North Korean Economy Watch

Choson Ilbo
7/13/2005

It is the afternoon of July 1, and seven trucks carrying iron ore are lined up at the customs house in the border town of Tumen, in China’s Yanbian Korean Autonomous Prefecture, waiting to clear customs with their North Korean cargo. The trucks are laden with so much ore that it is a wonder they can support it all.

“These days, there’s a lot of iron ore coming in from North Korea,” a customs official muses. “Maybe they’re indiscriminately shipping out unprocessed ore because they’ve sold everything else worth selling.”

At the Musan Iron Mine further up the Tumen River at Musan, North Hamgyong Province, it looks like the ore is being sucked into a Chinese black hole. On July 5, some 10 13-ton Chinese trucks laden with ground iron ore from Musan were heading to towns in the Yanbian Korean Autonomous Prefecture like Nanping, which faces Musan across the river, and Chungsan. Chinese trucks are also busy climbing the hills near the Musan mine. The project to develop the Musan mines is China’s largest investment in North Korea, with the country’s Jilin Province saying in December it would invest 4 billion yuan (about US$483 million) into the mines, which had been inactive. Ground iron ore imports started full-scale this year.

The skyrocketing trade between the North and China including in underground resources started with Pyongyang’s economic reforms in 2002.

According to statistics from China’s Customs General Authority, China accounted for 25 percent of North Korea’s total foreign trade in 2002, but the figure rose to 33 percent a year later and to 39 percent last year. Meanwhile, Japan — North Korea’s third largest trading partner — dropped from 13 percent in 2002 to 7 percent last year, while South Korea’s share of North Korea trade has been decreasing.

Lee Myong-suk is a member of the city council of Yanji, a town busy handling a great deal of trade between China, North Korea and South Korea. “There has been more and more trade traffic coming from North Korea via Dandong on the Yalu River and the Yanbian area on the Tumen River,” she says. “It’s a combination of North Korea’s economic difficulties and China’s demand for raw materials.”

As North Korea’s economic dependency on China grows, there are mounting concerns that the impoverished country could one day be reduced to a de-facto Chinese province. Prof. Nam Seong-wook of Korea University smells a rat. “China’s investment in North Korea, which doesn’t have even a properly constituted market, appears to be motivated by political objectives rather than economic incentives,” he says.

Korea Times
Na Jeong-ju
6/9/2005

South Korean companies setting up operations in the Kaesong industrial complex face difficulties due to a North Korean obligation that they must purchase insurance policies from a North Korean state-run firm.

North Korea demands that South Korean firms have insurance against accidents with a North Korean state-run firm, but they question whether it is financially stable enough to cover all possible accidents.

According to related regulations set up by North Korea last November, South Korean firms in the Kaesong industrial complex must buy insurance policies from North Korean firms. If South Korean companies didn’t follow the rule, they had to pay $10,000 in fines.

South Korean firms regard this rule as unfair.

“We have to buy insurance from a North Korean company despite its inability to cover possible accidents,’’ said an official of a company in the Kaesong complex.

“We have asked the South Korean government to correct this problem because we don’t trust North Korean companies.’’

According to sources, the Unification Ministry, the Financial Supervisory Commission and the Korea Non-Life Insurance Association (KNIA) will hold a meeting today to discuss the matter. The South Korean government has been aware of the problem faced by South Korean companies, but it has delayed notifying the issue to North Korea, the sources said.

“South Korea should have a consultation with North Korea to address insurance matters,’’ a source said. “North Korea may be active in correcting the problem, but it may demand something in return.’’

Currently, a total of 15 South Korean companies have signed contracts with Hyundai Asan, a North Korean business arm of Hyundai Group, to set up a factory in the Kaesong complex. Hyundai Asan has the exclusive rights to develop the Mt. Kumgang tourism complex and the Kaesong complex under agreements signed in 2000.

“South Korean companies have asked the government to check the financial status of the North Korean insurance firm, but they have received no answer,’’ a KNIA official said. “In case of accidents, insurance firms must conduct investigations and check the financial status of policyholders. In this sense, we believe North Korean insurance companies are not capable.’’

North Korea has only one insurance company run by the government, but South Korean companies have little information about it.

Asia Times
Andrei Lankov
12/4/2004

A creeping revolution, both social and economic, is under way in North Korea and it seems there’s no turning back. For decades, the country served as the closest possible approximation of an ideal Stalinist state. But the changes in its economy that have taken place after 1990 have transformed the country completely and, perhaps, irreversibly.

For decades, Pyongyang propaganda presented North Korea as an embodiment of economic self-sufficiency, completely independent from any other country. This image sold well, especially in the more credulous part of the Third World and among the ever-credulous leftist academics. The secret of its supposed self-sufficiency was simple: the country received large amounts of direct and indirect aid from the Soviet Union and China, but never admitted this in public. Though frequently annoyed by such “ingratitude”, neither Moscow nor Beijing made much noise since both communist giants wanted to maintain, at least superficially, friendly relations with their small, capricious ally.

But collapse of the Soviet Union made clear that claims of self-sufficiency were unfounded. From 1991, the North Korean economy went into free fall. Throughout 1991-99, the gross national product (GNP) of the Democratic People’s Republic of Korea (DPRK) nearly halved. The situation became unbearable in 1996, when the country was struck by a famine that took, by the best available estimates, about 600,000 lives. The famine could have been prevented by a Chinese-style agricultural reform, but this option was politically impossible: such a reform would undermine the government’s ability to control the populace.

The control on daily lives was lost anyway. What we have seen in North Korea over the past 10 years can be best described as collapse of what used to be rigid Stalinism from below. In the Soviet Union of the late 1950s and in China of the late 1970s, Stalinism-Maoism was dismantled from above, through a chain of deliberate reforms planned and implemented by the government. In North Korea the same thing happened, but the system disintegrated from below, despite weak and ineffectual attempts to keep it intact.

In the 1960s, North Korea was unique in being the only nation in the world where markets were outlawed. The retail trade in a strict sense almost ceased to exist since virtually everything, from socks to apples, was distributed through an elaborate public distribution system with money payments being rather symbolic. The rations depended on a person’s position in the intricate social hierarchy, which eventually became semi-hereditary. In Kim Il-sung’s North Korea, there was almost nothing that could be sold on market since production outside the state economy was almost non-existent.

Unlike governments of other communist countries, until the late 1980s the North Korean government did not even allow its farmers to cultivate kitchen gardens – the individual plot was limited to merely 20-30 square meters, hardly enough to grow enough chili pepper. This was done on purpose. In many other communist countries, farmers had bigger plots and made their living from them, ignoring their work obligations to the state-run cooperative farms. Without their own plots, farmers would work more for the state – or so believed the North Korean government. In the utopia constructed by Kim Il-sung, every single man or woman was supposed to work for the state, and was rewarded for his and her efforts with officially approved rations and salaries.

In 1969, Kim himself admitted that the anti-market policy had been a failure. Thus private markets were gradually legalized, but remained small and strictly controlled. However, as late as late 1980s, markets were still considered inappropriate for a “socialist paradise”. They were something to be ashamed of, so they were pushed to the margins of the city. Until the early 1990s, most markets were in places more or less hidden from view, inside residential blocks and behind high concrete walls. In Pyongyang, the main city market was set up under a huge viaduct at the easternmost part of the North Korean capital, as far from the city center as possible.

However, the economic disaster of 1991-95, and especially the subsequent famine, changed the situation. Markets began to spread across the country with amazing speed. From 1995-97, nearly all plants and factories ceased to operate. The rations were not issued anymore: in most areas people still received ration coupons but these could not be exchanged for food or other rationed goods. Only in Pyongyang and some other politically important areas did food continue to be distributed. But even there, the norms were dramatically watered down. In such a situation, the ability and willingness to engage in some private business became the major guarantee of physical survival.

The government also relaxed the restrictions on domestic travel. Since around 1960, every North Korean who ventured outside his native county was required to have a special “travel permit” (an exception was made for one-day travel to neighboring counties). However, in the mid-1990s, the authorities began to turn a blind eye to unauthorized travel. It is not clear whether it was a deliberate relaxation or just inability to enforce regulations when the state bureaucracy was demoralized. After all, a bribe of some US$5 would buy such a permit from a police officer.

The tidal wave of small trade flooded the country, which once came very close to creating a non-money-based economy. People left their native places in huge numbers. Many sought places where food was more available while others enthusiastically took up the barter trade, including smuggling of goods to and from China. Women were especially prominent in the new small businesses. Many North Korean women were housewives or held less-demanding jobs than men. Their husbands continued to go to their factories, which had come to a standstill. The males received rationing coupons that were hardly worth the paper on which they were printed. But North Korean men still saw the situation as temporary and were afraid to lose the trappings of a proper state-sponsored job that for decades had been a condition for survival in their society. While men were waiting for resumption of “normal life”, whiling away their time in idle plants, the women embarked on frenetic business activity. Soon some of these women began to make sums that far exceeded their husbands’ wages.

The booming markets are not the only place for retail trade. A new service industry has risen from the ashes: private canteens, food stalls and inns operate near the markets. Even prostitution, completely eradicated around 1950, made a powerful comeback as desperate women were eager to sell sexual services to the newly rich merchants. Since no banking institution would serve private commercial operations, illegal money lenders appeared. In the late 1990s they would charge their borrowers monthly interests of 30-40%. This reflected very high risks: these lenders had virtually no protection against the state, criminals and, above all, bad debtors.

In North Korea, which for decades was so different, this meant a revolution. The new situation undermined the government’s ability to control the populace. People involved in the new market activities are independent from (or inured to) subtle government pressures that had ensured compliance for decades. One cannot promote or demote a vendor, transfer him or her to a better or worse job, nor determine his or her type of residence (though admittedly, most people still live in the houses they received when the old system was still operating).

The growth of new markets also undermined some pillars of old North Korean hierarchy. Of course, many people who became affluent in the new system came from the old hierarchy – as was the case in most post-communist countries. Officials or managers of state-run enterprises found manifold ways to make an extra won. These managers often sold their factories’ products on the market. But many hitherto discriminated-against groups managed to rise to prominence during this decade. The access to foreign currency was very important, and in North Korea there were three major groups who had access to some investment capital: the Japanese-Koreans, Chinese-Koreans and Korean-Chinese.

The Japanese-Koreans moved into the country in the 1960s (there were some 95,000 of them – with family members, children and grandchildren, their current number can be estimated at 200,000-250,000). These people have relatives in Japan who are willing to send them money. Traditionally, the authorities looked at Japanese-Koreans with suspicion. At the same time, since money transfers from Japan have been a major source of hard currency for Pyongyang, their activities were often tolerated. This particular group even enjoyed some special rights, being privileged and discriminated against at the same time. When the old system of state control and distribution collapsed, Japanese-Koreans began to invest their money into a multitude of trade adventures. It did not hurt that many of them still had the first-hand experience of living in a capitalist society.

Another group were people with relatives in China. The economic growth of China meant that the relatives could also help their poor relatives in North Korea. In most cases, this was not in the form of money transfers, but assistance in business and trade. The local ethnic Chinese were in an even better position to exploit the new opportunities. For decades, they have constituted the only group of the country’s inhabitants who could travel overseas as private citizens more or less at their will. Even in earlier times, the ethnic Chinese used this unique position to earn extra money by small-scale and part-time smuggling. In the 1990s, they switched to large operations. There is an irony in the sudden economic advance of these groups. For decades, their overseas connections have made them suspect and led to systematic discrimination against them. In the 1990s, however, the same connections became the source of their prosperity.

Until recently, the government did not try to lead, but simply followed the events. The much-trumpeted reforms of 2002 by and large were hardly anything more than the admission of the situation that had been existing for a few years by then. The official abolition (or near-abolition) of the public distribution system did not count for much, since this system ceased to operate outside Pyongyang around 1995.

But the North Korean economy has indeed come a long way from its Stalinist ways. Now the government has neither money nor support nor the political will to revive the Stalinist-style central economy. There is no way back, only forward. Stalinism is dead. Welcome to capitalism, comrades!

From KCNA:

Regulations of Insurance in Kaesong Industrial Zone Adopted

Pyongyang, October 11 (KCNA) — Decision No. 35 of the Presidium of the DPRK Supreme People’s Assembly “On the Adoption of the Regulations of Insurance in the Kaesong Industrial Zone” dated September 21, Juche 93 (2004) has been published. The decision says the regulations were adopted and the Cabinet and organs concerned of the DPRK are to take working measures for their implementation. 

The regulations consist of 28 articles.

The mission of the regulations is to strictly establish the system and order in the work of insurance in the Kaesong industrial zone so as to help toward stabilizing the business activities and life of those who reside and stay there.

The regulations are applied to the enterprises, branches and offices established in the Kaesong industrial zone.

They are applied also to the south Koreans, overseas Koreans and foreigners who stay and reside in the industrial zone.

First foreign practice is a lure to investors : Law firm allowed in Pyongyang
Associated Press (via Herald Tribune)
Andrew Salmon
9/8/2004

North Korea has allowed the establishment of the country’s first private law firm as part of its efforts to attract international investors, according to a principal in the new venture.

Hay, Kalb & Associates opened its office on Kim Il Sung square in Pyongyang on Aug. 15, according to Michael Hay, who owns the firm with a North Korean partner.

The establishment of a partly foreign-owned law firm in North Korea is a rare instance where the Communist state is more open than its capitalist neighbor to the south.

South Korea remains closed to all foreign legal entities.

“The North Koreans recognize that foreign investors need a comfort level in the legal environment,” Hay, a British lawyer turned business consultant, told foreign journalists recently.

“Many foreign companies think it’s a dirt-poor country legally. It’s not. They are really revising laws.”

So far, there has been no official confirmation of the new firm by the North Korean government.

The firm has a dozen local lawyers and plans to focus on foreign companies seeking opportunities in North Korea.

“We are looking at two main areas,” Hay said. “The legal area for foreign

investors, and transparent accounting, bookkeeping and repatriation of funds.”

Foreign companies seeking to do business in North Korea have previously had to rely on legal advisers provided by the government, as no private law firms exist.

Hay said the North Korean authorities hoped that the establishment of Hay, Kalb and Associates would be a stage in the arrival of a completely foreign-owned, international blue chip law firm in Pyongyang.

Hay said international law firms that have flirted with entering North Korea have pulled back in recent years because of the recurrent crisis over the country’s capability to produce nuclear weapons.

Foreign lawyers working in South Korea were skeptical of the new firms prospects. “This sounds like a great romantic adventure,” said Brendon Carr, an American lawyer working for Seoul’s Aurora law firm.

Hay said, however, that business activity in the North was on the rise.

“Last time I was up there, I counted over 1,200 vendor stalls in Pyongyang, using the local currency, not dollars,” Hay said. “And reforms aren’t over; there are more coming.”

He cautioned, however, that reform had its detractors: “Young Turks are not always popular.”

Other foreign visitors have noted changes since economic reforms announced by North Korea in 2002.

“You see a lot of Chinese investment now, and Chinese are there for profits,” said Jean Jacques Grauher, Secretary General of the European Union Chamber of Commerce in Korea, which maintains offices in Seoul and Pyongyang. “There is more money circulating now, and there is a clear law on repatriation of funds,” he said.

The most promising business areas for foreign investors are agriculture, infrastructure development and power generation, Grauher said.

He noted, however, that major foreign investment is unlikely until North Korea is approved to receive financial assistance from international bodies such as the Asia Development Bank.

Areas where North Korea has core skills are animation and software, as well as textiles, Grauher said.

South Korea, Asia’s third-largest economy, maintains a legal market that is closed to foreign firms. Foreign lawyers working for South Korean law firms are titled “legal consultants.”

UK lawyer opens firm in Pyongyang
BBC
http://news.bbc.co.uk/2/hi/business/3634274.stm
9/7/2004

Betting on the further liberalisation of North Korea’s economy, a UK lawyer is opening a law firm in Pyongyang to advise investors doing business there.
Hay, Kalb Associates, which was set up by Mike Hay and the North Korean government, started business in August.

The firm offers legal advice, accounting services and help with repatriating funds from the North.

“[The North Korea government] realises they need a comfort level on the part of foreign investors,” Mr Hay said.

‘Opportunities’

North Korea is currently locked in dispute with its neighbours and the US over its nuclear programme.

Investors there have to wade through red tape, put up with power cuts and surveillance, amid widespread criticism of North Korea’s human rights record.

Some observers also wonder if money really can be made there.

But two years ago, the country did introduce economic reforms, including price and wage liberalisation.

Mr Hay said there are more reforms to come and that he is already advising a Western European firm though he declined to give its name. He added that there were rewards for those prepared to take the risk.

Areas of interest include tourism, mineral extraction and energy software.

Hay, Kalb Associates employs about 12 North Korean lawyers, all graduates of the Kim Il-sung University.

The company’s offices will be located in Kim Il-sung square in the central government complex.

Mr Hay, whose contacts with the North date back to 1998, said the level of legal expertise in the country is high.

“People think it’s a dirt track country in terms of law but it’s not,” he told foreign correspondents in Seoul.

KIEP has published the North Korea Development Report 2003/04 (follow the link to download all several hundred pages!)

Summary: As a result of North Korea’s isolation from the outside world, international
communities know little about the status of the North Korean economy and its
management mechanisms. Although a few recent changes in North Korea’s economic system have attracted international interests, much confusion remains as to the characteristics of North Korea’s recent policy changes and its future direction
due to the lack of information. Therefore, in order to increase the understanding of readers in South Korea and abroad, KIEP is releasing The North Korea Development Report in both Korean and English. The motivation behind this report stemmed from the need for a comprehensive and systematic investigation into North Korea’s socio-economic conditions, while presenting the current status of its industrial sectors and inter-Korean economic cooperation. The publishing of this second volume is important because it not only supplements the findings of the first edition, but also updates the recent changes in the North Korean economy. The topics in this report include macroeconomics and finance, industry and infrastructure, foreign economic relations and inter-Korean economic cooperation, social welfare and science & technology.

This report also covers the ‘July 1 Economic Reform’ launched two years ago and
subsequent changes in the economic management system. The North Korea
Development Report helps to improve the understanding of the contemporary North
Korean economy.
Table of Contents  
 
Part I Macroeconomic Status and Finance
Chapter 1 Current Status of the North Korean Economy and Its Prospects
Chapter 2 National Financial Revenue and Expenditure
Chapter 3 Banking and Price Management

Part II Industrial Management and Problems
Chapter 4 The Industrial Sector
Chapter 5 The Agricultural Sector
Chapter 6 Social Overhead Capital
Chapter 7 Commerce and Distribution Sector
Chapter 8 The Defense Industry

Part III International Economic Activities
Chapter 9 Foreign Economic Relations
Chapter 10 Special Economic Zones
Chapter 11 Inter-Korean Economic Relations

Part IV Social Security and Technology Development
Chapter 12 Social Security and Social Services
Chapter 13 Science and Technology Sector

Part V The Recent Economic Policy Changes
Chapter 14 The Contents and Background for the Recent Policy Changes
Chapter 15 The Features and Problems of the Recent Economic Policy Changes
Chapter 16 Prospects and Future Tasks of the July 1 Economic Reform  

BBC
Lucy Jones
4/13/2004

“Got any nuclear weapons for sale?” is the response Briton Roger Barrett usually gets when he tells people at Beijing cocktail parties that he invests in North Korea.
The country’s admission to a nuclear weapons programme and its listing on George W Bush’s “axis of evil” means most people are staying well away.

But Mr Barrett, 49, a former troop commander in the British army who has 10 years experience of doing business in North Korea, recently opened a branch of his consultancy firm, Korea Business Consultants, in Pyongyang.

A self-confessed “business adventurer”, he says there is growing interest in the country after Chairman Kim Jong-il introduced economic reforms in 2002.

It’s like China in the eighties… The market reforms are very evident. It’s an exciting time to join the market.

Robert Barrett, Korea Business Consultants 
He is also the enthusiastic publisher of what must be North Korea’s only business publication – the DPRK Business News Bulletin – which features some of the 250 companies he advises.

“It’s like China in the eighties… The market reforms are very evident. It’s an exciting time to join the market,” he says.

Mr Barrett is not alone.

Even in the middle of a nuclear crisis there are foreign investors in the country, and their numbers are increasing.

They say North Korea is a mineral rich country that needs everything and insist they have to get there first.

They also believe the 2002 economic reform is for real and that the country is gradually moving towards becoming a market economy.

Poverty

The little data there is on the country’s economy is hardly encouraging, though.

There has been a devastating famine and the UN says malnutrition is still widespread.

There are chronic heating and water shortages, and most North Koreans are paid less than £5 a month.

The country also has an appalling human rights record.

A BBC documentary on the country’s gulags this year contained allegations that chemical experiments are being carried out on political prisoners.

Meanwhile, the US says it is “highly likely” that North Korea is involved in state-sponsored trafficking of heroin.

In the political arena, the second round of six-nation talks aimed at resolving the nuclear crisis ended in Beijing in February without agreement, which means US and Japanese sanctions will remain in place.
‘Communism’ tourism

But the foreign entrepreneurs in North Korea are not put off.

Some are helped by UN employees who have worked in Pyongyang (among the few people to have had contact with the regime there) and many have a track record in China.

Pack a torch, conduct business meetings on the street to avoid big brother listening in and have plenty of “Asian patience” for the endless red-tape, they advise.

An Austrian company is reportedly buying pianos from the North Koreans, a French television station uses North Korean artists to produce cartoons, while a Singapore-based firm is developing forestry and tourism.

The Singaporeans intend to offer “adventure” stays on their North Korean forestry plantations.

Meanwhile, Western tourist agencies are gearing up to offer the last chance to see communism in action, and Fila and Heineken have reportedly entered into sponsorship deals with the North Korean regime.

North Korean labour

A German, Jan Holtermann owner of the computer firm KCC Europe, is putting North Korea online.

He hopes that by being there first he will be able to eventually tap into North Korean computer talent.

The country’s small number of internet users currently dial-up to Chinese providers, a costly process at about £1 a minute.

Mr Holtermann’s customers, who he hopes will number 2,000 by the end of the year, will have unlimited access for £400 a month.

As only a few North Koreans are permitted to have telephones, and as the internet service is costly, Mr Holtermann expects his customers to be government ministries, news agencies and aid organisations.

He has invested £530,000 in the venture, intending to get first pick when North Korean software programmers come onto the market.

“They are very talented,” he says.

“It’s this capacity we want to sell in Europe.”

The parcel delivery company DHL has operated in Pyongyang since 1997, when it was invited there by the government, and now has North Korean light manufacturing, textile and beverage companies on its books.

It sees itself as contributing to the country’s “slow but increasingly visible” economic reform programme.

British consultants

Former bank employee Mr Barrett is convinced North Korea is opening up much quicker than people think.

There are opportunities in banking, minerals, agriculture and telecommunications, he insists.

“There is the odd story of something going wrong,” he says.

“But when you walk around you notice construction going on.

“The people are feeling a change.”

High level contacts

But how to do business with one of the most isolationist regimes on earth?

Contacts are essential, say businessmen.

Though even knowing a North Korean minister is not enough, says Gerald Khor of Singapore-based forestry company Maxgro Holdings.

“You have to go above the ministers to the cabinet. You don’t have to know a member but you need to know people who can influence them,” he says.

“It is very important to get the favour of the dear leader (Kim Jong-il). Because when he says something, it gets done.”

Through a former UN employee, Maxgro got Kim Jong-il’s attention and has invested $2m in forestry, agreeing the state gets 30% of the profits.

“Kim Jong-il is an environmentalist,” Mr Khor says.

“We are confident we’ll get a return.

“We have dwindling supplies and this is high quality wood.”

To locate the forests elsewhere would cost much more, he adds.

Forced to change

Economic reforms introduced by the government in 2002 are seen as the first move away from central planning since the country adopted communism in 1945.

The government has been forced to change in order to survive, especially now it can no longer barter with Eastern Europe and the former Soviet Union, experts say.

“There is no real option not to carry out these reforms,” says UK-based Keith Bennett, who has taken trade missions to Pyongyang.

“But people don’t know where they will lead.

Chinese leaders have impressed on Kim Jong-il that there can be economic reform without fundamental political change.”

Way up on North Korea’s border with Russia and China is the Tumen economic zone, which was established in 1991 with UN help to lure investors.

The project has only had limited success and may indicate the type of problems those investing elsewhere in North Korea may face.

The North Korean section of the zone, Rajin-Songbong, hosts foreign-run hotels, telecommunications and restaurants, but that is about all.

“The North Koreans have sometimes been very co-operative and sometimes not, maybe because of policy change,” says Tsogtsaikhan Gombo, from the UN’s development agency.

“They were also disappointed when they didn’t see the investment.”

Vibrant Chinese economic zones nearby have put up fierce competition.

But even opening the door just slightly to let in capitalism has greatly improved the lives of the 150,000 people living in the zone, says Mr Gombo.

And many foreigners insist that small investments elsewhere in the country may have similar results.

From the Office of the National Counterintelligence Executive:

North Korea: Channeling Foreign Information Technology, Information to Regime Goals Pyongyang is working with Koreans abroad and other foreign partners in information technology (IT) ventures, sending software developers overseas for exposure to international trends, granting scientists access to foreign data, and developing new sources of overseas information in a bid to develop the economy. Cellular telephones and Web pages are accessible to some North Koreans, while foreigners in Pyongyang have access to foreign television news and an Internet café. While such steps are opening windows on the world, however, Democratic People’s Republic of Korea (DPRK) oficials are largely limiting such exposure to areas required for economic development. Moreover, they are applying IT tools to develop new means of indoctrinating the public in North Korea and reaching audiences overseas.

Working With Foreign Partners in IT Ventures
North Korea is promoting cooperative ventures with foreign partners to develop IT, which DPRK media have repeatedly described as a priority area in science and technology. An editorial in the 10 November 2003 issue of the party newspaper Nodong Sinmun, for example, named IT as the first of three technical fields, along with nanotechnology and bioengineering, to which “primary efforts should be directed.”

North Korean media suggest that officials have grasped the potential of leveraging IT for national development. A recent article in the government’s newspaper asserted that (1) “IT trade surpasses the automobile and crude oil industries” and (2) “IT goods are more favorable in developing countries than they are in the developed nations” (Minju Choson, 7 March).

ROK analysts, such as those who compiled a survey of Pyongyang’s IT industry (Puhkan-ui IT Hyonhwang-mit Nambuk Kyoryu Hyomnyok Pangan, 1 January), have suggested that DPRK policies for promoting a domestic IT industry reflect the nation’s lack of capital, dearth of natural resources, and relative abundance of technical talent.  Hoonnet.com CEO Kim Pom-hun, whose extensive experience in North Korea includes residence in Pyongyang from December 2001 to October 2002, has assessed North Korean IT manpower as resembling “an open mine with the world’s best reserves of high-quality ore” ( Wolgan Choson, 1 January).

Pyongyang is partnering with Koreans in South Korea, Japan, and China, as well as Chinese, in ventures to develop both software and hardware, including:

• The Morning-Panda Joint Venture Company in Pyongyang, a partnership between North Korea’s Electronic Products Development Company and China’s Panda Electronic Group, which began making computers in late 2002.
• The Pyongyang Informatics Center (PIC) and South Korea’s Pohang University of Science and Technology (PUST), which are cooperating to develop virtual reality technology. In addition:
• The ROK’s Hanabiz.com and PIC launched the Hana Program Center in Dandong, China, in August 2001 (http://hanabiz.com/history.html) for joint software development and training of DPRK programmers.
•  IMRI—ROK manufacturer of computer peripherals—and CGS—a Tokyo-based software company affiliated with the pro-Pyongyang General Association of Korean Residents in Japan (GAKRJ, a.k.a. Chosen Soren)—joined hands in July 2000 to form UNIKOTECH (Unification of Korea Technologies) to develop and market software. Both partners maintain links to North Korean IT enterprises.
• The ROK’s Samsung Electronics and the DPRK’s Korea Computer Center (KCC) have been developing software together at a Samsung research center in Beijing since March 2000 (Chonja Sinmun, 15 October).

Venturing Overseas To acquire information on foreign IT trends and to promote their domestic industry, North Koreans have begun venturing overseas in recent years.

• State Software Industry General Bureau Director Han U-ch’ol led a DPRK delegation in late September 2003 to the China International Software and Information Service Fair in Dalian. The North Koreans joined specialists from China and South Korea in describing conditions in their respective IT industries and calling for mutual cooperation. Participants from China and the two Koreas expanded on the theme of cooperation at the IT Exchange Symposium, sponsored by the Dalian Information Industry Association, Pyongyang’s State Software Industry General Bureau, and Seoul’s Korea Advanced Institute of Science and Technology (KAIST). Dalian Alios Technical Consulting, a company run by Chinese Korean Yi Sung-nam, hosted the exchange (www.kotra.or.kr, 15 October, http://hanabiz.com, 9 October).
• Pyongyang opened, in April 2002 in Beijing, its first foreign exhibition of DPRK software products developed by Kim Il-song University, Korea Computer Center (KCC), PIC, and other centers of software development (DPRK Korea Infobank, 16 May 2002).
• KCC Deputy Chief Technician Kim Ki-ch’ol led a delegation of DPRK computer technicians to the World PC Expo 2001, held in September 2001 outside Tokyo. KCC has worked with Digiko Soft—a company run by a Korean resident of Japan—to develop commercial software. Through Digiko Soft, the expo was the first show in Japan “of computer software developed in [North] Korea” (Choson Sinbo, 22 October, 1 October 2001).
• KCC computer programmers Chong Song-hwa and Sim Song-ho won first place in August 2003 in a world championship software competition of go—an Asian game of strategy—held in Japan. KCC teams have visited Japan and China on at least eight occasions since 1997 to compete in program contests for go, taking first prize three times.

Gaining Access to Foreign Data North Korea has been acquiring foreign technical information from a variety of sources in recent years, benefiting from developments in technology, warming ties between the Koreas, and longstanding sympathies of many Korean residents in Japan.

• Authorities have held the annual Pyongyang International Scientific and Technological Book Exhibition since 2001, bringing foreign vendors and organizations related to S&T publications to North Korea (KCNA, 18 August).
• The Trade and Economy Institute, advertised as North Korea’s “sole consulting service provider” on international trade, has been exchanging information with “many countries via Internet” since September 2002 (Foreign Trade of the Democratic People’s Republic of Korea, 1 April).
• According to PUST President Pak Ch’an-mo, who has extensive DPRK contacts in academic and scientific circles, North Korea has been purchasing technical books from amazon.com and from South Korea (Kwahak-kwa Kisul, 1 April).
• Pro-Pyongyang Korean residents of Japan have long sent technical literature to North Korea.
• ROK organizations, including PUST and IT publisher youngjin.com, have been donating technical publications on IT in recent years to DPRK counterparts as a means of earning good will and contributing to the eventual unification of Korea (Chonja Sinmun, 11 August).

Cell Phones, Web Pages, and NHK
Within North Korea, the advance of IT technology has been suggested by a number of recent developments:

• Approximately 3,000 residents of Pyongyang and Nason have reportedly purchased cell phone service since November 2002 (The People’s Korea, 1 March).
• Installation of a nationwide optical-fiber cable network in 2000, launch of the Kwangmyong 2000 Intranet the same year, and establishment of computer networks have made available domestic access to extensive technical databases maintained by the Central Scientific and Technological Information Agency, the Grand People’s Study House, and other repositories of technical information.
• Via North Korea’s Silibank Web site (www.silibank.com), established in Shenyang, China, in September 2001, registered foreign users can exchange e-mails with DPRK members.
• In August 2002, Kim Pom-hun, CEO of the ROK IT company Hoonnet.com, opened an Internet café in Pyongyang, the only place in North Korea for the public to access the Internet. Most customers of the service, which uses an optical cable linking Pyongyang and Shanghai via Sinuiju, are foreign diplomatic officials or international agency staffers; steep fees reportedly keep most Koreans from going on line (Wolgan Choson, 1 January).
• Foreign guests in Pyongyang hotels have had access to foreign news broadcasts of Britain’s BBC and Japan’s NHK since May 2003, according to a Japanese television report (TBS Television, 2 September).

Limiting Information to Technical Areas, Harnessing IT for Domestic Indoctrination and Foreign Propaganda Development of the nation, rather than empowerment of the individual, appears to be driving DPRK efforts to develop domestic IT infrastructure and industry. Officials, scientists, and traders can now access and exchange information pertinent to their duties within the domestic Kwangmyong Intranet. Those with a “need to know” can even surf the worldwide Web for the latest foreign data. While Kim Chong-il reportedly watches CNN and NHK satellite broadcasts (Kin Seinichi no Ryorinin, 30 June) and supposedly surfs the Internet, the public has no such freedom to learn of the outside world without the filter of official propaganda.

Indeed, Pyongyang is using IT to indoctrinate the public and put its propaganda before foreign audiences. In addition to studying the party line through regular group reading of Nodong Sinmun in hard copy, a practice for indoctrinating members of work units throughout North Korea, the installation of computer networks now brings the newspaper to some workplaces on line, as the photograph below shows:

Moreover, Pyongyang has put its propaganda on the Internet.

• KCNA offers Pyongyang’s line in English, Korean, and Spanish at a Web site in Japan at www.kcna.co.jp.
• News and views of the General Association of Korean Residents in Japan and its affiliated organizations appear on the group’s site at www.chongryon.com.
• DPRK media, including newspapers Minju Choson and Nodong Sinmun, have appeared on sites originating in China, such as www.dprkorea.com and www.uriminzokkiri.com.

According to the Financial Times:

John Chambers, managing director for sovereign ratings at S&P, told reporters in Seoul that state collapse in North Korea was just a matter of time and could cause a bigger shock to the South’s economy than the 1997 Asian financial crisis.  He urged South Korea to build financial reserves to cope with the cost of reunification.

North Korea has started to reform its rigid command economy in recent months by liberalizing prices and wages but S&P said the regime was too rigid to emulate the market openings adopted by communist governments in China and Vietnam.

“Although some other Asian nations that used to have centrally planned economies have successfully moved to a market-based system, the North Korean leadership probably lacks the flexibility and the vision to undertake such a change,” said S&P in a statement. “Unless South Korea has substantially built up fiscal reserves in the meantime, its [credit] ratings would fall from their current level upon sudden reunification of the peninsula.”

Analysts have been predicting collapse of the North Korean regime since 1989, when communist states started to fail in eastern Europe. The state has proved more resilient than many expected, surviving a famine in the mid-1990s that killed at least 1 million people and recording modest economic growth over the past three years. However, dwindling international food aid to the country and U.S. attempts to block some of the regime’s most important sources of cash, such as exports of arms and drugs, has prompted fresh doubts about the durability of the world’s last Stalinist state.

Mr. Chambers said reunification with the North could cost South Korea up to 300 percent of its annual gross domestic product, considering the reconstruction and welfare provisions that would be necessary.

South Korea’s policy of engagement with its neighbor – including humanitarian aid and economic co-operation – is designed to prevent economic failure in the North and encourage gradual reform of its economy and political system.

In a recent report, Dominique Dwor-Frecaut, economist at Barclays Capital, said state failure in North Korea need not lead to credit rating downgrades in the South. She said the cost of reconstruction would be spread over many years and would be offset by the economic benefits of reunification.

“The Korean peninsula could become a new Asian economic powerhouse if it could associate Chinese-level labor costs in the North with OECD-level financial and legal systems and R&D in the South,” she said.

From the BBC:

North Korea has unveiled the terms under which foreign investors will be lured to a ground-breaking industrial zone near the tense border with South Korea.

Two South Korean companies – Korean Land and an arm of the Hyundai conglomerate – are developing an international business park in Kaesong, part of a package of cautious economic reforms in the Stalinist country.

So far, more than 1,000 South Korean firms have enquired about setting up shop in Kaesong, where labour costs will be a tiny fraction of those south of the border.

The North Korean Government now promises investors favourable tax rates, but there are still considerable concerns over whether it will allow businesses much economic freedom.

Most of the companies so far interested in Kaesong are in light manufacturing, particularly textiles.

Depending on their line of business, these firms will be taxed at up to 14%, less than half the rate levied in the South.

Pyongyang is, however, especially keen to lure hi-tech firms, which will be subject to a tax rate of just 10%.

Investors will have to pay a number of other smaller levies, and must adhere to a minimum monthly wage of $50.

Such incentives have sparked a flurry of interest in the South, but many companies remain wary.

They will be forced to hire workers through a North Korean state agency whose powers and attitude remain unclear.

And there is still little confidence in the fundamental stability of North Korea, which has turned to economic reform in recent years, but which remains virulently opposed to most forms of foreign influence.

The Kaesong development does, however, seem to be a relatively permanent arrangement.

It forms part of a large-scale construction project in the region, which is just 50 kilometres northwest of Seoul.

Elsewhere the focus is on tourism, especially scenic Mount Kumgang on the country’s east coast, which Hyundai has been trying to develop for five years, with mixed success.

There is also a Unification Park, which will be the venue for reunions of families split by the country’s division.

Most significant are major road and rail developments which mark the first time the two rival countries have re-established transport links since the end of the Korean war in 1953.