20-something year old head in September, a senior source with close ties to Pyongyang and China told Reuters.
He also sought more Chinese investment after the North this year formally announced changes to investment laws for two economic zones bordering China.
Between 2003 and 2009, Chinese investment in North Korea stood at $98.3 million, just 12 percent of the amount Chinese firms have invested in South Korea, according to Chinese data cited in a 2011 report by Drew Thompson, a Korea specialist who now works at the U.S. Department of Defense.
ISOLATED AND POOR
North Korea has been effectively cut off from the global financial system since its debt default in the mid-1980s and subsequent sanctions over its weapons programmes.
The collapse of the Soviet Union removed one of its main sources of aid and its nuclear programme has turned North Korea into one of the most sanctioned states on earth, making it almost entirely reliant on China for trade, aid and investment.
South Korea has ended most economic cooperation with the North apart from an industrial zone on the heavily militarized border between the two after the killing of a South Korean tourist in 2008 and the sinking of one of its warships in 2010.
North Korea has experimented with foreign investment since the mid-1980s despite its official economic policy of self-reliance but a mish-mash of laws and lack of property rights has stymied its ability to attract funds, analysts say.
The country sits on significant deposits of coal, iron ore and gold and has substantial reserves of rare earths. But a rickety infrastructure and uncertain laws deters investors.
It's one successful joint venture is the Kaesong Economic Zone with South Korea, which is effectively subsidized by the South Korean government.
This year, North Korea' state news agency KCNA published new investment laws for the Rason and Hwanggumpyong and Wihwa Island special economic zones on China's border.
The Rason zone was set up in 1993 and its laws have been amended six times due to disappointing investment, according to specialist North Korea website 38North (www.38North.org).
The new laws sought to prioritize high technology, manufacturing and services, diversifying the North away from minerals, the mainstay of its exports to China.
Among the incentives offered were allowing 50-year land leases, the right to choose who to hire and how much to pay them as well as tax incentives, access to financial services and the promise to use international standards and a formal dispute mediation process, according to KCNA.
Although Kim Jong-un has changed the image of North Korea's leadership after the end of the austere 17-year rule of his father Kim Jong-un, who presided over a devastating famine in the 1990s, real change has been hard to detect.
"We still have to see whether Kim Jong-un will succeed or not. There are many Chinese businessmen who make the trip to the zones but few end up signing contracts," said a high-ranking government official in South Korea, who declined to give his name as he was not authorized to comment on the issue. (Editing by Jonathan Thatcher)
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