North Korean Economy Watch

The UN World Food Program has announced a new emergency relief measure in the DPRK.  The WFP claims to need more than 1.5 million tons food for North Korea and $503 million to maintain adequate operations until November 2009—$60 million of it now.  Below are highlights from the UNWFP and various media outlets:

According to the WFP:

The immediate negative impact on food security was confirmed by a comprehensive “Rapid Food Security Assessment” conducted jointly by WFP and the Food and Agricultural Organization (FAO) in June. More than three quarters of all households had reduced their food intake, over half were eating only two meals per day and more malnourished and ill children were being admitted to hospitals and institutions.

“All in all, operations are progressing well and we have been able to expand assistance to reach over 4 million hungry and vulnerable North Koreans.”

WFP is deploying 59 international staff members to support the new programme. More than 20 of them will be working in six newly-established field offices to monitor and track food distributions – and for the first time ever, the international staff will include Korean-speakers, in accordance with the new agreement between WFP and the DPRK government.

WFP monitors have already visited county warehouses and beneficiary institutions in 125 of the 131 targeted counties and have accounted for all WFP food assistance distributed so far.

As an aside, “two meals a day” is a scientifically meaningless measure.  At the bare minimum, it would be far more helpful to detail the number of calories the mean/median North Korean consumes per day along with the total necessary calories needed to maintain health.

The Christian Science Monitor printed a few more details: 

Citizens eligible for food rations have seen their allocation cut from 500 grams a day to 150 grams, Banbury reported. Few North Koreans eat meat except on major national holidays when the government distributes it, he added.

What are the roles of South Korea, USA and China in all this?

South Korea
South Korea, which provided more than half the North’s food aid last year, has suspended shipments of food and fertiliser this year in a tougher policy towards Pyongyang from new President Lee Myung-bak.(Financial Times)

On Tuesday, [South Korean] Unification Ministry spokesman Kim Ho-nyeon said Seoul is still considering the appeal and will make a decision based on its assessment of the North’s food situation while monitoring “various situations.” He did not elaborate.(AP via the Herald Tribue)

US
The US promised in May to donate 400,000 tonnes of food aid to North Korea through the WFP and a further 100,000 tonnes through private US organisations. That would nearly double the amount donated last year by China, which has in past said its relationship with Pyongyang was as close as “lips and teeth”. (Financial Times)

China
China is North Korea’s leading source of food and fuel aid. But difficulties in obtaining food export licenses from China have hampered the WFP’s efforts to procure food to be sent to North Korea as well as to Myanmar, the agency said, adding it was in talks with Chinese officials. It has asked the Chinese government to allow the agency to buy 50,000 tons of cereals and export it to their operations in either country. (AP via the Herald Tribune)

I have seen plenty of Chinese tourists in the DPRK, all gambling in Stanley Ho’s casino in the basement of the Yangakdo Hotel, but apparently China has eased regulations on traveling to the DPRK. 

According to Reuters:

China has officially recognized North Korea as a tourist destination for Chinese tour groups, the Xinhua News agency said on Tuesday, quoting Chinese tourism authorities.

North Korean tourism agencies will also be allowed to open representative offices in the northeastern Chinese city of Shenyang, it said.

Chinese individuals were allowed to travel to North Korea on tourism visas as recently as four years ago, but regulations were subsequently changed. However, Chinese tourists have continued to visit North Korea in small groups.

China is the main trading partner with North Korea, whose closed economy faces the risk of famine in the next 14 months following several years of poor harvests.

In 2009, the two countries will celebrate their 60th year of mutual diplomatic recognition.

Read the full article here:
China designates North Korea a tourist destination
Reuters
Lucy Hornby
9/2/2008

The policy of mutual benefits and common prosperity

It doesn’t have the same ring as “Sunshine Policy,” and the acronym PMBCP is too long, but this is the English name of South Korean President Lee Myung-bak’s policy towards the DPRK. 

According to Yonhap:

We decided to fix an English name for the policy because there have been many different translated versions,” Kim Ho-nyoun, spokesman for the Unification Ministry, the top Seoul office on North Korea, told reporters.

He said the name was chosen because it best suits the government’s policy of pursuing a relationship of co-existence and co-prosperity with the North beyond the current phase of reconciliation.

The government aims at a firmer inter-Korean reconciliation than its two liberal predecessors, seeking to bring tangible benefits not only to the North but to the South as well, officials said.

President Lee Myung-bak pledged during his election campaign to help the North triple its per capita gross national income to US$3,000 if it abandons its nuclear programs and opens itself to the world.

The so-called “Vision 3,000” program is now part of Lee’s broader North Korea policy, officials said.

The goal of tripling the DPRK’s per capita GNI (GNP) to $3,000 is based on the assumption that the DPRK’s current per capita income is close to $1,000, which is a wild over statement.  Some more realistic assesments put it as low as $368 per year.  Here is a wrap up of the DPRK’s most recent economic stats from the Bank of Korea.

Read the full article here:
Gov’t sets official English name for N.K. policy
Yonhap
Shim Sun-ah
8/26/2008

Myanmar severed diplomatic relations with the DPRK after North Korean agents attempted to assassinate South Korea  president Chun Doo Hwan on his October 1983 visit to Rangoon.

Diplomatic relations between the two countries were restored in April 2007.  Shortly after, North Korea was accused of selling rocket launchers to Myanmar’s SPDC (Orwellian acronym for: State Peace and Development Council)–formerly known as SLORC (State Law and Order Restoration Council).

Now the AFP reports that trade has expanded into natural resources, with which Myanmar is abundantly blessed:

Military-run Myanmar is to begin exporting rubber to North Korea, in a further warming of relations between the reclusive governments of the two countries, a weekly newspaper reported Tuesday.

“They will start by importing at least 10,000 tonnes within the first year,” Khaing Myint of the Myanmar Rubber Planters and Producers Association was quoted as saying by the Myanmar Times.

“We are extremely pleased to add another client nation to our export destinations for our rubber. We expect the first batch to be delivered in October,” Khaing Myint reportedly said.

Read the full article here:
Myanmar to begin rubber exports to North Korea
AFP
8/19/2008

Although the article did not offer much new or probing analysis, there were a few data points that I thought it was important to highlight: 

Despite its isolation and prisonlike feel, the Kaesong Industrial Park is booming with construction. The park’s operator, a South Korean developer, Hyundai Asan, hopes to expand it into a minicity over the next 12 years, with high-rise apartments and hotels, an artificial lake and three golf courses.

By that time, the company hopes there will be about 2,000 factories here employing 350,000 North Koreans and producing $20 billion worth of goods a year.

That compares with a manufacturing output of only $366 million in the first half of this year, according to South Korea’s unification ministry.

In the six months through June, the flow of goods in and out of the industrial park accounted for 42 percent of the $881 million in trade between the two Koreas, the ministry said.

and

[…] 72 smaller South Korean companies have already built factories here, looking to tap the North’s supply of low-cost, Korean-speaking labor. So far, only one foreign company has come [–German auto parts maker Prettl Group is building a factory. Two Chinese companies will begin operations soon[, b]ut most companies here continue to be smaller South Korean firms, producing low-tech goods, from frying pans to running shoes, largely for domestic consumption.] (NKeconWatch combined two different paragraphs here)

The piecemeal brand of change is seen in the experiences of SJ Tech, a South Korean maker of car and cellphone parts that built a $4 million factory here four years ago. The company’s first North Korean employees had never even seen a keyboard, much less a computer, said Yoo Chang-geun, SJ Tech’s president. SJ Tech has spent so much time teaching them things like machinery operation and management concepts that Mr. Yoo jokingly calls his factory “North Korea’s first business school.”

But the North Koreans were eager learners, sketching keyboards on paper to teach themselves typing. Now, SJ Tech’s 430 North Korean employees have learned enough to run the factory without South Korean supervisors.

In a telling sign, they have also changed their haircuts to look more like their South Korean colleagues.

Andrei Lankov seems optimistic on the project’s political goals, stating “When North and South Koreans can interact on a daily basis, it is a chance for the North Koreans to see with their eyes that their own propaganda doesn’t make sense.”

A few described how the South Korean-run industrial park was improving lives by paying its workers the equivalent of about $60 a month, three times the average salary in the rest of Kaesong. […]

The South Korean government, which spent more than $150 million subsidizing the park, provides low-interest loans and insurance to companies to offset the risks of investing in the unstable and still hostile North.

Mr. Yoo of SJ Tech said his North Korean employees’ monthly salaries of $75, in contrast to the $2,000 he pays South Koreans, made investing in North Korea entirely worthwhile, despite any risks.

The article seems to take worker compensation claims at face value, but in reality Kaesong workers do not take home their allotted wages.  The DPRK government keeps most of them in taxes and administrative fees.  However, other non-monetary benefits make the jobs highly envied among North Korean workers.  Rumor has it that North Korean workers pay hefty bribes to get these jobs. 

Read the full article here:
Big Dreams for North Korean Industrial Park
New York Times
Martin Fackler
8/20/2008

Despite tensions between North and South Korean this year, South Korea is still delivering promised energy aid to the North:

Under a six-nation accord signed last year, South Korea has started delivering energy assistance to North Korea.

This week’s shipment included 600 tons of round steel bars.

Seoul has so far provided assistance worth 124,000 tons of heavy fuel oil.

Read the full story here:
South Korea supplies the North with energy
Birmingham Star
08/08/08 

UPDATE:  (Reuters) Secretary of State Condoleezza Rice told Japan that Washington would not remove North Korea from a US list of state sponsors of terrorism on the initial deadline of Monday, Japan’s foreign minister said.

ORGINAL POST: Marcus Noland comments in a Newsweek International op-ed how recent US policy changes towards North Korea (delisting the DPRK as a state sponsor of terror and exempting sanctions under the Trading with the Enemy Act) amount to very little:

Lifting the trade restrictions will have a minimal impact. North Korea will remain one of a few countries that does not have normal trade relations with the United States, meaning its exports will continue to be subjected to punitive tariffs of up to 90 percent.

Removing North Korea from the terrorism list means that Washington can now legally support it for membership in international financial organizations such as the World Bank. But the White House is under no obligation to actually do so. North Korea also remains excluded from US government programs that encourage trade and investment.

North Korea’s declaration will trigger a reconvening of the Six-Party Talks, which includes China, South Korea, Japan, and Russia. The inadequate nature of the declaration guarantees there will be yet another round of negotiations in which North Korea will reveal a bit more in return for further concessions. It is no accident that up to 50,000 metric tons of US food aid is expected to arrive in North Korea early this month. 

Writing in 2004 (yet relevant today), Marcus Noland wrote about these issues in depth.  Below are excerpts from his op-ed on US tariffs:

US importers of DPRK products are required to obtain prior approval from the US Treasury’s Office of Foreign Assets, certifying that the products were not produced by North Korean entities designated as having engaged in missile proliferation. Subject to this condition, approval is routine. US government officials report that they receive only a handful of such requests each year. Their impression is that business conditions in the DPRK pose a greater impediment to bilateral trade than the regulatory regime.

…

So, at present, with the exception of military-related products, there are few specific legal restrictions on the ability of Americans to export to or invest in the DPRK. Imports are subject to a prior approval process, but this is based on a transparent and narrowly delineated certification requirement.

Yet there is little trade between the United States and the DPRK. North Korea is among the few countries that the United States does not grant normal trade relations (NTR) status to, and North Korean exports are subject to the so-called column 2 tariff rates established by the infamous Smoot-Hawley Tariff Act of 1930. These tariffs tend to be the highest on labor-intensive products such as garments, in which North Korea is conceivably competitive. Though their incidence is an accident of history, and not an intentional slap, the column 2 tariffs represent a serious potential impediment to trade. Some countries, notably China, have successfully exported to the United States despite being subject to the higher column 2 tariffs (though even China eventually gained NTR status on a year-to-year basis). Most countries that have recently obtained permanent NTR, such as China, have done so through the World Trade Organization (WTO) accession process. The DPRK has shown no interest in joining the WTO.

This disinterest is unfortunate. The United States does not grant the DPRK quotas under the Multi-Fibre Arrangement (MFA), a worldwide network of bilateral trade quotas on textiles and apparel (due to expire in 2005), and WTO accession could aid the DPRK in this regard. In the case of the similarly diplomatically problematic Burmese government, the US government found it politically easier to accept an increase in Burmese exports to the United States than to negotiate publicly a textile agreement under WTO auspices with the repressive regime. WTO membership has its privileges. In any event, the DPRK is one of the rare countries that chronically do not fill their MFA quotas in Europe, where there are no sanctions, suggesting that the problem lies in DPRK’s inability to compete, not in trade barriers.

However, should the DPRK obtain NTR status, the United States would likely classify it as a nonmarket economy (NME) and subject it to onerous antidumping rules on the Chinese template. The point is that improved diplomatic relations is no panacea—the United States can be protectionist on purely economic grounds, regardless of politics.

Conversely, the United States trades with some low-income countries preferentially, unilaterally granting them limited tariff-free access through the Generalized System of Preferences (GSP), subject to standards concerning workers’ rights, intellectual property protection, and drug trafficking. Given North Korea’s disregard for internationally accepted labor standards, it is inconceivable that the United States would grant North Korea GSP privileges under current practices, even if diplomatic relations were normalized. Yet China, which has never received GSP privileges, vividly demonstrates that it is quite possible to prosper without such advantages.

Today, internal conditions and practices in North Korea, not legal restrictions, greatly impede bilateral trade. However, with sufficient reform and improvement in competitiveness, a broad range of policy issues would become increasingly relevant. In this regard, DPRK accession to the WTO would be advantageous. In the meantime, rather than complaining about US policy, North Korean officials would be better served by redoubling their reform efforts.

For more information, read the full articles below:
Partially True Confessions: How Big is the North Korea Deal?
Marcus Noland, Peterson Institute
Newsweek (Link via the Peterson Institute)
7/7/2008

The Legal Framework of US–North Korea Trade Relations
Op-ed in JoongAng Ilbo, via the Peterson Institute web site.
Marcus Noland
4/27/2004

In the last several months the Daily NK has reported on North Korea’s anti-corruption campaigns, particularly in Sinuiju and Hyesan, major DPRK/China trade hubs. Additionally, we have seen stories of how the Chinese are making life harder for resident North Koreans in the run up to the Olympics.

These measures, both of which should have an adverse impact on trade volume between the two coutries—and thus on tax revenues—made this recent report in the Daily NK all the more surprising. China’s Yanji Customs House (along the North Korean border) has reportedly seen a 226% increase in tax revenue this year from trade with North Korea.

How can China and the DPRK make life difficult for traders/entrepreneurs and still see an increase in the value of traded goods and corresponding tax revenue?  According to the article:

Jilin Newspaper in China reported on the 4th that “[…]For the first half of this year, tax revenues vis a vis North Korea totaled 34.22 million Yuan, up 226.2 percent from the year before.

The newspaper continued, “During this period, entrepreneurs in Yanji imported 64 thousand tons of iron ore from North Korea; that is a 2.3 percent increase from the same period a year ago. Accordingly, the tax amount of collected was 29.13 million Yuan, which is 66.1 percent of the total tax revenue derived from North Korea.”

The Yanji Custom House covers seven border gateways with North Korea, such as Juanhe-Wonjeongri, Shazi-Saebyul, Tumen-Namyang, Sanhe-Hoiryeong, Kaishantun-Sambong, Naping-Musan, and Guchengli-Samjangri.

According to the Yanji Custom House statistics, the Naping-Musan border gateway, where iron ore collected from the Musan mine enters China, is the first ranked for commercial traffic, and Guchengli-Samjangri, the gateway for North Korean timber, is second.

Tonghua Steel Group, Yanbian Tianchi Trade Incorporated Compay, and Zhonggang Group purchased 50-year mining rights for North Korea’s Musan mine in 2005. Since late 2007 they had been discussing a seven billion Yuan additional investment in it but that failed due to conflicting views on cooperative investment rate proportions, methods of withdrawing invested funds and other issues. As a consequence of the stalled investment, the Musan mine’s exports to China have not grown relative to last year’s figures.

So most of the trade that goes through Yanji is in raw natural resources, particularly iron ore and timber, and trade in these resources seems to be carried out by Chinese companies and is probably supported (protected) by senior policy makers on both sides of the border.  Rather than looking at politics as an explanation, it might simply be another result of rising global commodities prices.

The tax windfall could come from one of two sources: A volume (unit) import tax (ex: $1 for each ton of iron) or an ad valorem import tax (ex: tax on the monetary value of the goods).  It is not likely they impose much of an export tax to make a difference.

If China imposed a unit tax, the revenue gains would have to come from surging imports.  In this case, it would be likely that the Chinese companies had fixed-price contracts with their North Korean suppliers, and that  the increase in global commodity prices simply made DPRK iron ore comparatively very cheap.  When (if?) global iron prices fell, we would expect to see China decrease imports from North Korea.  But according to the article, iron imports are up only 2.3%—not enough to explain the surge in revenue.

It is more likely that China imposes an ad valorem tax on North Korean imports and the contracts between the Chinese companies and North Korean suppliers are set at (near) market prices.  Simply put, taxing the monetary value of increasingly valuable imports has been beneficial for the Chinese government.  Even though production at the Musan Mine has not increased much, revenues are probably way up.

Given the status of the Musan Mine as the DPRK’s largest, it is likely that funds raised from this mine are firmly under control.  It would be interesting to know the customs receipts in Dandong, Laioning Province, across the river from North Korea’s Sinuiju.  Sinuiju seems to have suffered the brunt of the DPRK’s anti-corruption drive, and it is the main railway and trade artery between North Korea China.  Most of the companies targeted for inspection were in Sinuiju.  Have Chinese tax collections/trade rebounded there?

Read the full story here:
226% Rise in Tax Revenues at Yanji Custom House
Daily NK
Lee Sung Jin
8/6/2008

UPDATE 3 (2014-12-16): A documentary has been made about the Hong family reunion. You can see it here.

UPDATE 2: I added video of the family reunion to Youtube. You can see it here. 

UPDATE 1 (2008-8-5): Herald Tribune/Joong Ang have update and photo of reunion.

In February 2007 the Joong Ang Daily reported the sad story of Renate Hong, and East German citizen who married a North Korean student at Jena University named Hong Ok-geun.  Shortly after their marriage, Mr. Hong was called back to the DPRK in 1961, and the couple eventually lost touch.

Early last year, North Korea verified that Mr. Hong was still alive in Hamhung, though remarried and with a new family.   Ms. Hong, still in Germany with two children born of the short relationship, never remarried.

The couple was finally able to exchange letters with the help of German authorities. When the first arrived from Mr. Hong, it was the first time in 44 years that Renate had heard from her husband since her last letter came back with an “address unknown” stamp in 1963.

The DPRK government initially denied requests for a reunion, but this week the couple, as well as their children, were allowed to meet in Pyongyang.  According to the Hong family and diplomatic sources in Germany, Renate Hong, 71, and her two sons arrived in Pyongyang on July 25.  This will be the first time the two sons, now 47 and 48, will see their father.

Read more here:
Joong Ang Daily
Ryu Kwon-ha
2/13/2007

North Korea allows a separated couple to reunite after 47 years
Joong Ang Daily
Ryu Kwon-Ha and Ser Myo-ja
8/5/2008

German travels to NKorea to reunite with husband
Associated Press(Via Huffington Post)
8/5/2008

NKeconWatch blogged earlier about the US-based organizations permitted to enter the DPRK and distribute US humanitarian relief.  A list of those organizations can be found here.

Number three on the list, Samaritan’s Purse, is headed by “US religionist” Franklin Graham, son of Rev. Billy Graham, who just arrived in Pyongyang for a 4-day humanitarian relief tour.  Franklin visited the DPRK once before, in 2000 according to KCNA, and met with Kang Yong Sop, chairman of the central committee of the Korean Christian Federation, Paek Nam Sun, Minister of Foreign Affairs, Kim Kye Gwan, vice-Minister of Foreign Affairs, and Kim Yong Dae, vice-president of the presidium of the Supreme People’s Assembly, and delivered a sermon at Pyongyang’s Pongsu Protestant Church. 

Since Franklin’s mother spent 1934 living in Pyongyang, the family seems to have taken a special interest in the DPRK.  In addition to the relief they are distributing now, Samaritan’s Purse chartered a 747 cargo jet from Charlotte to deliver $8.3 million in medicine and other emergency supplies in August of 2007. It was the first private flight directly from the U.S. to North Korea since the Korean War.

Graham’s organization has been posting information on his trip here and here.  Greta Van Sustern has been posting video here: hospital visit (the most informative), monument 1, monument 2, Grand People’s Study House, Mass Games (most inaccurate), Mr. Graham’s work, taking off from Sunan Airport (interesting), Franklin Graham video 1, Video 2, and interview transcript.

Read more here:
Evangelist Franklin Graham to preach in North Korea
McClatchy Newspapers
Tim Funk
7/31/2008