North Korean Economy Watch

For international readers: The Congressional Research Service is an organization that puts together issue briefs and legislative histories for congressional staff.  They are one of the first places US Congressional staff go to learn about a topic.

In April, the Congressional Research Service published a document on the North Korean Economy.  The full report, as well as some past reports, can be downloaded here.

Executive Summary

This report provides an overview of the economy of the Democratic People’s Republic of Korea (DPRK) or North Korea, its external economic relations, attempts at reform, and U.S. policy options. Along with the United States, North Korea’s major trading partners — China, Japan, South Korea, and Russia — form the socalled “six parties,” who are engaged in talks, currently restarted, to resolve issues raised by the DPRK’s development of nuclear weapons.

The economy of North Korea is of interest to Congress because it provides the financial and industrial resources for Pyongyang to develop its military, can be used as leverage in negotiations, constitutes an important “push factor” for potential refugees seeking to flee the country, creates pressures for the country to trade in arms and illegal drugs, is a rationale for humanitarian assistance, is tied to Pyongyang’s nuclear program, and creates instability that affects South Korea and China. The North Korean threat to sell nuclear weapons material could be driven in part by Pyongyang’s need to generate export earnings. The dismal economic conditions also foster forces of discontent that potentially could turn against the Kim regime — especially if knowledge of the luxurious lifestyle of communist party leaders becomes better known or as the poor economic performance hurts even Pyongyang’s elite.

Economic conditions in North Korea currently seem to be improving but have been dismal for those out of the center of power. Mass starvation — eased only by international food aid and other humanitarian assistance — has stalked the countryside. Over the past 15 years, industrial production in North Korea has shrunk considerably. The country has embarked on a program of economic reforms that include raising wages, allowing prices to better reflect market values, reducing dependence on rationing of essential commodities, trimming back centralized control over factory operations, and opening foreign trade zones for international investment.

North Korea has extensive trading relationships with China and South Korea and more limited trade with Japan and Russia. Because of U.S. economic sanctions and lack of normal trade relations status, U.S. imports from North Korea in 2006 were nil, while U.S. exports consisted of $3,000 worth of books and newspapers.  The DPRK has been running an estimated $1.8 billion deficit per year in its international trade accounts that it funds primarily through receipts of foreign assistance and foreign investment as well as through various questionable activities, such as sales of weapons, transporting and producing illegal drugs, and counterfeiting brand name products and currency.

U.S.-led financial sanctions on North Korea have disrupted that country’s trade. In the six-party talks, economic assistance (including fuel oil) is a major bargaining chip. Economic policy options include increasing or easing economic sanctions, preventing shipments of illicit cargo, normalizing relations with Pyongyang, negotiating a trade agreement, allowing the DPRK to join international financial institutions, and removing the country from the terrorism list. This report will be updated as conditions warrant.

Donga (Hat Tip DPRK Studies)
6/5/2007

North Korea agreed with Russia to allow foreign ships enter and leave the port of Rajin. The agreement seems to show the North’s willingness to open the country partially under the mounting burden of economic sanctions.

Since 1991, North Korea had attempted a limited opening of the port as part of the Rason (formerly Rajin-Sonbong) Economic Special Zone Project. However, low participation of foreign investors and the nuclear crisis in 1994 derailed the opening.

Unlike the past, however, China and Russia now show keen interest in developing the port of Rajin. So many predict that this time will be different.

China and Russia in Competition-

The port of Rajin is a strategic point which borders Jilin Province in China and Primorsky Krai in Russia. The port`s sea level is deep enough to be advantageous for the development of the port. China and Russia are in competition for such development, and China is currently ahead of Russia.

China established the Rason International Distribution Company Limited through the joint investment of the People’s Committee Economic Cooperation Company in Rason. The Chinese company secured 50-year exclusive management rights to Port #3 and Port #4 in Rajin and a national highway which links Hunchun and Rajin.

Russia is also aggressively investing in Rajin with a plan to use the port as the distribution center of the Russian Far East; Russia seeks to sign a memorandum of understanding with North Korea to rebuild the railroad from Najin to Russia`s Hasan.

The Background of the Opening and its Implications to the North-

North Korea is said to hold a significant amount of investment promise as China and Russia rush to take the lead in the development project.

China agreed to spend 35 billion won in the construction of the industrial complex around the port of Rajin, including building the road between Hunchun and Rajin and developing the port of Rajin. Russia also expressed its intention to finance the 30 billion won project by remodeling railroad between Rajin and Hasan and renovating the port of Rajin.

Effects on the Inter-Korean Relations and the Opening of the North-

North Korea already opened seven ports, including Rajin, under the 2004 South-North Agreement on Maritime Transportation.

However, the agreement hasn’t produced anticipated results as processes are cumbersome and the quantity of goods transported is low. For example, the South still has to inform the North of the names of ships and crew, purposes, times, lists of cargo and other details three days before going to Rajin.

Using the port has a significant economic advantage for South Korea as exports to Europe can be shipped to Rajin and transported to Europe by TSR. This route costs less time and money than the current route (cutting up to three-fourths of costs and time). Therefore, once the port of Rajin is fully opened and becomes the hub of distribution for China and Russia, it is expected that ship operations between the two Koreas will increase.

Korea Times
Andrei Lankov
6/3/2007

Kim Il Sung’s North Korea has always been a tough customer, and nobody knows who was more irritated by its constant antics: its foes or its friends. It has been a tough ally, ready to cheat and manipulate its sponsors. Since the 1950s most of its patrons have had to put up with its style _ largely because of their grand strategy, of course.

In the long run, it was probably the Soviets who were subject to Pyongyang’s diplomatic frolics most frequently, but China has the dubious honor of being the first country to enjoy such an experience in the early 1950s. Somewhat surprisingly, this happened during the Korean War when only a massive Chinese intervention saved Kim Il Sung’s regime from a sorry end.

Recent document-based research by Chinese scholars, especially by the formidable Shen Zhihua, has provided us with new insights into the early history of relations between the two supposedly “fraternal” countries. Now it is clear that the picture was anything but rosy.

When the North Korean troops invaded the South, it was implied that the Chinese forces would step in if the situation took a dangerous turn. Nonetheless, until late September, Pyongyang ignored Chinese advice and kept Beijing in the dark about the frontline situation. This drove the Chinese military attache and ambassador mad, but they could not do much about it.

The situation changed in October when Kim Il Sung had lost the war: by late October 1950, there was hardly one battle-ready battalion in the North Korean armed forces. The Chinese rushed in a large expeditionary force, but soon a question arose: who was to be in charge of the united armed forces?

Kim Il Sung clearly assumed that he would stay in command, and would have operational control over the Chinese units. This was unacceptable to the Chinese. To an extent, this was a clash of two nationalisms (and nationalisms of East Asia are notorious for being particularly virulent). However, there were real considerations involved as well.

First of all, the Chinese force far outnumbered the North Korean army. Second, the Chinese generals did not have much trust in the military competence of their North Korean colleagues. Peng Dehuai, whose task was to save the North, did not hide his outrage about Pyongyang’s style of operations. He was especially angry about the meaningless defense of a doomed Seoul, where about 30,000 North Korean soldiers were killed in late September. In late 1950, he sent a telegram to Beijing in which he labeled the North Korean style “childish”.

However, Kim Il Sung and other North Korean leaders avoided the issue, so the two armies (or, to be more precise, the Chinese army and the remains of the North Korean army) for a while acted independently–often, with sorry results. On November 4, for instance, the lack of coordination even led to a battle in which the North Korean tanks mistakenly attacked Chinese infantry, and thus unwittingly helped a semi-circled American unit escape.

At the same time, the Chinese attempts to incorporate the North Korean units into their own forces were met with resistance on the part of Kim Il Sung. He needed an army of his own, and was not ready for concessions.

It took more than a month to solve the question of joint command. Perhaps, the problems would have last longer, had Stalin not sent a cable demanding an immediate rectification of the situation. Stalin’s advice had to be taken seriously, and his intervention put an end to delays. The Joint Command was headed by Peng Dehuai, with two Chinese-speaking Korean generals acting as his deputies (incidentally, both generals were purged by Kim Il Sung a few years after the war).

However, new tensions arose in December 1950 when the railways came to be discussed. The Chinese forces could be supplied only by rail, and those lines were subjected to intense bombing. The railways had to be managed carefully, but the Chinese commanders discovered that Korean administration gave preference to cargo related to the economic needs of Korean reconstruction, rather than to military supplies. As a result, the Chinese and Koreans ran two different railway administrations, operating on the same railway network. It’s easy to imagine how this influenced the efficiency of the transportation system.

After a few months of discussion the North Koreans agreed to have a joint railroad command, but on the conditions that they would exercise overall control. By that time, most of the rolling stock had been provided by China, and the Chinese soldiers were also doing most of the maintenance work, hence the Chinese generals assumed that they should have the upper hand. But the Koreans did not agree. For them, this was an issue of their territorial rights, sovereignty, and other important symbols. For the Chinese, this was a question of their soldiers’ lives.

Once again, direct Soviet involvement was necessary to put an end to the squabbling. Stalin had no patience for the petty ambitions of his not very efficient satellite, and he was still in position to control the North. Hence, Stalin himself cabled Pyongyang demanding they agree to the Chinese conditions. In May 1951, after his august intervention, Pyongyang gave in.

These early squabbles were a sign of things to come. Over the years, North Korea has developed a peculiar diplomatic style, harsh and unbending but remarkably successful. It used to be applied to Moscow and Beijing. Nowadays the same tricks work wonders in dealing with the current sponsors of the regime, Beijing and Seoul as well as with Washington. But that is another story…

Chosun Ilbo
6/1/2007

According to Russia’s Itar Tass news agency on Wednesday, Russian President Vladimir Putin has signed a decree imposing sanctions on North Korea in compliance with a UN Security Council resolution in the wake of Pyongyang’s nuclear test last October.

The presidential decree applies a full weapons embargo against North Korea in pursuance of UN Security Council Resolution 1718. All Russian government agencies and enterprises will be banned from exporting to North Korea tanks, fighter jets, warships, heavy artillery pieces, missiles, and missile launchers, as well as materials that can be used for nuclear weapons development.

In addition, North Korean officials involved in development programs for weapons of mass destruction including nuclear weapons are banned from entering Russia. Shipments of luxury goods to North Korea are also banned.

The measure will likely have no tangible effects, however, given that the current annual trade volume between Russia and North Korea is only about $200 million.

The decree comes as North Korea continues to delay implementing the conditions of the Feb. 13 nuclear disarmament agreement. The decree may put pressure on North Korea to follow the agreement.

After the UN approved the sanctions against North Korea in October last year, Russian government agencies had consultations amongst themselves and coordinated with the Russian parliament. Putin finally signed the sanctions decree on Sunday.

Joong Ang Daily
5/28/2007

Russia has its own dreams of a cross-border railway, linking its tracks to North Korea.

The former communist country has signed a non-binding deal with the communist country to rebuild a section of railway from the Russian border station of Khasan to the North Korean port of Najin, a Russian radio station reported yesterday.

Representatives of the Russian Railways and the North’s Ministry of Railways signed the memorandum last April at the end of the four-day talks held in Pyongyang, the Voice of Russia said.

A container terminal in Najin is the end goal of the new joint venture. After the repairs and reconstruction are completed, the two sides plan to ship freight from Northeast Asia to Russia and Europe, it said.

To solve technical and financial issues connected with this project, working groups will be set up. The first meeting is scheduled in Pyongyang next month.

After resolving practical issues, the two sides plan to organize a meeting of the leaders of the two countries’ railways to sign an agreement.

The restoration of the railway from Khasan to Najin will make it possible in the future to link the Trans Korean Railway to the Trans Siberian Railway, according to Russian media reports.

On May 17, two trains crossed the Military Demarcation Line dividing the two Koreas for the first time since the end of the 1950-53 Korean War. South Korea hopes the historic test runs will lead to the connection by railway of the Korean Peninsula, China and Europe.

Joong Ang Daily
Ser Myo-ja
5/21/2007

It must have been the most expensive train ride in history. A ticket to cross the border between the two Koreas, a 90-minute journey over 30 kilometers, cost more than 2.7 billion won ($2.9 million) per person last week.

On Thursday, 200 South Koreans boarded two trains on the reconnected Gyeongui and Donghae lines on the west and east sides of the peninsula to chug across the Demilitarized Zone in a show of potential unity. The cost to South Korea, so far, has been 545.4 billion won to reconnect the sections of the cross-border railway severed by the Korean War.

While there are no concrete plans for further runs, the South Korean government has dreams of an inter-Korean rail network that would help the peninsula, cut freight shipment costs dramatically and link Korea by rail to the vast markets of China and the natural resources of Russia.

But to get there from here, the money spent so far on the test run is a pittance. Assuming that the enormous political obstacles to dealing with the North could be overcome, experts say it could cost as much as $10 billion to overhaul the slow, obsolete and backward rail infrastructure of North Korea.

That has not stopped some officials from insisting it can happen. On May 14, Unification Minister Lee Jae-joung announced a three-step plan for an inter-Korean railroad.

The first step would be to use a section of the Gyeongui Line, connecting Seoul and Shinuiju in the North, to serve the Kaesong Industrial Complex project. Transporting goods in and out of Kaesong and allowing North Korean workers to commute to the inter-Korean industrial complex by train is part of the plan.

The next step would be expanding use of the Gyeongui Line up to Kaesong for South Koreans, so that commuters to the complex and South Korean tourists visiting Kaesong could ride the train.

And finally, the South wants to operate trains on a regular basis between Seoul and Pyongyang.

“As of now, providing transportation for goods and commuters to Kaesong and allowing Mount Kumgang tourists to travel by train are current demands,” Lee said at the briefing. The Donghae Line, running between Yangyang and Anbyon in the North, will be used for the Mount Kumgang trip.

“More than 10 billion won worth of goods is produced in Kaesong,” Lee said. “More than 13,000 North Koreans are working there and commuting has become a serious issue.”

Lee has even more ambitious dreams ― the building of a rail line to connect Korea with Europe. “The reconnected inter-Korean railroad will be connected to Russia, one of the largest reserves of natural resources in the world, and China, to provide new economic opportunities,” Lee said. “We need a serious discussion on this with the North.”

Lee, however, admitted that there are enormous obstacles. Gaining the cooperation of the North’s hard-line military, which has been reluctant to open the border to train crossings, and modernization of the outdated North Korean rail infrastructure are among them.

Continuing his drumbeat for the project, after the test run, Lee said South Korea will gladly pay for updating the North’s railroad network ― and cost is no object. “No matter how much it will cost, it is an investment for our economy,” Lee said Friday. “The research is ongoing to estimate the cost, so it is hard to make the number public.”

Estimates vary widely about the cost of modernizing the North’s railroads. Lim Jae-gyeong, a researcher at the Korea Transport Institute, estimated that upgrading the North’s sagging rail networks, for both the Gyeongui and Donghae lines, would cost from 6.5 trillion won to 8 trillion won.

Kim Gyeong-jung, the team leader for inter-Korean railroad networks at the Ministry of Construction and Transportation, cited a Russian report that estimated it would cost up to $3.5 billion “to modernize the railroads in the North and connect them with the Trans-Siberian Railroad.”

Ahn Byung-min of the Korea Transport Institute put the figure at $10 billion for the project, also citing previous Russian reports.

Russia is enthusiastic about the prospects, though, and it conducted three surveys of the North’s railroad infrastructure between 2001 and 2003. The project may accelerate when the two Koreas and Russia begin railroad talks next month.

“We are pushing to hold talks with Kim Yong-sam, the North’s railroad minister, and Vladimir Yakunin, president of the state-run Russian Railways company, at the end of next month in Pyongyang,” said Lee Chul, head of the Korea Railroad Corporation. “The South and Russia have already agreed and the North responded positively.”

The meeting will focus on linking a trans-Korean railway with the trans-Siberia railway. By linking to the Russian lines, Vladivostok could be reached directly by rail from Busan. Researchers say the connection would enable freight to be shipped from Busan to Moscow by rail in just eight days. The transportation cost would be half of the current rate for sea shipments, which is about $600 for a 20-foot container.

The immediate challenge is the infrastructure. Rail is the backbone of North Korea’s transportation system, Ahn said. About 60 percent of passenger traffic and 90 percent of freight is carried by train. With two main rail lines running on the east and west sides of the country, Ahn said, the North Koreans have tried unsuccessfully to connect the systems since the 1970s.

“As of late 2005, the North had about 5,248 kilometers of rail, but 98 percent of them are single-track lines,” Ahn said, meaning that the traffic that can be carried is limited to one train at a time. “Most of the other infrastructure, such as bridges, tunnels, stations and communication systems, is also extremely outdated.”

The trains also run at very slow speeds, between 30 and 60 kilometers an hour. “The speed has not changed much since 1956,” Ahn said. “From Pyongyang to Shinuiju, the distance is 223.6 kilometers. By express, it would take about five hours and five minutes, so the average speed is about 40 kilometers per hour,” Ahn said. “But the regular trains take more than 11 hours.” He noted that there are also no set timetables and service is erratic and sometimes dangerous.

Ahn, who has visited North Korea several times to examine the fraying rail network, provided some extreme examples of how the North tries to cope. “Russia and China often provide food aid to the North via trains,” Ahn said. “When train cars from the two countries arrive, the North, under bilateral treaties, must send back the trains within six months. Rarely are the actual train cars returned, instead China and Russia often receive older train cars ready to retire from service.”

About 2,000 train cars sent from China and Russia have thus been marked as “made in North Korea” and put to use, Ahn said.

“North Korea’s founder Kim Il Sung once said the operation of a railroad is like the circulation of blood in the human body,” Ahn said, “Based on that expression, you could say that North Korea’s rail network is a patient suffering from a serious circulatory disease.”

Korea Times
Kim Yon-se
5/17/2007

Senior officials of South Korea, North Korea and Russia will likely meet soon to discuss linking the Trans-Korean Railway (TKR) and the Trans-Siberian Railway (TSR), the chief executive of the Korea Railroad Corp. (KORAIL) said Thursday.

The three countries plan to hold a second round of talks for railway cooperation in Pyongyang in late June, said KORAIL President Lee Churl.

In a meeting with reporters in Munsan, north of Seoul, Lee said, “We’ve already reached an agreement with Russia and received a positive reply from the North.”

If the North accepts the proposal, Lee will meet his North Korean and Russian counterparts to discuss the matter on the basis of the first tripartite meeting in Russia in March 2006.

The connection of TKR and TSR, dubbed the “Iron Silk Road,” is expected to bring enormous economic benefits to the two Koreas and Russia.

Experts say it is expected to cut logistic costs as well as freight delivery times substantially.

First of all, inter-Korean projects including tours to Mt. Geumgang or Gaeseong, an ancient capital city in North Korea, will likely be activated .

Freight transportation fares between Incheon and Nampo in the North are expected to fall by 25 percent on average by utilizing the railway instead of ships.

It takes about 30 days and costs $2,213 for conveying 1 TEU (20-foot equivalent units) of freight between Busan and Moscow by ship. In comparison, it would take about 15 days and $1,822 if the railways were linked.

The Busan New Port has recently been designed to make Korea a logistics hub in Northeast Asia.

The port is likely to provide another advantage when the railroad among the two Koreas and Russia is connected.

It will become both the starting and ending point of the “Iron Silk Road,” crossing the Eurasian continent via the Trans-Siberian, Trans-Manchurian and Trans-China railways.

The port authority plans to build a logistics complex on a 1.2 million-square-meter lot in the northern container pier of the new port by 2008.

Joong Ang Daily
Lee Yang-soo and Brian Lee
5/16/2007

With an eye on future transportation infrastructure, both Russia and China are courting North Korea to get in on the development of Najin port, in the far north of the country near the Russian border.

A Foreign Ministry official said yesterday that Russian Railways President Vladimir Yakunin is scheduled to visit North Korea to discuss launching a project aimed at improving and repairing a railroad from Najin to Khasan, just across the border into Russia.

Yakunin told former Prime Minister Han Myeong-sook, who visited Russia last month, that President Vladimir Putin had great interest in the project and Russia was hoping for the active participation of South Korean companies, the official said. The railway official visited Seoul in July last year to discuss the project with South Korean companies. The issue was also discussed in March at a bilateral meeting with Russia on economic cooperation.

A government official said that Russia wants to use Najin port as a logistics hub, but is also intending to develop the port into a base for future development of oil and natural gas in Siberia. The ultimate goal would be to connect the trans-Siberian railway with an inter-Korean railway system.

Beijing also has its eye on the North Korean port, which it envisions as part of its grand design to build a transport network that stretches from the Indian Ocean to the North Pacific.

“Najin Port is near the Jilin area and China’s own ports in the area have already reached their full capacity,” a government official said yesterday.

Beijing has recently notified Pyongyang that it is willing to spend $1 billion to develop port facilities, build railroads connecting the port to China and improve existing infrastructure such as highways, the official said.

In a report published earlier this year, Cho Myung-chul, a researcher at the Korea Institute for International Economic Policy, predicted that China would use investments in the North’s ports and railroads to extend its own infrastructure for export and import purposes. China has made similar investments in Burma and Bangladesh, among others.

Korea Times
Kim Yon-se
5/3/2007

President Roh Moo-hyun has expressed his willingness for economic cooperation with Russia, including linking the Trans-Korean Railway (TKR) and the Trans-Siberian Railway (TSR), by sending a letter to Russian President Vladimir Putin, a Chong Wa Dae official said.

But cooperation with North Korea would be required for the railway connection between Seoul and Moscow, government officials said.

Though experts from South Korea, North Korea and Russia have held a series of meetings to discuss the railway project over the past several years, it has lingered on due to a series of politically negatives surrounding the Korean Peninsula.

According to government officials, North Korea has won Russian pledges of economic aid by agreeing on the project, which will generate huge profits for Russia.

During the Kim Dae-jung administration, many hoped the railway project would provide a momentum for the reunification of the two Koreas.  Since 2001 when North Korean leader Kim Jong-il and Russian President Vladimir Putin agreed on the reconnection of the TKR and TSR, the project to restore the Gyeongui line which links Seoul to Pyongyang and Shinuiju in the North, was expected to recommence.

Reconnection of the Gyeongui railway was agreed upon during the inter-Korean summit talks in June 2000.

But the North withdrew its workforce and equipment from the area in 2001, while the South has completed more than 70 percent of the Southern part of the line.

When the TKR and TSR are connected, transportation costs will be cut and the time taken to ship cargo to Europe will be reduced to 20 days from 45 days, bringing a significant change to the logistics system in Northeast Asia.

In addition, the connection of the railways is expected to increase both countries’ revenues, as North Korea and Russia are likely to collect $100 million and $400 million in tolls, respectively.

“The letter to Putin did not contain anything new on the railway project, though the issue was included in suggestions for economic cooperation,” said Cheong Wa Dae spokesman Cheon Ho-seon.

He added that there has been no reply from Putin to Roh.

In the letter delivered by former Prime Minister Han Myeong-sook, Roh also proposed to hold a summit with Putin. Han traveled to Moscow on April 25 to attend the state funeral of former Russian President Boris Yeltsin.

Joon Ang Daily
Brian Lee
5/1/2007

Still seeking access to the international financial system, Pyongyang has asked Macao authorities to transfer $25 million in funds to unnamed banks in Russia and Italy, signaling some progress in the deadlock over money held in a Macao bank.

Chinese Deputy Foreign Minister Wu Dawei told Japanese lawmakers visiting Beijing that North Korea broached the idea, the Kyodo News Agency reported. Wu said that Macao authorities are trying to determine whether the move is possible.

South Korean government officials held out hope that the news could be a catalyst in finally resolving an issue that has been dragging on for weeks. “We are ready at anytime to move on; we are just waiting for the clouds to clear,” said one official. Italy was the first European country to open diplomatic ties with Pyongyang in 2000.

The dispute over the money led the North to miss the April 14 deadline for shutting down its main nuclear reactor.

In what was viewed as a major concession, Washington announced on April 10 that it supported measures by Macao to unblock the North Korean funds held in Banco Delta Asia. The U.S. had said the money was the result of illegal activities.

However, other than saying that it has taken notice of such measures, Pyongyang has delayed withdrawing the money. Instead, through state media, the North said it was looking to integrate itself into the international financial system rather than just retrieve the money.

With China and Macao entering the labor day holiday starting today, it could be a few days before any transfer takes place, the government official in Seoul conceded.

A source said that Pyongyang had also asked banks in Singapore, Vietnam and Mongolia to agree to a transfer but was rebuffed.

Washington has endorsed measures to unfreeze the funds, but it has not withdrawn its designation of Banco Delta Asia as a confirmed money launderer.