Click image above to see KCNA video of interview with Yun Yong-sok, vice department director of DPRK Joint Venture Investment Committee
According to KCNA (2012-3-23):
The Democratic People’s Republic of Korea is willing to further improve its environment for foreign investment, Yun Yong Sok, a vice department director of the DPRK Committee for Investment and Joint Venture, told KCNA.
The nation’s economy is gaining momentum, with many industrial establishments and power stations being built across the country.
It is a consistent policy of the DPRK Government to enhance economic cooperation with other countries, while beefing up its self-reliant national economy.
In December last year, the government amended investment-related laws, including the DPRK Law and Regulations on Foreign Investment, laws on joint venture and joint collaboration and the Law on Foreign-funded Businesses and Foreigners’ Tax Payment, in step with the nation’s developing economy and international practices.
It enacted the law on economic zone on Hwanggumphyong and Wihwa islets in the River Amnok and revised and supplemented the law on the Rason economic and trade zone.
The joint development and management in the two economic zones takes on a new way of cooperation. Now it has been under way in a creditable way, driven by the active efforts of both sides of the DPRK and China.
Contracts on joint venture and joint collaboration have been on increase with the investment environment changing for the better.
Rare earth abundant in the country and infrastructure projects lure foreign investment in the DPRK.
The committee will pay deep attention to ensuring the interests of foreign investors, while invigorating the exchange and cooperation with governments, investors and businesses.
In other news, KCNA has adopted the American colloquialism “beefing up”.
UPDATE 1 (2012-2-21): According to the Korea Times, this store is now providing people with a legal window to exchange local for hard currency:
North Korea is apparently allowing foreign currency to be exchanged at unofficial, black market rates at a newly-renovated department store in Pyongyang, according to a diplomatic source who recently visited the country, Tuesday.
The source said people could exchange euros, dollars and yuan at kiosks at Kwangbok Area Supermarket, which recently opened after refurbishment and is said to resemble department stores in the South. The North has long kept the value of its local currency artificially high.
Euros were being exchanged at the rate of one euro for 4,420 North Korean won, while the official rate is around 130 won per euro, the source said.
“They are exchanging hard currency at a rate that seems to be an unofficial rate,” the source told The Korea Times. “People can also shop at the department store using foreign currency by taking their receipts to the booths.”
The source added that the exchange rates were written on a board inside the kiosks.
ORIGINAL POST (2012-1-6): See the original post below.
Pictured Above: (L) The original facade of the “Kwangbok Department Store (광복백화점)”. (R) The new facade of the “Kwangbok Area Supermarket (광복지구상업중심)”
Astute observers will notice the American beer, Pabst Blue Ribbon, featured prominently in the beer section.
Here is coverage of the opening in KCNA (2012-1-5):
Pyongyang, January 5 (KCNA) — The Kwangbok Area Supermarket was opened with due ceremony on Thursday.
All business service at the supermarket built as a commercial service center has been put on IT and digital basis. Customers can buy varieties of goods according to their taste and requirements in the sales rooms on each floor stacked with household appliances, electronic products, foodstuff, fibre, sundries and others.
Present there were officials concerned, officials of the Korea Taesong General Trading Corporation, officials and employees of the Kwangbok Area Supermarket, members of the Feihaimengxin Trading (Beijing) Co. Ltd. staying in the DPRK and the Chinese embassy here.
O Ryong Il, general president of the Corporation, said in his speech that the work to build the supermarket was successfully completed under the energetic leadership of leader Kim Jong Iland the dear respected Kim Jong Un and the positive efforts of the peoples of the two countries.
He expressed belief that the supermarket would help towards improving the people’s living standard and promoting the well-being of the two peoples through better service and management.
Xue Rifei, executive managing director of the Feihaimengxin Trading (Beijing) Co. Ltd., said in his speech that Kim Jong Il and Kim Jong Un gave field guidance to the supermarket on December 15, 2011 and named it the Kwangbok Area Supermarket.
He expressed the expectation that an effort will be made to reenergize the supermarket to win high appreciation for its best management, service and credit.
The Korea Taesong General Trading Corporation is a sanctioned organization, and according to the US Treasury, it is a “key node” in the illicit activity of Office 39. According to NK Leadership Watch:
One of the participants at the opening ceremony was Jon Il Chun (Chon Il-chun), deputy director of the Korean Workers’ Party’s Finance and Accounting Department and section chief of Office #39. Mr. Jon accompanied Kim Jong Il on a visit to the Kwangpok store in mid-December 2011, which was KJI’s last reported public appearance before his death.
On a more casual note, the supermarket marks a point of administrative departure from the way department stores are typically managed in socialist countries. The Kwangbok Department Store (the former name) was one of Pyongyang’s premier formal retail outlets. For decades it operated in the same way as other socialist department stores: customers ended up standing in three lines before they were able to collect their merchandise (one line to order, another line to pay, and another line to pick up). The new Kwangbok Supermarket has adopted a market-style check out line. Though unnoticed by foreigners, this is the first such check out line I have seen in a North Korean department store.
The supermarket is supplied with home and foreign-made products which are in demand in the country.
Although I have not acquired data specific to this store, I believe it is reasonable (even rational) to assume that if the supermarket sells imported goods it will charge had currency for them. This opinion is based on the following assumptions: 1. The Chinese investors will not accept North Korean won under any circumstances. 2. The goal of Office 39 is to acquire hard currency for the Kim family. 3. North Korean retail outlets frequently post prices in multiple currencies so I don’t see any reason why it would be different here. Today a plurality of North Koreans can easily acquire foreign exchange.
Here is my working assumption of the business model: Chinese partner acquires merchandise and imports it to the DPRK. Sales in hard currency go towards allowing the Chinese supplier to recover its costs. Chinese partner either earns a profit from a markup it charges Kwangbok or it divides the profit with Office 39 along some agreed percentage.
If Chinese profits are earned from a cost-plus markup that it charges Kwangbop, then the partnership is closer to an exclusive supplier deal rather than a true joint equity deal. The North Koreans could cheat on this deal by finding cheaper suppliers and decreasing its purchases from the Chinese partner. If after-sales profits are split between the Chinese and Office 39, then both partners will need auditors on hand to make sure the books are accurate. The Chinese partner will also need a good relationship with the Chinese embassy if it runs into problems with the DPRK managers should they unilaterally change the terms of the contract (the split).
Pictured Above (Google Earth): The Hwanggumphyong and Wiwha Island SEZ on the Yalu/Amnok River which separates the DPRK and PRC.
On Friday, the Donga Ilbo reported that Daewoo Shipbuilding was going to invest in the DPRK’s Hwanggumphyong SEZ (see the original post below). Today the report appears to be incorrect. According to the Wall Street Journal:
Daewoo Shipbuilding & Marine Engineering Co. on Monday shot down news reports that it had agreed to build a shipyard in North Korea.
“We don’t have any plans to do that,” a spokesman said.
According to some South Korean news accounts over the weekend, the company, which is the world’s second-largest builder of ships and whose controlling stake is owned by the South Korean government, had agreed to help a Chinese company develop an island off North Korea’s northwest coast, near the Chinese city of Dandong.
The DSME spokesman said the company held discussions with the Chinese company but isn’t close to an agreement.
The news accounts said DSME would build a shipyard that would be devoted to repair work. One report said the idea would be presented to DSME’s directors and announced in April.
The company spokesman said it’s unclear how the accounts originated.
As we argued last fall, the name of the game for Pyongyang’s elites is securing trade and investment deals. Two main investment organs exist, the JVIC and the Daepung Investment Group. We have in the past heard rumors of other similar international investment organizations being under consideration, also. From these overarching groups, down to smaller State Owned Enterprises, there is considerable competition to show that one’s organization can deliver.
Ri Chol was a close ally of Kim Jong Il’s and the organization he came to be associated with, JVIC, rose to prominence after he helped put together the Orascom deal and was given stewardship. He was even with Kim on his last official visit, to a joint venture supermarket in Pyongyang.
He also spent most of the 1980’s and 1990’s in Switzerland in various diplomatic capacities, not the least of which was acting as a minder to Kim Jong Il’s children as they studied at private school.
What might his departure portend?
A few possibilities come to mind.
- Has the JVIC fallen out of favor with the new leadership? If this is the case, Ri might be tasked with building a new organization, perhaps with a similar focus. It would seem redundant to add another, rather than reform this one, but redundancy is hardly unheard of in planned economies.
- Has Ri himself fallen out of favor? Is he being put out to pasture? Again, it is impossible to know, but it seems that such a long term friend of the Kims, who has a personal relationship with Kim Jong Un from his school days would be a key ally at this time, especially since his deals are driving economic growth in North Korea. (Though who knows? Perhaps Kim the Younger has never liked him.)
- If not an issue with Ri personally, the move could be a part of a factional reshuffling. Bartering and dealmaking for control of the commanding heights of the economy is no doubt underway as the new government consolidates its power. It might have been deemed necessary to grant control of the JVIC to another group of Pyongyang movers and shakers – of which Ri Chol is not a part.
- Also very possible is that the very top leadership is planning to give Ri some new responsibility elsewhere. JVIC may have been judged to be running smoothly enough that Ri’s skills would be more effectively used another important organization.
This of course is highly speculative. All we really know is that Ri Chol, with a track record of securing investment, has left the JVIC. Whatever the case may be, he is worth watching in the coming months, as Pyongyang is compelled to keep investments from China and elsewhere coming.
UPDATE (2011-12-19): KJI’s financial manager appears on tour of Kwangbok. According to Yonhap:
The head of a shadowy North Korean agency charged with managing slush funds for leader Kim Jong-il has again appeared in public after five months.
Recent footage from the North’s state television network showed Jon Il-chun standing closer to Kim than Kim’s heir apparent son, Kim Jong-un, on an inspection tour of a supermarket in Pyongyang.
Kim Jong-un is being groomed to succeed his father Kim Jong-il as the country’s next leader in what would be the country’s second hereditary power transfer.
Jon and Kim Jong-un were also seen standing side by side on an escalator at the Kwangbok Area Supermarket, according to recent photos released by the North’s official Korean Central News Agency.
Jon, who has rarely been exposed to media, was last seen on Kim’s trip to a factory in July.
He heads Office 39, which has often been referred to as Kim’s “personal safe” for its role in raising and managing secret funds for the North Korean leader.
The office is also believed to be involved in counterfeiting US$100 bills and drug trafficking.
Last year, the United States blacklisted Office 39 as one of several North Korean entities to come under new sanctions for its involvement in illegal activities such as currency counterfeiting.
ORIGINAL POST (2011-12-16): According to the Daily NK:
Chosun Central News Agency (KCNA) today reported news of an onsite inspection by Kim Jong Il, Kim Jong Eun and others to the Kwangbok District of Pyongyang, the city’s commercial center. The main site on the visit was reportedly the newly expanded and redesigned Kwangbok Department Store.
The redevelopment of the store was ordered by the elder Kim following his trips to China earlier this year, where he was repeatedly exposed to the full force of China’s commercial development.
According to KCNA, “To enhance the people’s welfare and improve their lives, upon the direct suggestion and boundless affection of the fatherly General with his perpetual concern for the people, Kwangbok Department Store, which was constructed in October, 1991, has been transformed anew into the commercial center of Kwangbok District.”
“From warehouse to sale, the realization of information technology and numerical control of all management operations guarantee accuracy and speed, and the store has been stocked to guarantee the utmost convenience of visitors,” it went on.
KCNA went on to say that Kim Jong Il listening to information from related officials, and subsequently declared himself satisfied with the way the store matched the people’s needs in all areas, from sales plans to the amount and quality of goods available.
“We must proceed with the kind of commercial activity that can sell to the people of the capital city those things that they would not be able to live without in their daily lives such as clothing, shoes, food, conveniences, family items, school goods and cultural things, and leave them with no complaint,” he emphasized.
Read the full story here:
Kim Satisfied with “Transformed” Store Daily NK
Kang Mi Jin
Hyesan-China Joint Venture Mineral Company, a large joint project between China and the Democratic People’s Republic of Korea (DPRK), started operation at Hyesan of Ryanggang province on Monday.
The mineral company was jointly set up by Wanxiang Resources Limited Company of China and the Ministry of Mining Industries of the DPRK on Nov. 1, 2007. Its main business was to produce and sell copper.
DPRK Mining Industries Minister Kang Min Chol and Chinese ambassador Liu Hongcai attended the opening ceremony.
Kim Chol, chairman of the people’s committee of the Ryanggang province, said at the ceremony that the joint venture was one of the symbols of the development of the DPRK-China friendship and would be a model of modernization, science and economic benefits.
Liu believed the company would make profits for both sides, benefit the two peoples and promote traditional China-DPRK friendship.
The mine was located a few miles from the Chinese city of Changbai in the northeastern province of Jilin and was 51 percent owned by Wanxiang, a source with direct knowledge of the project told Reuters on Tuesday.
The mine had a designed annual capacity of 50,000-70,000 tonnes of copper concentrate, expected to contain 20-30 percent copper, he added.
“All the concentrate will be sold to China,” the source said.
The source said the joint venture would conduct second-phase construction to expand the capacity of the mine if production ran smoothly, but did not give details on timing or expanded capacity.
China is the world’s top copper consumer but does not produce sufficient concentrate to meet demand. The country imported 3.4 million tonnes of copper concentrate in the first seven months of 2011, down 11 percent from a year earlier.
The Hyesan Youth Mine in Ryanggang Province was successfully updated as required by the new century.
The workers and technicians of the mine together with Chinese technicians and skilled workers completed the vast modernization project and successively ensured their commissioning.
The modernization of various production processes including mining, carriage and ore dressing made it possible to boost mineral production and thus contribute to economic development and the improvement of the standard of people’s living.
A ceremony for the completion of the modernization project at the Hyesan Youth Mine and the Hyesan-China Joint Venture Mineral Company was held on Monday.
Present there were Kang Min Chol, minister of Mining Industry, Kim Hi Thaek and officials concerned, Liu Hongcai, Chinese ambassador to the DPRK, and staff members of his embassy and Han Youhong, president of the Wanxiang Resources Co., Ltd. of China, and personages concerned.
Ri Mun Yong, manager of the Ryanggang Provincial Mining Complex, made an address to be followed by congratulatory and other speeches.
At the end of the ceremony, the participants went round production processes.
That day a reception was given in connection with the ceremony.
Pictured above: (L) satellite image of the Rajin Market, (R) a ground-level photo taken in 1999
Among the the flurry of activities that comprised the DPRK’s recent public relations campaign in Rason (Rajin-Sonbong), the Rajin Market appeared on the itineraries of a few visiting delegates. Alexa Olsen writes about the market for the Associated Press:
Chinese travel agents, potential investors and foreign journalists recently traveled into the North to get a look at the special economic zone Pyongyang is promoting in Rason. It lies in the far northeastern tip of North Korea, 600 miles (1,000 kilometers) from Pyongyang, but will be about an hour’s drive from China once the road is completed.
Rumbling Chinese cargo trucks already ply the route, churning up plumes of choking dust and ferrying containers of Chinese-made shoes, plastic toys, computer speakers, T-shirts and DVDs to the Rason Free Trade Market.
The market, a 13-year-old experiment in small-scale capitalism, has been so successful that the Chinese managing company, the Tianyu Group, is planning to expand the jam-packed 54,000-square-foot (5,000-square-meter) market to 320,000 square feet (30,000 square meters), Tianyu vice director Zheng Zhexi said.
“As I see it, this is the way of economic development, and it’s something that the people want,” Zheng said. “I think it’s reached a point where it cannot be reversed.”
North Korea declared the area a special economic zone 20 years ago. But after a brief flurry of activity and funding from the U.N. Development Program, the project languished without backing from Pyongyang’s leadership.
Rason has benefited from the shift in Pyongyang’s priorities. When Zheng arrived in 1997 to set up the market, people were hesitant to get involved. Now Tianyu doesn’t have the space to approve even a fraction of the applications from prospective vendors, he said.
“Ordinary people’s sense and the awareness of the market, and their views on the economy — all these have changed a lot,” Zheng said.
Foreign journalists, who typically are barred from local markets, were taken on a strictly controlled, 15-minute tour. No photos, no notes, the guide instructed: “Just use your eyes.”
Vendors, mostly women, stood behind stands loaded with freshly skinned rabbit and live chickens, as well as goods mostly imported from China: blouses, speakers, refrigerators, sofas, shampoo, playing cards, binoculars.
High heels went for 25 yuan (US$4), a Kim Jong Il-style beige suit for 85 yuan ($13) and a container of sea salt for 3 yuan ($0.47).
North Korean tour guide Mun Ho Yong, 25, said his family shops at the market several times a week to supplement state rations of rice, oil and fish.
Everything Mun wore — striped dress shirt, belt, polyester trousers and black dress shoes — was bought at the market except his pin of late President Kim Il Sung attached to his shirt, over his heart.
One major challenge will be to successfully leap from the market’s small-scale commerce to full-fledged manufacturing and trade.
(UPDATE) In an article published later in the New York Times (2011-10-12):
A Chinese company critical to Rason’s development, the Yanbian Tianyu International Trade Company, got involved here 13 years ago. It began by erecting the bazaar, then built the casino, a hospital, a bread factory and a telecommunications building. It is now working on a cement factory, and operates two iron mines.
“The policy environment has been improving continuously,” said Zheng Zhexi, 58, the company’s vice president. “It’s moving towards a market economy.”
He pointed to the official tolerance for the bazaar, where merchants rent stalls from the government to sell goods that they buy from Chinese traders. Prices fluctuate and shoppers haggle. The bazaar has proved so successful that it is expanding to six times the current size.
These kinds of markets have sprung up all over the country to supplement the government’s weak food distribution system. Still, the government is sensitive to their capitalist nature, and some top officials have tried to set limits on them. Foreign journalists were permitted a 15-minute tour of the Rason market on the condition that they not photograph it or take notes.
The market, open just a few hours each day, was bustling, with goods like skinned rabbits, sofas, Sony headphones and Dell computer mice. A soldier with a Kalashnikov slung over his back walked among the aisles, looking to buy, and women running stalls wore red vests, the uniform of officially registered merchants.
In one corner was an office with the English words “Foreign Exchange” above the door. In Rason, currency is exchanged at the market rate — one Chinese renminbi to 350 North Korea won — rather than at the official rate, which values one renminbi at 15 won.
Growth and improvement is evident in some areas of the private sector in North Korea, Ishimaru Jiro of ASIAPRESS revealed on the 16th, pointing to the growth of bigger, better private transit concerns and relatively productive coal mining operations as evidence of this trend.
In the past, trains were almost the only viable means of long-distance transportation in North Korea. Then, as private business began to grow and the railways fell into a deep malaise, vehicles such as trucks and cars belonging to military bases, state security and state enterprises were pushed into service to earn money for moving people; this, the so-called ‘servi-cha’ industry.
The servi-cha industry has long been fragmented and small scale; but now transportation companies run by rich individuals (‘donju’) which purchase several buses and hire drivers, guides and mechanics, are acting just as a transit company in a capitalist state would do.
With profit-sharing and bribery as the backbone, a large number of North Korean organs and enterprises have decided to lend their name to these individuals, fuelling the growth and development of a network of sorts.
“From the early 2000s, a high-speed bus network mostly between major cities began to emerge,” Ishimaru, revealing the latest research by ASIAPRESS internal North Korean sources, commented. “The companies are packaged as an enterprise affiliated to some state authority outwardly, but they are actually operated by individuals who pay kickbacks to that authority.”
The People’s Safety Ministry affiliated 116 Task Force Team is one such transportation company, Ishimaru says. It operates buses connecting Shinuiju, South Pyongan Province and Pyongyang. Ordinarily, the bus parks at a station or major public location, and then departs when it is full of passengers going to the next destination.
Theory tells us that weak rule of law and institutions deter cross-border integration, deter investment relative to trade, and inhibit trade finance. Drawing on a survey of more than 300 Chinese enterprises that are doing or have done business in North Korea, we consider how informal institutions have addressed these problems in a setting in which rule of law and institutions are particularly weak. Given the apparent reliance on hedging strategies, the rapid growth in exchange witnessed in recent years may prove self-limiting, as the effectiveness of informal institutions erode and the risk premium rises. Institutional improvement could have significant welfare implications, affecting the volume, composition, and financial terms of cross-border exchange.
JEL: P3, P33, F15, F36
Keywords: economic integration, property rights, institutions, transition, China, North Korea
Andrei Lankov provides some anecdotal evidence and a taxonomy of the DPRK’s growing entrepreneurial class (perhaps one of the most interesting and least reported aspects of the DPRK). He also gives us a glimpse of how the North Korean version of the “infant industry” mindset can impede economic reform.
Here is a great blurb from the article in the Asia Times:
Who are they – the North Korean new rich? The upper crust of this social group consists of high-level officials. Some of them have gained their wealth through illegal means, but many have seen their business activities permitted and even actively encouraged by the government. Most of the money is made in foreign trade, with China being by the far the most significant partner.
Many North Korean companies, despite being technically owned by the state, are effectively private and are run by top officials and their relatives.
That said, these people are not that frequently seen on the streets of Pyongyang. They live in their own enclosed world, of which not much is known.
But if we go one or two steps down, we will encounter a very different type of North Korean entrepreneur – somebody who has made his or her (yes, surprising many of them are women) money more or less independent of the state.
Complete independence is not possible because every North Korean businessman has to pay officials just to make sure that they will not ask too many questions and turn a blind eye to activities that are still technically illegal. In many cases, North Korean entrepreneurs prefer to disguise their private operations under the cover of some state agency.
Take for example Pak. In his early 40s, he runs a truck company together with a few friends. The company has seven trucks and largely specializes in moving salt from salt ponds on the seacoast to major wholesale markets. The company employs a couple of dozen people, but officially it does not exist. On paper, all trucks are owned by state agencies and Pak’s employees are also officially registered as workers of state enterprises.
Pak bought used trucks in China, paying the Chinese owners with cash. He then took them to North Korea where he had the vehicles registered with various government agencies (army units are the best choice since military number plates give important advantages). Pak paid officials for their agreement to “adopt” the trucks. This is so common in the North that there is even an established rate of how much fake registration of a particular type of vehicle costs at which government agency.
Kim was a private owner of a gold mine. The gold mine was officially registered as a state enterprise. Technically, it was owned by a foreign trade company that in turn was managed by the financial department of the Party Central Committee. However, this was a legal fiction, pure and simple: Kim, once a mid-level police official, made some initial capital through bribes and smuggling, while his brother had made a minor fortune through selling counterfeit Western tobacco.
Then they used their money to grease the palms of bureaucrats, and they took over an old gold mine that had ceased operation in the 1980s. They restarted the small mine and hired workers, bought equipment and restarted operations. The gold dust was sold independently (and, strictly speaking, illegally) to Chinese traders.
The brothers agreed with the bureaucrats from the foreign trade company on how much money they should pay them roughly between 30-40% and the rest was used to run the business and enjoy life.
One step below we can see even humbler people like Ms Young, once an engineer at a state factory. In the mid-1990s, she began trading in second-hand Chinese dresses. By 2005 she was running a number of workshops that employed a few dozen women.
They made copies of Chinese garments using Chinese cloth, zippers and buttons. Some of the materials was smuggled across the border, while another part was purchased legally, mostly from a large market in the city of Raseon (a special economic zone which can be visited by Chinese merchants almost freely).
Interestingly, Ms Young technically remained an employee of a non-functioning state factory from which she was absent for months on end. She had to pay for the privilege of missing work and indoctrination sessions, deducting some $40 as her monthly “donation”. This is an impressive sum if compared with her official salary of merely US$2.
The North Korean new rich might occasionally feel insecure. They might be afraid of the state, because pretty much everything they do is in breach of some article of the North Korean criminal code. A serious breach indeed – technically any of the above described persons could be sent to face an execution squad at the moment the authorities change their mind.
And before we all get our hopes up that this emergent entrepreneurial class will eventually push the leadership to adopt economic reforms, Lankov reminds us how they could just as well serve to prolong the regime’s life:
Paradoxically, the long-term interests of the emerging North Korean business class might coincide with that of the Kim regime. Unlike normal people in the North, both groups – officials and entrepreneurs – have an interest in maintaining a separate North Korean state. Unification with the South is bound to spell disaster for both groups.
A person who is now running a couple of small shops might eventually, if North Korean capitalism continues uninterrupted growth, become an owner of a supermarket chain. If unification comes, he or she would be lucky to survive the competition with the South Korean retail giants and keep the few corner shops they had.
The full story is well worth reading here:
The secret world of North Korea’s new rich Asia Times