North Korean Economy Watch

Korea Economic Institute
Oh-Seung Yeul

February 2005

Download in PDF: Oh.pdf

Trade, reform, inter-Korean cooperation, China, IT, aid.

Check it out.

KIEP has published the North Korea Development Report 2003/04 (follow the link to download all several hundred pages!)

Summary: As a result of North Korea’s isolation from the outside world, international
communities know little about the status of the North Korean economy and its
management mechanisms. Although a few recent changes in North Korea’s economic system have attracted international interests, much confusion remains as to the characteristics of North Korea’s recent policy changes and its future direction
due to the lack of information. Therefore, in order to increase the understanding of readers in South Korea and abroad, KIEP is releasing The North Korea Development Report in both Korean and English. The motivation behind this report stemmed from the need for a comprehensive and systematic investigation into North Korea’s socio-economic conditions, while presenting the current status of its industrial sectors and inter-Korean economic cooperation. The publishing of this second volume is important because it not only supplements the findings of the first edition, but also updates the recent changes in the North Korean economy. The topics in this report include macroeconomics and finance, industry and infrastructure, foreign economic relations and inter-Korean economic cooperation, social welfare and science & technology.

This report also covers the ‘July 1 Economic Reform’ launched two years ago and
subsequent changes in the economic management system. The North Korea
Development Report helps to improve the understanding of the contemporary North
Korean economy.
Table of Contents  
 
Part I Macroeconomic Status and Finance
Chapter 1 Current Status of the North Korean Economy and Its Prospects
Chapter 2 National Financial Revenue and Expenditure
Chapter 3 Banking and Price Management

Part II Industrial Management and Problems
Chapter 4 The Industrial Sector
Chapter 5 The Agricultural Sector
Chapter 6 Social Overhead Capital
Chapter 7 Commerce and Distribution Sector
Chapter 8 The Defense Industry

Part III International Economic Activities
Chapter 9 Foreign Economic Relations
Chapter 10 Special Economic Zones
Chapter 11 Inter-Korean Economic Relations

Part IV Social Security and Technology Development
Chapter 12 Social Security and Social Services
Chapter 13 Science and Technology Sector

Part V The Recent Economic Policy Changes
Chapter 14 The Contents and Background for the Recent Policy Changes
Chapter 15 The Features and Problems of the Recent Economic Policy Changes
Chapter 16 Prospects and Future Tasks of the July 1 Economic Reform  

BBC
Lucy Jones
4/13/2004

“Got any nuclear weapons for sale?” is the response Briton Roger Barrett usually gets when he tells people at Beijing cocktail parties that he invests in North Korea.
The country’s admission to a nuclear weapons programme and its listing on George W Bush’s “axis of evil” means most people are staying well away.

But Mr Barrett, 49, a former troop commander in the British army who has 10 years experience of doing business in North Korea, recently opened a branch of his consultancy firm, Korea Business Consultants, in Pyongyang.

A self-confessed “business adventurer”, he says there is growing interest in the country after Chairman Kim Jong-il introduced economic reforms in 2002.

It’s like China in the eighties… The market reforms are very evident. It’s an exciting time to join the market.

Robert Barrett, Korea Business Consultants 
He is also the enthusiastic publisher of what must be North Korea’s only business publication – the DPRK Business News Bulletin – which features some of the 250 companies he advises.

“It’s like China in the eighties… The market reforms are very evident. It’s an exciting time to join the market,” he says.

Mr Barrett is not alone.

Even in the middle of a nuclear crisis there are foreign investors in the country, and their numbers are increasing.

They say North Korea is a mineral rich country that needs everything and insist they have to get there first.

They also believe the 2002 economic reform is for real and that the country is gradually moving towards becoming a market economy.

Poverty

The little data there is on the country’s economy is hardly encouraging, though.

There has been a devastating famine and the UN says malnutrition is still widespread.

There are chronic heating and water shortages, and most North Koreans are paid less than £5 a month.

The country also has an appalling human rights record.

A BBC documentary on the country’s gulags this year contained allegations that chemical experiments are being carried out on political prisoners.

Meanwhile, the US says it is “highly likely” that North Korea is involved in state-sponsored trafficking of heroin.

In the political arena, the second round of six-nation talks aimed at resolving the nuclear crisis ended in Beijing in February without agreement, which means US and Japanese sanctions will remain in place.
‘Communism’ tourism

But the foreign entrepreneurs in North Korea are not put off.

Some are helped by UN employees who have worked in Pyongyang (among the few people to have had contact with the regime there) and many have a track record in China.

Pack a torch, conduct business meetings on the street to avoid big brother listening in and have plenty of “Asian patience” for the endless red-tape, they advise.

An Austrian company is reportedly buying pianos from the North Koreans, a French television station uses North Korean artists to produce cartoons, while a Singapore-based firm is developing forestry and tourism.

The Singaporeans intend to offer “adventure” stays on their North Korean forestry plantations.

Meanwhile, Western tourist agencies are gearing up to offer the last chance to see communism in action, and Fila and Heineken have reportedly entered into sponsorship deals with the North Korean regime.

North Korean labour

A German, Jan Holtermann owner of the computer firm KCC Europe, is putting North Korea online.

He hopes that by being there first he will be able to eventually tap into North Korean computer talent.

The country’s small number of internet users currently dial-up to Chinese providers, a costly process at about £1 a minute.

Mr Holtermann’s customers, who he hopes will number 2,000 by the end of the year, will have unlimited access for £400 a month.

As only a few North Koreans are permitted to have telephones, and as the internet service is costly, Mr Holtermann expects his customers to be government ministries, news agencies and aid organisations.

He has invested £530,000 in the venture, intending to get first pick when North Korean software programmers come onto the market.

“They are very talented,” he says.

“It’s this capacity we want to sell in Europe.”

The parcel delivery company DHL has operated in Pyongyang since 1997, when it was invited there by the government, and now has North Korean light manufacturing, textile and beverage companies on its books.

It sees itself as contributing to the country’s “slow but increasingly visible” economic reform programme.

British consultants

Former bank employee Mr Barrett is convinced North Korea is opening up much quicker than people think.

There are opportunities in banking, minerals, agriculture and telecommunications, he insists.

“There is the odd story of something going wrong,” he says.

“But when you walk around you notice construction going on.

“The people are feeling a change.”

High level contacts

But how to do business with one of the most isolationist regimes on earth?

Contacts are essential, say businessmen.

Though even knowing a North Korean minister is not enough, says Gerald Khor of Singapore-based forestry company Maxgro Holdings.

“You have to go above the ministers to the cabinet. You don’t have to know a member but you need to know people who can influence them,” he says.

“It is very important to get the favour of the dear leader (Kim Jong-il). Because when he says something, it gets done.”

Through a former UN employee, Maxgro got Kim Jong-il’s attention and has invested $2m in forestry, agreeing the state gets 30% of the profits.

“Kim Jong-il is an environmentalist,” Mr Khor says.

“We are confident we’ll get a return.

“We have dwindling supplies and this is high quality wood.”

To locate the forests elsewhere would cost much more, he adds.

Forced to change

Economic reforms introduced by the government in 2002 are seen as the first move away from central planning since the country adopted communism in 1945.

The government has been forced to change in order to survive, especially now it can no longer barter with Eastern Europe and the former Soviet Union, experts say.

“There is no real option not to carry out these reforms,” says UK-based Keith Bennett, who has taken trade missions to Pyongyang.

“But people don’t know where they will lead.

Chinese leaders have impressed on Kim Jong-il that there can be economic reform without fundamental political change.”

Way up on North Korea’s border with Russia and China is the Tumen economic zone, which was established in 1991 with UN help to lure investors.

The project has only had limited success and may indicate the type of problems those investing elsewhere in North Korea may face.

The North Korean section of the zone, Rajin-Songbong, hosts foreign-run hotels, telecommunications and restaurants, but that is about all.

“The North Koreans have sometimes been very co-operative and sometimes not, maybe because of policy change,” says Tsogtsaikhan Gombo, from the UN’s development agency.

“They were also disappointed when they didn’t see the investment.”

Vibrant Chinese economic zones nearby have put up fierce competition.

But even opening the door just slightly to let in capitalism has greatly improved the lives of the 150,000 people living in the zone, says Mr Gombo.

And many foreigners insist that small investments elsewhere in the country may have similar results.

From the Office of the National Counterintelligence Executive:

North Korea: Channeling Foreign Information Technology, Information to Regime Goals Pyongyang is working with Koreans abroad and other foreign partners in information technology (IT) ventures, sending software developers overseas for exposure to international trends, granting scientists access to foreign data, and developing new sources of overseas information in a bid to develop the economy. Cellular telephones and Web pages are accessible to some North Koreans, while foreigners in Pyongyang have access to foreign television news and an Internet café. While such steps are opening windows on the world, however, Democratic People’s Republic of Korea (DPRK) oficials are largely limiting such exposure to areas required for economic development. Moreover, they are applying IT tools to develop new means of indoctrinating the public in North Korea and reaching audiences overseas.

Working With Foreign Partners in IT Ventures
North Korea is promoting cooperative ventures with foreign partners to develop IT, which DPRK media have repeatedly described as a priority area in science and technology. An editorial in the 10 November 2003 issue of the party newspaper Nodong Sinmun, for example, named IT as the first of three technical fields, along with nanotechnology and bioengineering, to which “primary efforts should be directed.”

North Korean media suggest that officials have grasped the potential of leveraging IT for national development. A recent article in the government’s newspaper asserted that (1) “IT trade surpasses the automobile and crude oil industries” and (2) “IT goods are more favorable in developing countries than they are in the developed nations” (Minju Choson, 7 March).

ROK analysts, such as those who compiled a survey of Pyongyang’s IT industry (Puhkan-ui IT Hyonhwang-mit Nambuk Kyoryu Hyomnyok Pangan, 1 January), have suggested that DPRK policies for promoting a domestic IT industry reflect the nation’s lack of capital, dearth of natural resources, and relative abundance of technical talent.  Hoonnet.com CEO Kim Pom-hun, whose extensive experience in North Korea includes residence in Pyongyang from December 2001 to October 2002, has assessed North Korean IT manpower as resembling “an open mine with the world’s best reserves of high-quality ore” ( Wolgan Choson, 1 January).

Pyongyang is partnering with Koreans in South Korea, Japan, and China, as well as Chinese, in ventures to develop both software and hardware, including:

• The Morning-Panda Joint Venture Company in Pyongyang, a partnership between North Korea’s Electronic Products Development Company and China’s Panda Electronic Group, which began making computers in late 2002.
• The Pyongyang Informatics Center (PIC) and South Korea’s Pohang University of Science and Technology (PUST), which are cooperating to develop virtual reality technology. In addition:
• The ROK’s Hanabiz.com and PIC launched the Hana Program Center in Dandong, China, in August 2001 (http://hanabiz.com/history.html) for joint software development and training of DPRK programmers.
•  IMRI—ROK manufacturer of computer peripherals—and CGS—a Tokyo-based software company affiliated with the pro-Pyongyang General Association of Korean Residents in Japan (GAKRJ, a.k.a. Chosen Soren)—joined hands in July 2000 to form UNIKOTECH (Unification of Korea Technologies) to develop and market software. Both partners maintain links to North Korean IT enterprises.
• The ROK’s Samsung Electronics and the DPRK’s Korea Computer Center (KCC) have been developing software together at a Samsung research center in Beijing since March 2000 (Chonja Sinmun, 15 October).

Venturing Overseas To acquire information on foreign IT trends and to promote their domestic industry, North Koreans have begun venturing overseas in recent years.

• State Software Industry General Bureau Director Han U-ch’ol led a DPRK delegation in late September 2003 to the China International Software and Information Service Fair in Dalian. The North Koreans joined specialists from China and South Korea in describing conditions in their respective IT industries and calling for mutual cooperation. Participants from China and the two Koreas expanded on the theme of cooperation at the IT Exchange Symposium, sponsored by the Dalian Information Industry Association, Pyongyang’s State Software Industry General Bureau, and Seoul’s Korea Advanced Institute of Science and Technology (KAIST). Dalian Alios Technical Consulting, a company run by Chinese Korean Yi Sung-nam, hosted the exchange (www.kotra.or.kr, 15 October, http://hanabiz.com, 9 October).
• Pyongyang opened, in April 2002 in Beijing, its first foreign exhibition of DPRK software products developed by Kim Il-song University, Korea Computer Center (KCC), PIC, and other centers of software development (DPRK Korea Infobank, 16 May 2002).
• KCC Deputy Chief Technician Kim Ki-ch’ol led a delegation of DPRK computer technicians to the World PC Expo 2001, held in September 2001 outside Tokyo. KCC has worked with Digiko Soft—a company run by a Korean resident of Japan—to develop commercial software. Through Digiko Soft, the expo was the first show in Japan “of computer software developed in [North] Korea” (Choson Sinbo, 22 October, 1 October 2001).
• KCC computer programmers Chong Song-hwa and Sim Song-ho won first place in August 2003 in a world championship software competition of go—an Asian game of strategy—held in Japan. KCC teams have visited Japan and China on at least eight occasions since 1997 to compete in program contests for go, taking first prize three times.

Gaining Access to Foreign Data North Korea has been acquiring foreign technical information from a variety of sources in recent years, benefiting from developments in technology, warming ties between the Koreas, and longstanding sympathies of many Korean residents in Japan.

• Authorities have held the annual Pyongyang International Scientific and Technological Book Exhibition since 2001, bringing foreign vendors and organizations related to S&T publications to North Korea (KCNA, 18 August).
• The Trade and Economy Institute, advertised as North Korea’s “sole consulting service provider” on international trade, has been exchanging information with “many countries via Internet” since September 2002 (Foreign Trade of the Democratic People’s Republic of Korea, 1 April).
• According to PUST President Pak Ch’an-mo, who has extensive DPRK contacts in academic and scientific circles, North Korea has been purchasing technical books from amazon.com and from South Korea (Kwahak-kwa Kisul, 1 April).
• Pro-Pyongyang Korean residents of Japan have long sent technical literature to North Korea.
• ROK organizations, including PUST and IT publisher youngjin.com, have been donating technical publications on IT in recent years to DPRK counterparts as a means of earning good will and contributing to the eventual unification of Korea (Chonja Sinmun, 11 August).

Cell Phones, Web Pages, and NHK
Within North Korea, the advance of IT technology has been suggested by a number of recent developments:

• Approximately 3,000 residents of Pyongyang and Nason have reportedly purchased cell phone service since November 2002 (The People’s Korea, 1 March).
• Installation of a nationwide optical-fiber cable network in 2000, launch of the Kwangmyong 2000 Intranet the same year, and establishment of computer networks have made available domestic access to extensive technical databases maintained by the Central Scientific and Technological Information Agency, the Grand People’s Study House, and other repositories of technical information.
• Via North Korea’s Silibank Web site (www.silibank.com), established in Shenyang, China, in September 2001, registered foreign users can exchange e-mails with DPRK members.
• In August 2002, Kim Pom-hun, CEO of the ROK IT company Hoonnet.com, opened an Internet café in Pyongyang, the only place in North Korea for the public to access the Internet. Most customers of the service, which uses an optical cable linking Pyongyang and Shanghai via Sinuiju, are foreign diplomatic officials or international agency staffers; steep fees reportedly keep most Koreans from going on line (Wolgan Choson, 1 January).
• Foreign guests in Pyongyang hotels have had access to foreign news broadcasts of Britain’s BBC and Japan’s NHK since May 2003, according to a Japanese television report (TBS Television, 2 September).

Limiting Information to Technical Areas, Harnessing IT for Domestic Indoctrination and Foreign Propaganda Development of the nation, rather than empowerment of the individual, appears to be driving DPRK efforts to develop domestic IT infrastructure and industry. Officials, scientists, and traders can now access and exchange information pertinent to their duties within the domestic Kwangmyong Intranet. Those with a “need to know” can even surf the worldwide Web for the latest foreign data. While Kim Chong-il reportedly watches CNN and NHK satellite broadcasts (Kin Seinichi no Ryorinin, 30 June) and supposedly surfs the Internet, the public has no such freedom to learn of the outside world without the filter of official propaganda.

Indeed, Pyongyang is using IT to indoctrinate the public and put its propaganda before foreign audiences. In addition to studying the party line through regular group reading of Nodong Sinmun in hard copy, a practice for indoctrinating members of work units throughout North Korea, the installation of computer networks now brings the newspaper to some workplaces on line, as the photograph below shows:

Moreover, Pyongyang has put its propaganda on the Internet.

• KCNA offers Pyongyang’s line in English, Korean, and Spanish at a Web site in Japan at www.kcna.co.jp.
• News and views of the General Association of Korean Residents in Japan and its affiliated organizations appear on the group’s site at www.chongryon.com.
• DPRK media, including newspapers Minju Choson and Nodong Sinmun, have appeared on sites originating in China, such as www.dprkorea.com and www.uriminzokkiri.com.

from a great story in the Economist:

benefits of reform:

• The electricity supply has slightly improved in Pyongyang, as well as on the east coast in Hamhung and Chongjin. Apartment-block lights are now on for much longer.
• Second-hand bicycles, from Japan and China, are numerous, particularly in cities on the poor, industrial east coast.
• Farmers are allowed their own small gardens, and farmers’ markets are now referred to simply as “markets”, because, as well as food, they sell consumer goods. Significantly, these markets have been given official approval. In June, the government appealed for help from other countries in running them. As Marcus Noland of the Institute for International Economics in Washington, DC, explains, one immediate effect of the reforms is that there are now products available for hard currency, such as video players and movies like “The Lion King” dubbed in Korean, which were previously unobtainable. The government is also encouraging foreign investment in industries such as mining, energy, agriculture and information technology
• The leadership recently gave its approval for a South Korean company that assembles cars in North Korea to launch a marketing campaign.
• Mobile-phone services have been started in the country’s main cities and along its motorways.
• North Korea’s tourism authority claims that 2,000 Motorola and Nokia mobile handphones were sold in Pyongyang between November 2002 and August 2003. This in a country where barely a million land lines exist, out of a total population of 23m.
• The Hermit Kingdom recently announced plans to develop broadband internet capabilities to improve the business environment. The plan is to link the domestic intranet, called Kwangmyong, to the internet. The North’s national domain designation, “.kp”, is still not in use, but the government has reportedly been testing e-mail addresses incorporating it. There is even an internet café in Pyongyang, though at $10 per hour it is affordable only to the few tourists, diplomats and journalists who visit the city. Currently, only Mr Kim and a few privileged others can use the optical communications lines supplied to North Korea by China’s China Telecom. Contrast this to the state of affairs in the south, which has the world’s greatest penetration of high-speed broadband connections and where more than 65% of households now have internet access.

These observations say little about how the economy as a whole is doing. The sad truth seems to be that the leadership in the North undertook its partial reforms out of necessity, not because it had understood or embraced the market. Rather, for the past 15 months, according to a Korea expert, Kongdan Oh, at the Institute for Defence Analyses in Virginia, the country has been “creatively muddling through”. While the average North Korean has more economic freedom, the economy is near collapse.

Nicholas Eberstadt of the American Enterprise Institute, in Washington, DC, estimates that, if anything, economic decline has accelerated, not reversed. Last year’s price and wage increases saw prices rise 10 to 20-fold and wages rise by 20 times or more, the idea being to bring them more into line with market rates. But the increases have not been matched by measures to boost output, so inflation has spiralled out of control. The price of staple foods, for instance, has risen by as much as 400%, and the country continues to rely on foreign handouts to feed its people.

In a recent paper, Mr Noland argues that those with access to foreign exchange, such as senior party officials, do not feel the effects of inflation as severely as salaried workers who have no access to foreign exchange. So for urban residents with access to hard currency, in some respects things are much better. But for the bulk of the population, things are quite grim. As much as 80% of an average family’s income now goes towards food.

Just how committed is the regime of Kim Jong Il to its programme of market reform? Probably not very. It shows no sign of embracing reforms that could potentially undermine the state’s control. It continues to emphasise “military-first” policies, reserving the best of everything for the army it depends on. And even if greater economic reform were undertaken, it is far from certain that it would be successful any time soon.

The economy continues to suffer from a lack of energy, transport infrastructure and basic foodstuffs. Many factories—all of which under the reforms now have to pay their own way—have been shut down, leaving people without jobs and therefore no money to buy food. And since the North admitted last year to its illicit nuclear programme, aid flows have diminished and oil deliveries by the Korean Peninsula Energy Development Organisation have been suspended.

Foreign investors still stay away and the few companies that have been bold enough to invest in the North, such as Hyundai Asan, have lost millions of dollars. So, though much has changed in North Korea over the past 15 months, the probability is that more will stay the same

From NKChoson.com:

An Internet cafe, called ‘PC room,’ has recently opened in the North Korean capital city of Pyongyang for the first time, according to the Internet homepage Monday of a South Korean businessman doing business there.

Jangsaeng General Trading Co., a joint venture between the North’s Pan-Pacific Economic Development Association of Korean Nationals and software company Hoonnet of South Korea, opened the 66-square-meter PC room in its building, Hoonnet President Kim Beom-hoon said.

From the Asia Times:
The same businessman that set up the internet cafe also set up an online gambling site based in Pyongyang.  Since 2002 Kim Beom hoon (or Kim Pon Hun), set up (www.jupae.com) hosted in Pyongyang.