North Korean Economy Watch

According to Yonhap:

The number of North Korean workers at a South Korean-run industrial complex in the North Korean border city of Kaesong rose 22 percent every month over the past one and a half years, the South’s Unification Ministry said Wednesday.  Production increased 36 percent every month due largely to a rise in the number of South Korean factories operating in the complex, according to the ministry.

As of Friday, a total of 6,859 North Korean workers, including 1,047 construction workers, were registered at the complex.

South Korea hopes to promote the Kaesong complex as a role model for inter-Korean economic partnership, while officials in Washington express concern over its possible negative impact on the multilateral efforts to end North Korea’s nuclear weapons program.

Economic Reform and SEZ as Survival Strategy of DPRK
PDF: Deok Ryong Yoon.pdf
Deok Ryong Yoon

Introduction to & implications of Gaesong Industrial Complex Project
PDF: kaesong.faqs.pdf
Ministry of Unification

Gaeseong Industrial complex: Past, Present and Future
PDF: Dong-geun Kim.pdf
Speech by Dong-geun Kim, Chairman of Gaeseong Industrial District Management Committee

Gaeseong Industrial Complex : Frequently Asked Questions (FAQs)
PDF: kaesong.faqs1.pdf
Ministry of Unification, ROK

From the Asia Times: 

The only currency used in the complex is the US dollar.

No foreign investors have yet signed up for the zone

Washington requires high-tech products destined for North Korea that include US intellectual property to undergo stringent export controls. This has irritated many in the South – particularly after the process delayed the transfer of telecommunications equipment. It also appears highly unlikely that Kaesong-built products will be included in a free-trade agreement between Seoul and Washington that is under negotiation.

Officials of the complex say they have assisted local villagers with heating briquettes and rice, but there is otherwise neither trade nor contact across the fence, indicating that the experience of capitalism is strictly insulated. This assumption is buttressed by relations inside the complex: despite talk of inter-Korean fraternity, social contact between Northern and Southern workers is non-existent.

While the railways between the two Koreas were reconnected in early 2004, theoretically linking Seoul and Sinuiju on North Korea’s Chinese border, it is uncertain when trains will start to run through Kaesong.

“There will be talks on opening the line in July, but it is not certain,” said a South Korean official at Dorasan Station, a giant steel-and-glass edifice on the southern side of the border. The lack of rail transport complicates his firm’s logistics costs, said Stafild’s Moon, whose head office is on the south coast of the peninsula, in Busan.
 

From the Seould Times:  

Working conditions for North Korean workers in the Kaesong Industrial Park have been well publicized.  What is less known is that North Koreans are working all over the world in isolated conditions to earn hard currency for their governent.

Experts estimate that there are 10,000 to 15,000 North Koreans working abroad in behalf of their government in jobs ranging from nursing to construction work. In addition to the Czech Republic, North Korea has sent workers to Russia, Libya, Bulgaria, Saudi Arabia and Angola, defectors say.

Almost the entire monthly salary of each of the women here, about $260, the Czech minimum wage, is deposited directly into an account controlled by the North Korean government, which gives the workers only a fraction of the money.

To the extent that they are allowed outside, they go only in groups. Often they are accompanied by a guard from the North Korean Embassy who is referred to as their “interpreter.” They live under strict surveillance in dormitories with photographs of North Korea’s late founder Kim Il Sung and current leader Kim Jong Il gracing the walls. Their only entertainment is propaganda films and newspapers sent from North Korea, and occasional exercise in the yard outside.

Kim Tae San, a former official of the North Korean Embassy in Prague, helped set up the factories in 1998 and served as president of one of the shoe factories until he defected to South Korea in 2002.

It also was Kim’s job to collect the salaries and distribute the money to workers. He said 55% was taken off the top as a “voluntary” contribution to the cause of the socialist revolution. The women had to buy and cook their own food. Additional sums were deducted for accommodation, transportation and such extras as flowers for the birthdays of Kim Il Sung and Kim Jong Il.

The women even had to pay for the propaganda films they were forced to watch. By the time all the deductions were made, each received between $20 and $30 a month. They spent less than $10 of it on food, buying only the cheapest local macaroni.

“They try to save money by not eating,” said Kim, the former embassy official. He says that his wife, who accompanied him on visits to the factory, was concerned that women’s menstruation stopped, their breasts shriveled and many experienced acute constipation. “We were always trying to get them to spend more on food, but they were desperate to bring money home to their families.”

Czech officials say the North Koreans are model workers.

“They are so quiet you would hardly know they are here,” said Zdenek Belohlavek, labor division director for the district of Beroun, which encompasses Zelezna and Zebrak, a larger town where about 75 North Korean seamstresses stitch underwear.

Belohlavek displayed a thick dossier of photos and vital statistics of the women, most of whom were born between 1979 and 1981. All their paperwork is in perfect order, and the factories appear to be in full compliance with the law, he said.
 

From the Standard (China) and LA Times:
3/2/2006

The Kaesong industrial park is only an hour from Seoul but it’s like traveling to the moon, writes Barbara Demick
It takes barely an hour to drive from downtown Seoul to the other side of the demilitarized zone, but the culture shock is such that you might as well be commuting to the moon.

Mobile phones, books, newspapers, magazines, videos, laptops, MP3 players and many other appurtenances of 21st-century life must be checked on the south side of the border.

Also best left behind are any wisecracks about the North Korean regime, or in particular its leader, Kim Jong Il.

“You’ve got to watch what you say,” said Kim Yi Gyeom, a South Korean telecommunications worker standing in a long line of Monday-morning commuters waiting to go north. “The spirit of openness has not come to North Korea yet.”

In the boldest experiment to date with inter-Korean cooperation, nearly 500 South Koreans are working side by side with more than 6,000 North Koreans in a year-old industrial park just north of the DMZ.

South Koreans are assuming all the financial risk, having invested more than US$2 billion (HK$15.6 billion).

The South would like to reduce political tensions and reap the benefit of inexpensive North Korean labor so its manufacturers can compete with China.

For the North Koreans, the Kaesong experiment is a way to build its economy with only the most limited dose of openness to the outside world. But the political risk is all for the North Korean government, which fears that contact with the better-fed, better-clothed South Koreans could endanger its grip on power.

“It is natural that there is a culture gap,” said Hwang Boo Gi, director of the Kaesong Industrial District, who led a group of foreign journalists through the park Monday.

“We are talking about the difference between capitalism and socialism.”

Or as a North Korean official, Han Cheol, said diplomatically, “We like to emphasize what we have in common, like our heritage, and not our differences.”

Nevertheless, the contrast is particularly glaring when coming from Seoul, the high-tech, neon-lit capital of the world’s 12th-largest economy, a mere 58 kilometers away. Around the industrial park, which lies outside the center of the city of Kaesong, there is little but desiccated rice paddies and yellow hills denuded long ago by people scratching for firewood. Nearby is an abandoned agricultural college, its crumbling facade decorated by a faded red sign trumpeting the achievements of the North Korean Workers’ Party. Scrawny goats graze outside two-story white- washed houses with windows made of plastic sheeting.

The industrial park itself is surrounded by 8km of perimeter fencing and poker-faced, rifle-toting North Korean soldiers.

Inside the fenced compound everything from the toilets to the machinery are South Korean-made, mostly the latest, state-of-the-art models. Although all 11 companies now operating in the 9.31-hectare pilot project are South Korean, the North Koreans keep a tight rein over the work environment. No South Korean money is accepted here, even at a Family Mart convenience store set up for the exclusive use of South Korean employees.

North Korean patriotic music in praise of Kim Jong Il blares over the loudspeakers of a futuristic warehouse where North Korean women in crisp royal blue uniforms stitch athletic shoes using brand-new sewing machines.

The monthly salaries of US$57.50 for each North Korean worker – regardless of position – are paid directly to the North Korean government, which in turn gives the workers about US$8, more than double the average monthly salary. South Korean companies have asked repeatedly to pay the workers directly and to give bonuses for better work, but have been refused.

Even New Year’s gifts such as extra food and warm clothing could be given only after elaborate negotiations to make sure everybody was getting the same.

South Koreans, many of whom live for weeks at a time in modular housing in the complex, have their own cafeteria and their own medical clinic, all off- limits to North Koreans.

Last year, stories appeared in the South Korean media about a purported Romeo-and-Juliet romance between a North Korean woman and a South Korean man. But people at Kaesong said the story was apocryphal because the North Korean women are never alone.

There have been countless cases of culture shock. When Shinwon held a fashion show in October – complete with disco music, strobe lighting and slinky models in denim mini-skirts – it offended the conservative sensibilities of some North Koreans.

For their part, some South Koreans were taken aback recently to see the North Koreans workers dancing and singing enthusiastically to an accompaniment of accordion music at a fuel- pump factory. It turned out they were rehearsing in anticipation of Kim Jong Il’s birthday on February 16.

As is often the case, many misunderstandings resulted from acts of kindness.

South Koreans have tried covertly to give medicine from their private clinic to ailing North Koreans.

One South Korean employee was accused of trying to bribe a North Korean soldier when he gave him two packages of instant ramen noodles, according to a military source.

In a more serious incident, a South Korean was caught trying to distribute Christian literature, which is strictly anathema in the communist country, the source said.

“Almost every day something happens, some small quarrel or misunderstanding. But because Kaesong is so important to Kim Jong Il, the North Koreans choose to ignore it,” said Lim Eul Chul, a scholar at South Korea’s Kyungnam University who has written extensively on Kaesong.

Both sides have ambitious plans for Kaesong. When fully completed in 2012, the enclave is supposed to encompass 64.75 square kilometers and employ 700,000 workers.

The biggest impediment to the project’s success might be North Korea’s ongoing nuclear weapons program and its hostility to the United States. The tensions have limited the nature of the products manufactured at Kaesong to low technology – with anything having potential dual use for military purposes prohibited – and mostly confined sales to the domestic market within South Korea.

Although Shinwon Apparel, for example, supplies clothing to Kmart and Wal-Mart, among others, those garments are largely produced in Vietnam. US officials, who earlier this month announced negotiations toward a free- trade pact with South Korea, have said they would not consider Kaesong products to be labeled “Made in South Korea.”

With no progress on the horizon in its long war of nerves with the United States, the North Koreans have no choice but to chum it up with South Korea. If they are merely holding their noses and tolerating the presence of the South Koreans for their money, they go to pains not to show it.

The well-disciplined North Korean cadres who were showing foreign reporters around Kaesong Monday all lavishly praised their South Korean counterparts.

You know you have arrived when you are covered by the Washingon Post:

Two Koreas Learn to Work as One: New Industrial Park Matches South’s Capital and Know-How With North’s Low-Cost Labor
By Anthony Faiola, Washington Post Foreign Service
Tuesday, February 28, 2006; Page A10

Here are the highlights:

Layout

• Kaesong Industrial Park is two-thirds the size of Manhattan.  Only a fraction of its real estate currently developed.  15 factories already operating. One is called Shinwon Textile Factory. (Source)
• A South Korean telephone company has installed the first 340 of 10,000 planned phone lines.  Because of the communist state’s chronic shortages of electricity, the South Koreans have had to run power lines across the border to serve their factories.  The goal (starting next month) is 154000 kilowats (source).
• Some company representatives concede that the North Koreans are not always ideal business partners.
• A tall green wire fence marks the zone’s 8.6-kilometer-long boundary (Source)
• South Korea is assuming all the financial risk, having invested more than $2 billion  (source). Kim Dong-keun, president of the South Korean Committee, which co-manages the zone, says the 489 South Koreans who work in Kaesong receive special training on interacting with North Koreans.   For South Korean managers, Kaesong is considered a hardship posting.  As a result, many of them receive as much as $2,500 extra pay per month (Source). No South Korean money is accepted here, even at a Family Mart convenience store set up for the exclusive use of South Korean employees (Source).
• 50 year leases were auctioned off last summer. On Average, there were 4 South Korean companies vieing for each spot. 

Labor Relations and Statistics

• After the first busloads of North Korean workers arrived at the gates 16 months ago, weeks passed before people from the two societies could even understand each other’s dialect.  They had to explain virtually every aspect of modern life to his fresh-faced communist charges — down to how to use the factory’s Western-style toilets.
• The workers put in long hours at often grueling tasks, but life here nonetheless seems a cut above the poverty that is common in most of North Korea. 
• Although the zone currently employs about 6,000 North Koreans here, officials in Seoul project that an additional 15,000 North Koreans will start work as more than 20 South Korean companies move in. By 2012, plans call for as many as 700,000 employees — 4.5 percent of North Korea’s entire workforce.
• Thousands of workers live in on-site dorms, while others arrive by bus from Kaesong. South Koreans are not permitted beyond a bright green perimeter fence that is guarded by armed soldiers and separates the complex from nearby towns.
• North Korean workers are paid a fixed salary of $57.50 a month. That is about 20 times less than the pay of a South Korean worker of the same skill level, but it is a welcome sum in North Korea.  It is unclear how much of that money actually goes to the North Korean workers. The dollar-denominated checks issued by the South Korean companies are paid to a North Korean government agency. Na Un Suk, director general of North Korea’s Central Special Economic Zone Control Agency, said the government makes deductions for room and board provided to the employees before paying them varying amounts in North Korean currency.  The Los Angeles Times reports that workers get $8/month.  About double the average salary (Source).
• Although South Korean managers have some say in promoting workers, they have little role in choosing who arrives on their doorstep. Many employees are from Kaesong city — the ancient capital of the Goryeo kingdom that first united much of the Korean Peninsula. But all are picked by officials from the North Korean government.
• North Korean workers are forbidden from any contact with South Koreans except when necessary on the job.  They enter and leave the zone through a single checkpoint manned by North Korean soldiers. (Source)
• Managers from South Korea live in single-story temporary quarters that resemble military barracks. Typically, they go home twice a month.  “It’s very difficult,” says Kim Ki Hong, general manager of a branch of the only South Korean bank in the zone. “We cannot go outside,” says Mr. Kim. “We are almost prisoners.”(Source). Southerners also have their own cafeteria and their own medical clinic, all off limits to the North Koreans (Source). 
• In response to queries about their wages, a young North Korean woman murmurs, “I cannot say anything,” and another says only, “We get enough.”
• Everyone here has at least a high school education. Many of them are college grads. But the most convenient is the fact that they all speak Korean. It’s easier to train them,” said Ryu Nam-Ryul, a section manager at Taesung Industry
• North Korean patriotic music in praise of Kim blares over the loudspeakers.

Taxes

• Gaesong has also exempted foreign companies from corporate income taxes in the first five years, and gives a 50 percent reduction for three more years. (source)
• Independent labor unions are banned.

Production

• Taesun Hata is exporting compact casings for Clinique and eye shadow holders for Bobbi Brown from its multimillion-dollar plant.
• Southern companies make shoes, textiles, auto parts and kitchen implements
• A branch of a major South Korean bank is open for business, as is a Family Mart convenience store staffed by two North Korean women.
• Inter-korean trade surged 50% since last year, over $1 billion.

Political goals

• The Zone is also key to South Korea’s strategy for lessening what is bound to be a massive economic jolt if it reunites with the North. North Korea’s per-capita income is roughly $1,800 a year, 10 times less than the South’s.
• Officials say Kaesong is also meant to keep on course a program of market-oriented restructuring that the North is undertaking in its domestic economy.
• South Korean companies have received low-interest loans and security guarantees from the South Korean government to locate in Kaesong.
• South Korea no longer has to go to south east Asia for manufacturing.  they can undertake low-cost production in North Korea and undercut Chinese prices.(Source).  It takes only three hours to deliver the products from Gaesong to the South Korean warehouse, whereas it would take more than one week from China.(source)
• “Our workers here are not motivated by material satisfaction. We are motivated by the fact that this is a national business project. We are one nation, and this is an important part of our unification process,” Na Un-Suk, director general of the Central Special Economic Zone Control Agency.

Future plans

• South Korea’s state-run Korea Land Corp. and Hyundai Asan, the North Korea business arm of Hyundai Group, said Tuesday they plan to build a hotel at an industrial complex in the North by June next year. The two companies will invite a private enterprise to construct the hotel to resolve a shortage of accommodation at the complex in the North Korean border city of Kaesong.  To that end, the state land developer and Hyundai Asan will set up a joint venture to take charge of the hotel, they said. (Yonhap)
• To grow as planned, the park will have to win access to world markets. South Korea hopes that products made here will be eligible to enter the United States under any free-trade pact that may be negotiated with the United States (Source).

I Updated the information on Kimsoft:

The DPRK UN Mission in New York does not issue any visas at all under an agreement reached with the United States. Visas to Americans are issued by the DPRK Embassy in Beijing. You may contact Mr. Kim Ryong Hwan (A representative in Beijing of the Korea International Travel Company, Fax 011-86-1-532-4862) for visa or travel information.
Non-Koreans can reach Pyongyang by train or air by way of Moscow or Beijing. Some Japanese and Koreans resident in Japan are allowed to come to Wonsan by ship.

1. Short-term teaching or other works in N Korea: A letter of recommendation or introduction from Graham Bell, the Eugene Bell Foundation, the Carter Center or a Christian church organization may enhance the chances. If you are a Korean compatriot, all you have to do is either to make a stopover at the UN Mission and identify yourself or to send a letter to the Overseas Compatriots Aid Committee in Pyongyang.

A. Contact the DPRK New York UN Mission by email or smail or phone or Fax or go to New York to visit the mission:

Permanent Representative of the Democratic People’s Republic of Korea to the United Nations
515 East 72nd Street, 38-F, New York, N.Y. 10021
Telephone: (212) 972-3106
FAX (212) 972-3154

B. Write a letter direct to his or her target university or institution in North Korea, offering to teach English, history, engineering and etc. Upon receiving a positive response or letter of invitation, you are to visit the North Korean Embassy in Beijing (Phone: 532-1186 visa section: 532-4148 or 6639).

2.  Travel to the DRPK:
*Koryo Tours: http://www.koryotours.com/
*I visited with the Korean Friendship Association: http://www.korea-dpr.com/

A. AIR KORYO, Flughafen Schoenefeld, D-12521, Berlin, Germany: Fax: +49 (0) 30 – 60 91 36 65.
B. Korea Publications Exchange Association, Ri Chang Sik, Fax: +850-2-3-814 632.
C. National Directorate of Tourism, Central District, Pyongyang, DPR Korea Tel: (2) 381 7201. Fax: (2) 381 7607.
D. Kumgangsan International Tourist Company, Central District, Pyongyang, DPR Korea, Tel: (2) 814 284. Fax: (2) 814 622.
E. General Delegation of the DPRK, 104 boulevard Bineau, 92200 Neuilly-sur-Seine, France, Tel: (1) 47 45 17 97. Fax: (1) 47 38 12 50. Telex: 615021F.
F. Regent Holidays UK, 15 John Street, Bristol BS1 2HR, Tel: (0117) 921 1711. Fax: (0117) 925 4866. 
G. David Hunter — Edwards and Hargreaves Holidays Ltd, Portland House, 1 Coventry Road, Market Harborough, Leicestershire, England LE7 7HG, Fax 01858 433427 Tel: 01858 432123
H. Mr. Pak Gyong Nam, Manager — SAM Travel Service, Korea International Travel Company, Central District, Pyongyang, DPR of Korea, Tel: 850-2-817201, Telex: 5998 RHS KP, Fax: 850-2-817607
I. North Asia Consultancy & Services Co, Ltd is in a position to organise business missions into NK for European businessmen.NACS is organising on a regular basis sectorial fact finding missions to North Korea on behalf of the European Union Chamber of Commerce in (South) Korea.

3. Information:
The European Union Chamber of Commerce : Tel : 822-543-9301~3; Fax : 822-543-9304; E-Mail : eucck@eucck.org

Young Koreans United of the USA, P.O. Box 12177, Washington, DC 20005-0677, tel. 202-387-2420

International Korean Alliance for Peace and Democracy, 2530 1/2 South Crenshaw Blvd., Los Angeles, CA 90016, tel. 213-733-7785.

Travel Time email, 1 Hallidie Plaza, Suite 406, San Francisco, CA 94102, USA ; phone +1-415-677-0799, fax +1-415-391-1856, 1-800-956-9327 (1-800-9-LOW-FARE) toll-free in the USA

Chugai (Phone: 81-3-3835-3654, Fax: 81-3-3835-3690) based in Tokyo. It is affiliated with Chongryun, the General Association of Korean Residents in Japan. It arranges package tours to Pyongyang every month.

The Kumgangsan International Group ( email or Web Page) handles investments in N Korea. This group also makes travel arrangements. It is operated by Ms. Park Kyung Youhn, a Korean-American woman, who is not associated with Chongryon.

Ryohaengsa Korea International, Pyongyang, Korea; Tel. (850) 2-817 201, Fax (850) 2-817 607

The DPRK Committee for the Promotion of External Economic Cooperation, Jungsongdong, Central District, Pyongyang. FAX 011-850-2-3814664 and Tel: 011-850-3818111,2,3 & 4.

4. Research and Other Scholarly Works: At present, no institution, center, school or university in the DPRK is ready for “official exchanges” with American counterparts. Such exchanges will likely come only after the two ‘enemy’ countries have signed a peace treaty and established diplomatic relations. However, Kim Il Sung University has established a sister rela tionship with Seton Hall University. American scholars and authors are allowed to examine North Korean archives on an individual basis. Contact the Society for Cultural Relations with Foreign Countries, Kim Il Sung University, the Party Revolutionaly History Institute or the Asia-Pacific Peace C ommittee.

5. Check with the DPRK UN Mission for the phone and fax number of other agencies: The DPRK UN Mission is not the only gate to North Korea. Americans and other foreigners are being invited to visit the DPRK by way of many other organizations in the States, Japan and other parts of the world.

North Koreans are being invited to visit the United States not necessarily through the good offices of the New York mission. Any American host can establish a direct access to North Korea by mail, fax, and phone or by personal courier.

Warning: There are ‘horror’ stories of bureaucratic bungling by the DPRK Beijing Embassy vis-à-vis invited American guests. They are partly true and partly untrue. A possible explanation is a poor communication between the prospective visitor, th e UN mission and the DPRK. The DPRK Embassy in Beijing makes it the iron rule not to issue a visa even to a carrier of a written invitation from a DPRK organization unless it has been instructed to do so by the Foreign Office in Pyongyang.

The prospective visitor is advised to make it double sure with the host organization or the UN mission that the host organization has arranged for issue of a visa through the Foreign Office and that a visa is ready in Beijing (Phone: 011-86-1-6532-1186 or 1189, FAX: 011-86-1-6532-6056. Visa Section: 011-86-1-6532-4148 or -6639).

Kyodo News:

China has reached an agreement with North Korea to let the private sector, rather than the government, take the initiative in providing economic aid to Pyongyang and to respect market principles, sources familiar with China-North Korea relations said Saturday. According to the sources, the market-based approach is contained in a cooperation agreement in economy and technology signed by the two countries when Chinese President Hu Jintao visited North Korea in late October.

One of the objectives of North Korean leader Kim Jong Il’s visit to China in January was to confirm this approach, the sources said.

The sources also said a cooperation agreement in economy and technology signed by a Chinese delegation led by Vice Premier Wu Yi during their visit to North Korea in early October is separate from the agreement with the same name signed during Hu’s visit later that month.

The earlier agreement calls on China to continue providing materials and technological cooperation for the Da’an Friendship Glass Factory near Pyongyang. It also allows North Korea to export glass products made at the factory.

According to the Korea Times, 02-10-2006, the Kumgang tourist zone is being expanded.  Here are some stats:

• The Extended tour zone will reach Wonsan (Where the Japanese Chongryun ships come in)
• There are plans to finalize a “master plan” of development for the area (lakes, nursing homes, beaches).
• Since opening in 1998, 1.2 million south Koreans have visited
• Hyundai Asan hopes to channel 2.3 trillion won ($2.37 billion) into the project through domestic and foreign investors.
• Besides the tour-related issues, the two sides also agreed on a payment of $400,000 to the three victims of a traffic accident that happened late last year. It wish I could track that $400,000.  It will end up in interesting places for sure.  The accident happened on Dec. 27 in the tourist area, and North Korea called at first for at least $1 million in compensation. In an earlier traffic accident that killed a North Korean soldier in June 2001, $6,000 in compensation was paid.

Asia Times
Lora Saalman
2/8/2006

On January 10, North Korean leader Kim Jong-il traveled in a luxury train to China’s Guangdong province to sample socialist-flavored capitalism. Just a few months earlier, the North Korean Workers Party introduced reform measures granting foreign investors tax cuts and allowing them to sell goods produced in North Korea without tariffs.

For an economy that ostensibly issued halting economic reforms in 1984, these new measures constitute a revolution, albeit one with Chinese characteristics. In accordance with its giant neighbor’s model, North Korean economic reform is predicated as an alternative to the instability of political liberalization. Unforeseen social and political shifts are to be cushioned by financial solvency to keep the regime intact. With China’s assistance and unofficial aid, sustainable growth may one day be achieved in North Korea. Yet a darker side to North Korea’s economic awakening remains.

Kim Jong-il’s visit comes on the heels of accounts of North Korean money-laundering in Macau and the US decision last June and again in October to freeze the assets of various North Korean companies and financial institutions. While many of these firms are beyond the reach of US sanctions, implied misconduct has already led to runs on the North Korean-affiliated financial institution Banco Delta Asia in Macau.

As allegations swirl of money-laundering through counterfeit cigarettes and currency, a less-known story has emerged on British American Tobacco’s previously undisclosed four-year-old joint venture in North Korea. It presents the dilemma of doing business in a country in desperate need of revenue but with a poor track record of allocating resources to its people. This cautionary tale begs the question as to where exactly Pyongyang’s joint-venture profits are going.

For North Korea, which lacks many of the basic laws for financial transparency and good governance, capital investments are more than economically precarious. Shared contact information and dubious management practices among North Korean companies are ubiquitous.

Daesong-BAT is one of a handful of Western joint ventures in North Korea. The far-reaching tentacles of its North Korean partner illustrate the complexity of verifying the background and connections of any North Korean entity. Like many of its compatriots, North Korea’s Sogyong General Trading Corp (Sogyong) boasts circuitous and often indirect ties to entities engaged in proliferation, international trade, shipping, and money-laundering. These indicators point to larger concerns as to whether joint ventures, particularly Western ones, can be manipulated by North Korea for illicit financing of the regime or even to sustain its alleged WMD (weapons of mass destruction) programs.

Joint ventures and front companies
In establishing Daesong-BAT, British American Tobacco teamed up with Sogyong General Trading Corp, a Pyongyang-based state trader best known for its carpet exports. Sogyong, however, also exports such products as handicrafts, furniture and agricultural produce, while importing machinery, electronics, fishing tackle, chemicals and fertilizer. It is not uncommon for North Korean state-run enterprises to deal in everything from machinery to fishing tackle. Yet eclectic product lists make trade in illicit drugs and weapons all the more difficult to track. Cigarettes are just one more product in the Sogyong export-import pantheon.

North Korean company product lists also rarely convey their full range of trade. Seemingly innocuous industries are often manipulated as front companies. Last year, for example, Japan’s Ministry of Economy, Trade and Industry (METI) listed what appeared to be an innocuous North Korean food manufacturer, Sosong Food Factory, for its participation in nuclear, missile, chemical and biological-weapons proliferation. Cigarettes, like food, have been used at times to mask the real objects being transferred. In one case, Japan in 2002 seized a Chinese vessel and found that the declared store of cigarettes on board actually contained drugs thought to have come from North Korea.

While not as licentious as drug or human trafficking, even the black-market trade of cigarettes could have a tangible impact on North Korea’s financing, as seen in Eastern European illegal cigarette rings. These factors highlight the danger of taking a North Korean food or even carpet manufacturer at face value.

North Korea’s network
Among the elements of obfuscation, the company name Daesong-BAT merits attention. Rather than combining or modifying the titles of the two partner companies to form Sogyong-BAT, Daesong-BAT combines British American Tobacco’s acronym with a name that could either point to North Korea’s Daesong district or Daesong General Trading Corp (Daesong). If it turns out to be the latter, Japan and other governments have prominently featured Daesong for its ties to missile and nuclear proliferation.

Incidentally, Daesong maintains one of the most extensive and convoluted North Korean networks, with more than 10 subsidiaries. It also is suspected of falling under Bureau 39, which earns foreign currency for North Korea. A direct connection between Daesong-BAT and the sinewy Daesong franchise has yet to be established but, as illustrated below, nothing is clear cut in North Korean business relations.

Because of the lack of transparency and convoluted nature of North Korean companies, contact information often serves as the first stencil for tracing overlap between industries. In the case of Daesong, the US Central Intelligence Agency’s Open Source Center follows the use of the same fax number to establish potential business and branch linkages. If the same logic is applied to Sogyong, another pattern emerges. Sogyong shares common fax numbers with at least two companies, Korea Foodstuffs Trading Corp (Foodstuffs) and Korea Kwail Trading Corp (Kwail). These companies in turn share fax numbers with nearly 100 companies in North Korea.

Among North Korean firms sharing contact information with Sogyong-linked entities, Japan’s METI and official European export monitors have listed at least six as end-users associated with North Korean WMD programs. In October, the US government targeted one in particular, Korea Ryonha Machinery Joint Venture Corp (Ryonha), freezing its assets under US jurisdiction and placing it on the US Specially Designated Nationals and Blocked Persons list. Ryonha is a prime example of the complex web of North Korean subsidiaries. Last June, the US Treasury Department also targeted the assets of its parent company Korea Ryonbong General Corp, formerly known as Lyongaksan, which heads five other US-designated entities.

Ryonha is not an aberration among companies converging with Sogyong. Among other Foodstuffs and Kwail-connected entities, Korean company databases list Korea Pyongyang Trading Corp as a distributor of methane gas derived from animal excrement. Apparently, effluent is not its only fetid source of income. The Japanese government has listed the very same company, along with subsidiaries of two other firms tracing back to Sogyong, namely Korea Ryonhap Trading Corp and Korea Jangsu Trading Corp, for nuclear, missile, chemical and biological weapons proliferation.

Proliferation networks may not be the only mechanisms at Sogyong’s fingertips. Contact information also links the two Sogyong-connected associates with at least four North Korean financial institutions. Among these, Koryo Bank and Korea Joint Bank have alleged ties to the now-infamous Banco Delta Asia in Macau. Banco Delta Asia’s own purported involvement in counterfeit-currency distribution and counterfeit-cigarette smuggling does not bode well for Daesong-BAT, no matter how convoluted their connections. Banco Delta Asia may have three degrees of separation between it and Sogyong, but in North Korea’s fishbowl of finance this does not preclude cooperation.

Banco Delta Asia is also reported to maintain a close business relationship with Macau-based Zokwang Trading, which its own vice general managing director claims is a part of North Korea’s Daesong General Trading Corp. Daesong, as mentioned earlier, has a pervasive proliferation record. It also has reported links to Changgwang Sinyong Corp (Changgwang), which has been repeatedly sanctioned by the United States for its missile-proliferation activities and sales to Iran and Pakistan. Zokwang in turn deals in missiles and nuclear-power-plant components, all the while maintaining a partnership with the notorious Changgwang. Combined with Sogyong’s branch in the joint \-venture hub Shenyang, China, even indirect ties to Macau suggest that Sogyong has the ability to tap into proliferation, industrial and financial networks in China and beyond.

Proliferation, industry and finance mean little without the means to transport goods and technology. Sogyong-associated entities Foodstuffs and Kwail share fax numbers with North Korea’s national airline Air Koryo, which has also been cited by official European monitors for proliferation. A 2003 Far Eastern Economic Review article even named Air Koryo as the transportation mechanism for Daesong’s suspected military assistance to Myanmar. Sogyong’s own shipping vessels Sogyong 1 and 2, which were detained in Japan on safety violations in December 2004 and January 2005, complete the final leg of the contact-linked proliferation, financing and shipment triangle. This network belies a much more intricate set of alliances than the domestic-consumption-based joint venture touted by British American Tobacco and Sogyong General Trading Corp.

Standards of business conduct
British American Tobacco’s website advocates transparency in international business and laudably eschews bribery, corruption, illicit trade, and money-laundering. In October, BAT executives further contended in The Guardian that the company’s North Korean cigarette joint venture fuels only domestic consumption, not exports to China or elsewhere. In spite of these reassurances, BAT is no stranger to the dangers of black-market cigarette production and transshipment. A February 2000 article in The Guardian even accuses BAT of complicity, by knowingly allowing illicit smuggling of its cigarettes to occur.

In the case of Daesong-BAT, British American Tobacco officials have admitted to knowing little of the company’s North Korean joint-venture operations. Ominously, BAT has stated that an unnamed Singapore division controls its North Korean joint venture. Lack of oversight combined with a dubious North Korean offshore mechanism for managing an ostensibly domestic industry raises significant warning signs. The incestuous relationship between state-run North Korean entities that share fax numbers of companies and banks listed for WMD procurement and money-laundering through counterfeit tobacco should also elicit concern. These are not simply dilemmas for British American Tobacco, but pose challenges to any companies forming joint ventures in North Korea.

Economic integration, as in China’s case, may bring North Korea more into step with international norms and standards. Ironically, engagement that is likely to lead to greater future transparency may also be manipulated for North Korea’s short-term illicit gains.

In 2003, the British government pressured BAT to close down its cigarette factory operations in the military dictatorship of Myanmar because of concerns over that country’s lack of human rights. Given the legion of obstacles impeding transparency in North Korea, BAT and other Western firms could be contributing to the worsening of more than human rights. They could be aiding and abetting illicit North Korean financing that is alleged to fuel Kim Jong-il’s slush fund and WMD programs.