North Korean Economy Watch

Following up on a previous blog post, the Choson Ilbo informs us of the DPRK’s new policies designed to collect “back wages” for North Korean workers in the Kaesong Industrial Zone:

South Korean firms will be ordered to close down or pay fines if they delay pay for North Korean staff at the joint Kaesong Industrial Complex, North Korean authorities reportedly told the firms in November.

The Kaesong Industrial Council on Wednesday said North Korea last November notified South Korea’s Unification Ministry and the Kaesong Industrial Complex management committee of 27-point labor rules in the Kaesong Industrial Complex. Under the rules, South Korean firms will be fined up to US$2,000 if they delay a month’s pay and ordered to suspend operations for 10 days and pay an additional 300 percent of basic pay to staff who have worked for more than 24 hours without a break if they delay pay for two months.

The council worries that now firms in the Kaesong complex are receiving fewer orders due to the recession, they could face heavy costs if the rules are strictly applied.

A total of 93 South Korean firms are currently operating in Kaesong. They are paying about $75, including the minimum wage and social security, per month on average to each North Korean worker.

To get a better idea of the context of this story see a previous post here. 

The full article can be read here:
N.Korea Warned Kaesong Firms Over Staff Pay
Choson Ilbo
3/5/2009

The global financial crisis/recession is affecting some of the DPRK’s most visible assets. 

The first example comes from the Kaesong Industrial Zone, where South Korean firms are obliged to pay North Korean workers’ wages in $US directly to the North Korean government.  Since the South Korean Won/$US exchange rate has risen significantly in recent months, companies in the Zone have seen their labor costs (denominated in $US) soar.  Since wages are fixed and firms are unable to lay off workers, some have responded by simply not paying wages—which does not affect the workers so much as it does the North Korean government’s finances, since it keeps most of the funds.

Quoting from Radio Free Asia:

Authorities in North Korea have warned South Korean companies in its Kaesong industrial area they must pay workers’ wages or face fines, as many investors begin to feel the effects of the economic downturn.

Lee Lim-dong, secretary general of the Committee of the Association of Enterprises Invested in the Kaesong Industrial Complex, said the issue of unpaid salaries was brought up late last year but had now become a formal demand.

“This time around, official notification was issued to all South Korean enterprises invested in Kaesong, through the Kaesong Industrial District Management Committee (KIDMC),” Lee said.

South Korean businesses invested in Kaesong have already incurred serious losses due to the depreciation of the South Korean won against the U.S. dollar, according to Kim Kyu Chol, head of the Forum for Inter-Korean Relations, a Seoul-based group monitoring inter-Korean business relations.

“They already have to spend 30-45 percent more on labor [because of this],” he said, adding that the lives of South Korean entrepreneurs in the Kaesong economic zone would now be even more difficult.

… 

According to Park Yong-man, director of Green Textile Co.—a South Korean company invested in Kaesong—“The official notification was sent to all South Korean companies in Kaesong on Feb. 10.”

Meanwhile, Kim said, one South Korean electroplating company had already failed to pay its North Korean workers for more than three months and had been suspended.

Seven South Korean companies in Kaesong are currently unable to pay their North Korean workers on time and will soon be in bigger trouble because of the new measures, Kim said.

South Korean companies operating in Kaesong are not allowed to recruit or dismiss North Korean staff directly, and North Korean authorities impose quotas of staffing numbers on them.

In early February, North Korean officials said that salaries of North Korean supervisors watching over the night shift at South Korean enterprises in Kaesong would have to increase by 200-300 percent, putting further pressure on labor costs.

And companies can be suspended from operations for failing to pay their employees for more than a month.

Kim said South Korean companies in Kaesong don’t need more supervisors or clerical workers, which the North Korean side has sought.

“They are already facing a managerial crisis, and a [demanded] 50 percent increase in the number of North Korean managerial staff is pushing it too hard,” he said, adding that South Korean enterprises would find this hard to accept.

Until recently, the Kaesong Industrial District Management Committee (KIDMC), a joint North-South panel overseeing the complex, was responsible for half of the U.S. $10 a month transportation allowance given to North Korean workers in Kaesong.

North Korea demanded as of Jan. 1 that South Korea Kaesong companies must now pay the entire cost.

Now hard bargaining can pay off sometimes, especially for North Korea, but with all that has happened in the Zone recently it seems as if the DPRK actually wants these businesses to leave.  The DPRK’s negotiators are smart enough to know that the pie is shrinking and they naturally want to protect their share, but unfortunately they don’t yet seem to appreciate that their actions will have serious ramifications on future investment in the Zone once the global economy turns the corner.

Example No. 2: Unfortunately, recent economic conditions have also reduced the number of South Korean tourists venturing abroad where they might enjoy diversions such as eating in a North Korean-owned restaurant.

Quoting from Japan Probe:

Ever since a North Korean government restaurant opened in Bangkok two years ago, the Japanese press have been regularly visiting the place with hidden cameras to catch a glimpse of its dinnertime performances. However, it has now been discovered that the restaurant recently went out of business.

Most of its business had come from South Korean tourists, but the weakening of the won and the decline in tourism to Thailand due to the airport protests seem to have dealt a death blow to the restaurant. Attempts to contact North Korea-run restaurants in Cambodia and Vietnam failed, suggesting that those restaurants may have also gone under. It has also been said that a similar North Korean restaurant in China has suffered a big drop in business.

Read the RFA article here:
North Korea Warning Over Labor
Radio Free Asia
J.W. Noh
9/26/2009

According to Asia Pulse Businesswire (Hat tip to Oliver):

Trade between South and North Korea declined 19.6 per cent in January from a year earlier, apparently hit by the slumping South Korean economy and frayed Seoul-Pyongyang relations, the South’s official data showed on Feb. 22.

Inter-Korean trade reached US$113 million in January, down from $140.5 million a year ago, marking the fifth straight monthly fall, the data made available by Unification Ministry in Seoul said.

“The decline in inter-Korean trade appears compounded by several factors like the slowing economic downturn and frozen relations between the two Koreas,” the ministry said in the data.

Inter-Korean relations have chilled since conservative South Korean President Lee Myung-bak took office a year ago, pledging to get tough on North Korea.

The South Korean economy is sharply slumping, due to tumbling exports and sluggish domestic demand. South Korea is widely expected to post negative economic growth this year, the first annual contraction since the 1997-98 Asian financial crisis.

Citation:
Inter-Korean trade dips 20 pct in January
Asia Pulse Businesswire
February 26, 2009
(Yonhap)

DPRK trade deficit with China nears USD$1.3 billion
Institutue for Far Eastern Studies (IFES)
NK Brief No. 09-3-5-1
2009-03-05

As North Korean dependence on trade with China continues to grow, the amount of overall trade hit a record high in 2008, however its trade deficit rose along with it. According to recent statistics released by China’s Customs Bureau and the Ministry of Commerce, trade between the DPRK and PRC in 2008 was worth a total of 2.78 billion USD, a 41.2 percent increase over the mere 1.97 billion USD recorded in 2007.

DPRK exports to China were worth 750 million USD, a 29.7 percent rise, while imports from China totaled 2.03 billion USD, up 46 percent, which led to a record 1.28 billion USD trade deficit. Mineral resources accounted for more than half (54.7 percent) of North Korea’s exports to China, while the majority of imports were machinery and electronic goods.

The North’s trade deficit with China has continued to grow for the past five years straight. In 2004, the North’s trade deficit was a mere 210 million USD, but this more than doubled, to 580 million USD, in 2005, rose to 760 million USD in 2006, and then hit 810 million USD in 2007. The reason for the sudden jump in the North’s trade deficit appears to be the globally rising cost of raw materials, and therefore Pyongyang’s trade deficit is expected to continue to rise rapidly in the near future.

This deficit is exacerbated by the North’s isolation from the rest of the international community, leaving it little choice but to continue trading at prices set by the Chinese. With the currently frigid relations between Pyongyang and Seoul, and the deadlock in 6-Party Talks, tensions on the Korean Peninsula make it increasingly difficult for North Korea to trade with other countries, so its dependence on China and Chinese goods is expected to continue to grow. 

And according to the Choson Ilbo:

Trade between North Korea and China totaled US$2.78 billion last year, up 41.2 percent from $1.97 billion in the previous year, according to the statistics released on Monday by the China Customs and China’s Ministry of Commerce. North Korea’s imports topped $2.03 billion, up 46 percent from the previous year, but its exports stood at $750 million, up only 29.7 percent.

As a result, North Korea’s trade deficit with China reached a record high of $1.28 billion, up a whopping 57.7 percent from $810 million in 2007. It has been rising steadily from $210 million in 2004.

Mineral resources accounted for 54.7 percent of the North’s exports to China, while machinery and electronic equipment took up the biggest portion of imports.

The figures are attributable to the drastically increased prices of raw materials and the North’s deepening dependency on China. “North Korea’s dependence on China appears to be rising steadily because foreign countries other than China are reluctant to trade with the North because of strained inter-Korean relations and the stalled six-party talks,” said a North Korea export in Beijing diplomatic circles.

Read the full article here:
N.Korea’s Reliance on China Trade Deepens
Choson Ilbo
2/24/2009

Stephan Haggard and Marcus Noland
Asia Pacific Bulletin
No. 27, February 5, 2009

Abstract
North Korea has suffered chronic hunger problems for two decades. A famine in the 1990s killed up to one million people and shortages have remained endemic. Most observers believe that the recent harvest is the best in years, but even under optimistic scenarios, food-related distress is likely to continue. Stephan Haggard and Marcus Noland discuss North Korea’s current food situation and the prospects for the future.

Download the full paper in PDF here. 

Wednesday 4 March, 14:00 – 17:30
KVK The Hague, Randstadzaal
Koningskade 30, 2596 AA  Den Haag

This event is sponsored by GPI Consultancy (see previous posts here).

Speakers include:

Willem Lobbes, boardmember of the Dutch Korean Tradeclub, Director of Lobbes Insurance Consultants

Representative of the DPRK Embassy in Bern, Switzerland

Egbert Wissink, CEO of NovolinQ BV

Professor Evert Jacobsen, University of Wageningen

Kees van Galen, CEO VNC Asia Travel
 
Paul Tjia, Director of GPI Consultancy

The AGENDA can be found here (PDF).

The REGISTRATION FORM can be downloaded here.

By Michael Rank
Link to full report by Lord David Alton and Baroness Caroline Cox  at the bottom of this story

A British politician who visited North Korea this month to investigate the country’s human rights record and promote dialogue said she had been pleasantly surprised to come across an active Protestant seminary in Pyongyang with about 10 students and a church with a Bible on every pew.

Baroness Caroline Cox, who visited Pyongyang as vice chairman of the All Party Parliamentary Group for North Korea, also urged the United States to end hostilities with North Korea and open an embassy in Pyongyang, just as Britain did 10 years ago.

Cox, a devout Christian, said she was sure the congregation at the Protestant Pongsu church included many genuine worshippers as well as some officials and informers, and that the church was not simply a propaganda showcase for the regime.

She told NKEW that the church was “surprisingly big” and that the attached seminary had been opened with South Korean support and that South Koreans had apparently provided the Bibles. She was told that about 300 people regularly attend Sunday services.

She said she that although “there is a show element in it”, she did not believe the seminary could be written off simply as an empty showcase, as she had to push quite hard to visit it and some officials did not seem aware of its existence.

Cox said Choe Thae Bok, chairman of the Supreme People’s Assembly, repeated an official invitation to the Archbishop of Canterbury, Dr Rowan Williams, to visit the DPRK. Choe met Williams when he visited London in 2004.

Cox and the Parliamentary Group’s chairman, Lord Alton, a fervent Catholic, also visited the recently opened Russian Orthodox church which she described as “extremely beautiful” and where they met two North Korean priests, Fathers Thaddeus and Theodore.  She said the Moscow-trained Father Thaddeus was particularly warm and open, but she added that the congregation appeared to consist entirely of Russian diplomats and business people rather than North Koreans.

The delegation also, somewhat surprisingly perhaps, called for senior North Korean military officials to be invited to visit Sandhurst, Britain’s premier military academy.

Cox said their visit, their second to Pyongyang, was aimed at building “bridges not walls” and that she believed there are “people [in North Korea] who genuinely want to dig themselves out of the hole they have been dug into by the Great Leader.” She and Alton first visited North Korea in 2003.

The two said in a statement that they were were “less than encouraged by our visit to Changchung Catholic Cathedral and our meeting with Mr Jang Jae On, Chairman of the Korean Consultative Society of Religious Believers.

“The delegation expressed their dismay at the continued failure to provide a resident Catholic priest and the lack of progress in normalising relations with the Holy See.

“The delegation emphasised to Mr Jang that if the DPRK wishes to send a positive message about its respect for religious freedom, as enshrined in its Constitution, it would address these two fundamental issues.

“Concerns were also raised about why the importing of Bibles should remain a serious offence, which has been treated in some cases as a capital offence. The delegation gave Korean Bibles to their hosts as a sign of respect and we hope these were received in the spirit in which they were given.”

On the political side, the group’s recommendations include:

1. “a call to the incoming Administration of President Barack Obama to instigate a formal cessation of hostilities and normalisation of relations with the Democratic Peoples republic of North Korea (DPRK). The United Kingdom established a diplomatic mission in the Pyongyang ten years ago; this would be an opportune moment for the United States to do the same.

2. “a recognition of the error of not linking human rights and security concerns in the six-party talks – constructive critical engagement with Pyongyang is recommended: a ‘Helsinki Process with a Korean Face.’

“a call for renewed concerted international pressure to grant access to Professor Vitit Muntarbhorn – the United Nations Special Rapporteur on Human Rights, access to the DPRK. He has estimated that 400,000 people have died in the camps in the last 30 years.

3. “encouragement of the DPRK to allow greater freedom of information for its citizens and access for aid agencies to carry out their work – in particular in the areas of capacity building and health care.

Their principal findings include:

1. deep concerns over human rights, humanitarian and security issues – issues they raised during high level meetings with DPRK government ministers and officials.

2. the consequences of deteriorating relations between North and South Korea which could jeopardise a historic opportunity for progress.

3. observations about political and religious liberties, including some positive developments which were noted and appreciated.

Their full report can be read  at the London/Korea Links web page.

The South Korean and Indian governments are finalizing a trade concession agreement that will lower Indian import tariffs on some goods produced in the Kaesong Zone. According to India’s Economic Times:

Sounds odd, but some select North Korean goods may soon get special trade concession in India after New Delhi signs a trade pact with South Korea. In fact, the North Korean city of Gaesung will emerge as a major beneficiary as part of the terms and conditions of the India-South Korea comprehensive economic partnership agreement (CEPA), which is likely to be signed soon, sources close to the development told SundayET. The North Korean city is located just 60 km north of Seoul, the capital of South Korea.

Though Indian negotiators initially showed reluctance to such a deal, South Koreans were very keen as many of their companies have invested heavily in the region and set up many factories in that city, using cheap North Korean labourers. Goods produced at Gaesung include low-end engineering products, leather goods, jewellery, chemicals and textiles.

When contacted, commerce secretary GK Pillai confirmed to SundayET that India would extend the same concession to goods produced at Gaesung too. “It’s a matter of 30-40 products which are not very high-end. Those are not cars or steel. Yes, Gaesung is in North Korea, but it’s very much a part of South Korea’s economic co-operation plan. Both the Indian and the Korean (South Korean) governments have agreed to the CEPA, and it should be coming into effect from June or July this year,” he said.

Once the partnership agreement is signed, it will be the first such instance in which India recognises the outward processing concept and gives the same status to goods produced outside the negotiating country with those produced inside. Though Mr Pillai said there was no issue regarding Gaesung, sources close to the development added that India was not very keen on allowing those products.

“India was opposed to the idea as other countries too may demand the same model later. What if a country entering into a trade agreement with India chooses a place in Bangladesh or Pakistan for outward processing,” said a senior government official.

The trade volume between India and North Korea is quite insignificant if it’s compared with that of India-South Korea. During FY08, India’s import from North Korea was worth a mere $161 million, which was 2.6% of that from South Korea. In case of exports, the figures are somewhat better. The total export from India to North Korea was $850 mn in FY08 which was 29% of India’s export to South Korea.

The Bank of Korea, the South’s central bank and most cited source of DPRK economic statistics, estimates North Korea’s gross exports (to all countries except South Korea) in 2006 and 2007 at $950 and $920 (USD in millions) respectively.  They estimate the DPRK’s imports in these years at $2,050 and $2,020 (USD in millions) respectively. 

According to the data in this article, North Korea’s exports to India ($161 million) are a non-trivial 17.5% of its total exports (assuming the 2007 number is approximately current and changes in inflation and exchange rates are trivial).  The DPRK’s imports from India, $850 million in 2008 (according to the article), are a whopping 42% of North Korea’s estimated 2007 total imports.  Either India is now one of the DPRK’s major trading partners, or there was a short-term spike in DPRK-India trading activity, or these numbers are fishy.

Setting this debate aside, a further question arises—how will these transactions be recorded?  Since the DPRK has a trade relationship with India, will goods from Kaesong be flown/shipped from the DPRK to India and counted as North Korean trade, or will goods be shipped from Kaesong to South Korea and then sent to India—to be counted as South Korean trade? 

My suspicion is that the Kaesong goods will be counted as South Korean merchandise trade since this is a South Korea-India trade deal.  If the goods are recorded as South Korean, agreements of this sort will make it much more difficult in the future to determine the DPRK’s trade volume using mirror statistics.  This is because the country of origin records kept by the DPRK’s trading partners will show goods produced in the Kaesong zone as originating in South Korea.  As a result, the DPRK’s merchandise exports could go underestimated.

Read the full story here:
Ever heard of Gaesung? Gear up for its products
The Economic Times
Shantanu Nandan Sharma
2/15/2009

As reported last year, the British Council in Beijing is recruiting English teachers to work in Pyongyang.  According to Yonhap, the number of expats living in Pyongyang to teach English was recently increased from 3 to 4. According to the story:

Last September, North Korea moved up the start year of English education to the third grade from the sixth, Seoul officials said.

“The DPRK government continues to support this program, and we take this as evidence that they give importance to raising the standard of English in DPRK schools and universities,” Bilbow said in an email interview with Yonhap. DPRK is the acronym of the North’s official name, the Democratic People’s Republic of Korea.

With access to native English speakers scarce in the communist state, North Korea asked Britain for assistance after the two countries established diplomatic relations in 2000. The British Council started the teacher trainer program two years later.

British instructors, recruited among those who have a diploma in Teaching English as a Foreign Language with at least three years of work experience, teach a small group of elite university students and local English teachers who will later be deployed to provincial education universities and schools.

Bilbow said the program is now available at three of the top North Korean universities in Pyongyang — Kim Hyong Jik University, the Pyongyang University of Foreign Studies and Kim Il Sung University. About 150 students and in-service teachers are taking the courses at each university, he said.

The program, the only one offered in the North by native English speakers, has the full support of the Pyongyang government, Bilbow said.

In a show of such support, Choe Thae-bok, chairman of the North’s parliament, Supreme People’s Assembly, told a visiting British parliamentary delegation last week that his granddaughter was learning English from British native speakers and asked the delegation to help enlarge the program, according to Radio Free Asia on Tuesday.

“In DPRK, exposure to the wider English language teaching community has been scarce, though the project has done much to bridge the gap,” Bilbow said.

“In time, it will mean improved English language education which in turn will allow DPRK citizens to access the educational resources and opportunities that are available to competent English users worldwide,” he said.

Cho Jeong-ah, an analyst with the state-run Korea Institute for National Unification in Seoul, said the North Korean government closely monitors global educational trends and adjusts its education system. Pyongyang believes English education will help enhance its relations with other countries and boost its economic drive, Cho said.

“North Korean natural resources are limited, and its relations with the United States, which can draw economic assistance, won’t be resolved overnight. North Korea seems to be trying to reach its goal by developing human resources,” Cho said.

Learn more about the British Council’s English education program here.  PDF here.

Read the full Yonhap story here:
N. Korea welcoming native English teachers with open arms
Yonhap
Kim Hyun
2/13/2009 

According to Telegeography:

Vietnamese military-owned telco Viettel has announced plans to expand its network to North Korea, Cuba and Venezuela, according to reports in local paper Thanh Nien Daily. Tran Phuoc Minh, deputy director of Viettel, said the company is hoping to hold negotiations with the three countries in order to gain a foothold in their still relatively underdeveloped wireless markets. The cellco expanded its network to Cambodia last year, where it signed up 100,000 wireless subscribers after two months of pilot operations, as well as Laos, where it hopes to attract 50,000 subscribers this year. According to TeleGeography’s GlobalComms database, Viettel had a subscriber base of 28 million at end-2008.

Read the full story here:
Viettel plans network expansion to North Korea, Cuba, Venezuela
TeleGeography
2/6/2009