North Korean Economy Watch

The Economist
3/11/2004

So far as a visitor can tell in this secretive land, North Korea’s economic reforms are starting to bite. But real progress will require better relations with the outside

COMMUNIST North Korea has started to experiment with economic reform, and opened its door a crack to the outside world. Though its culture of secrecy and suspicion stubbornly persists, it was deemed acceptable for your correspondent to visit Pyongyang’s Tongil market last week. Here, stalls are bursting with plump vegetables and groaning with stacks of fresh meat. You can even buy imported pineapples and bananas from enthusiastic private traders.

But how about a photograph? Most foreigners think of North Korea as a famished nation, and the authorities are evidently keen these days to tell the world about the great strides their economy has made since reforms were introduced in July 2002. Logic might seem to suggest that a snap showing the palpable result of the reforms would be acceptable too. But it is not. The officials were friendly but firm: no pictures of fat carrots.

The July 2002 reforms were ground-breaking for North Korea: the first real step away from central planning since the dawn of communism there in 1945. The government announced that subsidies to state-owned enterprises were to be withdrawn, workers would be paid according to how much they produced, farmers’ markets, hitherto tolerated, would become legal and state enterprises would be allowed to sell manufactured products in markets. Most of these enterprises, unless they produced “strategic items”, were to get real autonomy from state control.

Almost two years on, how to assess the success or failure of these reforms? That climate of secrecy makes it deeply frustrating. Even the simplest of statistics is unavailable. Li Gi Song, a senior economist at Pyongyang’s Academy of Sciences, says he does not know the rate of inflation. Or maybe he is not telling. After all, he says, “We can’t publish all the figures because we don’t want to appear bare before the United States. If we are bare then they will attack us, like Afghanistan or Iraq.” So what follows can be little more than a series of impressions.

The indications are that the reforms are having a big impact. For a start, North Korea has recently acquired its first advertisement (pictured above)—for foreign cars, assembled locally by a South Korean majority-owned company. Or, to be more basic, take the price of rice, North Korea’s staple. Before the reforms, the state bought rice from state farms and co-operatives at 82 chon per kilo (100 chon make one won, worth less than a cent at the official exchange rate). It then resold it to the public through the country’s rationing system at eight chon. Now, explains Mr Li, the state buys at 42 won and resells at 46 won.

North Korea’s rationing system is called the Public Distribution System (PDS). Every month people are entitled to buy a certain amount of rice or other available staples at the protected price. Thus most North Koreans get 300g (9oz) of rice a day, at 46 won a kilo. According to the UN’s World Food Programme (WFP), that is not nearly enough. Anything extra has to be bought in the market.

In theory, even in the market the price of staples is limited. Last week, the maximum permitted rice price was marked on a board at the entrance to Tongil as 240 won per kilo. In fact, it was selling for 250. WFP officials say that in January it was selling for 145 won, which points to significant inflation, for rice at least. This is not necessarily a bad thing, since it means that the price is coming into line with the market.

The won’s international value is also adjusting. Since December 2002, the euro has been North Korea’s official currency for all foreign transactions. In North Korean banks, one euro buys 171 won. In fact, this rate is purely nominal. A semi-official rate now exists and the price of imports in shops is calculated using this.

Last October, according to foreign diplomats, a euro bought 1,030 won at the semi-official rate. Last week it was 1,400. A black market also exists, in which the euro is reported to be fetching 1,600 won—which implies that the won is approaching its market level. It also means, however, that imported goods have seen a big price-hike. For domestically-produced goods, like rice, prices may well go on rising for a good while longer.

What about earnings? Before the 2002 reforms, most salaries lay in the range of 150-200 won per month. Rent and utilities, though, were virtually free, as were (and are) education and health care. Food, via the PDS, was virtually given away. Now, pay is supposed to be linked to output, though becoming more productive is not easy for desk-bound civil servants or workers in factories that have no power, raw materials or markets.

Rents and utilities have gone up, though not by crippling amounts. A two-bedroom flat in Pyongyang including electricity, water and heat costs just 150 won a month—that is, about a tenth of a euro.

Earnings have gone up much more: a waitress in a Pyongyang restaurant earns about 2,200 won a month. A mid-ranking government official earns 2,700. A worker at a state farm earns in the region of 1,700, a kindergarten teacher the same, and a pensioner gets between 700 and 1,500. A seamstress in a successful factory with export contracts can earn as much as 5,000 won a month. Since that seamstress’s pay equates to barely three euros a month, wages still have a long way to adjust.

The prices of food and other necessities, to say nothing of luxuries, has gone up much more than rent has. According to the WFP, some 70% of the households it has interviewed are dependent on their 300 gram PDS ration, and the WFP itself is targeting 6.5m vulnerable people out of a total population of some 23m. Not all suffer equally: civil servants in Pyongyang get double food rations from the PDS.

There are some encouraging stories. In Pukchang, a small industrial town 70km (40 miles) north-east of Pyongyang, Concern, an Irish aid group, has been replacing ancient, leaking and broken-down water pipes and pumps, and modernising the purification system. This has pushed the amount of clean water available per person per day from 80 to 300 litres. Kim Chae Sun is a manager at the filtration plant, which is now more efficient. Before July 2002 she earned 80 won a month. Afterwards she earned 3,000 won. Now she earns 3,500.

As Mrs Kim speaks, three giant chimneys belch smoke from the power station that dominates the town. All workers have been told they can earn more if they work harder, but certain groups have been told they will get even more money than everyone else. In energy-starved North Korea these include miners and power workers. Mrs Kim says her husband, who works in the power plant, earns an average of 12,000 won a month. Her rent has gone up from eight to 102 won a month, and in a year, she thinks, she will be able to buy a television or a fridge.

A lot of people, in fact, are buying televisions. The women who sell the sets from crowded Tongil market-stalls get them from trading companies which they pay after making a sale. The company price for an average set is 72,000 won, the profit just 1,000 won. After they have paid for their pitch, the traders can expect an income of 10,000-12,000 won a month.

Mystery sales
Which makes for a puzzle. Who can afford a good month’s salary for a locally made jacket in Tongil, costing 4,500 won? How come so many people are buying televisions, which cost more than two years of a civil-servant’s pay? How come the number of cars on the streets of the capital has shot up in the past year? Pyongyang still has vastly less traffic than any other capital city on earth, but there are far more cars around than a year ago. Restaurants, of which there are many, serve good food—but a meal costs the equivalent of at least a white-collar worker’s monthly salary. Many of these restaurants are packed.

Foreign money is part of it. Diplomats and aid workers say many new enterprises seem to have opened over the last year. Nominally they are state-owned, but sometimes they have a foreign partner, often an ethnic Korean from Japan. The majority are in the import-export business. Some have invested in restaurants and hotels and some in light industry. Thanks to the 2002 reforms, these firms have a degree of autonomy they could not have dreamed of before. An unknown number of people also receive money from family abroad, but there are still no North Korean-owned private companies.

Farmers are among the other winners: they can sell any surpluses on the open market. But two out of three North Koreans live in towns and cities, and only 18% of the country is suitable for agriculture. The losers include civil servants, especially those outside Pyongyang who do not get double food rations and have no way to increase their productivity.

Factory workers have it the hardest. A large proportion of industry is obsolete. Though Pyongyang has electricity most of the day, much of the rest of the country does not. Despite wild talk of a high-tech revolution, the country is not connected to the internet, though some high-ups do have access to e-mail service. In the east of the country lies a vast rustbelt of collapsing manufacturing plants.

Huge but unknown numbers of workers have been moved into farming, even though every scrap of available land is already being cultivated. The extra workers are needed because there is virtually no power for threshing and harvesting and no diesel for farm vehicles. This requires more work to be done by hand. Ox-carts are a common sight.

The innocent suffer
Markets are everywhere. But this does not mean that there is enough food everywhere. In Pyongyang, where there are better-off people to pay for it, there is an ever-increasing supply. Outside the capital, shortages are widespread.

No one knows how many died during the famine years of 1995-99; estimates range from 200,000 to 3m. In Pukchang, officials say that 5% of children are still weak and malnourished. In Hoichang, east of Pyongyang, schools and institutions tell the WFP that about 10% of children are malnourished. Masood Hyder, the senior UN official in North Korea, says that vulnerable households now spend up to 80% of their income on food.

And yet some things are improving. Two surveys carried out in 1998 and 2002 by the North Korean government together with the WFP and Unicef showed a dramatic improvement in children’s health between those years. The proportion of children who fail to reach their proper height because of malnutrition fell from 62% to 39%, and the figures are thought to be still better now. However, Unicef says that though children may no longer die of hunger, they are still dying from diarrhoea and respiratory diseases—which are often a side-effect of malnutrition.

To a westerner’s eye, a class of 11-year-olds in Hoichang is a shocking sight. At first, your correspondent thought they were seven; the worst-affected look to be only five. Ri Gwan Sun, their teacher, says that apart from being stunted some of them still suffer from the long-term effects of malnutrition. They struggle to keep up in sports and are prone to flu and pneumonia. They are also slower learners.

Pierrette Vu Thi of Unicef says that North Korea’s poor international image makes it hard for her agency, the WFP and others to raise all the money they need. The country is in a chronic state of emergency, she says, and to get it back on its feet it would need a reconstruction effort on the scale of Afghanistan and Iraq.

Such bleak talk is echoed by Eigil Sorensen of the World Health Organisation. He says that health services are extremely limited outside the capital. Medicines and equipment are in short supply, large numbers of hospitals no longer have running water or heating and the country has no capacity to handle a major health crisis.

None of this is likely to change very fast. With no end yet to the nuclear stand-off between North Korea and the United States, American and Japanese sanctions will remain in place. And nukes are only part of it. Last week the American State Department said it was likely that North Korea produced and sold heroin and other narcotics abroad as a matter of state policy. North Koreans who have fled claim that up to 200,000 compatriots are in labour camps. North Korea denies it all.

Reform, such as it is, has plainly made life easier for many. But rescuing the North would take large amounts of foreign money, as well as measures more far-reaching than have yet been attempted. At present, there is no way for the government to get what it needs from international financial institutions like the World Bank. Such aid as comes will be strictly humanitarian, and investment in so opaque a country will never be more than tentative. Domestic reform on its own cannot fix an economy wrecked by decades of mismanagement and the collapse of communism almost everywhere else.

According to the Washington Post:

A severe food shortage has crippled the U.N. feeding program that sustains North Korea’s most vulnerable and undernourished people, according to Masood Hyder, the U.N. humanitarian aid coordinator and World Food Program representative in Pyongyang.

He said his organization can now feed fewer than 100,000 of the 6.5 million people it normally does, many of them kindergarten-age children and pregnant women who cannot get what they need to stay healthy from the country’s distribution system.

The food shortages are likely to hang in the air as North Korean, U.S., South Korean, Chinese, Russian and Japanese diplomats gather in Beijing Feb. 25 to discuss North Korea’s incipient nuclear weapons program and respond to its demand for formal security guarantees and more economic aid.

Japan, for instance, used to provide 300,000 tons of food a year but has stopped shipments because of disagreement with Pyongyang over Japanese citizens abducted and taken to North Korea for training as spies in the 1970s and 1980s, the diplomat said.

South Korea and China run government-to-government aid programs for North Korea, outside the World Food Program, but the level of their current shipments is not known. Masood estimated that such aid is roughly equal to the multilateral aid administered by the U.N. agency for the neediest people.

The last shipment arrived in North Korea in September, when South Korea sent a boatload of corn, Masood said. The next shipment, 38,000 tons of corn from the United States, is due at the end of March, he added. The six-month break has dried up a supply chain crucial for more than a fourth of North Korea’s 23 million people, particularly those not given the benefits of the million-strong military and government employees.

“That means people are without food at the worst time, in the dead of winter,” Masood said. “A little slippage in deliveries, and it’s a tragedy.”

The shortages are not expected to produce widespread starvation of the kind that devastated parts of North Korea in the mid-1990s, according to U.N., Japanese and other Asian officials. But Masood predicted they will intensify and spread malnutrition. Food shortages already produce stunted growth in four out of 10 North Korean students and allow pregnant women to gain only half of the 22 pounds they are expected to gain to give birth to healthy babies.

This winter’s shortage is likely to reverse for many people the progress made since the disaster a decade ago.

Some orphanages have started serving two meals a day instead of three because of the shortages, Masood said. Although North Koreans traditionally eat rice as their staple, the U.N. program provides mainly wheat, corn and edible plant seeds, which are used to make bread or gruel.

Normal deliveries of such grains take about three months from the time a government decides to donate to the food’s arrival in North Korea and its distribution to areas where people are going hungry. The World Food Program has asked for 485,000 tons this year but has received less than a third of that in pledges — and a small fraction in deliveries.

Masood said his main hope is that food shipments headed elsewhere could be rerouted to North Korea or that the North Korean government could be persuaded to dip into its strategic reserves of rice and other food.

“Statistically, they have food,” the Asian diplomat said. “It depends on how quickly the North Korean government diverts food from some other groups.”

Reluctance to help North Korea this winter stems in part from donor governments’ traditional end-of-year budget pinches. But it also reflects frustration over Kim’s refusal to abandon the country’s nuclear program and unwillingness to allow U.N. or other outside inspectors to fully monitor what happens to the aid.

The secrecy has caused some donor governments to suspect that the food aid might be diverted to the military or government employees. Monitoring is “less than effective” because of the restrictions, Masood acknowledged. But he expressed skepticism that U.N. food was ending up in army or government cupboards because, he said, officials have first call on government-to-government aid and North Korea’s own rice harvest.

Another problem is that North Korean food shortages have become chronic over the last decade so they no longer cause alarm. As long as Kim’s government clings to a system unable to produce enough food, the Asian diplomat said, people wonder why their tax money should be spent to make up the difference.

According to the BBC:

More than six million North Koreans will go without emergency food aid until April, says the UN World Food Programme (WFP).  It has run out of food.

For the next two months food rations will only be given to 100,000 people – mostly child-bearing women and children in hospitals and orphanages. A quarter of the population who normally receive food aid will have to survive winter without normal rations.

Food shortages have plagued North Korea for at least nine years, after floods, economic mismanagement and the consequences of the break-up of chief donor the USSR combined to precipitate the crisis.

WFP Pyongyang representative Masood Hyder said the agency was scraping the bottom of the barrel. “If you’re going to give, please give early,” was Mr Hyder’s message to donor countries. He said the crisis had come at the “wrong time”, when harvest stocks were already depleted and recent economic reforms had forced up prices on farmers’ markets.

Mr Hyder blamed the funding shortfall on an unfavourable political context – a reference perhaps to North Korea’s nuclear ambitions, says the BBC’s Louisa Lim in Beijing – and donor fatigue with a country which has received food aid for nine years.

He responded to the charge that assistance from the WFP was contributing to a dependence on aid in North Korea. “Whenever humanitarian action is protracted these kinds of worries arise: ‘Are we the solution or have we become part of the problem?'” he told the BBC World Service’s World Today programme. “I think we’ve got to be quite robust in confronting these issues – so long as there are people in need … there is a strong case for the WFP to assist.”

The WFP representative said the current pattern of stop-go had begun in September 2002.  The worst until now had been an inability to feed half the people on the WFP’s books. “Now we’re talking of a total cutback,” Mr Hyder said. “It’s graver, with deeper consequences.”

“Right now we are in the situation where we will be unable to feed all 6.5million, perhaps we will be able to feed just under 100,000 in February and March, but the vast majority we will not be able to help,” he said.

Mr Hyder described the consequences as a real increase in suffering and malnourishment. “People are not really expected to die because of the short-term deprivations,” he said.  “People in fragile and recovering health… would then again suffer a setback.”

Underweight pregnant mothers were more likely to give birth to poorly developed babies, and many elderly people would be unable to buy food at the markets.

Though the US, Russia and other countries had pledged thousands of tonnes of grain and other food, the next shipments of aid will only arrive in North Korea in April. The WFP says it will face another crisis from June onwards.

From another article in the BBC:

The US gave 40,000 tonnes of food earlier in the year but said that no decision had been made on whether to send an additional 60,000 tonnes.

The WFP wants another $171 to refume the aid.

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.

According to the Financial Times:

John Chambers, managing director for sovereign ratings at S&P, told reporters in Seoul that state collapse in North Korea was just a matter of time and could cause a bigger shock to the South’s economy than the 1997 Asian financial crisis.  He urged South Korea to build financial reserves to cope with the cost of reunification.

North Korea has started to reform its rigid command economy in recent months by liberalizing prices and wages but S&P said the regime was too rigid to emulate the market openings adopted by communist governments in China and Vietnam.

“Although some other Asian nations that used to have centrally planned economies have successfully moved to a market-based system, the North Korean leadership probably lacks the flexibility and the vision to undertake such a change,” said S&P in a statement. “Unless South Korea has substantially built up fiscal reserves in the meantime, its [credit] ratings would fall from their current level upon sudden reunification of the peninsula.”

Analysts have been predicting collapse of the North Korean regime since 1989, when communist states started to fail in eastern Europe. The state has proved more resilient than many expected, surviving a famine in the mid-1990s that killed at least 1 million people and recording modest economic growth over the past three years. However, dwindling international food aid to the country and U.S. attempts to block some of the regime’s most important sources of cash, such as exports of arms and drugs, has prompted fresh doubts about the durability of the world’s last Stalinist state.

Mr. Chambers said reunification with the North could cost South Korea up to 300 percent of its annual gross domestic product, considering the reconstruction and welfare provisions that would be necessary.

South Korea’s policy of engagement with its neighbor – including humanitarian aid and economic co-operation – is designed to prevent economic failure in the North and encourage gradual reform of its economy and political system.

In a recent report, Dominique Dwor-Frecaut, economist at Barclays Capital, said state failure in North Korea need not lead to credit rating downgrades in the South. She said the cost of reconstruction would be spread over many years and would be offset by the economic benefits of reunification.

“The Korean peninsula could become a new Asian economic powerhouse if it could associate Chinese-level labor costs in the North with OECD-level financial and legal systems and R&D in the South,” she said.

I suspect this has more to do with DPRK emigration than anything else…. 

BBC
Rupert Wingfield-Hayes
9/15/2003

The Chinese Government says it has transferred control of its border with North Korea from the police to the People’s Liberation Army.

But it is refusing to confirm media reports that it has also sent 150,000 combat troops to the border area in recent weeks.

A number of Hong Kong newspapers have reported that the extra troops were being deployed to seal off the border, and put pressure on the North Korean Government to end its nuclear weapons programme.

According to China’s foreign ministry, the change in border command is nothing out of the ordinary, and has in fact been planned for years.

But the timing seems more than a coincidence.

In recent months, China has become much more explicit in demanding that North Korea must end its nuclear weapons programme, and Beijing is growing increasingly frustrated by Pyongyang’s intransigence.

Talks hosted by China last month to try and break the deadlock over Pyongyang’s weapons programme got nowhere.

Few now doubt that China is actively preparing for every eventuality, including that of a possible North Korean collapse.

From the BBC:

North Korea has unveiled the terms under which foreign investors will be lured to a ground-breaking industrial zone near the tense border with South Korea.

Two South Korean companies – Korean Land and an arm of the Hyundai conglomerate – are developing an international business park in Kaesong, part of a package of cautious economic reforms in the Stalinist country.

So far, more than 1,000 South Korean firms have enquired about setting up shop in Kaesong, where labour costs will be a tiny fraction of those south of the border.

The North Korean Government now promises investors favourable tax rates, but there are still considerable concerns over whether it will allow businesses much economic freedom.

Most of the companies so far interested in Kaesong are in light manufacturing, particularly textiles.

Depending on their line of business, these firms will be taxed at up to 14%, less than half the rate levied in the South.

Pyongyang is, however, especially keen to lure hi-tech firms, which will be subject to a tax rate of just 10%.

Investors will have to pay a number of other smaller levies, and must adhere to a minimum monthly wage of $50.

Such incentives have sparked a flurry of interest in the South, but many companies remain wary.

They will be forced to hire workers through a North Korean state agency whose powers and attitude remain unclear.

And there is still little confidence in the fundamental stability of North Korea, which has turned to economic reform in recent years, but which remains virulently opposed to most forms of foreign influence.

The Kaesong development does, however, seem to be a relatively permanent arrangement.

It forms part of a large-scale construction project in the region, which is just 50 kilometres northwest of Seoul.

Elsewhere the focus is on tourism, especially scenic Mount Kumgang on the country’s east coast, which Hyundai has been trying to develop for five years, with mixed success.

There is also a Unification Park, which will be the venue for reunions of families split by the country’s division.

Most significant are major road and rail developments which mark the first time the two rival countries have re-established transport links since the end of the Korean war in 1953.

UPDATE 2 (2003-9-7): The BBC reports that Mr. Yang has lost his appeal:

A business tycoon once listed as China’s second richest man has lost an appeal against his 18-year sentence for fraud.

Yang Bin, known as China’s flower king, was found guilty in July of a string of economic crimes including bribery and illegal land use.

The High People’s Court of Liaoning province on Sunday also upheld fines against him and his companies totalling 8.3m yuan ($1m), said the official Xinhua news agency.

Yang is one of a number of high-profile businessmen to have fallen foul of the law in China over the last year.

Before his fall from grace, he was one of China’s most flamboyant businessmen, and was named by North Korea to head a free-market experimental zone across from the Chinese border.

Border arrest

A Dutch citizen, he built a business empire growing tulips amid the industrial decay of north-east China and by 2001 had a fortune close to $1bn.

However, much of Yang’s wealth had, it turned out, been based not on flowers but on illegal property development.

In what may have been a last bid to avoid prosecution, he accepted an offer from the North Korean government to run a new free trade zone inside the Stalinist state.

But last October, as he prepared to cross the border, Chinese police moved in and took him away.

UPDATE 1 (2003-7-14): Mr. Yang has been sentenced to 18 years by a Chinese court. According to the BBC:

A business tycoon once listed as the second richest man in China has been sentenced to 18 years in prison for fraud.
Yang Bin, known as China’s flower king, was found guilty of a string of economic crimes including bribery and illegal land use.

He is one of a number of high-profile businessmen to have fallen foul of the law in China in recent months.

Before his fall from grace, Yang Bin was one of China’s most flamboyant businessmen, and was named by North Korea to head a free-market experimental zone across from the Chinese border.

A Dutch citizen, he built a business empire growing tulips amid the industrial decay of north-east China.

By 2001 he was listed as China’s second richest man, with a fortune close to $1bn.

But with fame came suspicion and soon a government investigation.

Much of Yang’s wealth had, it turned out, been based not on flowers but on illegal property development.

False receipts were used to get his company listed on the stock market. As his empire began to crumble around him, Yang made what may have been a last bid to avoid prosecution.

He accepted an offer from the North Korean government to run a new free trade zone inside the Stalinist state.

But last October, as he prepared to cross the border, Chinese police moved in and took him away.

A spokesman for Yang, chairman of Hong Kong-listed Euro-Asia Agricultural (Holdings), said he planned to appeal.

Read the full story here:
China’s ‘orchid king’ gets 18 years
BBC
2003-7-14

ORIGINAL POST (2002-10-4): According to the Washington Post, Mr. Yang has been arrested.

Chinese sources, including journalists, said police detained Yang Bin, a 39 year old multimillionaire and flower mogul, on suspicion of tax evasion in the northern Chinese city of Shenyang.

A Chinese source said that the move did not mean China opposed North Korea’s fledgling efforts to reform its economy.  China, he said, was simply against the choice of Yang Bin to head the effort.

Nonetheless, Chinese economists said Yang’s detention constitutes an embarrassment for Kim Jong Il and could threaten reform efforts.

Within the last few days, Chinese journalists say, China’s Ministry of Propaganda has issued three circulars banning China’s press from in depth coverage of Yang.  Analysts in China say they believe this means Beijing is uncomfortable with his new status in North Korea.

The Sinuiju region draws its inspiration from the special economic zones that china established in the 1980s .

Yang said any foreigner could travel to Sinuiju without a visa as long as they had a a visa to return to China (as of Sept 30).  But those plans hit a roadblock on Thursday when North Korean authorities declined to allow foreign correspondents travel with Yang to the Zone.  Yang’s problems then started snowballing when an impromptu news conference he called to explain the visa restrictions was declared “illegal” by Chinese police.

Yang’s shares have been suspended from the Hong Kong Stock Exchange because the company has not made sufficient disclosures.

Yang has been reticent about how he got the North Korean appointment–one of the stranger events in Pyongyang’s checkered attempts to open to the outside world.  In an interview with a Chinese magazine, he said that he had been “Sharing my agricultural technology with the people of North Korea “for more than a year” and that “my selfless help won the trust of the Korean people.”

Yang struck up a friendship with Kim Jong-il several years ago.  Yang took his corporate jet to Pyongyang and worked hard to cultivate Kim.  Kim traveled to Shenyang to meet Yang.  Yang offered to donate greenhouses to North Korea which is desperate for ways to grow food, and Kim accepted.

Some Chinese economists and officials have privately criticized North Korea’s choice of Yang, saying he is emblematic of a type of Chinese businessman who amasses fortunes making use of connections and legal loopholes.

Yang has said he hoped to turn Sinuiju into a trading and manufacturing and trading hub.  Chinese cources, however, said that so far Yang has been approached only by developers looking to turn the area into a gambling and entertainment enclave for Chinese tourists.  Gambling is illegal in China.

Source:
The Fall of Mr. Yang
Washington Post
2002-10-4
Page A25

BBC
7/9/2003

North Korean and US officials are to resume talks on recovering the remains of US soldiers still missing from the Korean War.

Negotiators will meet on Thursday in the Thai capital of Bangkok to discuss a schedule for new search operations, a US spokesman said.

Previous talks were suspended last year as tensions between the two nations rose after the US accused North Korea of developing a nuclear weapons programme.

The US search for remains, involving forensic experts, has focused on several key battlefields.

These include the Chongchon River vicinity, north of Pyongyang, and in the Chosin Reservoir area, scene of some of the most savage fighting of the war in the final months of 1950.

More than 8,000 US servicemen are listed as unaccounted for from the Korean War, which ended 50 years ago this month.

‘Humanitarian work’

US officials stressed that the talks would not focus on the subject of North Korea’s alleged weapons programmes, describing it instead as a “separate, stand-alone, humanitarian” issue.

“This has been the US policy in our dealings with all other countries,” US Defense Department spokesman Lieutenant Commander Jeff Davis told the Associated Press news agency.

“And it has enabled us to continue moving ahead in our humanitarian work even if there may be policy difficulties in other areas.”

Since 1996, when North Korea first permitted the US to search for remains of servicemen, around 200 sets of remains have been recovered.

BBC
6/25/2003

Two top aides to South Korean former President Kim Dae-jung have been charged following an inquiry into a cash for summit scandal which preceded an historic inter-Korean meeting three years ago.

Park Jie-won, Mr Kim’s presidential chief of staff, and Lim Dong-won, the former head of South Korea’s spy agency, were among more than eight people charged as a result of a 70-day probe by independent counsel Song Doo-hwan.

Mr Song’s investigation found that $100m of the $500m transferred by Seoul to North Korea ahead of the 2000 summit was government money.

The inquiry was ordered by incumbent South Korean President, Roh Moo-hyun, after the scandal first surfaced during last year’s presidential election.

Kim Dae-jung has already apologised to the nation for the advance payment to the North, but denied the government itself had made any payments.

Mr Song said that while $400m of the money belonged to Hyundai, and was intended for legitimate business investment in North Korea, $100m was sent by Seoul as “politically motivated government aid”.

He stopped short of saying the government money was a bribe, but said the donation was clearly related to the summit and had been sent secretly through improper channels.

Mr Kim, who left office this February after a five-year tenure, was given the Nobel Peace Prize largely as a result of the historic inter-Korean summit.

He has argued that the money transfers “facilitated peace on the Korean Peninsula”.

But opposition politicians have continued to demand a more thorough enquiry into the matter.

Charges

One of the officials charged in connection with the scandal, former Culture and Tourism Minister Park Jie-won, met North Korean officials in April 2000 to arrange the June summit, according to Mr Song’s inquiry.

During the meeting, Mr Park pledged $100m to Pyongyang, which he later persuaded Hyundai to transfer, Mr Song said.

Lim Dong-won, former director of the National Intelligence Service, is accused of violating laws on foreign exchange transactions.

Chung Mong-hun, the chairman of Hyundai Asan, has also been charged in connection with the falsification of financial documents in order to cover up the payments to Pyongyang.

At least five others have been charged in connection with the case – some of whom could face up to five years in jail, according to the Associated Press news agency.

Mr Roh has vetoed a call by the South Korean opposition that the probe be extended to investigate the role of former President Kim Dae-jung himself.