December 17, 2015 12:00 pm JST

In need of foreign funds, North Korea courts tourists

ATSUSHI IJUIN

A screen at the Masikryong ski resort plays music videos of popular North Korean songs and displays information on mountain conditions. (Getty Images)

WONSAN, North Korea   "Tourist destination" is probably not a phrase many associate with North Korea, but with its economy in shambles, the reclusive regime is looking for foreign funds anywhere it can find them. And, as an official at the Academy of Social Science, Economy Institute, a government think tank, explained, "Catering to holidaymakers brings big returns for a relatively small investment."

     A three-day stay in the Wonsan-Mount Kumgang international tourist zone, a 430-sq.-km tract of land in the country's southeast, was one of the highlights of my recent visit to North Korea. Of all the special economic zones the country has created to attract foreign investment, it is devoting the greatest efforts toward developing this one.

HITTING THE SLOPES   Wonsan is a port city located on the Sea of Japan. Its beautiful, pine-dotted beaches attract foreign tourists and locals every summer. Mount Kumgang, meanwhile, is known for its stunning landscape with distinctive rock formations, lush forests and spectacular waterfalls and valleys.

   In June last year, Pyongyang announced plans to divide the zone into six areas to be developed individually. Among these, supreme leader Kim Jong Un ordered that the Masikryong ski resort be given top priority. By making extensive use of the military for construction, a resort with 10 slopes and two hotel complexes was quickly completed.

     According to the hotel manager, the highest point of the slopes is 1,360 meters above sea level. The ski season begins in late November and lasts through early April. Snow-making machines ensure the slopes stay open, even when there is not enough natural powder.

     The generous use of wood on the exterior and interior of the hotels creates a rustic, lodge-like atmosphere, and the staff are all carefully selected and well-trained.

     There are three grades of room, with rates for foreigners starting at $104 per night for one person or $143 for two. The hotel would not divulge rates for domestic guests.

    Roughly 30,000 people have stayed there so far, according to hotel officials, with Chinese visitors making up the bulk of foreign guests. The hotel has also received guests from Holland, Germany, the U.S. and Southeast Asian countries.

     In accepting reservations, priority is given to foreigners. North Koreans can only stay if rooms are available after foreign bookings are filled.

ALL-OUT EFFORT   The Masikryong resort has been advertised as being four hours from Pyongyang by bus. But the highway from the capital is badly maintained, making for an unpleasantly bumpy ride.

     Keenly aware of the need for improved transportation, Pyongyang decided to open an airport nearby by converting the Kalma military airfield into a civilian one. For a country that has long put top policy priority on defense, that is a bold decision -- and a clear reflection of just how seriously the regime is trying to mend its battered economy.

     From the top floor of a hotel in central Wonsan, I could see what looked like a passenger terminal across the bay, at the base of the Kalma Peninsula.

     "The plan is to convert it into a fully commercial airport comparable to any in the world," said Yu Kyong Il, a department head at the government-controlled Wonsan Zone Development company.

     "Negotiations are underway with Southeast Asian nations to have international flights," he added.

     According to the manager of the Masikryong hotel, the airport has already been used by overseas tourists. In September, visitors from Europe stayed at the hotel after arriving at the airport on chartered flights, he said.

     That a military facility -- particularly one as vital as an air base -- is being handed over for commercial use is an extraordinary development in a country like North Korea. It is also a clear sign that the country's supreme leader is determined to make a success out of the Wonsan-Mount Kumgang area.

MOUNTING CHALLENGES   Much more must be done, however, if Pyongyang really wants to make the area an international tourist destination.

     We experienced a blackout while dining at a restaurant in Wonsan. Just as in Pyongyang, solar panels could be seen on numerous apartment balconies in the port city. But the capital, where various party and government offices are concentrated, gets priority when it comes to allocating the power supply.

     And no matter how ambitious the developer is, attracting investment and visitors is never a given.

     At Mount Kumgang, we followed a trail that leads to the Kuryong Waterfall. It was a sunny weekend, but we came across only a handful of local hikers and visitors from China and Eastern Europe.

     In 1998, South Korea's Hyundai group started bringing South Korean tourists to the area. The endeavor, initiated by group founder Chung Ju-yung, was seen as a symbol of the "sunshine policy," the conciliatory approach of then-President Kim Dae-jung toward the North.

     This tourism business helped bring roughly 2 million visitors from the South to the mountain before it was suspended after a fatal accident in 2008 -- a North Korean soldier shot dead a South Korean woman who had wandered into a restricted area.

     Most of the service areas and other facilities built by the Hyundai group have been abandoned since the flow of tourists dried up. 

FOREIGNERS WANTED   To solicit tourism-related investment, North Korean authorities have been holding briefings inside and outside the country. "Chinese businesses make up a large proportion, but some in Southeast Asia and Europe are also showing interest," an official at the Wonsan development company said.

     "We would welcome investment and tourists even from those countries, such as America and Japan, with which we have no diplomatic ties and whose governments are hostile toward us," the official added.

     But the biggest target for Pyongyang's pitch is South Koreans, who share the same ethnic heritage and a strong affection for Mount Kumgang.

     "The authorities in the South have been trying to block us (from having more active tourism exchanges)," said the official who arranged our tour of Mount Kumgang. "We think it would be best if the Hyundai group returns."

     There is speculation that the Masikryong ski resort is being developed with an eye toward a possible joint hosting of the 2018 Winter Olympic Games, to be held in South Korea's Pyeongchang.

     As keen as North Korea is for foreign investment, however, businesses see reason to remain wary. Egypt's Orascom Telecom Holding has been providing wireless telecommunications services in North Korea through a joint venture with the country's ministry of telecommunications. The company has reportedly had some issues with the North Korean government restricting its ability to send profits back to Egypt.

     Pyongyang has taken some steps toward building a legal framework for investor protection, but it remains to be seen whether the move will create a genuinely business-friendly environment.

BROKEN BANKING  Financial reform remains key to North Korea's future, as it affects both the health of the domestic economy and the country's ability to attract foreign investment.

     Over the past few decades, the North Korean won has depreciated drastically, resulting in a stunning gap between the official and black-market exchange rates. This has prompted citizens to hoard cash at home, exacerbating the shortages of funds available for businesses to invest.

     During our visit, the official exchange rate posted at hotels and airports was around 106 won to the dollar. An exchanger at a Pyongyang supermarket was buying the greenback at 7,850 won -- more than 70 times higher than the official rate. This huge gap can cause headaches for foreign businesses when they try to repatriate their won-denominated profits.

     An interesting development in big cities is the growing use of the Narae card, a prepaid card that allows payments to be made in a foreign currency.

    The cards, issued by the country's trade settlement bank, can be loaded up at banks and at shops that accept them. Foreigners can also use the Narae card, which is easily purchased at hotels and shops.

     In North Korea, certain payments, such as taxi fares and mobile phone bills, must be made in a foreign currency. The Narae card is good for such payments, and it is also accepted at a growing number of retailers.

     In 2006, the North Korean banking system was thrown into disarray when the government implemented a one-for-one exchange of the 100 won bill with the new 1 won bill. The impact of this redenomination was made worse by a cap on the amount that could be exchanged for the new bills.

     Researchers at the Academy of Social Science, Economy Institute admit that many challenges remain.

     "To make the most of the funds that citizens are hoarding, we should improve trust in banks," one said.

     Pyongyang enacted a commercial banking law in 2006, but locals continue to rely on black-market lending services.

Atsushi Ijuin is a principal economist at the Japan Center for Economic Research. This is the second part of a two-part series.

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