North Korean Economy Watch

Yonhap
1/25/2007

North Korea has called upon South Korea to implement an earlier agreement to help revive its light industry in return for tapping into the communist nation’s natural resources, a senior unification official said Thursday.

During Unification Minister Lee Jae-joung’s first visit to the Kaesong Industrial Complex since he took office in December, Ju Dong-chan, head of the North’s Kaesong development agency “asked the minister to honor the agreement, saying it is not an aid, but only swapping of natural resources and raw materials,” the official said anonymously.

In July 2005, South Korea agreed to provide the North with US$80 million worth of raw materials to help it produce clothing, footwear and soap starting in 2006. In return, the North was to provide the South with minerals such as zinc and magnesite, after the mines are developed with South Korean investments, guaranteed by the Pyongyang government.

But the agreement was never carried out as North Korea abruptly cancelled scheduled tests of two cross-border railways in May 2006. North Korea’s subsequent missile and nuclear weapons tests further clouded hopes to implement the accord.

“Lee agreed in principle to honor the accord, but he held the position it is more important to create a favorable environment for carrying out the agreement,” the official told reporters.

Asked about the North’s denial of reports that it scrapped plans to change its partner for tours of Kaesong, the official said it is purely a matter of business, which does not require the intervention of the government.

Just hours after Lee returned to Seoul from Kaesong, an unidentified spokesman for the Korean Asia-Pacific Peace Committee (KAPPC) said the North “has no formal agreement with the Hyundai side over the issue of tour of Kaesong.”

Despite its earlier contract with Hyundai Asan, North Korea requested a new deal with Lotte Tours Co. in 2005. However, the South Korean government said the change can happen only when Hyundai Asan voluntarily concedes or pulls out of the business.

Korea Times
Chang Se-moon
1/23/2007

Obviously, it is important to know the correct answer to this question. Sanctions that have no impact on North Korea’s economy will not change the behavior of North Korean leaders. If sanctions do have a significant impact, the possibility that North Korean leaders may be tempted to resolve the pending security issues through negotiations exists.
In answering the question, however, we need to keep in mind what the British economist John Maynard Keynes (1883-1946) said: “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor draw correct conclusions.’’ In plain English, Keynes stressed an unbiased economic way of thinking that could help us draw correct conclusions. In other words, until we review all the facts with an open mind we should not make up our minds.

This is exactly what we will do by assessing the impacts of economic sanctions on North Korea.

The first question that comes to mind is which sanctions are we talking about. If we review U.S. sanctions on North Korea since the outbreak of the Korean War in 1950, there would be too many sanctions imposed on North Korea to be practical. There are three important sanctions that are still in effect, however. One is the U.S. denial of a Most Favored Nation (MFN) trade status on North Korea’s exports.

This sanction was imposed on North Korea’s exports to the United States on September 1, 1951, following the outbreak of the Korean War. MFN tariffs are the lowest tariffs that are levied on imports to the U.S. Over 99 percent of imports to the United States qualify for the MFN tariffs. Without MFN status, tariffs on North Korean exports to the United States are so high that North Korea simply cannot even imagine exporting anything to the United States.

The second of the three important sanctions stemmed from the bombing of Korean Air 858 by North Korean agents on November 29, 1987. The explosion killed 115 innocent passengers and crew members. On January 20, 1988, North Korea was placed on the list of countries that supported international terrorism according to the U.S. Export Administration Act of 1979.

The importance of this sanction is that placement on the list has made it impossible for North Korea to borrow money from international financial institutions including the World Bank and the International Monetary Fund. Like the denial of MFN status, the placement of North Korea on the list of countries supporting international terrorism continues to this date.

The third of these three key sanctions relates to tightening of North Korea’s illegal financial transactions, which culminated in Banco Delta Asia’s termination of business dealings with North Korea as of February 16, 2006. You may know that Banco Delta Asia had long been suspected of handling North Korea’s illicit activities overseas such as laundering of counterfeit U.S. dollars and sales of illegal drugs

Banco Delta Asia is located in Macao, which is a Special Administrative District of China. Tightening of North Korean financial transactions was extended to North Korean trade during 2006. This added pressure on North Korea originated from U.N. Resolution 1540 following North Korea’s test-launching of long-range missiles on July 5, 2006, as well as from U.N. Resolution 1718 which followed North Korea’s nuclear test on October 9, 2006.

Are these sanctions having an impact on North Korea’s economy? Perhaps, a more accurate question is whether these sanctions are placing enough pressure on North Korean leaders to reconsider the possibility of returning to the negotiation table?

One aspect is the status of North Korea’s trade deficit. As you probably know, North Korea buys from other countries much more than it sells to other countries. When the amount of imports exceeds the amount of exports it’s called a trade deficit. North Korea’s annual trade deficit averaged about $800 million from 2003 to 2005. This figure does not include North Korea’s trade deficit against South Korea, since South Korea appears to consider any financial support to the North as a long-term investment rather than a trade deficit.

How has North Korea been paying for the trade deficit? The ways have been unique. Almost the entire deficit appears to have been financed by weapons sales, illicit activities, and funds flowing from South Korea through joint projects.

In fact, a study by the Korean Institute for Defense Analysis indicates that full implementation of U.N. Resolution 1718 would cause North Korea to lose just about the same amount ($700 million to $1 billion) by stopping exports of weapons and illegal drugs and counterfeit money.

The Economist Intelligence Unit is quoted to have estimated in 2003 that “North Korea earned as much as $100 million a year from counterfeit money, while in 2005, a U.S. task force estimated that “$45 million to $60 million in Pyongyang’s counterfeit currency (primarily in U.S. $100 bills) is in circulation,’’ reportedly, including some in Seoul’s Namdaemun Market.

Assuming that recently added sanctions will cause North Korea to lose about $800 million that it has been earning overseas each year, the next interesting question is how North Korea will pay for the annual trade deficit of $800 million in the future? If North Korea does not pay for its imports, other countries will refuse to sell products to North Korea and the North Korean economy will suffer.

North Korea cannot borrow from world financial institutions because of the 1988 U.S. sanctions that branded North Korea as one of countries supporting international terrorism. They cannot use the money from foreign direct investment because China and Korea are the only two countries that have been willing to invest in North Korea, but the combined amount is not even close to paying for the annual trade deficit.

Think of it this way. If you borrow money every year, and lenders believe that your ability to pay off the debt is rapidly declining, will lenders continue to lend you money? Not likely. With sanctions adversely affecting North Korea’s ability to pay for imports, North Korea will find it increasingly difficult to buy what it needs. The breaking point may not be imminent, but the future is predictable.

This is what I think will happen. North Korea will ask China to increase its foreign direct investment in North Korea by giving China more incentives for such investment. These incentives may include low taxes and free land. North Korea will ask South Korea to send more money.

For instance, as of July 1, 2004, Hyundai Asan and North Korea set the entrance fee to Mt. Kumkang at $10 for a day trip, $25 for a two-day trip and $50 for a three-day trip. On May 1, 2005, these fees were raised to $15, $35, and $70. On July 1, 2006, these fees were raised again to $30, $48, and $80. This is just one way.

North Korea may also ask South Korea to lend it a large sum of money with an empty promise of paying it back. This explains in part why it is so important for North Korea to have leaders of the South Korean government who are friendly to North Korea.

These desperate acts are likely to be very short of paying for the majority of the annual trade deficit. If sanctions continue to be effective, the likelihood of North Korea returning to the negotiation table increases. Economics is rarely boring, especially when it deals with real problems.

Yonhap
1/22/2007

North Korea will put strong emphasis on inter-Korean economic projects this year as the communist state insinuated that it is suffering from economic difficulties, a state-run think tank said Monday.

In its new year commentary, Pyongyang partially admitted that its economy is in bad shape and said its highest priority for 2007 is boosting the sagging economy, the Korea Development Institute (KDI) said in a report.

“Unlike in previous years, when the North placed political ideology, the military and the economic sector, in that order, as its three key areas of importance, North Korea set the economic sector ahead of those two other sectors in the commentary this year,” the KDI said.

“The North also skipped over commenting on a series of economic achievements, except for saying that it has secured a foothold for a new leap. … In addition, it said that it has gone through the ‘worst adverse situation’ in the past 10 years, showing that the economy was still suffering from difficulty in 2006.”

To boost the economy, the North may actively push for inter-Korean economic projects and depend on the South for increased economic support as its economic cooperation with other nations such as the United States and Japan has come to a near halt, the institute said.

In the commentary, the North also used a slogan, “put an importance on the Korean people,” a comment indicating increased inter-Korean cooperation, the KDI said.

Every Jan. 1, the communist nation releases its new year commentary on three state dailies, including the Rodong Sinmun, one of the only sources of information on the country’s economic policy plans.

Under the title, “Create a prosperous era of the Songun (military-first) Choseon,” the North urged its people to make concerted efforts to solve the economic problems in 2007 and make the country an economic power as a socialist nation.

According to many analysts, the North’s annual economic growth may have fallen below 1 percent last year, down from an estimated 1 percent growth in 2005 and 2.2 percent in 2004. A variety of global economic sanctions against Pyongyang could have contributed to the slower growth in 2006, the institute said.

Yonhap
1/22/2007

China has issued a permit to allow its citizens to take a tour of the North Korean Mount Geumgang, via South Korea, tourism officials said Monday.

Hyundai Asan Corp., the operator of the tourism business at the scenic mountain, signed an exclusive contract with a travel agency affiliated with China’s communist youth organ, they said.

Donga (Hat Tip DPRK Studies)
1/22/2007

It is expected that the government’s aid to North Korea will be affected as the international community has decided to investigate the general situation of aid projects using U.N. funding including the United Nations Development Program (UNDP). So far, the government and private groups supporting North Korea have often used international organizations as a means to give humanitarian aid to the North, as such aid through the World Health Organization (WHO), United Nations Children’s Fund (UNICEF), World Food Programme (WFP) and others are less influenced by the inter-Korean relations.

Last year, the government and private organizations didn’t provide previously planned corn aid to the North in the aftermath of North Korea’s missile and nuclear tests. However, they spent 5.912 billion won in malaria preventive measures and infant and child support.

In 2005, they sent products worth 25.773 billion won in food aid and quarantine measures against malaria. Besides, they provided goods worth 2.254 billion won in aid and preventive measures against malaria with the North in 2004, and offered North Korea goods worth 20.303 billion won in corn, malaria preventive measures, and vaccine and immunizing agents in 2003.

The total sum Korea spent on the North in humanitarian assistance over the last 10 years (from 1995 to 2004) amounts to $119.43 million, 7.99 percent of the total U.N. financial aid of $1.49 billion to North Korea. During the period, apart from world organizations, the government gave the North $1.16 billion in financial support.

A government official said, “The government’s support for North Korea through international groups is its obligation as a responsible member of the international community,” and added, “Assistance for North Korea through world organizations is for humanitarian purposes, and as far as I know, there is no possibility for misappropriating funds since the aid is being carried out based on a principle of providing 100 percent goods.”

However, contrary to the above government’s official statement, the government seems rather perplexed at the suspicion that its aid through world organizations was diverted to be used for the North’s nuclear development program. The government has used world organizations as an indirect route for its aid toward North Korea because it was worried about getting embroiled in accusations that it is being too lenient on North Korea.

Unification Minister Lee Jae-Jeong also said in his inaugural speech that even humanitarian aid should be divided into emergency aid, assistance in loan form and aid for development, and that emergency aid should continue under any circumstances in order to emphasize the continuation of government’s support for North Korea through world organizations.

Minister Lee has so far expressed regret to the WFP over the suspension of food aid to the North and emergency relief aid for North Korea’s catastrophic flood damage. Another government official stated, The “UNDP seems to have nothing to do with humanitarian aid since it is aid for the development of North Korea. Still, it will still affect the government’s humanitarian assistance program for the North in the future.”

Meanwhile, it was revealed that the government is investing in the Tumen River Area Development Programme (TRADP) the government has been participating in since 1995 under the auspices of the UNDP. An official at the Ministry of Finance and Economy noted, “This year, the government will pay $181,000 for the operating expenses of the TRADP office.”

Everything you wanted to know about minerals in the DPRK and their export  can be found in these USGS reports (In PDF format):

 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 |

Korea Times
Lee Jin-woo
1/11/2007

Unification Minister Lee Jae-joung said Thursday that some 40 small factories, mostly clothing manufacturers, will move into the joint industrial complex in North Korea this year.

But he said it would take more time for the ministry to fully resume the halted expansion of the Kaesong Industrial Complex.

Last September, the South Korean government decided to hold off expanding the inter-Korean business venture because of heightened tension on the Korean Peninsula after the North’s launching of ballistic missiles in July. After the Stalinist state’s first-ever nuclear test on Oct. 9, tensions increased further.

“We’ve decided not to postpone helping small South Korean manufacturers, which have been struggling with adverse domestic business conditions, especially high wages,” Lee said during a press briefing at the ministry.

The manufacturing companies will move into a new five-story building constructed by the state-run Korea Industrial Complex Corp. involved in a pilot project for the industrial complex.

Construction of the building will be completed by June. It is not related to the postponed sale of the second section of the industrial complex, the minister said.

The number of North Koreans working for the 18 South Korean firms at the industrial complex surpassed 10,000 last year.

When fully expanded by 2012, the complex is expected to house about 2,000 South Korean manufacturers employing about half a million North Koreans, according to the Ministry of Unification.

The minister, however, said more progress in the stalled six-party talks is necessary for the government to resume expansion of the project.

He said he will continue discussing the matter with the Korea Land Corp., a state-run land developer, which has been involved in the Kaesong project, and Hyundai Asan, the business arm of Hyundai Group that handles the Mt. Kumgang tourism project.

Lee said the government would not provide medical aid to the Stalinist state to help stem the spread of scarlet fever, an infectious disease.

“Scarlet fever is not a fatal infectious disease. Given the significance of the disease, we believe that North Korea itself will be able to solve the problem,” Lee said.

The ministry considered providing medical aid to the North after scarlet fever broke out in the northern part of North Korea last October.

Earlier, South Korean humanitarian aid groups shipped 36 types of medicine including penicillin and other antibiotics to Pyongyang.

Korea Times
1/4/2007

The number of inter-Korean cross-border visits climbed 15.1 percent last year from a year earlier despite escalating tensions over North Korea’s test-fire of missiles and the underground detonation of nuclear devices, the Ministry of Unification said Thursday.
A total of 101,708 South and North Koreans visited each other’s country, compared with 88,341 in 2005, according to the ministry.

It said the number did not include South Korean tourists to scenic Mt. Kumgang in the North. Last year, 234,446 South Koreans traveled to the mountain resort, down 21.4 percent from 2005.

The ministry said that 100,838 South Koreans visited the North, while 870 North Koreans visited the South.

It added that the increasing inter-Korean economic exchanges drew 87,845 South Korean visits to the North.

The inter-Korean trade volume jumped 27.8 percent year-on-year to $1.3 billion last year, according to the ministry.

Joong ang Daily
Moon So-young
12/28/2006

…[edited]…President Roh Moo-hyun’s Uri Party and the Grand National Party agreed to cut the budgets for inter-Korean cooperation projects…

The North-South cooperation fund, one of the latter budget items, was perhaps the hottest of the hot issues. The Assembly agreed to allocate 500 billion won for that fund, down 150 billion won from the government’s proposal.

The Grand Nationals had demanded that spending be cut by at least 300 billion won, citing North Korea’s nuclear test in October. The Uri Party refused to cut more than 100 billion won. Mainly because of that fight, the budget approval had been delayed from its mandated deadline of Dec 2. Last year, Seoul allocated 650 billion won for the North-South fund, the same amount as the 2007 request.

Joong Ang Daily
Jung Ha-won
12/27/2007

In early 2007 South Korea is expected to begin its first graphite shipments from a new mine in North Korea that has been co-developed by the two countries since 2003.

The mine development project in Jeongchon, which cost $10.2 million, was completed in April, but electricity shortages and diplomatic tension over North Korea’s nuclear test delayed testing operations for months.

According to Korea Resources Corp., South Korea’s state-run mineral developer that took part in the project, the new mine, located near the western part of the border with South Korea, recently began test operations, and graphite shipments will begin early next year.

“North Korea authorities recently guaranteed a stable supply of electricity,” said an official with Korea Resources.

The mine is expected to produce about 3,000 tons of graphite a year, and Korea Resources Corp. plans to bring about 1,830 tons of graphite, or 20 percent of annual production, to South Korea each year for next the 15 years. The firm is also involved in an iron ore mine development project in the North’s Deokhyun, North Pyeongan province.

North Korea is known to have more than 200 varieties of minerals worth about 2.2 quadrillion won ($2.4 trillion) still unexplored in its mountainous areas. Chinese companies have wasted no time exploring those resources, with the North Korean government thirsty for cash and outside investment. China’s state-run steelmaker, Tonghua Iron and Steel Group, last year was granted rights to develop the Musan iron ore deposit in North Korea, the largest open-air iron mine in Asia, for the next 50 years. North Korea also granted exploration rights for more than 10 mines to China’s Wookwang Group and other Chinese developers.

South Korea has been sluggish by comparison, due to political issues and a lack of infrastructure, such as roads and electricity. There remain untapped resources in the reclusive North.

“There is a wealth of magnesite buried in the Dancheon area,” said the Korea Resources Corp. official. “We will carefully review the plan to explore the area.”