North Korean Economy Watch

From Reuters…

[Naguib Sawiris, CEO] said he was “astonished” how quickly the North Korean authorities wanted the service to start and he had high hopes for business in the country.

“We firmly believe that in the next three or four years we will be having a couple of million subscribers there and we will be seeing ARPUs in the range of $12 or $15 (a month),” he added.

Sawiris said that of the $400 million the company plans to invest in North Korea over the next three years, about $200 million would probably come in the first year, with $100 million in each of the two subsequent years.

Read the full story here:
Egypt’s OT seeks 100,000 N Korean subscribers from May
Reuters
3/12/2008

A couple of days ago, we had an interesting exchange in the comments that I want to make sure readers have an opportiunity to see:
———————–

Werner Koidl Says: 
 
In that Asia Times report Dr. Petrov wrote:
“… Last year the Russian auto plant KamAZ opened its first assembly line in North Korea, specializing in the production of medium-size trucks named “Taebaeksan-96″. …”

I would be interested in more details about that KAMAZ truck assembly line in North Korea ! Where ?, joint venture ?, size ?
———————–

Leonid Petrov Says: 
 
Concerning the “Taebaeksan 96″ truck assembling plant, the KamAZ set it up last year (2007 or Juche 96) in the town of Pyeongseong. The terms of this deal with NK were really “friendly” and last year KamAZ was having no or very little profit. The production volume last year was very limited (45 or 48 trucks). However, it’s just the beginning of such cooperation.

There is one technician-representative from KamAZ who manages the assembling process. He stays in Pot’onggang HTL and commutes to Pyeongseong. Many North Korean drivers and technicians seem to be technically ignorant (i.e. not knowing how to change the engine oil, etc.), so they need a new technological culture to be introduced. Russians train them well and the North Koreans are grateful.
———————–

Gag Halfrunt Says:

Now that explains the brochure for the Taebaeksan 96 I’d noticed on the Korean Friendship Association’s exports page. I was wondering how anyone could be making money from sticking badges on KamAZes and trying to sell them on. In any case, the export potential for the Taebaeksan 96 must be close to zero, since anyone outside the DPRK who wants a KamAZ can buy one assembled by KamAZ itself.

Trying to drum up interest in the DPRK as an investment destination, the KFA say, “All business made directly with the government, state-owned companies. No middle agents.” This is amusing, because, on the Pyeonghwa car brochure on the KFA website, they’ve sneakily deleted Pyeonghwa’s own contact details and replaced them with the KFA’s email and web addresses. I think this qualifies them a “middle agent” standing between Pyeonghwa and any potential export customers…
———————–

Werner Koidl Says:
 
The link “brochure for the Taebaeksan 96″ given by Gag Halfrunt seems to indicate that the KamAZ Taebaeksan-96 is assembled in a joint venture with Ryongwang [Ryongbong] Trading Company of North Korea. Ryongwang Trading is also the joint venture partner of Pyeonghwa Motors (Unification Church) to assemble the “Whiparam” in Nampo. And Ryongwang Trading company is also business partner of “Kohas” company from Switzerland. And because of its connections to Ryongwang this Swiss company got in troubles with the US administration.

According to Business Week German auto parts manufacturer, Prettl, became the first non-Korean firm to start building a plant inside a joint inter-Korean factory complex in North Korea–breaking ground Wednesday.  Kim Min-kyung with the Kaesong Industrial District Management Committee claims the factory will be open in December and employ 550 North Koreans.

Other facts:

Two Chinese companies also signed contracts last year to run factories in the area but have not started construction, Kim said.

A total of 69 South Korean companies are currently operating in the zone, employing some 23,220 North Korean laborers, according to the management committee.

The full article can be found here:
German firm breaks ground in North Korea
Business Week
3/5/2008

Writing in today’s Asia Times, Dr. Leonid Petrov analyses the complexity of Russia, Rok, DPRK, and Chinese relations:

Russia and North Korea:

Territorial claims, in one form or another, involve almost all countries adjacent in this region with the exception of Russia and Korea. The Joint Russian Federation-DPRK Commission for the Demarcation of State Borders has recently completed its work by documenting and marking the 17-kilometer frontier. This strip of uninhabited and swampy land in the mouth of the Tumannaya (Tuman-gang) River plays an exceptionally important geopolitical role. It not only provides the two countries with land access to each other, but also prevents Chinese access to the East Sea (Sea of Japan).

China and North Korea: 

Here, some 50km north of the small port that forms the core of North’s Rajin-Seonbong Special Economic Zone, the interests of Russia and China are now at stake. Russia is rapidly repairing the railroad track, and China (in a similarly speedy manner) is constructing a new automobile highway, both leading from their respective borders to the port of Rajin. Russia, investing at least 1.75 billion rubles (US$72 million) into this project, seeks to strongly connect Rajin (and the rest of northern Korea) to its Trans-Siberian Railroad. China, in turn, hopes to divert the growing cargo traffic to its own territory, offering the efficient network of railroads for delivery of South Korean and Japanese goods to Central Asian and European markets. What position will the government of North Korea take in this clash of ambitions?

Russia and South Korea (energy and trade):

In 2007, the volume of the export of “black gold” from Russia to South Korea reached 38.13 million barrels (2.7 times more than in the previous year). The relative proximity of the Russian oil and gas fields is an attractive factor for Korean companies who actively search for alternatives to Middle East oil suppliers. This year South Korea will for the first time start importing natural gas from Russia. The expected volume of delivery during 2008 is 1.5 million tons (or 5.1% of South Korea’s annual demand).

and

Trade relations between Russia and Korea are steadily growing. According to customs statistics, last year Russia recorded the sharpest increase of South Korean imports (56.2% more than in 2006). Due to the inflow of “petro-dollars” the new class of nouveaux riches in Russia began actively buying Korean automobiles, cell phones, television sets and LCD monitors. South Korea exported to Russia goods worth US$8.1 billion (including $3.296 billion of automobiles, $859 million of mobile phone equipment, motor vehicles and spare parts worth $659 million). As for trade with North Korea, in 2006 Russia occupied third place after China and South Korea and absorbed 9% of the total $3.18 billion spent by the North on imports.

More on Russia/South Korea energy talk here. 

The whole article deserves reading here:
Russia lays new tracks in Korean ties
Asia Times
Leonid Petrov
3/5/2008

Details are starting to emerge on North Korea’s recent anti-corruption drive.   

North Korean authorities have been investigating the chief of a North Korean committee in charge of inter-Korean economic cooperation for months after seizing $20 million from his house, a report said Friday.

Quoting an unidentified Chinese source informed on North Korean affairs, the Dong-A Ilbo newspaper said Pyongyang authorities are intensifying their investigation into Jung Woon-eop and 80 other officials of the committee over where the money came from.

It is possible that this is just a good old fashoned purge.

It is also possible that this campaign is the first stage in a policy shift.

The full article can be found here:
NK Official Suspected of Embezzling Funds From Seoul
Korea Times
Jung Sung-ki
02-22-2008

At its height, North Korea’s socialist infrastructure was responsible for the vast majority of the people’s standard of living.  Ration coupons and large purchases (such as for a car or refrigerator) were all provided through one’s employer.  This is because society was vertically integrated, with state-owned companies and ministries providing a broad array of social services that are handled by a variety of agents in a capitalist society (food, housing, education, childcare, health care etc..). There was little room for markets, or even prices, in people’s lives.

Although this system only worked for North Koreans in large urban areas, and excluded those in smaller villages and the country side who were much more dependent on themselves, for the vast majority of North Koreans today that system (or social contract) is a distant memory.  Out of fiscal necessity it has been chiseled away over the years, and as a result the scope for individual entrepreneurship in both the public and private spheres is increasing.  I do not want to give the impression that capitalism is running wild, but when compared to the past, the control of the North Korean state over the lives of its people is diminished.

One practice which has been retained to some degree, however, is the distribution of gifts or special provisions on the birthdays of the two leaders, Kim il Sung and Kim Jong il.  The scale of one’s gift, however, allegedly depends on one’s rank in society.  A common farmer might get a new pair of socks.  A senior Worker’s Party official probably receives a good deal more.  One estimate puts the value of these special gifts at USD$20m. 

The origins of these gifts are mixed.  Some are donated by foreigners.  Some are imported by the leadership.  Others are made domestically by the people themselves.

According to a story in today’s Daily NK, creeping marketization - bringing with it an increase in price and quality discrimination,  has left many North Korean consumers less than impressed with this year’s gift offerings:

A North Korean source in Shinuiju said in a phone conversation on the 17th, “When looking at the goods provided this time around, the quality has gone up as a whole in contrast to the past. However, the citizens did not attach too much significance to the ‘Great General’s gift’ as in the past.”

The source relayed the public sentiment as “Goods more valuable than his gifts are all over the place in the jangmadang. A portion of the people has said, ‘Special provisions are not necessary. Just do not regulate the markets.’”

In Shinuiju, a bottle of luxury liquor, 2kg of tangerine, and two pheasants were provided to the party organization through the “special provision’ and a bottle of liquor and a modest amount of fruits such as apples and tangerines were given to regular organizations. The People’s Units received a bottle of liquor, a toothbrush, and a bar of soap and pre-school and elementary school students received five pieces of gum, two rice crackers, two packs of chips, and one pack of candy.

The source added, “Those receiving the ‘title of hero’ and the Secretaries in charge of the county parties were given boxes marked with the label ‘gift,’ but its contents are uncertain.”

Another source in Hoiryeong in a phone conversation on this day said, “A bottle of liquor, a bar of soap, and a bottle of toothpaste were provided through the February 16th holiday provision and the children received a pack of candy, two packs of chips, a pack of pea candy, two packs of rice crackers, and seven pieces of gum.”

He also expressed discontent, saying, “It is pitiful to have to wait in line in front of the stores through which provisions are handed out for a mere bottle of liquor and soap.”

In the Hyesan, Yangkang Province region, laborers working at state enterprises were given 3kg of Annam rice (wild rice) and a bottle of liquor and oil were given to average households.

North Korea, in time for Kim Jong Il’s birthday in 2007, provided around 10 food items and daily necessities, including liquor and beer, cider and rice tally, oil, chips, and gum, to civilians.

In 2007, 200g of chips, 200g of candy, 100g of rice snacks, and five pieces of gum were given to elementary school students. Due to the shortage in foreign currency, special provisions were not offered to average civilians.

A caveat to this story is that all of the data points are from the large cities on the Chinese border.  These cities have benefited the most from trade with China and in all likelihood are the most “ideologically contaminated” in the DPRK.  

Source:
Jangmadang Goods Are More Valuable Than the General’s Gifts
Daily NK
Choi Choel Hee
2/21/2008

Since Orascom announced at the end of January that it was going into the cell phone business in the DPRK, there has been a lot of follow up reporting which has flushed out a broader picture of the DPRK’s attempts to launch a mobile phone network.

Today Yonhap is reporting that Pyongyang will likely go live with the Orascom project in April, although on a piecemeal schedule:

The measure will affect only Pyongyang, the North’s capital, this time and gradually expand to cover other major cities in the communist country, the Tokyo Shimbun said, quoting an unnamed North Korean official in Beijing.

North Korea has prohibited its people from using mobile phones since a deadly explosion occurred at the Ryongchon train station near the North’s border with China in April 2004. Debris of a mobile phone with adhesive tape attached to it was reportedly found at the scene of explosion, leading the authorities to impose the sudden ban in the belief that the mobile phone could have been used as a detonator.

More details of the deal also emerged:

Cheo [an Orascom subsidiary] secured a 25-year license and will invest up to US$400 million in network infrastructure. The North Korean state company owns a 25 percent stake in Cheo, Orascom said.

How accessible will the  new phones be?

Choi Yeong-cheol, 43, who defected from North Korea in 2006, said that senior party and administrative officials as well as trade workers were given mobile phones for free in 2002. “But ordinary people have not even dreamed of using a mobile phone because it cost them 170,000 North Korean won,” Choi told Daily NK, a Seoul-based Internet newspaper. The figure of 170,000 won is big money considering the average monthly payment for ordinary North Korean workers is up to 3,000 won (US$1) now.

The full article can be found here:
N.K. to lift mobile phone ban in April: Japanese daily
Yonhap
2/18/2008

Update:
It seems opposition efforts to spare the South Korean Ministry of Unification were not entirely successful. Yonhap is reporting that even though the ministry will retain its name, much of the rest of it is on the chopping block.

Sources said that if the ministry is retained, its five divisions and one office may be reduced to a single office and three bureaus, with part of its work transferred to the other ministries.

The ministry’s five division headquarters — including unification policy, economic cooperation and cultural exchange — are likely to be reorganized into smaller bureaus, with public relations and information analysis to come under the direct control of the minister.

The office in charge of the Kaesong industrial complex may be turned over to the newly created Ministry of Knowledge-based Economy.

However, the ministry may retain control of inter-Korean dialogue headquarters, the inter-Korean transit office, and a settlement support team for people who have fled North Korea.  (Yonhap)

Although I personally favor an engagement policy with the DPRK, sending the signal that MoU standard practices will no longer be tolerated might actually encourage the DPRK to use donated funds and supplies in an acceptible way.  Remember: carrots AND sticks.  See the game theory here.  However, since the DPRK’s new game seems to play the US, China, Russia, and South Korea off of each other, some are concerned that pushing the DPRK too hard on accoutability and transparency in managing their donations might simply shift North Korea more firmly into China’s corner–which according to Lankov, they already have a strong incentive to do… 

Original Post: 2/8/2008
In the political shake up following the recent South Korean elections, incoming President Lee Myung-bak floated the idea of merging the Ministry of Unification (responsible for the North Korea protfolio) with the South Korean Foreign Ministry.  The story is here.

Today, Reuters is reporting that the Unification Ministry is here to stay.  Afterall, the first rule of bureaucracy is, “Why have one ministry when you can have two at twice the cost!” 

South Korean lawmakers have agreed to spare the ministry responsible for relations with North Korea and reject a call for its closure made by the president-elect, local media reported on Saturday.

The compromise allows the Unification Ministry to stay while lawmakers try to strike a deal to shut other ministries in a plan backed by Lee to streamline government, local media reported lawmakers as saying.

Critics say Lee’s proposal to close the ministry primarily responsible for relations with North Korea could send the wrong signal to Pyongyang, which has long accused Lee’s conservative party of plotting to keep the peninsula divided.

The Unification Ministry has been at the centre of criticism that the outgoing government had been too soft on the impoverished North, pouring aid across the border despite internationally condemned missile and nuclear tests. (Reuters)

The full article can be found here:
South Korea to keep ministry on North: media
Reuters
Rhee So-eui
2/8/2008

New gov’t to downsize Unification Ministry
Yonhap
2/17/2008

This morning I received an email from a reader at the Brookings Institution who shared an article by one of their visiting fellows.  Much of it was about US/DPRK foreign policy, but I thought the following excerpt was interesting from a social change perspective:

On a recent visit to Pyongyang, this author was impressed by the sheer scale of new economic phenomena in DPRK. In terms of variety of goods, activity, and scale, markets in North Korea’s central areas (less in the provinces) remind of Chinese provincial markets. Numerous restaurants serve good—and very cheap, by Western standards—food to customers flocking to them. New “service centers” (eundokwon), combining shops, saunas, and restaurants under one roof, have sprung up and are run by highly placed entities such as Party departments and “offices.” Every branch of the Party, military, and local authorities now operates trading companies. Real business managers have appeared, some engaged not only in the “shuttle” trade with China but in bigger projects (in construction, for example), and some corporations have amassed a considerable volume of business. Judging by the author’s experiences in the 1980s and 1990s, these “new Koreans” are much more realistic and open to contact with outsiders than was the case before. There are changes in the official line as well: North Korean economists explained that now, out of several hundred thousand products manufactured in the country, only several hundred are now centrally planned. For the vast majority of manufactured products, managers of the state-owned enterprises are given a free hand to determine their production targets and to get what they need through the “socialist wholesale market.”

Having witnessed the processes eventually leading to the denunciation of the command economy in the USSR, and the transition to a market-based economy, this author can testify that there are striking resemblances in certain aspects of contemporary daily life in the DPRK to the USSR in the 1970s and 1980s (the Chinese experience in the1980s, with private enterprise officially sanctioned, is less similar). At that time in the Soviet Union, a vast black market of goods and services began to form in major cities. Many of its dealers became (often after a prison term) the leading businessmen of the post-Soviet era.

For example, at that time there was no private property for apartments in Moscow or elsewhere, and no real estate market officially existed. But at the same time almost any Soviet in the course of his life would “change” one apartment for a better one, paying considerable sums of money to the former “owner.” Some shadowy dealers would buy apartments outright, bribing officials to get a “registration” (propiska), and many made a profession of acting as a “go-between.” Similar activities are sprouting like mushrooms around North Korea. A one-room apartment in Pyongyang is said to cost about US$5000, less in local areas. However, real estate in some small cities close to Pyongyang boast the same high prices, as various kinds of dealers and traders, who are not permitted to settle in Pyongyang, buy apartments there. Foreign currency flows freely and, like in the USSR, most things can be obtained for money. A Russian joke said: “if it is illegal, but very much desirable, it is not prohibited.”

The ground for developing market relations is well prepared. The “royal economy” serving the ruling class (Kim Jong-il’s immediate retinue and the top nomenklatura or kanbu), and a large part of the internationalized sector (joint ventures and free economic zones) operate on market principles. The next step, should the country’s leaders admit the need for developing the country and sustaining their power, should be “setting the rules of the game” by providing a legal framework for what already exists. For that, however, external security should be guaranteed to the regime—irreversibly and comprehensively. Only then will the hard-liners, who fear—with good reason—that reforms would invite subversion of the regime, be confident enough for real progress to take place. Nevertheless the words “reform” and “openness” (especially because of their “Chinese connotations”) are unacceptable to Pyongyang, and Kim Jong-il himself stated as much during his talks with Roh Moo-hyun in October 2007. Under the present leadership Pyongyang, any economic reforms would most likely never be called such and would take place in an unpublicized manner without discussion, which is not helpful in terms of public relations with the West and negative international sentiment about the regime.

The full article can be found here:
North Korea Now: Will the Clock Be Turned Back?

Georgy Toloraya, Visiting Fellow, Center for Northeast Asian Policy Studies
2/11/2008

The Chosun-Shinbo reports (via the Daily NK) ”North Korea can produce instant noodles again” because construction has been completed on Pyongyang’s newest (and largest) noodle factory, the Pyongyang Wheat Flour Factory.

“Starting this year, domestically produced instant noodles will likely be supplied to people on a large scale.”(Daily NK)

…signaling that the DPRK government still seems intent on re-launcing the collapsed Public Distribution System (which has floundered many times).

[The] Pyongyang Wheat Flour Factory is located in Samheong-dong of Mankyungdae District, in Pyongyang, and mainly produces wheat flour, cookie, noodle, and yeast. North Korea built its first noodle factory, Daedong River Instant Noodle Factory, with foreign capital in August 2000 along the Daedong River in Pyongyang.(Daily NK)

Last October Yonhap, reported that Hyundai’s 44,000-strong union donated US$553,800,  appx. $13 per worker, to help finance a corn noodle factory in Pyongyang.  This is likely the “older” Daedong River Instant Noodle Factory.  If this is the case, then Pyongyang has two noodle factories coming on line at about the same time.

The rest of the story:
Although the DPRK government is a newcomer to the noodle business, noodle production and consumption have been burgeoning in North Korea’s private economy, and there is supportive journalistic evidence that the business now suports those on the lower rungs of the  economic ladder (see here, here, here, and here).  Small scale noodle production requires little capital, so it is a natural fit for those who have nothing but have taken to supporting themselves. 

The opening of new government-operated food processing plants is tantamount to a “re-nationalization” of a “privatized” industry in the DPRK.  Past reports claim that noodle sales earned private vendors between 900 to 1,600 won.  Now these vendors, who operate at the fringes of North Korea’s semi-legal private economy, will at a minimum, be forced to compete with “free” or heavily subsidized government operators. 

What will be the result?  On the pessimistic side, we could claim that the DPRK government is attempting to monopolize the food supply to control the population (as it has in the past).  On the other hand, their ambitions might be more modest and they are only looking to establish some form of carrot they can point to as legitimization of the government’s leadership.

From an economic reform perspective, however, North Korea needs fewer government-run noodle factories and a better business environment for noodle entrepreneurs. 

The full stories can be found here:
North Korea Can Produce Instant Noodles Again
Daily NK
Park Hyun Min
2/12/2008

Hyundai Motor union leaders visit N. Korea for noodle project
Yonhap
10/31/2007