North Korean Economy Watch

UPDATE 2 (2013-6-24): A documentary was made of the NY Phil’s visit to Pyongyang.  You can watch both parts here:

Part I:

Part II:

UDATE 1 (2008-11-17): Suki Kim wrote about the experience in Harpers.  Download the PDF here:  harpers.pdf

ORIGINAL POST (2008-2-27): Its difficult to say anything about the NY Phil’s performance that has not already been reported on by numerous other forums, but I think I managed to put together enough interesting material to meet the high standards of North Korean Economy Watch readers:

Pyongyang and the Star Spangled Banner

This site claimed that the philharmonic’s performance would likely be the first time that the US national anthem was broadcast on North Korea’s airwaves.  The Joong Ang Daily backs this claim up with a caveat:

The Unification Ministry of South Korea said the U.S. national anthem was played in Pyongyang in 2005 at an international boxing match. It is, however, the first time the Star Spangled Banner has been broadcast live across North Korea. (Joong Ang Daily)

The first public performance of the Star Spangled Banner in Pyongyang was in honor of US female boxer Yvonne Caples (official biography here).  Here is how it was reported in KCNA:

DPRK Female Pro Boxer Choe Un Sun Wins World Championship

Pyongyang, June 28, 2005 (KCNA) — Female pro boxer Choe Un Sun of the Democratic People’s Republic of Korea captured the championship title of the WBCF in the women’s light flyweight category (48.98 kg). Choe Un Sun settled the bout by a unanimous decision over Yvonne Caples of the United States.
The champion belt, trophy and certificate were awarded to Choe.
The match was held at the Ryugyong Jong Ju Yong Gymnasium in Pyongyang Tuesday.

In the interest of fair reporting, here is Ms. Caples’ side of the story:

…Yvonne traveled to Pyongyang, North Korea to be a part of the historic first professional boxing matches in North Korea to fight for the WBCF Jr. Flyweight World Title against North Korean Eun Soon Choi. During Yvonne’s bout the American National Anthem was played for the first time in North Korea. Yvonne knew that in order to get a decision she would probably have to get a knock out. Eun Soon Choi proved to be very strong and skillful. Fighting in front of 13,000 cheering North Koreans, Yvonne fought what she felt was the best fight of her career. Despite the intimidating crowd Yvonne felt relaxed and confident throughout the fight. “I fought the fight of my life and came on very strong in the last five rounds. Even though I felt I won the fight, I knew I wouldn’t get the decision. It is no joke fighting in an arena with 13,000 people cheering against you. I was so proud of myself for keeping my composure and fighting so hard in this fight. I do have to take my hat off to the North Korean fighters. I expected them to be strong and well-conditioned, but they were also very skillful fighters. I don’t think anyone would be able to go over there and completely dominate them or knock them out.”

Ms. Caples aside, the editor of this site sang the US national anthem on a bus full of tourists and north Korean guides traveling to Wonsan in August 2005. For the record, this counts as the second live, “public” performance of the Star Spangled Banner.  The NY Philharmonic is only now taking the bronze.

Jazz also made its debut.  According to Defector Kim Chol-woong:

[“An American in Paris”] is a masterpiece, a mixture of classical and jazz. I am amazed that they will play jazz, because the genre is strictly forbidden in North Korea.

[W]hat musicians are allowed to perform is strictly political. Jazz is forbidden because it is American music. Jazz is considered lewd and immoral. (Joong Ang Daily)

What are North Korea’s full musical capabillities?
Dr. Petrov sent in a great Washington Post article on North Korea’s musical capabilities on which I wrote a separate post.

How many people heard the performance?
The theater holds 1500.  According to the WSJ, there were a minimum of 150 foreigners likely in the audience (they flew in with the orchestra).  Who knows if any of the small business, NGO, and diplomatic community residing in Pyongyang were able to attend.  There was also a dress rehearsal for 1200 earlier in the day.

The Daily NK reports (Via the Japanese Mainichi) the the performance was not boradcast on radio, only on television.  This means that relatively few people saw it since the penetration of radios is far more significant than television in the DPRK.

Addendum: Who attended?
In the comment section below, “Gag Halfrunt” (clever handle) links to a list of VIP attnedees in KCNA.

Don Kirk notices who did not attend.

Here you can listen to the perfomrance:

In the comment section below, Greg Halfrunt posts a link to http://www.medici.tv/.  Beginning Friday, Feb 29 (happy leap year), 2008.

The full stories cited in this post can be found here:
Americans in Pyongyang
Joong Ang Daily
Kim Ho-joung and Ser Myo-ja
2/27/2008

Philharmonic is hopeful sign for defector
Joong Ang Daily
Ser Myo-ja
2/23/2008

North Korea Criticizes the US during the New York Philharmonic Performance
Daily NK
Park In Ho
2/28/2008

A Sour Note in Pyongyang
Asia Times
Don Kirk
2/29/2008

As readers of North Korean Economy Watch are well ware, North Korean embassies do not receive all of their operational funding from Pyongyang.  In most cases, the embassy staff do not only generate their own income, they must also remit money back to Pyongyang.

This system might seem strange to westerners, but it has one major benefit to Pyongyang: the embassies actually earn a profit! The down side, however, is that more than one North Korean diplomat has been caught neck deep in some kind of shady business deal.

It might be possible, though, that business for the embassies is not too brisk these days…

This week, the Daily NK reports that Kim Jong il’s half-brother, who is the exiled ambassador to Poland, seems to be making overhead cutbacks at his embassy:

The North Korea embassy in Poland has not been able to hold Kim Jong Il’s birthday party in the embassy since 2006 due to financial problems. Despite this, they have been holding events, ceremonies and parties in pro-North Korean organizations or North Korean branch companies with pro-North Korean figures in Poland.” (Daily NK)

This is the second DPRK emabssy story in the media recently.  Just a few days ago, it was reported the the North Korean ambassy in Australia was also closing. 

What other DPRK embassy cutbacks are we unuware of?

The full article can be found here:
Kim Pyong Il Says Kim Jong Il System Will Last For a While
Daily NK
Yang Jung A
2/22/2008 

Update: Today the New York Times reports that the North Korean government has agreed to broadcast the New York Philharmonic’s Pyongyang concert live on state television.  Why is this interesting? First of all, this means that the US national anthem, and many other beautiful songs, will be played over North Korea’s airwaves–probably for the first time.  Secondly, communist countries are typically very hesitant to broadcast anything live. 

The concert will take place in Pyongyang’s East Theater, located in the Munsu district on the east side of the city.

One thing is for sure, Politics aside, the performance will certainly be more interesting than the concert South Korea’s Shinhwa and Baby V.O.X. put on in Pyongyang! 

Original Post: 2/7/2008 
Today the New York Times (link requires free registration) ran a story on who will be broadcasting the New York Philharmonic’s concert in Pyongyang…

The New York Philharmonic’s concert in North Korea on Feb. 26 will be broadcast that evening on [New York’s local PBS station] WNET, Channel 13, and distributed two days later on PBS, broadcast officials said Wednesday.

In an unusual arrangement, ABC News will cooperate with WNET, New York’s public television station, to produce the broadcast.

Because of the time difference, the concert will actually take place before dawn New York time on Feb. 26. A live broadcast will be made available for any takers by EuroArts Music International, which produces and distributes classical music programming and has the rights to the broadcast outside South Korea.

The most interesting part of the story, however:

One place where the broadcast is still uncertain is North Korea itself. Government officials there have not said whether the concert will be shown on local television, according to Eric Latzky, the Philharmonic’s spokesman.

Given North Korea’s deep isolation and the government’s tight control over its citizens, the broadcast issue is of crucial interest. Orchestra officials said they had pressed hard to have the concert shown on North Korean television, to ensure that it would be heard by more than just a small audience of dignitaries. The broadcast of any event from North Korea is rare.

You can read the stories here:
Concert in North Korea to Be Broadcast Live
New York Times
Daniel Watkin
2/19/2008

PBS Will Broadcast Concert From North Korea
New York Times
Daniel Wakin
2/7/2008

Yesterday’s post on accountability and South Korean aid to the North got me thinking about game theory again.

The South Korean Ministry of Unification has a dominant strategy to lend/give/invest in North Korea for ostensibly two reasons: 1. If the MoU does not, their raison d’etre goes away.  2. South Korea will ultimately see a payoff if a development strategy works in the DPRK.

Contracting with North Korea, however, is essentially a prisoner’s dilemma (see chart above), and North Korea has the ability to cooperate or defect.  However, the North Koreans have rational expectations, so they know the Ministry of Unification has a dominant strategy to cooperate.

Therefore the Nash equilibrium is for the South to keep cooperating and for the North to keep defecting.  In a repeated game, cooperation evolves over time as trust develops and defection decreases.  Because of South Korea’s dominant strategy,however, the North never has an incentive to cooperate–so we end up with an “anti-folk theorum” where defection is the only incentive compatible outcome over time.

Addendum: The game could be radically different for private investors, however, who are in a more credible position to say “no”–leading to defect/defect moves (because South Korean investors are not as politically constrained and can recognize sunk costs).  These moves result in neither gains nor losses for either side, however, because both sides have the ability to bargain, cooperation that is mutually beneficial can evolve over time as it should.

On February 8, it was announced that the South Korean Ministry of Unification, the agency responsible for official interactions with the North, would not be merged with the Foreign Ministry (full story)–dealing an early policy blow to the newly elected South Korean President’s efforts to reduce the size of the South Korean government.

However, just three days later, on February 11,  the Chosun Ilbo reported that a South Korean government cash donation to North Korea (cash donations are apparently unlawful) has [surprisingly] gone missing:

In March last year South Korea gave US$3.8 million worth of aid, including $400,000 in cash and building materials, to North Korea to build a center for inter-Korean video-link family reunions in Pyongyang. But North Korea has not even started construction on the site, it was known on Sunday.

The donation violated a ban on cash aid to North Korea, but South Korea’s Ministry of Unification said at the time that there would be no room for suspicious dealings because the North agreed to inform the South where the money was spent and the South agreed to visit the construction site to find out whether the money and materials were used properly.

It has been almost a year since the aid was delivered, but it is not clear what the North has done with the cash and building materials. The South Korean government has demanded that it be allowed to visit the construction site, but the North has brushed off the requests, saying it will show the site “next time” or after the center is dedicated.

[and…] 

On eight occasions from early April to late August last year, South Korea delivered to the North building materials such as cement, iron bars, electric cable, tiles, drills, adhesive glue, interior furnishings, elevators, and air-conditioning and heating equipment. It also sent 10 buses and six Rexton SUVs.

When sending the materials, Seoul demanded five times that the North allow South Korean officials to visit the construction site and provide details on where the materials were used. All such demands were rejected. (Chosun Ilbo)

Today, February 14, South Korean military authorities admitted to knowing (since 2003, when the previous Roh Moo-hyun administration was inaugurated), that North Korea has transported rice supplied by the South for humanitarian purposes to front-line units of the Korean People’s Army.

The South Korean military has admitted it found no fewer than 200 South Korean rice sacks transported to North Korean Army units on about 10 occasions to the demilitarized zone including Gangwon Province between 2003 and recently.

This is the first corroboration by the South Korean military of testimony by North Korean refugees that the food aid provided by South Korea is being diverted for military purposes. But despite their knowledge of this fact, neither the South Korean government nor military authorities protested to North Korea or asked it for an explanation, apparently for fear of provoking Pyongyang. (Chosun Ilbo)

Updated: 2/21/2008: North Korea denies it diverted food aid to military. 

Now, I personally favor some kind of engagement policy with the North, but implementing an effective strategy is difficult.  Strict transparency and accountability are absolutely necessary to avoid mismanagement of public funds.  This is admittedly difficult, even in the OECD, much less in a secretive communist state.  Under the current circumstances, however, the North is treating the South like an unwanted lover, and this is not a healthy outcome. 

Handing out public funds with weak- or no-strings attached (as the South has done for years) creates markets in political corruption in the North.  The North Koreans know that the Ministry of Unification has a bureaucratic incentive to spent the money on aid.  If they don’t, it will not be appropriated in the next fiscal cycle.  This is why government budgets almost never go down, and agency heads go on a spending spree just before the fiscal year ends–use it or lose it.  The North Koreans have simply learned how to say the right things, etc., so the Ministry of Unification can check the box and pay up, because they know there will be no consequences when they fail to deliver.

So what is the solution?  If the South Korean government demonstrated some desire to monitor development aid, and reduce it if necessary (say “no” once in a while), they might encourage the North Koreans to do with the money as they claim (at least more so).

Another option available to the South Korean government is to stop using public funds to develop North Korea and instead free the South Korean business community, and other individuals, to take their chances contracting with North Korean entities themselves.  Putting their own Won on the line will definitely encourage private investors and venders to keep an eye on their balance sheets, and will help depoliticize the development of a country with a poor reputation.  

See the gratuitous game theory here.

You can read the referenced articles below:
S.Korea Knew Its Rice Feeds N.Korean Military
Choson Ilbo
2/14/2008

N.Korea May Have Diverted Cash Aid
Chosun Olbo
2/11/2008

Kang: North Korean Trade Potential
Council on Foreign Relations
12/17/2007

Last December, David C. Kang, a professor of government at Dartmouth College and an adjunct professor at Tuck Business School, discussed the North Korean economy for the Council on Foreign Relations. I have excerpted some of his comments below.

His view on the new North-South cargo train service:

It doesn’t have huge economic significance in the overall GDP of North Korea. But it does have major economic significance in the fact that what North Korea had to do in order to let a train go through was an awful lot of adjustment[…]in terms of linking up the railroad, all the ministries had to prepare.  The old [Korean Energy Development Organization] had this problem as well. [W]hen they wanted Americans and South Koreans working in North Korea to build this light-water reactor, [they] had to set up protocols [Post offices, phone calls, where they were going to stay, etc]. It is pretty significant in terms of how much they had to adjust.

He quoted the following figures on North – South trade:

From $200 million in 1998, to now exceeding $1.7 billion in 2007.   South Korea’s total trade volume is $250 billion.

His opinion on the direction of the North Korean economy:

At this point what we’re seeing is very initial steps on the part of North Korea as they try to open up reform and yet maintain control. At the same time, they are being forced into a number of institutional changes and mind-set changes that are the first step forward in this process.

His view of North Korea’s comparative advantage:

Most of the companies that have gone in—the South Korean companies that have gone in—are assembly and light manufactures, such as or textiles and light consumer goods. This is the sort of obvious point of departure. It’s not hugely capital intensive in terms of building factories, and can take advantage of North Korean cheap labor and South Korean technological advantages.

There are a lot of potential mineral resources in North Korea, which would require a whole infrastructure of legal reforms to happen before anyone would take care of them. But at this point the safest bets are the ones that are on the order of assembly and light manufactures in the North and then exporting them out.

His view of South Korea’s long term goals:

If there’s unification, or even better relations, and South Korean companies can use cheap North Korean labor, instead of having to send those factories to China or Vietnam—not only do they speak Korean, they’re culturally similar, and the labor would be cheaper.

[I]f you could reconnect the railroads, from Japan, through Pusan [South Korea], up through North Korea, then out to China and Russia, you would be linking up all these economies in a much more efficient way than they are now. So everybody wants that. But obviously there’s the political problem. And even on the infrastructure side, the North Korean rail system is so old and so decrepit, that basically it would have to be rebuilt from zero. But the potential upsides are massive, in the long run.

His view of China’s engagement:

China has been essentially as deeply involved in economic engagement with North Korea as has South Korea—and by some measures, actually more so. Whereas South Koreans just do this assembling, some Chinese companies are moving in and building full factories in the North. There’s a lot of interest in Chinese-North Korean economic relations on both sides.

Yonhap
2/12/2008

North Korea will begin using more than a hundred new buses with air conditioning for the convenience of a growing number of foreigners visiting Pyongyang, a U.S. government-funded radio station reported Tuesday.

Pyongyang’s municipal people’s committee recently requested a Chinese bus manufacturer to install air conditioning in 110 new buses to be used in the capital city, Radio Free Asia said.

The North already paid the cost in cash and 52 of the buses were already sent to Pyongyang, it said.

The communist state depends heavily on foreign aid to overcome its chronic energy shortage.

“North Korea is introducing buses with air conditioning to make Pyongyang look more advanced and urban in the eyes of foreign tourists whose number is on the rise,” the radio report said, quoting an unidentified source in China. “North Korean people have realized by watching TV dramas and other programs from South Korea that their living standards are not good enough.”

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-2-12-1
2/12/2008

South Korean businesses currently involved in inter-Korean economic cooperation are facing many difficulties, both due to and in spite of the system in place, so that at the moment, investment in North Korea does not look much more appealing than in Vietnam or China.

The Korea Chamber of Commerce carried out a survey, titled “Business Perspective on the Direction of South-North Economic Cooperation Policy”, targeting 300 successful businesses (170 companies responded) and 200 companies currently involved in inter-Korean economic cooperation (132 companies responded). According to the results of the survey, 79.4 percent of companies involved in inter-Korean cooperation responded that they are “currently facing systemic and procedural difficulties.”

More specifically, 44.7 percent pointed to the “3-C” (commute, communication, and customs) issues, 22.4 percent pointed to “claim resolution procedures,” 14.3 percent highlighted “difficulties with financial transactions,” 11.8 percent chose the “ban on the import of strategic materials,” and 5 percent indicated that “limited markets” were the main issue.

In addition, 58 percent of responding companies noted issues not related to the system set up for inter-Korean cooperation. 36.6 percent pointed to difficulties resulting from the “lack of understanding of market economics,” 28.7 percent noted a “lack of supervision by managers,” 24.8 percent chose “uncooperative, highly tense attitudes,” and 8.9 percent pointed out “demands for quick production.”

When asked about the relative attractiveness of investment in North Korea if the current situation were maintained, as compared to Vietnam and China, only 27 percent responded, “more attractive”, while 53.7 percent, or twice as many companies, responded that investment was “impossible.”

However, 58 percent responded that, in the event the North’s nuclear issues were resolved, investment in North Korea would be “more attractive than China and Vietnam”, while only 21.7 percent responded that investment in the North would still be “impossible.”

The overall impression of these companies regarding inter-Korean cooperation is that “improvement of inter-Korean relations offers opportunities for new enterprises and is a positive influence on the South Korean economy” (65.3 percent), and 19 percent felt that cooperation would “in the future, serve as a springboard for the relaunch of the South Korean economy.” 15.7 percent of responding companies felt, however, that “there would be no substantial positive influence on the economy.”

Currently, a resolution to the North Korean nuclear issues is the most important factor, but it is imperative that pledges of the incoming ROK administration such as strengthening investment security, preparing claim resolution measures and other issues to placate business interests, and nurturing North Korean exporters, are institutionalized.

Excerpts below…

Korea Times (click here for full article)
Yoon Won-sup
2/12/2008

The Voice of America (VOA) said that U.S. President George W. Bush approved the lifting of some sanctions imposed on Pyongyang under an act governing human trafficking in mid-October, 2007. Washington notified the North of the decision.

The State Department designated North Korea as one of the worst states involved in human trafficking, and the act prevented the United States from offering any aid except humanitarian assistance.

But the easing allowed Washington to provide assistance in educational and cultural exchanges to the extent that the aid doesn’t damage its national interest.

This is the first time for the United States to lift any sanctions on North Korea since the communist country first appeared on its blacklist for human trafficking in 2003.

An official of the State Department said the rare measure came in order to improve ties and expand exchange with North Korea.

and

In a report on human trafficking in 2007, the State Department said prostitution and forced labor often take place in North Korea and human trafficking of female North Korean defectors also exists in China.

The department classified North Korea as the third-worst nation in the world in terms of human trafficking because Pyongyang hasn’t made any effort to improve the situation.

Writing today for the Asia Times, Sunny Lee gives an update on the North Korean-run restaurants in China and South East Asia.  Much has already been published on these restaurants: how they channel money back to North Korea and how the waitresses tend to defect.  (As mentioned in the Kaesong post yesterday, they probably also pay hefty bribes for their overseas posts and have well-connected relatives.)

Sunny Lee points out that these restaurants (see YouTube video here) are now diversifying their product lines to boost profits, and like other successful capitalists across Asia, they are doing it by leveraging their most unique asset–attractive North Korean women.  How?  By transforming into karaoke bars after dinner hours.

North Korea has some 100 restaurants overseas, mostly in China and Southeast Asia, including Laos, Vietnam and Cambodia. These restaurants serve as an important revenue pipeline for earning foreign currencies for Pyongyang. Each overseas North Korean restaurant is said to be allotted a revenue quota to fill, ranging from US$100,000 to $300,000 a year to send to Pyongyang, which makes the total revenue estimation some tens of millions of dollars.

The business formula – restaurant by day and karaoke bar by night – is also seen as an effort for these restaurants to meet the assigned financial quota. Currently, there are scores of North Korean restaurants in China, including in cities such as Beijing, Tianjin, Tsingdao, Dandong and Yanji. Beijing has 11 North Korean restaurants. All of these employ North Koreans whose total employment number in China is estimated to be several hundred. (Asia Times)

Despite the higher cost, business is brisk…

The reason that North Korean restaurants are expensive yet remain popular among customers is their immaculate service from beautiful employees. In China, where service quality at restaurants is often unsatisfactory, North Korean restaurants are becoming a favorite alternative among members of the businesses community. (Asia Times)

However, if you want to enjoy an authentic North Korean dining experience but have moral qualms about supporting the regime, then you can patronize similar resturants managed by North Korean defectors in South Korea–though the experience is quite different.  Whereas the Chinese pay extra for premium restaurant service in Beijing, the South Koreans pay for the genuine socialist restaurant experience.  In other words, they pay to be treated like an annoyance to the staff.

[At the Pyongyang Moran Bar (located in South Korea), the] North Korean waitresses wore traditional dresses in the bright colors that were fashionable in the South some years back. The singer’s interpretation of “Whistle,” a North Korean standard of the 1980’s, was shaky and off-key. Service was bad and included at least one mild threat. Drinks were spilled, beer bottles left unopened and unpoured.

But the South Korean customers could not get enough of the Pyongyang Moran Bar. (New York Times)

So you have your choice of North Korean themed restaurants:  The propaganda ideal or the  socialist reality.

The full articles can be found here:
Chillin’ at a North Korean karaoke bar
Asia Times
Sunny Lee
2/8/2008

In Deep South, North Koreans Find a Hot Market
New York Times
Norimitsu Onishi
5/25/2006