Archive for the ‘Foreign direct investment’ Category

An update on the DPRK’s economic relations

Sunday, April 18th, 2010

Francoise Nicolas has written a data-driven survey on the DPRK’s changing trade and investment relationships.  The paper can be downloaded here (PDF).  This paper has also been added to my DPRK Economic Statistics page.  Here is the paper’s conclusion:

This brief analysis of the current external economic relations of the DPRK leads to a number of conclusions.  First, the North Korean economy maintains very limited exposure to the outside world and, as a result, to external influence.  In terms of volume North Korea’s trade is miniscule, even in relation with the size of its economy.  This is also the case for foreign direct investment inflows.

Secondly, although North Korea is less isolated than often thought, its trade and investment flows are very heavily polarized both geographically and sectorally, limiting de facto their potential impact.  In contrast to what was the case during the Soviet era, North Korea’s main economic partners are not ideological partners but neighboring economies, namely China and South Korea.  They are major partners in trade as well as in FDI.  Russia still plays a non negligible role but is in no way comparable to what was the case before the demise of the Soviet bloc.

Thirdly, North Korea’s external economic relations are very much dictated by political considerations.  Politics accounts both for the choice of partners and for the nature of the economic relations.

Fourthly, and more importantly, the very distinct nature of the DPRK’s connection with the rest of the world, and primarily with its two major economic partners, sets it apart from other transition economies and in particular from China, but also from Vietnam.  In the case of North Korea, economic openness, although announced time and again as an official objective, cannot be seen as an instrument for enhancing competitiveness or as part of a development strategy.  The recent, renewed signs of reform in the direction of increased openness should thus be interpreted with utmost caution.

Fifthly, the structure of the country’s external trade is indicative of an economy in survival mode.  The substantial aid component in the inter-Korean trade and FDI relationship undoubtedly further substantiates such a claim.  Surprisingly, relations between North Korea and China are more often based on a market-economy logic, although this only holds true for trade flows and not FDI flows.  The Probability of change through trade appears still very limited.

Lastly, the role the European Union may play in the region remains very much an open question but the margin of maneuver is limited.  Given the state of play described earlier, it would be extremely naive to believe that a European engagement strategy vis-à-vis the DPRK could contribute to economic change.  In addition the country’s lack of attractiveness for potential investors is a further obstacle.  However, the persistent uncertainty and the lack of visibility over the political and economic evolution of the DPRK should not deter European investment in the region and, far to the contrary, should provide a strong incentive to closely monitor the economic moves made in Pyongyang.

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GPI hosting May DPRK business delegation

Tuesday, April 13th, 2010

According to GPI:

In the current financial and economic situation, companies face many challenges. They must cut costs, develop new products and find new markets. In these fields, North-Korea might be an interesting option. Since a few years, it is opening its doors to foreign enterprises. The labor costs are the lowest of Asia, and its skilled labor is of a high quality. It established free trade zones to attract foreign investors and there are several sectors, including textile industry, agro business, shipbuilding, logistics, mining and Information Technology that can be considered for trade and investment.
  
European Business Mission to Pyongyang: May 2010
In order to explore these business opportunities, we will organize again a business mission to North-Korea (15-22 May). We will also visit the annual Pyongyang Spring International Trade Fair (see photo). This fair can be used by European companies to come in contact with potential buyers and suppliers in North-Korea. Information abouth both events has been attached. In case this date is not convenient for you, individual business trips are possible as well. Later this year, another trade mission will visit Pyongyang from 11-18 September. 
       
With best regards, Paul Tjia (director)  
GPI Consultancy, P.O. Box 26151, 3002 ED Rotterdam, The Netherlands
E-mail: paul@gpic.nl
Tel: +31-10-4254172 
Fax: +31-10-4254317
Website: www.gpic.nl

Here is the program flyer (PDF) 

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DPRK to seize Kumgang assets this week

Sunday, April 11th, 2010

UPDATE: According to Yonhap:

North Korea has told four employees at a South Korean-run mountain resort to leave the communist nation within 24 hours as part of measures to freeze Seoul-held assets there, sources here said Tuesday.

The North has also sealed the key holes of entrances to five facilities and has pasted keep-out stickers, they said. The facilities were built and run by the South Korean government and its state tourism agency.

The workers, ethnic Koreans from China, had been overseeing the maintenance of a family reunion center at Mount Kumgang. The other facilities subject to Tuesday’s asset freeze included a duty free shop run by Seoul’s Korea Tourism Organization.

The North’s measures were seen as an attempt to increase pressure on Seoul to resume a joint tourism program to the mountain resort that had been an important source of foreign currency for the impoverished nation.

Officials in Seoul earlier said the freezing of assets will have little actual impact as the facilities have hardly been in use since the cross-border tours to Mount Kumgang were suspended in 2008.

Still, the measure symbolizes Pyongyang’s anger over Seoul’s refusal to resume the lucrative project that had earned the regime millions of dollars a year. It also suggests that stronger steps, such as asset confiscations, could come if the South keeps refusing.

On Tuesday morning, North Korean officials began carrying out the measure, a source said without giving any specifics.

“We will respond after we see what the freezing measure will involve,” an official in Seoul said.

The tours, which began in 1998, had been a prominent symbol of reconciliation between the rival states that are still technically at war after the 1950-53 Korean War ended in a ceasefire, not a peace treaty. Nearly two million South Koreans had visited the scenic mountain.

South Korea suspended the program in 2008 after one of its citizens was shot dead by a North Korean guard after entering a restricted area near the resort. Seoul has demanded a state-to-state guarantee of tourist safety as well as a joint on-site probe into the death before the tours can resume.

North Korea says it did everything to assure tourist safety in a deal that leader Kim Jong-il struck with the head of the tour’s main South Korean organizer, Hyundai Asan, last year.

South Korea has protested the North’s decision to freeze the five facilities which include a family reunion center, a fire station and a duty free shop.

Despite threats from the North, the government of South Korean President Lee Myung-bak has shown no signs of backing down. It also rejected the North’s demand that Seoul officials come to the resort to attend the asset freeze, and warned it would hold the North responsible if it causes any damage to resort facilities.

Since taking office in early 2008, Lee halted unconditional aid to the North, linking its resumption to progress North Korea makes in ending its nuclear weapons programs.

Amid the lack of aid from the South, North Korea’s economic troubles have deepened in the wake of fresh U.N. sanctions imposed after Pyongyang’s nuclear test last year, and the regime’s failed currency reform that worsened inflation and food shortages.

Here are some press releases from the Ministry of Unification: Statement 1, Statement 2.

ORIGINAL POST: According to the Associated Press:

North Korea informed South Korea that it will begin quitting a joint tourism project in the communist country this week, officials said Sunday, in another setback to relations between the countries.

North Korea said Thursday that it would freeze some South Korean assets at scenic Diamond Mountain, expel South Koreans working at the site and restart the stalled project with a new partner.

A day later, the North told the South that it will carry out the plan Tuesday, starting with the freezing of the South Korean government-owned assets that include a reunion center for families separated by the Korean War, according to Seoul’s Unification Ministry.

It was not clear when the North would expel South Korean personnel, according to Hyundai Asan, the resort’s South Korean tour operator that relayed the North’s plan to the South Korean government.

The North said it would freeze assets at the site while South Korean officials were in attendance, but the South has no intention of sending officials to comply with the North’s request, ministry spokeswoman Lee Jong-joo said.

South Korea halted tours to the mountain resort on North Korea’s east coast in July 2008 after a South Korean tourist was fatally shot after allegedly entering a restricted military area next to the resort.

The North had recently expressed its willingness to restart the tours, a legitimate source of hard currency for the impoverished regime. But South Korea said the North must first accept a joint investigation into the shooting death.

North Korea’s decision to quit the tour project “is the inevitable consequence entailed by the moves of the South Korean authorities to escalate the confrontation with fellow countrymen,” the North’s government-run Minju Joson newspaper said in a commentary carried by the official Korean Central News Agency on Sunday.

Relations between the two Koreas have worsened since a conservative Seoul government took office in early 2008 with a pledge to get tough with the North.

But North Korea has tried to reach out to Washington and Seoul since last summer in an about-face that analysts and officials say shows the North feels the pain of U.N. sanctions adopted to punish it for its nuclear test in May.

The DPRK wants South Korean officials present for the occasion, but the South has refused.  According to the the AFP:

Seoul on Sunday rejected Pyongyang’s demand that South Korean officials come to a North Korean resort where the communist regime is about to freeze South Korean assets, worsening bilateral ties.

North Korea wants South Korean officials present on Tuesday when it freezes the assets, Seoul’s unification ministry spokesman Chun Hae-Sung said.

However Seoul will not comply with the summons, he said.

The North last week threatened to freeze assets at the Mount Kumgang resort after pressing Seoul in vain to lift its ban on tours to North Korea, which once earned the impoverished state tens of millions of dollars a year.

The North also declared its cross-border tour business deal with South Korean firm Hyundai Asan void, threatening to find a new partner to replace it and to expel some South Korean personnel.

Seoul suspended the cross-border tours in July 2008 after North Korean soldiers shot dead a South Korean housewife who strayed into a military zone.

South Korea demands firm agreements on the safety of visitors, a joint investigation into the shooting and the North’s apology for the killing.

The North says it has already given safety guarantees.

The latest tit-for-tat reflects the deterioration in relations since the South’s conservative government took office in 2008 and took a tougher line with Pyongyang, linking economic cooperation with the North to progress on its nuclear disarmament.

The North’s official Minju Joson newspaper said Sunday the collapsing tour deal “is the inevitable consequence entailed by the moves of the South Korean authorities to escalate the confrontation with fellow countrymen.”

It accused Seoul of overturning previous agreements on resuming the tours, which began in 1998.

Nearly two million South Koreans had travelled to the North in the past decade, earning it some 487 million dollars.

North Korea is also suffering economically from tougher sanctions imposed by the UN Security Council since Pyongyang’s second nuclear test in 2009.

It says it will freeze five Seoul-owned assets — a family reunion centre, a fire station, a culture centre, a spa and a duty free shop — in the Mount Kumgang resort, but did not specify how, Seoul officials said Sunday.

The South has urged the North to reverse its decision, saying the communist state is breaching business contracts and international norms.

Pyongyang also threatens to re-examine an industrial park with the South at Kaesong just north of the border.

Some 42,000 North Koreans work at 110 South Korean-funded plants at Kaesong, which like Kumgang is a valuable source of scarce hard currency for the North.

Here is a link to previous Kumgang stories.

Read the full story here:
NKorea to start quitting joint tour this week
Associated Press
Kim Hyung-Jin
4/11/2010

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Scott Snyder on Rason

Monday, April 5th, 2010

Scott Snyder wrote a good piece on recent developents in Rason fo rthe Jamestown Foundation’s China Brief:

The Rajin-Sonbong region in North Korea (also known as Rason following a 2004 administrative reorganization by central authorities) is an underdeveloped backwater near the far northeastern tip of the Korean peninsula bordering Jilin province of China and Primorsky Krai of Russia. Although the area is far from the nerve center of the North Korean regime, Pyongyang, Rajin-Sonbong has strategic significance as the northern-most year-round ice free port in Northeast Asia and therefore is an attractive geostrategic transit point for the shipment of goods to landlocked Northeastern China and the Russian Far East. For this reason, recent reports of new Russian and Chinese investment deals following a rare personal visit by North Korea’s supreme leader, Kim Jong Il, to Rajin-Sonbong in December of last year merit closer scrutiny.

Rajin-Sonbong has been the focal point of periodic efforts by Pyongyang to experiment with economic reforms since it named the area a free economic trade zone in late 1991. At that time, the Rajin port was an essential piece of a UN-sponsored regional development effort known as the Tumen River Area Development Project (TRADP)—which encompasses areas within China, Mongolia, Russia and South Korea—but the project never attracted sufficient international investment to take off. The spotlight returned to Rajin-Sonbong briefly in 1996 when North Korea sponsored an investor forum there in an attempt to stir up interest in a revamped set of investment laws for the region, but few investors came and North Korea’s famine later that year diverted attention away from the effort. 

(more…)

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Pramod Mittal eyes stake in DPRK mines

Sunday, April 4th, 2010

According to the Economic Times of India:

Pramod Mittal, the younger sibling of steel tycoon LN Mittal and head of Global Steel Holdings, is negotiating with the North Korean government for a stake in the country’s Musan Iron Ore mines, estimated to hold reserves of more than seven billion tonnes. The move by Global Steel is aimed more at accessing the mineral resource, as the ore is in sharp demand with steelmakers expanding capacity and iron ore miners moving to a quarterly price regime to meet growing markets in Asia and Africa.

Mr Mittal, who is chairman of Global Steel, a closely-held company of the Mohan Lal Mittal family, had visited Pyongyang last week to talk to senior government officials to work out the modalities of a share of Musan’s reserves. The ML Mittal family consists of elder son LN Mittal, Pramod Mittal and younger brother Vinod Mittal, who looks after the Mumbai-based Ispat Industries. When contacted, Pramod Mittal declined to comment. “Our visit to North Korea is to further business interests. We are not looking for any stake in Musan,” he told ET .

According to people familiar with the development, Global Steel could likely be negotiating with Pyongyang for development rights to Musan for a fixed peiod, where Global Steel would do the mining and get to buy an agreed portion of the reserves. Typically, in the mining industry, such development rights are for a long term period of 20 to 50 years.

Global Steel, which is registered in the tax haven Isle of Man, has steelmaking operations in Bulgaria and Nigeria and a 20-year management contract to operate Zimbabwe Iron & Steel. Although Global Steel has a small steelmaking capacity of just more than 2 million tonnes, iron ore from Musan would not be used for Global Steel’s operations. Global Steel also owns two coal blocks in Mozambique where ArcelorMittal, controlled by elder brother LN Mittal, also has coal mines. While the Mittal family has maintained that Global Steel has no link to ArcelorMittal, the world’s largest steel company has been reportedly keen on Global Steel’s assets.

Two years ago, North Korea had granted development rights on Musan to China’s Tonghua Iron & Steel Group for a period of 50 years. However, Pyongyang recently terminated that agreement without offering any reason. People connected with the issue said Global Steel is negotiating with Musan on the amount of investment needed for developing the mines and also on building infrastructure, which is integral to any mining activity.

While the talks with Pyongyang is at an initial stage, under the previous agreement with Tonghua, the Chinese company had reportedly agreed to put in about 7 billion yuan, and had also planned to produce 10 million tonnes of iron ore each year. Of the total investment, about $240 million was for building roads and railways from Musan to Tonghua in China. The Musan iron ore mines are close to the Chinese border. The secretive North Korean government has recently been sending out feelers to global mining companies for developing its vast mineral deposits, said to contain one of the world’s largest reserves, closely rivalling Brazil.

The Musan Mine is the DPRK’s largest and satellite imagery of it can be seen here.

Here is a story about Tonghua’s Musan deal

Read the full story here:
Pramod Mittal eyes stake in North Korea’s Musan mines
The Economic Times
MV Ramsurya
4/5/2010

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Jin Hualin, Yanbian University, on Chinese investment in DPRK.

Sunday, April 4th, 2010

Jin Hualin, dean of the College of Economics and Management at Yanbian University, talks about Chinese investment in Rason in China’s Global Times.  Here is an excerpt:

GT: If China does continue to rent Rajin harbor for another 10 years, what will the effects be?

Jin: China has reached an agreement to rent a pier at Rajin Port for another decade. A Dalian-based Chinese company has invested 26 million yuan ($3.8 million) in the reconstruction of Rajin Port No.1 Pier. Park also said that China may enjoy more favorable conditions there, such as more berths.

I think Chinese companies’ participation is good for promoting the North Korean economy and building logistical infrastructure in the area, which is beneficial to China, North Korea and the Northeast Asian countries.

When the Sino-Mongolia route is finished, raw materials and natural resources from Mongolia can be shipped to Japan and South Korea via Rajin harbor, and then China’s northeastern regions and North Korea can both benefit.

GT: What should China do to promote Northeast Asian cooperation and devel-opment?

Jin: I suggest Chinese governments at all levels consider the following issues. They should accelerate trade and tourism and build cooperation on logistics, and support Chinese companies going global and investing in North Korea.

Actually, China now has many companies capable of investing abroad. The point is foreign countries’ investment environment.

We should strengthen cooperation on education with North Korean universities and colleges, sending students to study there and exploring research in new areas together.

We can also strengthen regional cooperation. We can designate China’s Hunchun city and North Korea’s Rason city as pilot cities and permit China’s commercial banks to open yuan-based accounts in Rason’s commercial banks.

Relations between Northeast Asian countries are subtle and complicated because of geopolitical contradictions, different political systems, the influence of the Cold War, historical issues, territorial disputes and sentiments caused by historical and territorial issues.

Mutual distrust fundamentally hinders cooperation. China needs to take the responsibility to promote regional cooperation and make it institutionalized and legally guaranteed as soon as possible.

GT: How do you evaluate the political and economic risks for Chinese companies going into North Korea? What advantages do Chinese companies have?

Jin: There are always political and economic risks involved in trade between different countries. The first major solution is to establish a mutual investment guarantee agreement, so that the two countries’ economic cooperation will be protected legally.

We hope that North Korea can keep the stability and consistency of its policies and issue development policies that is in line with international conventions. As long as North Korea adopts consistent policies, Chinese companies won’t encounter great political and economic risks there.

China and North Korea are believed to enjoy good mutual trust. China has experience from its reform and opening-up and plenty of investment capability. North Korea has a good educational foundation, low labor costs, and rich natural resources.

Chinese companies are active participants in investing in North Korea and I believe they’ll do well there.

Read the full interview here. Hat tip to Adam.

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DPRK-PRC plan two more Yalu River dams

Sunday, April 4th, 2010

UPDATE: According to Michael Rank:

Two power stations are under construction on the Yalu river between China and North Korea, a Chinese website reports.

They are both small plants with an installed capacity of 40,000 kilowatts and both are situated near the border town of Ji’an 集安 in southwestern Jilin province, near the border with Liaoning.

The dams are set to be finished in 2013. Negotiations concerning construction have been protracted: a preliminary agreement was reached in July 2004, followed by a further agreement in August 2008 and a final accord last January.

The Wangjianglou or Lintu 望江楼(林土)dam will be based on the Chinese side of the river with investment totalling 600 million yuan ($88 million), while the Wenyue or Changchuan 文岳(长川)dam will be based on the North Korean side with investment put at $500 million ($73 million). The report did not say how power, or costs, would be shared between the two countries.

A ceremony marking the beginning of construction was held on March 31, attended by North Korean vice-minister of electricity industry Kim Man-su and Jilin vice-governor Chen Weigen.

The plants will each produce 154 million kilowatt-hours per year. The Wangjianglou dam is 397 metres long and 16 metres high, while Wenyue is 602.7 metres long and 15.5 metres high. They are 36 and 24 km from Ji’an, respectively and are 1.5 and 5.5 km from North Korean railway stations (Rinto린토 and Mun’ak 문악 – these are the Korean names of the dams).

These dams are very small scale compared with the world’s largest dams, which run into thousands of megawatts (440 kW is just 0.44 MW).

ORIGINAL POST: According to the AFP:

China and North Korea will build two hydro-electric dams on the Yalu River that marks their border, Chinese state media reported on Thursday.

The dams will cost a total of 1.1 billion yuan (161 million dollars) and generate a combined 308 million kilowatt hours of electricity when completed, China Central Television reported.

The announcement came amid reports that North Korean leader Kim Jong-Il would soon visit China in a trip that could revive talks on ending Pyongyang’s nuclear drive.

Xinhua news agency said one dam would be built at Wangjianglou in China’s northeastern Jilin province and the other at Changchuan.

Electricity from the dams would help “drive economic growth in Jilin and North Korea,” it added.

It was not immediately clear how the two sides would share the cost of the projects or the electricity.

Construction would begin this year.

North Korea, desperately poor after decades of isolation and Stalinist economic policies, is heavily dependent on China for trade and aid.

South Korea’s government said this week there was a “high level of possibility” that Kim would pay a visit to China, the reclusive regime’s closest ally.

The South’s Yonhap news agency cited diplomatic sources saying he might leave for China as early as Thursday or Friday.

China’s foreign ministry declined to confirm the reports.

After an October visit to Pyongyang by Chinese Premier Wen Jiabao, Kim said his nation would rejoin the six-nation denuclearisation talks which the North stormed out of in April of last year.

The talks group hosts China, the two Koreas, Japan, the United States, and Russia.

Adam Cathcart offers a translation of the Xinhua dispatch:

中朝两国在鸭绿江新合建的两座水电站开工   // China and North Korea to Begin Construction on Two New Shared Hydroelectric Plants

Huanqiu Shibao, April 2, 2010 [translated by Adam Cathcart]

新华网吉林频道3月31日电(记者李双溪)31日, 中国与朝鲜在界河鸭绿江上共同建设的两座水电站开工。这两座电站总投资为11亿元人民币 ,建成后年发电量达3.08亿千瓦时。其中,望江楼(朝鲜称林土)电站计划投资6亿元,发电厂位于中方一侧,电站主要由混凝土重力坝、泄水闸、电站厂房及变电站等部分组成。On Jilin’s newschannel on 31 March, Xinhua’s reporter Li Shuangxi broadcast that China and North Korea would start joint construction on two hydropower plants in the border areas of the Yalu River. Investment on these two power plants will total 1.1 billion yuan, and the year after completion, they are projected to have a power generation capacity of 308 million kilowatts.  Among these plants are the Wangjiang Station (called Lintu by the Koreans), which is slated for 6oo million RMB of investment.   The power plant on the Chinese side will be a concrete gravity dam with a sluice gate and substation components.

[Lots of details follow on dam dimensions, projected electric output…It seems clear that China will bear all of the cost, though.]
2004年7月中朝双方审查通过了两座电站的初步设计,2006年中国有关部门批准了建设方案。2010年1月,双方在朝鲜签署了《中朝建设鸭绿江望江楼和文岳电站第九次会议纪要》,一致同意两电站开工建设。 In July 2004, China and the DPRK jointly reviewed the preliminary design of the two power stations.   In 2006, the Chinese authorities approved the construction plan.  In  January 2010, the two sides signed an agreement in North Korea known as the “Minutes of the Ninth Meeting on Sino-North Korean Construction of Yalu River Dams at Wangjianglou and Wenbing,” in which it was agreed to commence with the construction of the two power stations.

发源于长白山主峰、总长约795公里鸭绿江水能资源丰富,流经过吉林省和辽宁省。 目前在吉林省境内中朝双方已建有云峰、渭源两座水电站。 望江楼、文岳电站将成为双方共同受益的水电站,对开发鸭绿江、拉动吉林省和朝鲜的经济增长将起到积极的促进作用。Originating in the main peak of the Changbai Mountain range, with a total length of 795 km, the Yalu River is a rich resource flowing through Jilin and Liaoning provinces.  Currently, on the borders of Jilin Province, China and the DPRK have already built two jointly benefitted-from hydropower plants called Yunfeng and Weiyuan.  The Wangjianglou and Wenbing power stations will be built for of mutual benefit, developing the Yalu River, driving forward continued economic development between Jilin province and North Korea, playing a positive role.

I am not sure where these dams are going just yet.  The DPRK and China already share 4 dams across the Yalu. Here are satellite images of them (Dam 1, Dam 2, Dam 3, Dam 4).  Unfortunately I do not know the names of most of them, but Dam 2 is now known as the Suphung Dam.  It used to be called the Suiho Dam and it was bombed during the Korean war:

Read the full story here:
China, N.Korea plan Yalu hydropower dams: reports
AFP
4/1/2010

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DPRK looking to greater Chinese investment

Thursday, April 1st, 2010

According tot he Washington Post:

Squeezed by food shortages and financial sanctions, North Korean leader Kim Jong Il appears to be reaching out to China and Chinese investors in a way that could mark an extraordinary opening in the insular nation’s shuttered economy.

Kim might soon travel to China, according to the office of South Korea’s president and U.S. officials. They cited preparations that appear to be underway in the Chinese border city of Dandong and in Beijing. The Chinese Foreign Ministry said Thursday it does not have information on whether Kim will visit China.

“The North is now planning to open foreign-owned factories not just in closed-off special economic zones, but in major cities like Nampo and Wonsan,” Lim said. Until now, the government has confined nearly all foreign business operations to sealed-off economic zones, such as Kaesong near the South Korean border. “The military is closely cooperating with the State Development Bank to try to increase foreign investment.”

Although the repressive power of the army and security forces remains strong, the North’s command-style economy is a ruin. There were unconfirmed reports of starvation deaths in some areas this winter.

Kim, 68, and showing the effects of a 2008 stroke, is in the early stages of handing power over to his untested 27-year-old son, Kim Jong Eun. But the legitimacy of the succession — and of the state itself — is being weakened by the growth of the markets and increased public access to foreign media.Refugee surveys show that many North Koreans blame Kim’s government for food shortages, corruption and incompetence.

In South Korea and China, there is widespread skepticism about North Korea’s willingness to create modern banking systems and enforce laws that allow foreign companies to operate under standardized accounting rules.

Companies that have invested in North Korean mineral ventures have complained for years of corruption and outright theft by the government.

Read the full story here:
Overtures to China may signal opening of North Korea’s economy
Washington Post
Blaine Harden
4/2/2010

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Why the Sunshine Policy Made Sense

Thursday, April 1st, 2010

Nautilus Institute Policy Forum Online 10-020A: April 1st, 2010
James E. Hoare
4/1/2010

I. Introduction

James E. Hoare was Britain’s Chargé d’Affaires to the DPRK from 2001-2002 and opened the British Embassy in Pyongyang. In this article on the Sunshine policy he writes, “Slowly, the policy was creating a group of people who could see benefits in remaining on good terms with South Korea and who had wider links with the outside world. Engagement has worked in other countries, most noticeably China, and I believe that it was beginning to work in North Korea. There was never going to be a speedy change in attitudes built up over sixty years, but stopping the process after ten was not a wise decision.”

This article was published by 38 North a web site devoted to analysis of North Korea from the U.S.-Korea Institute at SAIS. 38 North will harness the experience of long-time observers of North Korea and others who have dealt directly with North Koreans. It will also draw on other experts outside the field who might bring fresh, well, informed insights to those of us who follow North Korea.

The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Nautilus Institute. Readers should note that Nautilus seeks a diversity of views and opinions on contentious topics in order to identify common ground.

II. Article by James E. Hoare

– “Why the Sunshine Policy Made Sense”
By James E. Hoare

At a recent private meeting in London, a former senior United Nations’ official, drawing on experience relating to a wide range of countries, said that transforming a “failing” or “fragile” state was not something that could be done overnight. Those involved needed to think in terms of ten to twenty years rather than weeks or months. Regardless of whether or not one accepts the idea of the Democratic People’s Republic of Korea (DPRK or North Korea) as a failed or even fragile state-and the term is often used in some quarters-the idea that one is in for the long haul in bringing about major modifications in behavior and attitude is certainly a good one to have in mind when dealing with the DRPK. It was such an approach that marked the Republic of Korea’s policy towards the North under former Presidents Kim Dae-jung and Roh Moo-hyun.

Since the Lee Myung-bak government took office in the Republic of Korea (ROK or South Korea) in 2008, it is fashionable to dismiss the policies followed by his predecessors as an expensive failure. Sneers about “ATM diplomacy,” innuendo about Kim Dae-jung’s motives, and references to his successor Roh Moo-hyun’s naivety, are the commonplace of South Korean academic and press comment, and are heard much further afield. “Sunshine” or engagement have become terms of mockery. The Lee government has adopted a more aggressive policy towards North Korea. It has not refused assistance outright, but has couched its offers in such a way that rejection is inevitable-the most recent example is the “grand bargain” proposed in 2009 in which the DPRK must first give up its nuclear program to receive security guarantees and aid. This is then played back as evidence that the North is incorrigible and not deserving of assistance.

The Lee government’s approach is based on an incorrect assessment both of the Sunshine Policy and what went before it. “Sunshine” or “engagement” was not something that sprang from Kim Dae-jung’s fertile brain, though he certainly can be credited with refining and developing the idea. The policies pursued by Kim and Roh lay firmly within a tradition that goes back to President Park Chung Hee in the early 1970s and that was followed by all his successors to a greater or lesser degree. However, it was never easy to engage the North and it did not take much to divert earlier presidents from such a policy. Frustrated or annoyed, they eventually gave up the effort.

The difference after 1998 was that South Korea stuck to “sunshine” even when there were difficulties. Neither Kim nor Roh were starry-eyed and neither expected that the North would be changed overnight. Both responded to Pyongyang’s bad behavior with firmness. But they realized that circumstances had changed with the famine and other problems that hit North Korea in the 1990s. They also realized that for engagement to be successful, it was best to avoid rubbing in the fact that the country faced real problems. Even if the explanations offered for the problems often ignored the North Korean regime’s own part in bringing them about, there was nevertheless an acceptance that help was needed. The unprecedented appeal for outside assistance that brought in UN agencies and resident non-governmental organizations in the late 1990s showed that the South would help without preaching. No doubt the expense and complications of German reunification also gave pause for thought. If the two Germanys, which had not fought a savage war and were far richer, could not achieve a smooth reintegration, how could the two Koreas?

So Kim and Roh did not break off engagement as a result of “bad” behavior or outside criticism of “soft policies.” They accepted that it would take a long time to modify Pyongyang’s policies and that there were likely to be few expressions of thanks. Of course there was no instant transformation. But the new approach provided a window for other countries to establish relations with North Korea. In theory, it had long been the South’s policy to allow if not to encourage such relations, but the reality had been different. From 2000 onwards, that changed. Countries that had hitherto held back for fear of offending Seoul now found themselves encouraged to establish relations with Pyongyang.

Those that did so found a North Korea that seemed eager for change, although very careful about how that eagerness was expressed. But there was a readiness to do things that would have seemed improbable only ten years before. While never quite admitting that the policies pursued under Kim Il Sung and Kim Jong Il might have had defects, those of us working in the North between 2000-2002 found a willingness on the part of officials to admit that they needed assistance and that mistakes had been made. Examples included a vice-mayor who admitted that post-Korean War town planning had many defects that were only then becoming obvious. Officials were willing to admit that the country was in need of a whole range of economic and commercial skills that had hitherto been neglected. Perhaps most telling of all, a country that had responded to the changes in the former Soviet Union, Eastern Europe and China in the early 1990s by calling home all its overseas students now was most anxious to send students abroad once again.

Engagement was thus helping to open North Korean eyes to possibilities beyond juche, but unfortunately, even before the 2002 nuclear crisis, there was relatively little follow-up on these expressions of intent. Pyongyang found difficulty in matching students to the requirements of foreign universities and other training institutions. Some countries that established diplomatic relations preferred to concentrate on human rights issues to the exclusion of other matters. Since several of these were members of the European Union (EU), their approach inevitably affected the EU’s broad approach to North Korea. Even among countries that did not give predominance to human rights, goodwill was rarely transformed into sufficient funding to make a real difference.

That said, in the British case alone, we were able to fund several sessions of economics training, an English-language training program that put initially two-now four -British teachers into DPRK universities to train English teachers, and intensive English courses for a variety of North Korean officials. In addition, non-governmental bodies such as the BBC and Reuters conducted training programs for media staff in modern methods of news presentation and communication skills. Perhaps if the United States had been more supportive of its ally’s engagement policy these efforts would have made a difference. But as the relatively benign approach towards engagement of the Clinton years gave way to hostility under President George W. Bush after 2000 that too had an impact on how far countries such as Britain would support the sunshine policy.

It was South Korea’s approach to engagement that had the greatest impact. Seoul’s aid and other measures taken under the umbrella of the “sunshine” approach brought North and South into contact across many fields. During the period from 1998-2008, the North became known to South Korean citizens in a totally unprecedented way. The process had begun earlier, especially during the Roh Tae-woo presidency (1988-93), but the trickle of information about the North of those years became a flood. And it was not only information but actual contact with North Korea. For some, this meant tightly controlled tours to the Diamond Mountains (Mount Kumgang) or towards the end of the period, to Kaesong at the western end of the Demilitarized Zone. Limited though these were, they were still a glimpse into what had hitherto been unknown and feared. There were also signs that, as the North got used to the idea of such visits, it might open up a little more; the decision to allow the use of visitors’ own cars in March 2008 was one such indication, but there were several others.

Much more important were the wide range of government and non-governmental contacts. Relatively few North Koreans came South but the traffic in the other direction was enormous. On any given day, there were likely to be several thousand South Korean visitors in the North, dealing with aid, trade, cultural, educational and even religious exchanges-both the Protestant and the Roman Catholic churches in the North had regular South Korean officiating ministers as well as hymnbooks and prayer books produced in the ROK. South Korean journalists were also a not uncommon sight. Most of this activity may have been confined to Pyongyang, by not all of it was. South Koreans were visiting many parts of the country, especially in connection with agricultural assistance and other aid-related projects. Nobody was starry-eyed about these visits. South Korean visitors were watched and controlled. But they were able to learn a lot since they could speak and read Korean. If the projects agreed to at the October 2007 summit between Kim Jong-il and Roh Moo-hyun had been implemented by the incoming Lee Myung-bak government, there would have been a huge increase in these types of contacts.

No doubt engagement was expensive and sometimes the means used to bring it about were shady, but it was producing benefits. The South, and to some extent the rest of the world, now has a far better understanding of how North Korea works then it did before engagement began. Within the North, a large number of people have come to see their southern compatriots in a less hostile light and have some, even if limited, understanding of the economic and social structures of South Korea. Perhaps some of the assistance provided was diverted away from its original purpose, but enough rice and fertilizer bags reached areas far away from Pyongyang and enough people were willing to ask questions about the South to show that the impact of engagement extended beyond a small circle of ruling elite. Slowly, the policy was creating a group of people who could see benefits in remaining on good terms with South Korea and who had wider links with the outside world. Engagement has worked in other countries, most noticeably China, and I believe that it was beginning to work in North Korea. There was never going to be a speedy change in attitudes built up over sixty years, but stopping the process after ten was not a wise decision.

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Hermit economics hobbles Pyongyang

Wednesday, March 31st, 2010

Aidan Foster-Carter writes in the Financial Times about some poor decision-making coming out of Pyongyang:

Great Leader? Pyongyang’s fawning hagiography not only grates, but is singularly unearned. Even by its own dim lights, North Korea’s decision-making is going from bad to worse.

Last year saw two spectacular own goals. Missile and nuclear tests were a weird way to greet a new US president ready to reach out to old foes. The predictable outcome was condemnation by the United Nations Security Council, plus sanctions on arms exports that are biting.

Domestic policy is just as disastrous. December’s currency “reform” beggars belief. Did Kim Jong-il really fail to grasp that redenomination would not cure inflation, but worsen it? Or that brazenly stealing people’s savings – beyond a paltry minimum, citizens only got 10 per cent of their money back – would finally goad his long-suffering subjects into rioting? Forced to retreat, officials even apologised. One scapegoat was sacked – and possibly shot.

By his own admission, Mr Kim does not do economics. In a speech in 1996, when famine was starting to bite, the Dear Leader whined defensively that his late father, Kim Il-sung, had told him “not to get involved in economic work, but just concentrate on the military and the party”.

That awful advice explains much. Incredibly, North Korea was once richer than the South. In today’s world, this is the contest that counts. “It’s the economy, stupid” is no mere slogan, but a law of social science.

Having taken an early lead, Kim senior threw it all away. He built the world’s fourth largest army, crippling an economy that he refused to reform, viewing liberalisation as betrayal. His own personality cult was and is a literally monumental weight of unproductive spending.

Used to milking Moscow and Beijing, in the 1970s North Korea borrowed from western banks – and promptly defaulted. That was not smart; it has had to pay cash up front ever since.

Pyongyang also resorts to less orthodox financing. In 1976 the Nordic nations expelled a dozen North Korean diplomats for trafficking cigarettes and booze. In December a Swedish court jailed two for smuggling cigarettes. More than 100 busts worldwide over 30 years, of everything from ivory and heroin to “supernotes” (fake $100 bills), leave scant doubt that this is policy.

Yet morality aside, it is stupid policy. Pariahs stay poor. North Korea could earn far more by going straight. The Kaesong Industrial Complex (KIC), where South Korean businesses employ Northern workers to make a range of goods, shows that co-operation can work. Yet Pyongyang keeps harassing it, imposing arbitrary border restrictions and demanding absurd wage hikes.

Now it threatens to seize $370m (€275m, £247m) of South Korean assets at Mount Kumgang, a tourist zone idle since a southern tourist was shot dead in 2008 and the north refused a proper investigation. Even before that, Pyongyang’s greed in extorting inflated fees from Hyundai ensured that no other chaebol has ventured north. Contrast how China has gained from Taiwanese investment.

In this catalogue of crassness, the nadir came in 1991 when the dying Soviet Union abruptly pulled the plug on its clients. All suffered, but most adapted. Cuba went for tourism; Vietnam tried cautious reform; Mongolia sold minerals. Only North Korea, bizarrely, did nothing – except watch its old system crumble. Gross domestic product plunged by half, and hunger killed up to a million. Now famine again stalks the land. The state cannot provide, yet still it seeks to suppress markets.

All this is as puzzling as it is terrible. China and Vietnam show how Asian communist states can morph towards capitalism and thrive. Kim Jong-il may fear the fate of the Soviet Union if he follows suit. True, his regime has survived – even if many of its people have not. Yet the path he is on is patently a dead end. Mr Kim’s own ill-health, and a belated bid to install his unknown third son as dauphin, only heighten uncertainty. Militant mendicancy over the nuclear issue – demanding to be paid for every tiny step towards a distant disarmament, then backsliding and trying the same trick again – will no longer wash. North Korea has run out of road; the game is finally up.

What now? A soft landing, with Mr Kim embracing peace abroad and reform at home, remains the best outcome. But if he obdurately resists change, we need a plan B. The US and South Korea have contingency plans for the north’s collapse. So does China, separately. Tacit co-ordination is urgent, lest future chaos be compounded by a clash of rival powers – as in the 1890s. Koreans have a rueful proverb: when whales fight, the shrimp’s back is broken.

But Beijing will not let it come to that. China is quietly moving into North Korea, buying up mines and ports. Some in Seoul cry colonialism, but it was they who created this vacuum by short-sightedly ditching the past decade’s “sunshine” policy of patient outreach. President Lee Myung-bak may have gained the Group of 20 chairmanship, but he has lost North Korea.

Nor will Mr Kim nuzzle docile under China’s wing, though his son might. As ever, North Korea will take others’ money and do its own thing. In early 2010 new fake “super-yuan” of high quality, very hard to detect, started appearing in China. They wouldn’t, would they?

Read the full article here:
Hermit economics hobbles Pyongyang
Financial Times
Aidan Foster-Carter
3/30/2010 

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