North Korean Economy Watch

According to an article in the Choson Ilbo, Koryolink has attracted nearly 50,000 subscribers since launching.  Most surprisingly, they claim that members of the Worker’s Party are not allowed to use the phones.  (I am not sure if I believe that).

According to the article:

Orascom, the Egyptian telecom firm that runs it, plans to expand the service area from Pyongyang to the whole of North Korea by the end of this year, VOA said. The operator is poised to start HSPA service at the request of foreigners in North Korea who need to use wireless high-speed internet there, the report said.
 
Currently, officials of the North Korean Workers’ Party or the government are reportedly banned from using mobile phones for security reasons. Ordinary North Korean residents, whose monthly pay is about 4,000 North Korean won (around US$30), cannot afford the service due to the high price of handsets, which cost at US$300-500, and the subscription fee.

“We understand that mobile phones are used chiefly by foreigners, wealthy people, and trade functionaries,” a South Korean government official said.

North Korean phone users buy prepaid phone cards and can send text messages. The North started the European-style GSM service in Pyongyang and the Rajin-Sonbong special economic zone in November 2002 but suspended it after an explosion at Ryongchon Railway Station in April 2004.

Further information: 

1. The Economist Intelligence Unit on Orascom (joint venture partner in Koryolink).

2. Here is a very informative older post on Koryolink. Make sure to read the information in the comment section.

3. Regarding the claim that party members are not allowed to purchase Koryolink service: In February, Martyn Williams gave us an interesting update on Koryolink–after only two weeks of sales.  This story notes, “But while Koryolink’s first customers might not have high-profile official jobs, they are among the more wealthy in society and price, particularly of the handsets, stands as an obstacle to greater penetration.”

4. The previous mobile network, set up by a Thai subsidiary in 2002, is still in operation.  I know that North Korean VIPs and visiting journalists have been using this network since 2002 (despite the wide media coverage of this system being closed down).

5. If this story is true, it would imply that 1 out of every 60 Pyongyang residents has a phone (assuming pop of 3 million).  Additionally, if Koryolink sold 6,000 units in their first two weeks last February, they would have to sell nearly 9000 new units/month on average to reach a total of 50,000 today.  Does that seem reasonable?  Can anyone track down the original VOA sotry on which the Choson Ilbo story is based?

Read the full Choson Ilbo story here:
Some 50,000 N.Koreans Use Mobile Phones
Choson Ilbo
7/31/2009

From YouTube:

(Click on image to see video)

According to the video description:

This was PyongSu’s introduction to donor organisations and individuals that have been purchasing pharmaceuticals abroad and shipped them to North Korea. PyongSu’s promotional presentation explained to them why they should place their orders with PyongSu rather than with pharmaceutical companies abroad.

As PyongSu had no budget to mandate a professional advertising company with the task its managing director Felix Abt made the concept, the script and produced it in-house towards the end of 2005, with the help of North Korean IT and designing students and their Canadian trainer Ian Lee as well as teacher Michael P. Spavor, then giving language courses in Pyongyang, who was the “voice” in this clip. Thus, this unique advertising clip was made in its entirety in Pyongyang (and by people who are not advertising professionals). Check it out and add your comment!

Longer videos on investments in the DPRK can be found here.

According to Yonhap:

A South Korean automaker operating in North Korea said Wednesday it has posted its first net profit and remitted part of it home, the first southbound money transfer by an inter-Korean venture.

Pyeonghwa Motors Corp. made a net profit of US$700,000 for the fiscal year ending in February and sent $500,000 to its headquarters in Seoul via a bank account in Hong Kong, its spokesman Roh Byoung-chun said.

The automaker began production in 2002 as a joint venture between North Korea and the Unification Church of South Korean Rev. Moon Sun-myung, who was born in the North. Its plant in Pyongyang produces sedans and small buses with some 340 employees, and its customers are mostly local businesses.

Roh said it took a while for North Korea to approve the remittance, which was made through a South Korean lender, Woori Bank, in Hong Kong in late May.

“For North Korea, $500,000 is a large sum of money. It is not used to the capitalist idea of making investments and retrieving profits. We believe they pondered deeply before giving approval,” he said.

Pyeonghwa sold 652 units last year, while North Korea took $200,000 for its 30 percent share in the venture, he said. The company says profits are picking up, with this year’s sales already surpassing 740.

North Korea’s own automaker, Sungri Motor, was established in 1958 and mostly produces cargo trucks.

Pyeonghwa’s production is not influenced by political tensions or South Korea’s ban on cross-border shipments, he said, as raw materials and parts are imported from Europe and China. The ban was enforced after North’s rocket launch in April, with the exception of goods going to a joint industrial complex in the North’s border town of Kaesong, where 109 South Korean small firms operate.

“The remittance is symbolic. They are having a hard time in Kaesong, and many went bankrupt in Mount Kumgang (the North Korean tourist resort),” Roh said. “We hope this can bring hope to people doing business in North Korea that anyone can go there and can bring back profits.”

Officials from the South Korean Unification Ministry said inbound money transfers from North Korea are not restricted, although outbound remittances are strictly monitored and prohibited in some cases. It is the first time a South Korean company has sent profits from sales in North Korea, they said. Other businesses investing in North Korea, including those operating in the Kaesong park, sell their goods in South Korea and elsewhere.

South Korea has put three North Korean firms, including a bank, on its blacklist under a U.N. resolution that bans financial transactions with North Korean entities suspected of aiding the country’s nuclear and missile development.

Read the full artilce below:
S. Korean automaker in Pyongyang sends first business profit home
Yonhap
Kim Hyun
7/15/2009

According to the Wall Street Journal:

The Pyeonghwa spokesman didn’t disclose revenue figures but said last year’s vehicle sales were just over twice the 2007 level. The company has already sold more cars this year, 742, and expects to sell more than 1,500 for the full year, the spokesman said.

The performance is the culmination of an 18-year effort that began when church founder Rev. Moon Sun-myung met North Korea’s then-ruler Kim Il Sung in Pyongyang to propose several business ventures. In 1999, the church spent $55 million to build the auto factory in the port city of Nampo, on North Korea’s west coast. The Unification Church, based in South Korea, has a number of investments in tourism, construction and trade.

Since completing the factory in 2002, Pyeonghwa has imported partially built cars, in a form called knockdown kits, from manufacturers such as Italy’s Fiat SpA and China’s Brilliance Automotive Holdings Ltd.

Pyeonghwa completes the cars and puts its own nameplate and brand names on them. In 2003, its first full year of operation, the company sold 316 cars.

North Korea’s government is a partner in the company and took about 30% of the profit.

When it first started production, the company touted North Korean dictator Kim Jong Il’s role in naming several cars. One sport-utility vehicle, built from the design of Fiat’s Doblo model, was named by Mr. Kim as the Ppeokkugi, or Cuckoo.

Pyeonghwa, like other companies that do business in North Korea, faced enormous difficulty moving its money out of the country. Many Chinese businesses resort to buying commodities in North Korea with their profits, then exporting them to China to be sold for Chinese currency.

The motor company worked from February to May to move its money from North Korea, seeking permission from the North’s central bank, the spokesman said.

Read the full article below:
Pyeonghwa Sells in North Korea
Wall Street Journal
Sungha Park
7/16/2009

Read other Pyonghwa stories here.

Here is the location of Pyonghwa’s factory near Nampo.

Barbara Demick has an informative article in the Los Angeles Times.  The whole piece is worth reading but here are some themes and excerpts.

Market restictions ordered

In the markets of Kilju, a city of 100,000 near North Korea’s eastern seacoast, the ruling Korean Workers’ Party has ordered the removal of Chinese-made cookies, candies and pharmaceuticals.

Even soybeans, many articles of clothing and shoes are now forbidden.

It is all part of a great leap backward taking place in the secretive autocracy. North Koreans interviewed in China in recent weeks say that the regime of Kim Jong Il has made a concerted effort to roll back reforms that had over the last decade liberalized the most strictly controlled economy in the world.

… 

So many Chinese goods are now taboo that markets stock only about 35% of the merchandise previously available, some say.

Import substiution policy implemented?

“They want to promote our own products made in North Korea, but since everything is ‘made in China,’ there is nothing to buy,” said Kim Young Chul, a civilian working for the North Korean military who had come to China to sell wild ginseng on behalf of his employer.

Exports curtailed

Kim Chol Hee, a trader from Yanji, a Chinese city near the border with a large ethnic Korean population, said it was harder now than at any time in the 10 years he’s been in business to import from North Korea.

“I used to bring in squid, crab, steel parts from Chongjin. We can still buy seafood, but the North Korean government won’t let us buy steel,” he said Kim. “They say they need to keep all their resources for themselves.”

Restrctions inefective

Kilju residents have not dared to hold public protests against the restriction. But the Korean Workers Party nonetheless might be fighting a losing battle. Much of the trading is done by people with powerful connections in the provincial government and the military. Many state-owned enterprises do illegal trading to raise cash for their operations.

For example, trader Kim Young Chul says he is responsible for raising about $900 each year for his work unit by selling ginseng, while he and his partners keep any additional profits.

“I have a lot of freedom. They don’t dare ask me too many questions in North Korea, because I work for the ministry,” said Kim.

Just as quickly as the Korean Workers’ Party issues a decree, people find a way to circumvent it. Vendors banned from the market bring out their mothers and grandmothers, while secretly running the businesses from behind the scenes. Others sell banned good from their homes, or simply stash it behind other merchandise.

“If you want to buy cosmetics in Kilju, you still can find them, but they are usually hidden underneath the table,” Lee said.

Once a loyal member of the Workers’ Party, Lee said she had remained devoted to Kim Jong Il up to her departure from North Korea in May, vowing that she would return home as soon as she got money for her family.

“Even the day I left, I was singing songs about Kim Il Sung and Kim Jong Il in my house,” said Lee. “Now that I’ve come to China, I’m not so sure.

Read the full article here:
North Korea moves to restrict economy
Los Angeles Times
Barbara Demick
7/5/2009

From China Business News:

Q: Koryo Tours has built its business by providing tour trips to North Korea. Why did you choose North Korea, and how tricky was it to get the business started?

A: In 1993, Joshua Green and I were approached by a North Korean colleague (that Josh had studied Chinese with at the Beijing Foreign Language University in 1998 and Nick played football with in 1993) who, after returning to Pyongyang had worked in the national travel company. At that time, it was a real fledgling travel industry (they only opened to western tourism in 1987) and less than 50 western tourists visited per year. We started going every month but with very few tourists, mainly driven by fascination, realisation that we had incredible access and the fun of working with some amazing Koreans. During the famine, we worked with aid agencies and continued tourism which brought in a steady amount of work for our Korean colleagues. in the past five years, DPRK tourism have seen growth, and we now take just under 1,000 tourists a year – about half of all western visitors. With my colleagues Simon and Hannah, we make sure that tourists have the best access possible to the country and people. Having specialised in one country for 16 years, it really does mean we are literally the only experts in this destination, and for every tourist we have taken it rates as one of their most amazing experiences.

Q: What effect does North Korea’s aggressive stance on defense have on your business – do people become more or less interested in visiting when it tests a nuclear bomb or fires a missile?

A: Every few weeks, North Korea makes the news for one reason or another, usually a negative reason of course. However, North Korea remains one of the safest and most fascinating countries in the world to visit. For those who are of the opinion that seeing a country for yourself is more valuable than watching the interpretation on the world news, then we provide them that access. In addition, as we accompany the tours, we provide an insight into the country that is difficult for a visitor to interpret. Our clientele are generally very worldly and aware and interested in what is going on, I think the DPRK being in the news for any reason puts it on people’s mental map and thus makes more people visit rather than being scared off.  

Q: North Korea is a pretty ‘left-field’ travel destination. What have been the key approaches to marketing your company, both locally and internationally?  

A: Our reputation has been established because we provide excellent service and we really do make sure that any visitor to Korea will have the time of their lives. We have a company responsibility to engage with the Koreans and much of our work is involved in cultural exchanges, film making and charity projects. I think this aspect of our work comes across to potential clients who see we really are more than a travel agency. We rely heavily on word of mouth and a great deal of our tourists know someone else who has been before, also we get a good number of repeat visitors as we don’t simply run the same tour over and over again. Being honest, doing the best job possible and maintaining good contacts with our previous clients are critical. This is how we keep a good reputation which we see as being the key to selling our product.  

Q:  Are you planning to diversify to other locations beyond North Korea – and if so, how do you choose new destinations?

A: Since 2006, we have been running twice-yearly tours to Turkmenistan, which is a fascinating and amazing place to go. In addition to this, in 2010, we are planning on offering a wider range of tours to places such as Tajikistan (for Persian New Year – when they hold a Buzkashi event), to the Tumen river area including Yanji in China, the North Korean free trade zone of Rajin-Sonbong, and Far Eastern Russia (around Vladivostok), also a tour to the North Western Caspian Sea region including Volgograd (once known as Stalingrad) and the mysterious republics of Kalmykia and Dagestan. All are remarkable, highly-interesting, and unique places that we think our discerning clients will be interested in. North Korea remains the focal point of our company, but these other destinations fit well in the mould of visiting unusual but interesting places.

Although I have never visited the DPRK with Koryo Tours, I did travel to Turkmenistan and I recommend it.  That trip launched my interest in Central Asia, and I quickly followed it up with visits to Iran and Tajikistan.

Read the full story here:
BizTalk Interview: Nick Bonner, Founder of Koryo Group
Gary Bowerman
6/27/2009

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-6-16-1
6/16/2009

The amount of inter-Korean exchange has shrunk considerably this year, as tensions between the North and South continue to mount. According to the ROK Customs Administration’s inter-Korean trade office, cross-border transactions between January and April of this year fell 24.8 percent from 2008; trade amounted to 426.35 million USD, down from 566.92 million USD during the same period last year. South Korean imports were down only 9.5 percent, at 260.19 million USD, but exports to the North amounted to a mere 59.4 percent of the amount sent last year, recording 166.17 million USD. 54.9 percent of these goods (by value) traveled across the border by passing through Dorasan Station; 32.8 percent went through Incheon Harbor; 6.4 percent through Busan Harbor, 1.6 percent through Sokcho Harbor; and 1.1 percent passing through Goseong.

In April, with the North’s launch of a long-range missile in spite of the opposition of the international community, inter-Korean trade dropped to 69.2 percent of last year’s level, falling to 105.53 million USD. In fact, inter-Korean trade fell relative to the same month in the previous year eight months straight, beginning in September of last year.

With last month’s sudden nuclear test and South Korea’s subsequent joining of PSI, inter-Korean trade is expected to continue to wither in the latter half of the year. The amount of trade seen from January to April of this year is equivalent to 23.4 percent of the total trade for last year (1.82078 billion USD), and even if the current level of trade is maintained for the rest of the year, it is expected to amount to a mere 70 percent of what was traded in 2008.

Inter-Korean trade had previously been recording significant growth; in 1999, during Kim Dae Jung’s ‘People’s Government’, inter-Korean trade was worth only 328.65 million USD, but began to climb, growing more than five-fold by 2008, topping out at 1.82078 billion USD last year. However, after the launch of the current government, the amount of goods imported by the North from the South began to fall; exports to North Korea in 2008 were worth 883.41 USD, 145.15 million less than in 2007.

North Korean companies involved in processing-on-demand, agriculture and fisheries work have been part of Pyongyang’s trade ambitions, and these companies have also been hurt by the freeze in inter-Korean relations, with dozens of businesses facing closure, and many more severely hit by the North’s shrinking trade.

Stephan Haggard and Marcus Noland
East-West Center Working Papers
Economics Series, No. 104
Download paper here (PDF)

Abstract:
Despite North Korea’s turn away from economic reform and the constraints of the second nuclear crisis, the country has in fact become more economically open. But it has emphasized closer economic relations with China and other trading partners that show little interest in political quid-pro-quos, let alone sanctions. Yet the U.S. can still exercise economic leverage by going aggressively after third-party financial intermediaries. This particular form of sanction does not require multilateral coordination, since foreign banking institutions that conduct significant business in the United States have a strong interest in avoiding institutions that the United States Treasury has identified as money laundering or proliferation concerns.

There is some evidence that North Korea moderated its missile proliferation activities during periods when rapprochement with the United States, and to a lesser extent Japan, was a priority, but in the absence of such interest and as legitimate trade, investment, and aid dry up, the incentives to intensify proliferation activities increase.

The internal organization of the North Korean economy has important implications for any policy seeking transformation via engagement. The economy is structured in such a way that outside economic ties are still largely monopolized by stateowned enterprises and other gatekeepers, such as the military. Under such circumstances, the precise design of engagement policies requires very close scrutiny. Even nominally commercial relations can be exploited if the North Korean counterparties believe that they are ultimately political in nature, subsidized and thus vulnerable to blackmail. If economic ties are truly commercial in nature, those choosing to trade and invest with North Korea do so at their own risk. Under these circumstances, private actors will make economic decisions fully factoring in political risk, and North Korea will bear the costs if it chooses to renege on commitments or fails to provide a supportive policy environment.

Paper prepared for the conference on “North Korean Nuclear Politics: Constructing a New Northeast Asian Order in the 21st Century,” University of Washington, June 4-5, 2009. We would like to thank the Smith Richardson, MacArthur, and Korea Foundations for financial support and Jennifer Lee for research assistance.

UPDATE: A shorter version of this paper can be found here.

According to Yonhap:

Trade between South and North Korea plunged nearly 25 percent in the first four months of this year amid growing tensions on the Korean Peninsula, a report showed Tuesday.

Inter-Korean trade amounted to US$426.35 million during the January-April period, down 24.8 percent from $566.92 million a year earlier, according to the report by the Korea Customs Service.

The decline comes as tensions mounted after North Korea fired a rocket on April 5, prompting the U.N. Security Council to unanimously condemn the move. The North responded by kicking out outside nuclear inspectors and quitting six-party denuclearization talks.

Trade between the two Koreas, which amounted to $328.65 million in 1999, surged more than five-fold to $1.79 billion in 2007 when leaders from the two sides met for the second time. Last year, trade inched up to $1.82 billion.

Experts say that trade is expected to fall further in months to come as tensions are still running high after the North conducted its second nuclear test last month in defiance of repeated warnings by the international community and recently sentenced two U.S. journalists to 12 years in a labor camp for illegally entering the country.

In addition, we pointed out earlier this month that the South Korean government had barely touched the funds it appropriated for inter-Korean projects in 2009.

Finally, although inter-Korean trade has floundered this year, the DPRK’s trade volume reached a record US$3.8 billion in 2008, due largely to its trade with China.  

Read the full Yonhap story here:
Inter-Korean trade tumbles amid growing tensions
Yonhap
Koh Byung-joon
6/9/2009

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-6-4-1
6/4/2009

As inter-Korean relations continue to worsen, cooperative projects and humanitarian aid efforts have practically ground to a halt, leaving inter-Korean cooperation funds almost untouched.

According to the report “South-North Cooperation Fund Statistics” released by the Ministry of Unification on May 31, the South Korean government budgeted just over 1.508 trillion Won (1.2 billion USD) to fund inter-Korean cooperative projects in 2009, but as of the end of April, only 1.8 percent (26.919 billion Won) had been spent.

Some projects originally granted funds include financing for the construction of an East Sea line inter-Korean import facility and joint-use yard (8.795 billion Won); capital loans for Hyundai Asan economic cooperative projects (5.739 billion Won); NGO aid to the North, including nutritional supplements for children and soybean oil from the Catholic Seoul Archdiocese (2.933 billion Won); loans to cover expenses of the Kaesong Industrial Complex (KIC) Management Committee (2.08 billion Won); and the construction of a KIC General Support Center (2.444 billion Won).

Use of this fund has hit a low water mark, in part because 800 billion Won allocated for rice, fertilizer and other humanitarian aid has not been spent. A ministry official stated, “Rice and fertilizer aid can only proceed according to an agreement between North and South Korean officials following a request from North Korea, but this year, there was no request from North Korea, and therefore the amount of cooperative funding spent was low.

The South-North Cooperation Fund distributed 674.409 billion Won in 2005, 470.995 billion Won in 2006, 715.734 billion Won in 2007, and 231.205 billion Won last year.

If the North Korean government is given to casually breaching its economic, political, and military contracts and agreements, the prospects of serious foreign direct investment in the country look increasingly grim.

Last week the North Koreans canceled their agreements and contracts with the South Korean government which laid the ground rules for the most significant joint-economic project, the Kaesong Industrial Zone.

This week they surprisingly announced that they are no longer bound to the 1953 armistice! According to the Washington Post:

North Korea announced Wednesday that it is no longer bound by the 1953 armistice that halted the Korean War, the latest and most profound diplomatic aftershock from the country’s latest nuclear test two days earlier.

North Korea also warned that it would respond “with a powerful military strike” should its ships be stopped by international forces trying to stop the export of missiles and weapons of mass destruction.

This is bad news for ordinary North Koreans as it will only serve to increase the risks and costs of investing in the DPRK…or at least this is what a simple analysis would predict.

As we have seen recently, however, North Korea has received significant investment in the last few years.  Additionally, the DPRK’s international trade volume (excluding South Korea) continues to grow.

How is this possible?  The North Koreans are not canceling any agreements and contracts with China or Chinese companies (as far as we can tell).

UPDATE: Chinese fishermen seem to have been affected:

“Chinese fishing vessels have begun retreating from NLL (northern limit line) waters since yesterday. We are working to find out if this is based on North Korea’s request,” Yonhap news agency quoted an unnamed South Korean army source as saying.

Read the full stories here:
North Korea Issues Heated Warning to South
Washignton Post
Blaine Harden
5/27/2009

Chinese ships quit North-South Korea border: report
Reuters (via the Boston Globe)
Lee Jin-woo
5/28/2009