Aid to DPRK drops in H1 2014

July 2nd, 2014

According to Yonhap:

International humanitarian assistance to North Korea tumbled nearly 50 percent in the first half of this year from a year earlier, a U.S. radio report said Wednesday.

Citing the United Nations Office for the Coordination of Humanitarian Affairs (OCHA), the Washington-based Voice of America said North Korea received US$19.6 million of humanitarian aid in the January-June period, down 45 percent from the same period last year.

The report, however, gave no reason for the on-year plunge.

Six countries offered aid to the impoverished country during the six-month period, down from 10 a year earlier.

Switzerland led the pack with $3.82 million, followed by Sweden and Canada. No data was available on aid from Australia, Germany, Italy and Ireland, which provided assistance to the communist country last year, the report said.

Over 65 percent of the aid has been allocated to improve food security and nutrition in the country, it added.

So far this year, the U.N. has extended $6.49 million in the Central Emergency Relief Fund (CERF) to five of its agencies working in the communist state. The CERF is a type of pooled funds managed by the OCHA to assist humanitarian operations in any country experiencing acute or large, on-going crises.

Read the full story here:
Humanitarian aid to N. Korea nearly halves in H1: report
Yonhap
2014-7-2

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Farewell Choco Pie?

July 1st, 2014

News media reports claim that the DPRK has banned the use/possession of Choco Pies in the Kaesong Industial Complex.

According to the Washington Post:

By some estimates, as many as 2.5 million Choco Pies were traded monthly — though it’s unclear who exactly was so assiduously following Choco Pie markets.

Regardless of its volume, the trade will now surely be shrinking.

According to recent reports in the South Korean press, North Korean authorities have now banned the South Korean-produced Choco Pie at the Kaesong Industrial Complex following a lengthy crackdown on the chocolate treat that has made it scarce in Pyongyang.

Before, workers could pocket as many as 20 pies every night of work. But now, South Korean factory staff said they’ll instead get sausages, instant noodles, powdered coffee or chocolate bars as a bonus.

You can read the full story here.

More information here and here.

Previous posts on the Kaesong Industrial Complex here.

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Bank of Korea on DPRK economy in 2013

June 27th, 2014

The South Korean central bank, the Bank of Korea, publishes an annual summary of the DPRK’s economic performance the previous year. The 2013 report is out. You can also download it on my DPRK Economic Statistics Page.

Here is a summary in Yonhap:

The Bank of Korea (BOK) estimated that the country’s economy expanded 1.1 percent in 2013, slowing from a 1.3 percent on-year expansion in the previous year.

In 2012, the North Korean economy was estimated to have grown at the fastest pace in four years, after contracting 0.9 percent and 0.5 percent in 2009 and 2010, respectively.

A BOK official explained that while the North’s construction sector shrank last year, its agricultural output improved on favorable weather conditions.

An expansion in production of coal and iron ore also lent support to growth, the official added.

Pyongyang’s construction industry contracted 1 percent on-year, compared with a 1.6 percent decline in 2012, as an increase in the number of residential buildings failed to offset falling demand for road construction works.

Its agricultural and fishery industry, which accounts for 22.4 percent of its total output, expanded 1.9 percent last year, slowing from a 3.9 percent growth in 2012.

Growth in its mining and manufacturing industries, which account for 35.7 percent of overall output, gained traction to reach 1.5 percent, up from 1.3 percent a year earlier.

The data, meanwhile, showed that North Korea’s nominal gross national income (GNI) came in at 33.8 trillion won (US$33.3 billion) last year, which is roughly 2.3 percent of South Korea’s 2013 GNI of 1,441.1 trillion won.

The Wall Street Journal’s Korea Real Time notes the following:

“North Korea has neither the capability to collect and analyze all the relevant data necessary to measure its own GDP growth nor the willingness to disclose them to the outside world,” says Mr. Cho.

Marcus Noland published a graph of korean growth rates from 1990-2013 and offered comments on the BOK’s methodology:

Noland-Koreas-GDP-growth-2013

And Noland’s comments:

According to the report, BOK constructs its national income account estimates “using basic data on North Korea’s economic activities supplied by relevant institutions…GDP at current prices is estimated with the use of South Korean prices and value-added ratios.”

What this means in non-economist speak is that someone (the NIS?) gathers data using some sources and methods which presumably put an emphasis on physical indicators that are easily countable. So that, as a practical matter, the South Korean authorities may have a better grasp of output in some sectors (like coal, where it’s easy to count railcars leaving a limited number of mines) and less on say services such as education where both the quantity and quality are more difficult to observe. Not surprisingly, the agricultural and industrial sectors of the economy show more output variability than does services. Whether this reflects reality or just problems counting physical indicators for services is unknown.

Then, having obtained these physical measures of output, we need prices and value-added weights to aggregate them into a single measure of the value of output. According to the BOK report they use South Korean prices and value-added weights. There are two problems here, though one problem may be diminishing over time. The first problem is that the relative price structures of the North and South Korea economies are not the same. However, over time it appears that the structure of domestic prices in both economies is getting more like world prices, and hence more like each other. So differing relative prices is probably less of an issue today than say 20 years ago.

Its less clear that the problem is disappearing with respect to the use of South Korean value-added weights that reflect the underlying techniques of production which remain vastly different across the two economies. Bottom line: we know there are some non-trivial problems with using the South Korean data to construct the North Korean GDP estimates.

Rumors have long circulated that the South Koreans either obtained or constructed a North Korean input-output table which they could use for these calculations, and contrary to the statement in the BOK report, weights derived from this source are used to construct the North Korean national income estimates, not the South Korean value-added weights. I personally do not know whether these claims are true or not.

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On the DPRK’s official retail sector

June 27th, 2014

The Daily NK has published an article describing how the DPRK retail sector works. It is far from perfect, but it explains some of how the complicated retail and distribution systems work.

Daily NK recently interviewed Hwang Cheol Min, who left North Korea in 2012 after eight years as manager of a commercial administration office in North Pyongan Province. He gave the latest details on the distribution of consumer goods and other products.

-What is the function of administration offices such as yours?

It’s the agency that manages the distribution of goods in a given city or county. Goods produced by factories in accordance with the national economic plan are transferred to them through provincial, municipal, and county wholesalers, and we then supply those goods to state-owned stores.

-How are the managers of such entities selected?

Managers of county-level ones are selected from among provincial Party cadres. Municipal ones are chosen through consultation between the Central and provincial arms of the Party. The necessary requirements for the job are, first, a good Party record, and then a business degree and work experience in the sector. Many are graduates of Jang Cheol Gu Pyongyang Commercial University and Wonsan University of Economics.

- What is the affiliation of these offices, and how are they organized?

They are positioned under the commercial departments of municipal people’s committees. Municipal ones are classified as “1st class enterprises,” and deal with various things like planning, commerce, accounting, labour, logistics, etc. This is what makes them bigger than county-level ones. Managers of “general stores,” which are under the administration offices, must be ratified by the municipal Party, while those responsible for ordinary stores are chosen from within the executive branch of the administration office. The executive branch is composed of a junior Party secretary, departmental secretary, and a manager, whose daily reports get reported to the city, provincial, and Central Party by the Party secretary.

- How are they comprised?

They have a Commercial Administration Section, Food Services Section, Conveniences Section, and Services Section (this office oversees things like bathhouses, massage parlors, and hairdressers). The Services Section was once classified under the Conveniences Section, and the Food Services Section was under the Commercial Administration Section, but they were both hived off after jangmadang (markets) cropped up in the 1990s.

Each Food Services Section has about 500 restaurants within its remit, of which less than 100 are state-owned; all the rest are private. But to run a private restaurant you need a certificate confirming approval from the Food Services Section. It used to cost 50,000 won a month in fees, too, which the Food Services Section must transfer up to the relevant people’s committee. Individual targets for the Food Services and Services sections are set by the planning section of the relevant people’s committee, while the overall Commercial Administration Office plan is set by the State Planning Commission. Food Services and Services sections often bribe people’s committees to get their targets reduced so they have a chance to make a profit.

- How many shops are in the average city and what is their function?

Shops are the places that directly supply and sell the goods to residents. There are those that sell foodstuffs and others that sell light industrial goods. In a city of seventy thousand households, there would be seventy stores; one per every thousand families, and six of the larger general stores. Store managers submit a list of their households to the commercial administration office, and in turn they get goods like doenjang [fermented soybean paste], soy sauce, salt, shoes, toothbrushes, etc. from the office, which they are then meant to supply to residents.

-What goods do these offices distribute?

Those manufactured in North Korea, and those supplied by the UN. During the [presidencies of Kim Dae Jung and Roh Moo Hyun], volumes of UN goods rose dramatically. When UN goods arrived at the port at Nampo, they were greeted by the United Front Department of the Party and the Central Wholesale Office. The former body divided them up by origin (China, US, and South Korea), removed all South Korean labels and handed them over to the latter. They took bribes from local commercial offices seeking to receive a greater share of the UN goods […] UN goods supplied the seed money for Kim Jong Il’s “gift politics.”

-What are the key parts of such an office’s plan?

The agencies must distribute Class 1 consumer goods such as alcohol, doenjang, shoes, soap, toothbrushes, toothpaste, etc. to individual families on the four major holidays (Chinese New Year’s Day, February 16th, April 15th, and Chuseok). However, an even more important thing is keeping the 4th Warehouse [for strategic goods] stocked. If the manager fails to send 5% of production to the 4th Warehouse then he can be held legally responsible.

Also, military goods in the warehouse must be replaced once every three years with new ones. These warehouses are often located in remote mountainous spots, and nobody can go in there except the Party secretary, commercial administration office manager, and 4th Warehouse employees.

-What is their present condition?

Take the cosmetics factory in Sinuiju that Rodong Sinmun [recently] said was operating normally. The Commercial Administration Office should receive seventy thousand bars of soap monthly from the factory, but if they don’t pay a monetary sum worth roughly thirty thousand bars of soap at market price to the factory, they won’t get it. The agency will then immediately sell forty thousand bars of soap on the open market in order to recoup the purchase price. The same goes for shoes as well. The purchase price of a pair of running shoes is two pieces of rubber. The agency must pay the market price of rubber to the factory in order to receive the shoes.

In this situation, the commercial side will cooperate with store managers to engage in trade. The store managers obtain loans from donju [money men, often Chinese-Koreans], then use the funds to order goods from the administration office. The office is permitted to buy and sell goods nationally, and has a license to trade with China, so they use the money to trade in sugar, flour, oil, refrigerators, etc. from China. These are then sold at wholesale prices to stores. The stores will then sell the goods at a price slightly higher than the market price. If the scale of the trade gets bigger, the office can enlarge operations by obtaining bank loans on the pretext of “bringing to fruition the Party’s plan of enhancing citizens’ living standards.”

-Do North Korean banks charge interest on loans?

There is no interest on bank loans in North Korea. A commercial trader is backed by the name of a state agency, so once his credit has been confirmed the bank manager sets a lending schedule and just transfers the cash. However, if the borrower does not give 20% to the bank manager at the time of the transfer then he won’t be able to transact future loans. Just like the saying “money goes to money,” the bank manager profits readily at the expense of the nation.

Some additional information on the DPRK’s official retail sector can be found here (page 414).

I am working on a more comprehensive organization chart.

Read the full daily NK story here:
The Hidden World of NK Commerce
Daily NK
Seol Song Ah
2014-06-27

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Potato prices falling

June 23rd, 2014

According to the Daily NK:

Potato prices are declining in many areas of North Korea as a result of the first new potatoes of the season arriving on the market. In North Korea, new potatoes are planted at the end of March or beginning of April, depending on the climate that year, and are harvested in the middle of June.

Until the end of last month, a kilo of potatoes cost 800KPW (North Korean won) in public markets, but prices have since fallen by half.

“Because it is hard to survive solely on grains such as rice and corn here, demand for potatoes is high,” a Yangkang Province source told Daily NK on the 23rd. “The current decline in potato prices will slightly lessen the burden for those people who constantly worry about their food supply.”

In addition, “Rice and corn prices are on the increase when compared to last month, whereas potato prices are declining in most regions, including Pyongyang, Pyongsung, Chongjin and Hyesan,” the source added.

According to the source, some of the new potatoes are distributed to farming households, while others go onto the market where they are bartered for fertilizer to be used for other crops later in the season. The current declining price reflects the fact that most people prefer to sell new potatoes rather than store them, because they go bad more rapidly than old potatoes, which are planted in the spring and harvested in the autumn.

“A lot of people are relieved that potatoes are getting cheaper,” the source said. “This spring rice fell to 4,000KPW per kilo but then rose again. This seems to have pushed people into stocking up on food.”

New potatoes have long been cultivated as a main staple in colder regions of North Korea, particularly Yangkang and North Hamkyung provinces. However, during and after the ‘Arduous March’ (the North Korean famine of 1994-1998), southerly regions also began to plant them to help ameliorate chronic food shortages.

“In some regions the potato harvest started last week so farm workers are able to breathe more easily,” the source said. “Since Management Committees and individual work units are giving potatoes to the market to obtain fertilizer for fall vegetable farming, prices have fallen to 500 KPW. People are happy with that.”

The current price of potatoes in Hyesan is 500KPW per kg, which is 200 KPW less than the same time last year. “However, the current potato price can only last until the end of the month,” the source warned. “By July, when farmers face some of their biggest difficulties, prices look set to rise again.”

Read the full story here:
Prices Fall on First New Potato Harvest
Daily NK
Kang Mi Jin
2014-06-23

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Mobilization of idle funds emphasized for fiscal expansion

June 20th, 2014

Institute for Far Eastern Studies (IFES)
2014-6-18

With the international sanctions against the DPRK and the country’s continual isolation, North Korean authorities are stressing the need to mobilize the “cash in the closet” being kept by more and more North Korean people and institutions.

According to an article published in the Kim Il Sung University Gazette (Vol. 1, 2014, January 20), “The Basic Direction of Financial Management and Measures to Resolve Funding Problems Based on Kimilsung-Kimjongilism,” one solution to finance the enormous defense and economic construction costs is to “mobilize idle funds.”

The article states the following: “Some of the funds that are being circulated in the market have strayed away from the normal production process and distribution passage and remain harbored in the hands of organizations, enterprises, and people. . . . Mobilization of idle funds shall meet the funding needs of the state and serve as a source of supplementary income to increase state revenue.”

The article adds that “The state should secure idle funds of institutions and enterprises through banks and mobilize idle cash kept by the people through savings and insurance,” and furthermore states that “Banks should concentrate to have control over idle funds.”

According to the article, “Dependence on foreign aid to resolve funding problems will lead to continuous financial subjugation.” Mobilization of idle funds is seen as a necessary policy to realize the national goal of “autonomous economy,” which takes precedence over attracting foreign investment.

Since the early 2000s, North Korea has emphasized the need to mobilize institutions’ and persons’ idle funds. But the North Korean people remain reluctant to save money in banks for the fear of revealing their income to authorities and anxiety over the possibility of losing their savings.

The recent increase in North Korean academia’s emphasis on the “fiscal expansion through the mobilization of idle funds” began from late last year, but it also appears to serve the purpose of attracting capital to fund economic development zone projects, which is currently suffering from fund shortages.

North Korea continues to seek opportunities to expand trade and exchanges with Russia and China but is also turning an eye toward the domestic market to fully maximize its objective of fiscal expansion.

In addition, the issue of introducing commercial banks (as a means to effectively mobilize idle funds of the private sector) is being raised again — a policy that remained inactive for a decade due to insignificant results.

North Korea instituted the Commercial Banking Act in 2006, but the actual operation of the bank has yet to be confirmed.  

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New KNIC web page

June 19th, 2014

The Korea National Insurance Corporation (KNIC) has a new web page that is internet accessible. Martyn Williams was the first to notice it. Although the web page offers information in English and Korean, I have only examined the English portal and I am unaware if there are significant differences between the two.

According to the web page:

KNIC, as a sole insurer of the DPR Korea has over 10 provincial insurance branches and over 200 insurance offices at municipal (district) and county levels under its umbrella nationwide and representative offices overseas.

The English web page provides basic financial and corporate information from 2008-2012. You can check out financial highlights, underwriting performance, and the consolidated balance sheet. It is unclear why 2013 and Q1 2014 data is not presented, but it is not like the shareholders or regulators are going to be up in arms about it.

On the corporate side we have a letter from the chairman of the executive management committee (since there are no shareholders he cannot be chairman of the board of directors)–again seeming to date from late 2012 or early 2013. We also see a list of the members of the executive management committee and an organization chart. The organization chart shows a list of internal divisions but does not explain how KNIC is linked to the cabinet.

KNIC posted a table of financial data (all numbers are in millions of KPW and cannot be verified):

KNIC-table

The chart shows gross written premiums (총접수보험료) experienced an average growth of 16.6% (from 41,939m KPW to 48,905m KPW) between 2008 and 2012. Investment revenue (투자수입) also increased 87% (from 1,597m KPW to 2,996w KPW). Profits (순소득), however, fell 31% on average from 8,041m KPW in 2008 to 5,544m KPW in 2012. So over time, the firm has experienced increasing costs. I am not sure what these costs are, but if you love forensic accounting, please go through the financial reports and let me know.

The DPRK won experienced a significant loss in value compared to the US$ on the black market in 2012, falling from 4,400 to 9,100 per 1$. Using an annual average rate of 6,750 KPW to the US$, profits totaled just $821,333. Using the black market rate of 9,100, profits total $609,203. Using the official rate of 100KPW to the US$, profits grow to $55.44 million. Using the official Euro rate of 130KPW, profits total E42.64 million.

It is unclear what exactly “Pre-state payment result” (국가납부전 결과) is, but I believe it is the equivalent of “Earnings Before Taxes (EBT)” under Generally Accepted Accounting Principles (GAAP). Since the DPRK has officially abolished taxes, direct cash transfers to the state must take another name, so it appears to simply be “State Payment”, but it is definitely not “tax”.

“Profit for the year” listed for each year is .675 of the “Pre-state payment result” which tells us the unofficial tax rate on the firm is a flat 32.5% (1-.675) on net earnings.

It is unclear what happens with profits in these firms. In privately owned firms in capitalist countries, profits are generally reinvested in the business or distributed as dividends to shareholders, partners, or proprietors.

Moving on to the corporate side, the web site lists the following major operational departments:

1. Property Insurance Department is in charge of non-life insurance classes, such as property, crop, livestock, engineering and motor applied from institutions, enterprises, cooperatives and individual citizens.

2. Marine Insurance Department handles such lines as marine hull, cargo and liability, aviation hull and liability applied from institutions, enterprises and cooperatives.

3. Life Insurance Department provides life and personal accident coverage applied from institutions, enterprises, cooperatives and individual citizens.

4. Economic Cooperation Insurance Department offers different classes of insurance to newly developed economic zones and foreign invested enterprises (foreigners, joint ventures, representative offices, correspondent branch offices, embassies and international organizations) including Rason Economic and Trade Zone and Hwanggumphyong and Wihua Islet Economic Zone.

5. Reinsurance Department organizes reinsurance protection for primary insurance accounts written by KNIC. This department has a bad reputation in the west.

6. Investment Department conducts investment activities into financial securities and mining, and manages non-insurance enterprises like a shipping company.

7. Additional divisions: Market Research, Insurance Cooperation, Financial Supervision, Finance & Accounting, Administration and Protocol, all of which are engaged in their respective functions.

 

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UN World Food Program cuts nutrition program for DPRK

June 19th, 2014

According to Yonhap:

The World Food Programme (WFP) has decided to curtail its nutrition program for North Korean babies and pregnant women by about 30 percent due to a lack of funding, a U.S. report said Thursday.

The WFP is operating the two-year nutrition program worth US$200 million in North Korea through 2015, targeting 2.4 million children under the age of 5 as well as pregnant women.

But a lack of funding seemed to lead the U.N. food agency to decide to reduce the operation of its nutrition program, according to Radio Free Asia (RFA).

The WFP’s total budget for its humanitarian aid to North Korea reached $137.5 million, down about 30 percent from its original plan, according to the report, it added.

The number of North Korean children and pregnant women who benefited from the WFP’s program reached some 840,000 last month, far below the agency’s target.

Ertharin Cousin, the executive director of the WFP, said in late May in Seoul that its nutrition program stands at a “very crucial juncture,” adding that it had received only 20 percent of the funding required to implement the program.

The North has relied on international handouts since 1995 to help feed its people suffering from chronic food shortages.

The WFP’s humanitarian aid to North Korea reached $26.56 million last year, compared to $86.94 million in 2012, according to the U.N. food agency.

In November, the agency said that food production in the North is estimated to have been 5.03 million metric tons in 2013, up 5 percent from the previous year.

Stephan Haggard has a review of the WFP’s efforts in the DPRK here.

Read the full story here:
Underfunded WFP cuts nutrition program for N. Korea: report
Yonhap
2014-6-19

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DPRK creates Ministry of External Economic Affairs

June 18th, 2014

According to KCNA:

Ministry of Foreign Trade Reorganized as Ministry of External Economic Affairs

Pyongyang, June 18, 2014 20:58 KST (KCNA) — The DPRK decided to reorganize the Ministry of Foreign Trade as the Ministry of External Economic Affairs of the DPRK by merging the Joint Venture and Investment Commission of the DPRK and the State Economic Development Committee of the DPRK with it.

The Presidium of the DPRK Supreme People’s Assembly promulgated a decree in this regard on Wednesday.

Here is what Choson Exchange, who predicted the merger, had to say:

We think this is a good thing. Investor agreements, ‘exclusive’ rights and attraction need to be streamlined to prevent multiple ‘exclusive’ rights being sold. While this can bureaucratize the investment process, things really can’t get more bureaucratic than it is now in North Korea.

Here are previous posts on the Ministry of Foreign Trade, the Joint Venture Investment Commission (JVIC), and the State Economic Development Committee (SEDC).

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ROK private sector aid to the DPRK at low

June 16th, 2014

ROK-DPRK-aid-Hankyoreh

According to the Hankyoreh:

In terms of levels of private-sector [interchanges], the situation is even worse than the previous all-time low under the Lee administration. According to the annual White Paper on unification published in March, the total amount of private aid to North Korea authorized by the Ministry of Unification in 2013 stood at 5.1 billion won (US$5million). This amount not only pales in comparison to the 90.9 billion won (US$89.3million) okayed in 2007, the last year of the Roh Moo-hyun administration, but is only one-sixth the 31.0 billion won ($30.5 million) annual average during the Lee years. Even in 2011 and 2012, years when interchange and cooperation with North Korea were banned under the May 24 measures adopted in the wake of the ROKS Cheonan sinking, aid from NGOs amounted to 13.1 billion won (US$12.9million) and 11.8 billion won (US$411.6million), respectively. Between 120,000 and 180,000 people traveled between the Koreas under the Lee administration in comparison with last year’s total of 76,000. The Ministry of Unification is calling the numbers misleading.

“Last year, there was not any real aid to North Korea until August because all ties had been cut off after their third nuclear test in February,” a senior ministry official said on condition of anonymity. “The amount of aid and the number of people involved in exchange fell because there was a six-month vacuum,” the official explained.” The NGOs are countering by arguing aid has remained at a low 2.1 billion won (US$2.06million) this year, despite a lack of major frictions.

There are, however, signs of some change in inter-Korean interchange though the NGOs are cautioning against reading too much into the government’s decisions. On June 4, the Ministry of Unification approved the first agricultural exchange effort since the May 24 measures. The Gyeongnam Unification Agricultural Cooperation Committee has sent 33 million won (US$32,400) worth of strawberry seedlings to North Korea, where they are to be grown for four months before being brought back South

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