North Korean Economy Watch

From the LA Times:

More than 100 pages of written lectures smuggled out of North Korea this year reveal that the leadership is in a state of near-hysteria about outside influences seeping across the nation’s once hermetically sealed borders. The spread of “unusual lifestyles,” the lectures warn listeners, could render them “incapable of following revolutionary thoughts and sacrificing their lives” for Kim.

The documents also underscore the extent to which anti-Americanism gives meaning to the country and its people. More than 50 years after the end of the Korean War, the United States is blamed for all of North Korea’s woes, from food shortages to the infiltration of foreign culture.

In the last several years, trade between North Korea and China has surged, much of it not approved by North Korea’s leaders. Along with food and consumer goods, traders smuggle in DVDs, tapes, books and Bibles, radios and mobile phones. Once considered taboo, T-shirts with English lettering are pouring into North Korean markets from Chinese garment factories.

The regime fears not only critical material but depictions of other nations that would make North Koreans realize how poor they are in comparison.

“The enemies use these videos and specially made materials to beautify the world of imperialism … and to [spread] a fantasy of the free world,” one lecture says. North Koreans are urged to steel themselves against such corrupting influences by eating traditional foods, wearing traditional clothing and keeping their hair tidy.

FDI Magazine
Stephen Timewell
12/12/2005

On my journey to Pyongyang a Beijing receptionist remarked that the Democratic People’s Republic of Korea (DPRK) is very much like China was 25 years ago. And as the motorcade of China’s president Hu Jintao passed thousands of flower-waving North Koreans on his visit to the world’s most secretive and politically isolated country at the end of October, he may well have agreed.

Visiting Pyongyang is like going back decades in a time machine, to a land with no advertising, no Nokia, Microsoft or McDonald’s billboards and almost no cars. Impressive grand avenues and massive public monuments dominate the landscape but there is no new construction or shops.

The streets are scrubbed clean by hand and are full of hundreds of orderly people wearing their ‘Great Leader’ badges and walking everywhere. Curiously, bicycles are discouraged because of bad accidents and the government encourages power walking for good health, or so I am told. In a country said to spend 30% of its GDP on defence, there is no visual military presence (or overt police presence) in the capital at all.

The ‘traffic ladies’ standing at major intersections are a welcome replacement for traffic lights but there are precious few cars to direct.

Questions greatly outnumber answers in this capital where visitors are duly dazzled by the spectacular grand mass gymnastics and artistic performance (called Arirang) by almost 70,000 children in the massive 150,000-seat May Day Stadium. But visitors are also aware of serious food shortages and cannot ignore the capital’s tallest building, a magnificent 105-floor pyramid tower with a crane on top, left unfinished many years ago, I was informed, due to financial problems.

Winds of change

Whether the DPRK is seen as the last Stalinist communist state or as a Confucian nationalist monarchy or even, as it describes itself, as a “powerful socialist nation”, visitors can feel the winds of change, particularly on the economic front. For more than 50 years the iconic stature of the late ‘Great Leader’ Kim Il Sung and that of his successor son Kim Jong Il have dominated the political landscape; the question going forward is how the country’s dire economic circumstances can be improved and whether the regime has the capability to create the new structures needed.

Pyongyang was playing host not only to Mr Hu but also to an increasing number of foreign delegations and journalists, all keen to understand the trends taking place in probably the last country to have massive pictures of Marx and Lenin hanging outside its Ministry of Trade. For many, however, the current focus is progress in the Six-Party Talks on the nuclear weapons programmes of the DPRK.

In the fourth round of talks in September between the two Koreas, China, Japan, Russia and the US a landmark agreement appeared to have been reached. “All six parties emphasised that to realise the inspectable non-nuclearisation of the Korean Peninsula is the target of the Six-Party Talks,” a joint statement said. “The DPRK promised to drop all nuclear weapons and current nuclear programmes and to get back to the non-proliferation treaty as soon as possible and to accept inspections from the International Atomic Energy Agency.”

At the time of going to press in November a fifth round of talks was expected to move a final agreement closer but detailed negotiations over implementation of the above agreement were not expected to be easy or to be concluded quickly. The DPRK, unsurprisingly, wants some payback, be it light-water reactors from the US or other economic incentives.

The core issue is that the DPRK’s publicly acknowledged plutonium programme, believed to provide enough radioactive material for about six bombs, is probably also the country’s key card in trying to rebuild the economy. Kim Jong Il needs to gain maximum advantage from giving up his nuclear threat, but even then, what does his economy have to offer?

Information hollow

For a financial journalist the DPRK represents a serious challenge. Understanding the economy and the banking sector of a country is never easy, but when no data is published by the government or the central bank it becomes significantly more difficult. I knew information was scarce but believed that the two very agreeable government minders, assigned to monitor my every move in my four-day visit, would be able to help me extract a simple list of banks operating in the country. No such luck. Although my visit was welcomed, the central bank (which acts as both the issuing bank and as a fully operational commercial bank in the traditional socialist model) failed to provide the list (or anything else), despite numerous requests.

Although the consensus after several interviews was that around 20 banks of various types exist, I can only vouch for the handful listed here. Clearly the Foreign Trade Bank (FTB) represents a pivotal bank in the financial system and Ko Chol Man, director of the FTB, was keen to explain the peculiarities of the DPRK banking system. “The domestic and foreign exchange settlement systems are completely separate. The central bank deals with the domestic market and money issuance and it also has a commercial banking role; the FTB has complete control over foreign exchange matters and trade and also holds the country’s foreign exchange reserves.”

Unlike other banking systems, the FTB in the DPRK acts as a clearing house for the foreign exchange activities of the banks in the country. It does not report to the central bank but, like all banks, reports to the State Fiscal and Financial Committee (SFFC), the overall banking regulator.

Mr Ko was pleased to note that the FTB had around 500 correspondent banks worldwide and, along with its 600 staff (including 11 branches) in North Korea, had six representative offices outside the country (including offices in Austria, Russia and China) and planned to establish a UK representative office in London. However, when asked for details of FTB’s banking activities he replied bluntly that no banking institution had published its figures in terms of activities or balance sheet. “We cannot give figures about the size of our assets because it is a regulation of the state. If the situation becomes better we can make them public but up to now it is impossible.”

Economic estimates

Despite the absence of official economic and banking data, various estimates help make the picture a little less murky. A recent Standard Chartered Bank report places North Korea’s nominal GDP at the end of 2004 at $22bn or $957 in GDP per capita terms for the country’s 23 million population; by comparison, South Korea’s nominal GDP is put at $680bn or $14,167 per capita for its 48 million population. While the unification of the two Koreas is seen as an important political objective, especially in Pyongyang, the startling economic gap between the two states could mean that the North becomes a huge burden on the South, and Seoul well recognises the economic problems that emerged from the reunification of Germany in the 1990s.

Meanwhile, Jong Msong Pil, of the Institute of Economy at the Academy of Social Science, explained how the economy had declined dramatically from a GDP per capita of $2500 in the mid-1980s to $480 per capita in 2000.

“The big drop was caused by the disappearance of the socialist market worldwide in the early 1990s; the collapse of our socialist barter trade system led to the failure of many enterprises and a decline in living standards,” he said.

Dr Jong noted that, following the hard times of the mid-1990s, the first target of the national economy has been self-reliance. He added that no economic data had been published since 2000. He believed, however, that 10% economic growth occurred in 2004 and, responding to reports from the World Food Programme (WFP) that a third of the population were malnourished, he said the food situation was improving. “In our country, all people have a job so for this reason no one has died of starvation or hunger. Our country is a socialist planned economy so the government takes care of people’s living.”

Acknowledging shortages in the past, Dr Jong said that in October the government had normalised the public food distribution system, which indicated the government was now supplying sufficient food.

Is the DPRK’s food crisis over? Driving around Pyongyang’s spacious avenues (with two minders) there was no visual evidence of malnutrition – but the capital is likely to be much better served than elsewhere. A supermarket was shown but the goods were only available for foreign currency, hardly food for the masses. Cha Yong Sik, deputy director general at the Ministry of Foreign Trade, said the government had not imported food on a commercial basis in 2005, unlike previous years, but neighbouring countries are still providing significant food aid. Richard Ragan, country director of the WFP, said food production in 2005 was up 10%, with cereals up 6.6%. But while the food situation may have improved, the DPRK is said to be still dependent on food aid.

Trade predictions

So what are the DPRK’s prospects? Much depends on the outcome of the nuclear negotiations but estimates from the Seoul-based Korea Trade-Investment Promotion Agency (KOTRA) say the DPRK’s trade volume in 2005 is expected to pass $3bn for the first time since the fall of the Soviet Union with the figure likely to reach $4bn if inter-Korean trade is included. Trade with China, the DPRK’s largest trading partner, grew by more than 40% in the first half of 2005, indicating Pyongyang’s growing dependency on Beijing.

Upbeat on trade prospects, Mr Cha explained that the recently opened Tae-an Friendship Glass Factory, built with a $32m donation from the Chinese government, would export 40% of its 300-ton capacity, mainly to Siberia. Also Pyongyang’s first autumn international trade exhibition in October included companies from six European countries, the focus being on the country’s mineral potential rather than its manufacturing abilities, which are a long way off.

As for banks, the group of up to 15 joint venture banks are helping to finance the country’s 150 or so international companies. But do not expect miracles. The latest, Koryo Global Credit Bank, set up in June, is a joint venture between the UK-based Global Group, headed by Hong Kong businessman Johnny Hon, with 70%, and the state-owned Koryo Bank with 30%. Established with a paid-up capital of e10m, KGC Bank is ambitious in its plans to engage the DPRK in trade and commercial relations with the rest of the world, especially Asia, the Middle East and Europe.

KGCB’s first correspondent banking relationship in Europe is with Germany’s Helababank. The bank, the first product of cooperation in the finance field between the DPRK and the UK, has a staff of five and is also interested in investing in property. It was also able to produce, at the instigation of US authorities, a comprehensive anti-money laundering file.

Another local venture is North East Asia Bank (NEAB), which was set up by ING Group in 1995 but is now wholly owned by the Korean BOHOM Group. Amazingly, Kim Hyon Il, NEAB’s president, produced a balance sheet showing total assets of e79m at the end of 2004 and a paid-up capital of e25m. He also showed me the bank’s newest product, a chip-based cash/debit card, the first in the DPRK. The card demonstrates perhaps that the country is slowly joining the real world – but with only 100 issued and only 13 outlets available, the service has a long way to go.

Political effects
 
At Daedong Credit Bank, chief executive Nigel Cowie explained how international politics can have a dramatic impact on banking even in the isolated DPRK. In September, just before the conclusion of the fourth round of the Six-Party Talks, the US Treasury accused Banco Delta Asia (BDA), a Macao-based bank, of aiding the DPRK in a series of ‘money laundering’ cases. The Wall Street Journal had said the Macao crackdown was Washington’s method of cutting off Pyongyang’s financial sources for its nuclear weapons programme.

Mr Cowie, a former HSBC banker, explained that all DPRK banks had accounts with BDA for the purposes of remitting funds and, as a result, the accounts were suspended pending an inquiry in mid-November. While Stanley Au, chairman of BDA’s parent, denied the US allegations and BDA’s involvement in any illegal business relations with DPRK banks, the damage is done. “It affects our customers because it affects people’s ability to remit money to and from the country. I imagine that this will cause people doing legitimate business to give up,” says Mr Cowie.

The nuclear negotiations remain critical to the country’s future and the Chinese, in particular, want them to succeed. But that is just a start. There is evidence that the DPRK is opening up and changing with reports that there are 300 open markets operating across the country, 30 in Pyongyang. But whether the DPRK follows the China model of 25 years ago and can restructure its ‘powerful socialist nation’ doctrine remains doubtful under the current leadership.

From the Asia Times:
By Michael Rank
11/18/2005

Chinese companies are venturing into North Korea, and both countries hope to reap the rewards. North Korea’s heavy industry is in a desperate state, but Pyongyang is hoping that Chinese investment will come to its rescue, while China sees the North as a convenient source of minerals, from coal to gold.

China’s increasing investment also means that North Korea is casting off its rigid juche, or self-sufficiency, policy and overcoming its deep historical suspicion of its giant northern neighbor.

Border trade in consumer items from televisions to beer has been booming since the 1990s, but now the focus is turning to the industrial sector. Deals are being reached on mines, railways and leasing a North Korean port to a Chinese company, but North Korea is notoriously secretive and few details have been published outside China. The deals include an agreement to “completely open” North Korea’s railways to a Hong Kong millionaire, as well as moves to revive ailing coal, iron and gold mines.

Tumen-Chongjin rail link rumored
Hong Kong businessman Qian Haomin is reported to have reached a US$3 billion deal with North Korea that also involves the Chinese Railways Ministry building a new rail link between the Chinese border city of Tumen and the North Korean port of Chongjin. The agreement marks an end to long-running tension between the Chinese and North Korean state railway authorities over North Korea’s retention of up to 2,000 Chinese goods wagons and reluctance to repay loans.

The Hong Kong news magazine Yazhou Zhoukan recently reported that these issues had been resolved and that Qian’s grandly named company Hong Kong International has agreed to provide the North Koreans with 500 to 1,000 freight wagons. Qian told the magazine that “after six months of effort, there are now hopes of solving the railway transport bottleneck between China and North Korea”, and this would help to integrate the economy of the entire northeast Asian region.

Qian’s ambitions are not limited to railways. Not only has he expressed interest in investing in a North Korean coal mine, but Yazhou Zhoukan also reported that he hopes to set up a special economic zone in the North Korean border city of Sinuiju. He has clearly not been deterred by the unhappy case of Yang Bin, a Dutch-Chinese multi-millionaire who was made head of a similar development zone in 2002. Before Yang could take up his post, he was arrested by the Chinese authorities for tax evasion and other economic crimes and jailed for 18 years.

Qian, aged 41, is originally from the southern Chinese province of Guangdong and moved to Hong Kong in 1993. He has been involved in North Korea since the early 1990s, and has apparently established a fruitful relationship with Prime Minister Pak Pong-ju. He has said that “to invest in North Korea has been my dream” because three of his uncles fought in the Korean war; one was killed and one was seriously wounded. The Hong Kong investor has signed a plastics, tire and battery recycling agreement with North Korea and has expressed interest in investing in the country’s largest anthracite coal mine, which now produces only 1 million tons a year, compared with 3 million tons at its peak.

Tonghua Steel looks North
Meanwhile, state-owned Tonghua Steel or Tonggang, based in the northeastern city of Tonghua, expects to sign a 7 billion yuan ($865 million), 50-year exploration rights deal with the Musan iron ore mine, said to be North Korea’s largest iron deposit. Tonggang, Jilin province’s largest steelmaker, hopes to receive 10 million tons of iron ore a year from Musan as part of its plans to increase steel production from a projected 5.5 million tons in 2007 to 10 million tons in 2010.

The planned deal reflects China’s immense and growing appetite for steel. Although the country already produces 30% of global output, it is heavily reliant on imports and is concerned about rising prices. A Jilin provincial trade official said importing iron ore from North Korea was attractive because of low transport costs, which would increase Tonghua’s competitiveness.

Tonggang officials say they expect the deal to be signed soon, and that of the 7 billion yuan (US$866.1 million) pledged, 2 billion yuan will be invested in transport and power lines. Company president An Fengcheng said agreement had already been reached with China Development Bank on 800 million yuan worth of soft loans and 1.6 billion yuan of hard loans, while “the remaining investment will come in in stages”.

Rajin deal to give China Sea of Japan access
China’s export boom is one of the great economic success stories of the past 25 years, but it is constrained by a lack of suitable ports. In particular, the country lacks a port on the Sea of Japan, but after attempted deals with Russia came to nought, the inland Chinese border city of Hunchun has reached an agreement for a 50-year lease with the nearby North Korean port of Rajin.

The ceding of Rajin, an ice-free port with a handling capacity of 3 million tons a year, will give access to the sea to inland areas of northeast China which, at present, must send freight long distances by rail to the port of Dalian on the Bohai gulf. The agreement also provides for the construction of a 5-10 square kilometer industrial zone and a 67 kilometer highway, and envisages that the Rajin area will become a processing zone for Chinese goods which will then be re-exported to southeast China.

A Hunchun economic official stressed that the leasing of the port is “a business deal and not a government deal”. The South China Morning Post reported from Hunchun that the man behind the deal is Fan Yingsheng, a property developer from Hunan province who put up half the initial capital investment of 60 million euros (US$70 million). The sum could not be denominated in dollars for political reasons.

The paper quoted the United Nations Development Program as saying this sum would only be enough to build the road to Rajin, and far more would be needed to rejuvenate the port. The deadline for final agreement is December 30, 2006, and it remains to be seen if a final deal will be reached in time.

An unusually frank North Korean trade official noted the possible pitfalls as well as the advantages of such deals. Kim Myong-chol, head of the Korean Council for the Promotion of Foreign Trade, said the deals would have to involve importing “highly advanced technology and equipment”, and added: “These agreements are not easy to put into actual practice and can run into many problems so far as funding and bilateral cooperation are concerned.”

“Because the amount of money involved in these cooperative projects is quite large and [North] Korea will be investing ports, roads, etc, there are rather great risks in such investment, and in addition because the domestic Korean economy and its policies, laws and regulations, etc, are unclear, many problems are likely to arise in carrying out these plans,” Kim told a Chinese website.

Coal and gold
Such concerns may have been in the mind of the president of China Minmetals Corp, Zhou Zhongshu, when he signed “an agreement on setting up a joint venture in the coal sector of the DPRK” [North Korea]. The deal was signed in October when Chinese deputy premier Wu Yi visited Pyongyang, and is said to be the first of its kind. North Korean Vice Minister for Foreign Trade Ri Ryong-nam urged the Chinese side to “provide advanced technology and set up a good model for other joint ventures and cooperation between the two countries”.

North Korea also has substantial gold deposits, and a Chinese company plans to invest in a “semi-paralyzed” North Korean gold mine and refine the metal at its base in Zhaoyuan in Shandong province. Guoda Gold Co Ltd reached a preliminary agreement last year with Sangnongsan gold mine, which is said to have gold deposits totaling at least 150 tons.

Guoda deputy manager Lin Deming said his company was attracted to North Korea because of low labor, energy and transport costs as well as the “highly favorable” investment terms offered, but gave no details. Chinese investment in North Korea is certainly increasing, but final agreement on a number of deals has not yet been reached, and political factors such as uncertainty over Pyongyang’s nuclear weapons program may well discourage Chinese companies from moving too fast.

Michael Rank is a former Reuters correspondent in China, now working in London.

Daily NK
Kim Young Jin
11/14/2005

Employees from the Emperor Hotel in the city of Rajin in North Korea are said to make their livings by doing business in market places. The hotel is well known for its casino.

On the 13th day of this month I had an interview with a manager of the hotel, who I will call Kim Myung Chul (alias, 42 years of age) for the sake of his safety. “The hotel has had much difficulty paying wages to its employees since it closed its casino in February,” he said. “It laid off about half of its 300 employees, and even some of the remaining half had to open restaurants near the hotel or start business in market places for their livings.”

The Emperor Hotel is a five star hotel founded by the Emperor Group in Hong Kong that invested about 24 million dollars in it. It is well known for the finest casino in North Korea.

For the last two years, two high raking Chinese officials have lost a large sum of government money to the casino and the Chinese government complained to the North pressing it to close it. Thus, it was closed in February, and the hotel lost many Chinese tourists. The number of Chinese tourists had been almost 20 thousands a year before. Virtually the hotel is out of business now.

Chae Moon Ho, a former head of Traffic and Transportation Office of Yanbian Autonomous Prefecture in Jilin, China squandered 3,510,000 yuan (more than 434,000 dollars) of government money in the casino and was sentenced to 8 year imprisonment at the first trial. Mr. Wang, a former superintendent of highway construction, wasted 870,000 yuan (about 107,000 dollars) of government money in the casino and was taken into custody.

After these incidents, the Chinese government had prevented travel agencies around Yanbian area from holding North Korean tourism in March this year. It lifted the ban last September.

The following is some excerpts from the interview.

– When did you start to work for the Emperor Hotel?

I have been working in the hotel since 2000. People in Rajin call it Bipa Hotel or the Five Star Hotel. When the hotel was first opened, it was run in a capitalistic way. Even hostesses from Russia and China were recruited. But they have all returned now because they could no longer get paid. It took 3 years to complete its construction. I heard that it had been intended to be a 30 story building, but it is 7 stories high because the Emperor Group cut spending. Visitors were usually foreign gamblers and those Chinese who enjoyed fish and other seafoods.

– How is business now?

Business situation became very tough after the Chinese stopped coming. Usually thousands of Chinese people visited for the summer, and Russian and Chinese gamblers constantly came and went. But since the casino was closed and the Chinese stopped coming, it has been difficult for the employees to be paid. The hotel even laid off half of its employees. At frist 300 people were recruited, but there are less than 150 employees now. Among them, less than 50, mostly janitors, cooks, Karaoche coordinators, massagists, come to the hotel to work.

– Does the owner not pay the employees?

I do not know. Even though the owner is Emperor Group from Hongkong, the employees are controlled by the Administrative Committee of Rajin city. I suppose that wages must be distributed by the civil authorities. Anyhow, I have not been able to be paid since last spring.

– What kind of people are employed in the hotel?

High ranking people were eliminated from the recruit lest they be contaminated by capitalism brought in by foreign gamblers. For example, Kim Il Sung University graduates, partisans, workers involved with law and national defense and their family members were all eliminated. Mostly tall and good looking people from Rajin were accepted.

– How are the employees paid?

At first, we were well paid. We were not rationed but received wages. Until 2000, I received 300 yuan a month. At that time, 1 yuan($0.1237) was equivalent of 25 Chosun(NK) won($0.0125), and rice was quite cheap. Hence 300 yuan made a sound pay. Moreover, we were fed three times a day and allowed to sleep in the hotel, which was considerable benefits for us. But while business was getting difficult, employees were being turned into 8.3 workers one after another. Finally, payment started to be incomplete from last February. We could just take three meals a day thanks to the money the 8.3 workers gave to the hotel.

– What is 8.3 worker?

The hotel forced some of its employees to earn money all by themselves and to give some part of it to the hotel. 8.3 worker is called so because Kim Il Sung ordered the system during a factory visit on a third day of August.

– How do 8.3 workers earm money?

Some workers opened restaurants near the hotel, and others merchandize in market places. There are people like me who are out here in China and do business with old customers. Chinese tourists like to eat fish and other seafoods in Rajin. That’s why 8.3 workers like to open seafood restaurants near the hotel calling them branch restaurants of the hotel. There are more than 10 such restaurants near the hotel. There are also a few souvenir shops. If they earn money, they give some of it to the hotel. Those who merchandize are just like that. If you give some money to the hotel every month, you are not required to go there to work.

– Does the money go to Emperor Group?

No. It goes to the Administrative Committee of Rajin city. The hotel is just a Work Place: we are not under the owner’s control. We are required to take permission from the Administrative Committee to work outside the hotel.

– Do 8.3 workers make much money?

It is advantageous for business to be an employee for the hotel. We do not pay such heavy taxes as ordinary merchandizers do. It is also easier for us to occupy stalls in market places than for ordinary merchandisers.

– What is people’s life like in Rajin recently?

Outsiders envy Rajin and Seonbong because they compose the free trade zone, but the situation is on the contrary. The government takes more from Rajin and Seonbong because of the free trade. Rice is also more expensive. They are good places for the rich to live in but not for the poor.

From NK zone:

China and North Korea have signed a 50-year agreement that will give the Chinese border city of Hunchun exclusive rights over the North Korean port of Rajin, according to Chinese and South Korean reports.

The deal is seen as a boost to this underdeveloped region of China and to Hunchun in particular which is about 80 km inland on the Tumen river. It also envisages that Hunchun will establish a 5-10 sq km industrial zone in Rajin and for a highway to be built between the two cities.

A Chinese-language report posted last month describes how Hunchun, although it was given border trade rights with North Korea as long ago as 1986 and was made an “open city” in 1992, has seen little benefit from these privileges, despite national, provincial and local level investment totalling five billion yuan ($600 mln) as part of the Tumen River Development Zone. The report says this resulted in an economic bubble in the early 90s, with vast numbers of half-built factories, offices and roads and a border bridge that was never completed.

The aim has long been for Hunchun to have access to a nearby port in North Korea or Russia and to dredge the Tumen river, but the report says that while it has reached a navigation agreement with Russia it had failed to reach agreement with the DPRK. It also notes that dredging would have serious environmental implications (doesn’t enlarge on this but see below). It adds that plenty of landlocked countries are economically highly successful and that there are plenty of other cases “leasing ports to reach the sea”.

Thus even before the Rajin deal was signed there were hopes that Hunchun would in the next 10 years become the most advanced city in the Yanbian region after the capital, Yanji and eventually become the “Rotterdam of the north[east?!].”

Anyhow the agreement with Rajin has of course been greeted as a great victory and comes as the Tumen River Area Development Programme agreed to extend its 1995 Agreement on the establishment of a Consultative Commission for a further ten years and to expand its geographical reach to include the three Northeastern provinces and Inner Mongolia in China, the Rason Economic and Trade Zone of DPRK, eastern provinces of Mongolia, eastern port cities in South Korea and part of the Primorsky territory of Russia.
However, another Chinese report is sceptical about the deal which it says also involves construction of a 67-km highway and plans for the Rajin area to become a processing zone for Chinese goods which will then be reexported to southeast China.

It quotes a Jilin province commerce bureau official as saying as saying only time will tell whether it will achieve its aims, and also cites an unnamed professor from the Jilin Academy of Social Sciences as saying that North Korea’s ports, railways, roads, power and water networks and communications are extremely backward and badly maintained and development has also suffered from the “instability of [North Korean] government policy.”

The deal with North Korea follows failure to reach a similar agreement with a Russian port. The People’s Daily reported in 2003 that the Russian Ministry of Communications was opposed to a proposed 49-year deal with either the port of Zarubino or Posyet, both just over the Chinese border, because it viewed the Chinese as having territorial designs on the region, which China of course denies.

The Chinese article about the Rajin deal also gives some figures for Jilin’s border trade. It says this totalled $250 mln last year, consisting of $80.07 mln worth of exports to North Korea and $114.5 mln in imports (presumably the rest consists of trade with Russia, etc). Main exports consisted of machinery, grain and flour, textiles, steel, cars and coal. “Because the railways and other means of transport are poor and there are long delays, this was bad for our province’s exports of coal, grain and other bulk items,” the Jilin commerce bureau official said, adding that transport was the main factor impeding the province’s foreign trade.

A Chinese report posted last December says Hunchun officials had visited Pyongyang several times in the last year and had found North Korean officials eager to improve road and sea communications in order to create a “northeastern golden triangle.” It says leasing a nearby port across the border is the best option, and mentions a South Korean clothing company which saved much money and time by switching to Zarubino port in Russia (only 70 km from the border) from far away Dalian in China.

It adds that there are plans for an export-oriented abattoir at Hunchun with a capacity of 200,000 cattle and sheep per year. It also says Hunchun expected to handle $220 mln worth of foreign trade last year and in January-October 2004 it handled 172,300 tonnes of imports and exports, up 7.9% over 2003.  A North Korean trade official gave the Rajin zone his blessing in 1999, as did a professor of economics from Kim Il Sung University.

Development of the area would no doubt improve living standards, but it would also have serious environmental implications. the Tumen Development Programme notes that the Hunchun Border Economic Cooperation Zone was established in 1992 without an environmental impact assessment (EIA). “Since then, considerable investment has taken place and Hunchun’s population has multiplied many-fold, with serious implications for nearby wetlands and other ecosystems.” It adds that “in 1999, the Tumen Programme undertook a long-overdue EIA of the Zone to meet international (World Bank) standard and serve as a model for other development areas in the Tumen Region.”

Eastern Siberia and the Chinese border are is the last remaining stronghold of the Siberian (or Manchurian) tiger and it is also has crucial sites for a large number of bird species including about 50 species listed in the international red book of endangered species.

The Hunchun area is where most NK refugees cross into China, so economic development would presumably make North Koreans less likely to flee their miserably poor country, though improved communications may make it easier for them to do so…

The famous or infamous Emperor casino is also not far away. As NKZ readers will doubtless recall it was closed in January after a Chinese crackdown against gambling as its clientele was entirely Chinese. Little has been heard about it since though the management are apparently hoping to attract Europeans to replace the Chinese, not sure that habitués of London casinos are likely to be greatly tempted… Am also told that the Emperor isn’t totally closed but it does have extremely few customers.

Anyhow its two websites are still up, click here for the Chinese one and here for the Hong Kong one.

According to a Chinese report, Chinese gamblers are now flooding into Vladivostok following the closure of the Emperor (so much for the crackdown against gambling in border casinos…)

From the Herald Tribune:
Donald Greenlees

In May, Kelvin Chia, one of the first foreign lawyers to receive a license to practice in North Korea, took a party of Indonesian miners on an investment tour.
 
Visiting a coal mine outside Pyongyang, the group was surprised by the welcome from North Korean officials and found that the basic road and power infrastructure serving the mine site was in a better condition than they expected. Chia said the mining company – which he declined to identify for commercial reasons – is likely to soon enter a joint venture with the North Korean operator to further develop the mine.
 
Since being granted the right to open an office in Pyongyang last October, Chia, who is from Singapore, says his firm has been approached by about 20 companies from Europe, Southeast Asia and Australia with an interest in investing in communist North Korea’s shaky economy. Chia’s firm was the first wholly owned foreign legal practice in North Korea.
 
“I think there is an upsurge of interest in that country,” said Chia, who is based in Singapore but runs an office of two lawyers in the North Korean capital and has plans to expand.
 
Chia’s recent experience mirrors that of other hardy business people who have persisted with North Korea in the past decade, despite a nuclear crisis and U.S. commercial embargoes. Some business people equate the current level of investor interest with the early 1990s, when foreign companies, including some multinationals, started a spate of investments in the hope that North Korea’s largely self-imposed isolation would end.
 
While the latest round of six-nation talks to dismantle North Korea’s nuclear weapons program remains inconclusive, a handful of Asian and Western investors, some with earlier experience in doing business there, are again considering possibilities in defiance of Washington’s desire to use economic seclusion as a bargaining tool.
 
These investors, mainly manufacturers and miners, are being enticed back by low wages, plentiful mineral resources and a regime that appears increasingly prepared to support foreign investment and open its economy.
 
Pyongyang has signaled plans to open investment promotion offices within its embassies in Singapore and Malaysia, according to Chia, who maintains regular contact with North Korean officials. A revised foreign investment law, passed by the North Korean Supreme People’s Assembly in 2004, relaxed some conditions on foreign investment and permitted full foreign ownership of some ventures. The assembly has also strengthened intellectual property rights laws.
 
A South Korean government official said that Pyongyang also recently started to approve visas for foreign buyers to enter the joint North-South industrial park at Gaeseong, just north of the demilitarized zone. The official said 19 visas had been approved as of mid-July for buyers from Germany, Japan, China and Australia.
 
Investment in Gaeseong is restricted to South Korean companies.
 
Tony Michell, [Korean Associates Business Consultancy]a business consultant based in Seoul, has received permission to take a group of eight investors to North Korea in September in the first of what he said would be monthly investment missions. The first group will comprise European and Asian business people, none of whom are from China or South Korea, the countries with the largest investment in the North.
 
Michell, who introduced a number of companies to North Korea during the last upswing in investment interest from 1993 to 1995, said there had recently been “a revival of interest.”
 
“This comes up to the 1993 level of interest,” said Michell, managing director for Asia of the Euro-Asian Business Consultancy, adding that if the United States dropped its economic embargo “this would be a humdinger of an emerging market.”
 
Still, potential investors in North Korea have to weigh a long history of failure. Of the eight companies Michell introduced during the early 1990s, only one investment survives. An investment bank based in Hong Kong, Peregrine, entered a joint venture to establish Daedong Credit Bank in Pyongyang. Peregrine collapsed, but Daedong is marking a decade in business.
 
The experience of North East Asia Telecom, a Thai firm, is sobering. It set up a mobile phone network, but since May 2004 use of mobile phones has been suspended by the North Korean government as part of a security crackdown.
 
New investment largely dried up after October 2002 when U.S. officials claimed that North Korean officials had admitted during talks to possessing a nuclear weapons program. There is general agreement among investment advisers and economic analysts that if the nuclear impasse can be resolved foreign investment will accelerate.
 
The nuclear crisis erupted as North Korea was implementing a series of measures to open its economy and increase appeal to investors, like giving state-owned enterprises greater freedom to operate commercially, removing price controls and allowing its currency, the won, to be exchanged for the euro, which was adopted in December 2002 for all foreign currency transactions.
 
Analysts of the North Korean economy say those reforms remain largely on track and paved the way for an upsurge of direct investment in 2004 from China, North Korea’s main economic partner. Ahn Ye Hong, who studies the North Korean economy for the Bank of Korea, the South Korean central bank, said that investment from China rose from $1.3 million in 2003 to $173 million in 2004.
 
He said this investment was driven by China’s desire to “obtain as much of North Korea’s resources as it can,” particularly iron ore. He expects a further significant increase in Chinese investment this year.
 
The South Korean government is also seeking to increase direct investment in the North. Although the bulk of South Korean investment has gone into just two projects, Gaeseong and the Mount Geumgang tourism development, recent talks between the two Koreas explored the possibility of investment in upgrading or repairing mines that have fallen into disuse.
 
An official in South Korea’s Ministry of Unification said an inter-Korean economic cooperation meeting in Pyongyang between Sept. 28 and Oct. 1 would discuss the proposal further. The official, who requested anonymity due to restrictions on speaking publicly, said it was likely any South Korean involvement in redevelopment of the mines would be carried out by a joint enterprise between the government and the private sector.

A presentation by the Korea Economic Institute using Bank of Korea data

Presentation in PDF here: North Korea eocnomic data 2005.pdf

via: http://www.vuw.ac.nz/~caplabtb/dprk/NK_econ06.htm

Choson Ilbo
7/13/2005

It is the afternoon of July 1, and seven trucks carrying iron ore are lined up at the customs house in the border town of Tumen, in China’s Yanbian Korean Autonomous Prefecture, waiting to clear customs with their North Korean cargo. The trucks are laden with so much ore that it is a wonder they can support it all.

“These days, there’s a lot of iron ore coming in from North Korea,” a customs official muses. “Maybe they’re indiscriminately shipping out unprocessed ore because they’ve sold everything else worth selling.”

At the Musan Iron Mine further up the Tumen River at Musan, North Hamgyong Province, it looks like the ore is being sucked into a Chinese black hole. On July 5, some 10 13-ton Chinese trucks laden with ground iron ore from Musan were heading to towns in the Yanbian Korean Autonomous Prefecture like Nanping, which faces Musan across the river, and Chungsan. Chinese trucks are also busy climbing the hills near the Musan mine. The project to develop the Musan mines is China’s largest investment in North Korea, with the country’s Jilin Province saying in December it would invest 4 billion yuan (about US$483 million) into the mines, which had been inactive. Ground iron ore imports started full-scale this year.

The skyrocketing trade between the North and China including in underground resources started with Pyongyang’s economic reforms in 2002.

According to statistics from China’s Customs General Authority, China accounted for 25 percent of North Korea’s total foreign trade in 2002, but the figure rose to 33 percent a year later and to 39 percent last year. Meanwhile, Japan — North Korea’s third largest trading partner — dropped from 13 percent in 2002 to 7 percent last year, while South Korea’s share of North Korea trade has been decreasing.

Lee Myong-suk is a member of the city council of Yanji, a town busy handling a great deal of trade between China, North Korea and South Korea. “There has been more and more trade traffic coming from North Korea via Dandong on the Yalu River and the Yanbian area on the Tumen River,” she says. “It’s a combination of North Korea’s economic difficulties and China’s demand for raw materials.”

As North Korea’s economic dependency on China grows, there are mounting concerns that the impoverished country could one day be reduced to a de-facto Chinese province. Prof. Nam Seong-wook of Korea University smells a rat. “China’s investment in North Korea, which doesn’t have even a properly constituted market, appears to be motivated by political objectives rather than economic incentives,” he says.

From Asia Times:

North Korea has mass-produced computers with Pentium IV processors since 2002, a Russian journalist says in a new book. The confirmation came at a time when the United States and North Korea are in a war of nerves over US and international export control regulations that would ban 15 South Korean firms selected to operate in an industrial complex in the North’s city of Kaesong from bringing in “strategic materials,” including computers.

The South Korean companies said they must be permitted to bring computers with at least Pentium IV chips, which are essential for normal office work, citing earlier unconfirmed reports that the North already began to produce those kinds of computers.

“North Korea has produced computers with Pentium IV processors since 2002, which I saw during my visit to an electric appliance factory in Pyongyang,” Olga PMaltseva, a Vladivostok-based journalist, said in her new book about the North Korean leader, Kim Jong-il.

The Korean translation of the book, titled “A Waltz with Kim Jong Il” was published here on Monday.

“Seven hundred workers and technicians made 14,000 Pentium IV computers in 2002,” she said.

“The factory has produced tens of thousands of computers since 1986 and half of them were exported to Germany.”

There was a similar report by the Choson Sinbo, organ of the pro-Pyongyang General Association of Korean Residents in Japan, in May last year.

The newspaper reported at the time that a North Korean electronic appliance developer has been selling computers with Pentium IV processors in a joint venture with China’s Nanjing Panda Electronics Co since September 2002.

South Korea’s Korea Trade-Investment Promotion Agency (KOTRA) confirmed the report in August last year, citing data from its North Korean counterpart, the International Trade Promotion Committee.

The KOTRA said the North’s electronics firm “Achim (Morning)” and China’s Nanjing Panda have produced three types of Pentium IV computers.

The Russian author is believed to have visited the joint venture factory.

North Korea is classified as a “dangerous country” under the Wassenaar Arrangement, which replaced the Cold War era’s Coordinating Committee for Export Control to Communist Areas in 1996, and thus signatory countries cannot export items classified as “strategic materials” to the communist state.

The items include computers, various metal machinery, laser equipment, high-tech materials and electronic appliances with US-produced parts.

South Korea is among the 33 signatory nations.

An earlier report said the South Korean government is studying ways for the 15 domestic companies to use production equipment, materials and office supplies in Kaesong without conflicts with the U.S.

The Kaesong industrial complex, being built by the Korea Land Corp and Hyundai Asan Corp, a South Korea firm, is one of the most prominent symbols of inter-Korean reconciliation set in motion by the first-ever summit of the leaders of the two countries in 2000.

The developers are scheduled to open Kaesong’s main complex to hundreds of South Korean manufacturers in the first half of next year.

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.