North Korean Economy Watch

We have all been watching whether the DPRK will implement economic policy adjustments that strengthen material incentives to farmers, workers and enterprise managers to increase production. I have cataloged many of these stories/articles/observations here.

Today the Daily NK offers a scenario as to why the DPRK has not implemented more generous agricultural production incentives:

A Hyesan-based source explained today, “Cooperative farm cadres are saying that none of the experimental farms will be given 30% of their production this year because it has become difficult to meet the target. They are saying that the harvest is not good and they need to feed the military as a matter of priority, so first they’ll guarantee the military rice then give the rest to the farmers.”

A Shinuiju source corroborated the story, saying that the authorities “haven’t said they are going to take all the production from the farms, but nobody actually thinks they are going to get very much. People who trusted the official words are feeling quite stupid, and nobody is working very hard.”

Back in July, each province designated a number of ‘model farms’ that were to be used to test the policy. These farms were supposed to receive their initial inputs of fertilizer and machinery from the state, and then be given 30% of their production in return.

“They are saying that the state does not have enough rice right now and that there is no choice but to give it to the military, so please try to understand,” the source said. “Farm workers, many of whom had been buoyed by talk of food distribution, are really disappointed, especially since prices are sky high in the market these days.”

Anyone who has taken a game theory class will note the presence of credible commitment problems and backwards induction.

If a game consist of two players (the state, farmers) operating in an environment where credible commitment is not attainable, one could argue that an outcome where the state promises to increase agricultural incomes yet farmers work less is the predictable result. Here is why: If at the beginning of the game the state says “we will raise your incomes if you produce more” and farmers respond by producing more, in the absence of credible commitment, at the end of the game the state can simply take all the increased production and pay no more. There is nothing to force the state to actually keep its word once the increased output has already been produced (assuming policy makers with short time horizons). Of course by utilizing backwards induction farmers realize this and do not increase production despite the promise of higher incomes. In the limit case, the DPRK announces economic policy adjustments, nobody believes them, and nobody moves to increase labor supply in the official sector of the peoples’ economy.

If the DPRK wants to offer effective policy adjustments that lead to real increases in output it must not only promise greater material incentives to workers and managers but it must do so in a believable way. Unfortunately there are no simple mechanisms to credibly bind the hands of the North Korean policy makers within the DPRK. In the absence of suitable constraints on state power (broadly defined), this means that reputation capital is even more important for achieving desired policy goals. This is why the decision to back-peddle on the 6.28 agricultural policies, if this is indeed what happened, is perhaps the most damaging move of all in terms of improving economic performance. Taking the North Korean government at its word (reputation capital), the farmers who increased effort in the fields (expecting a 30% ownership of their output in return) have instead given the state a free lunch. They will not be so inclined to increase output the next time the government comes knocking on their door offering dreams of a chicken in every pot.

If the DPRK government hopes to induce workers to increase labor supply through official channels, relying on nothing more than reputation, it is going to have to pay for failing to live up to its economic commitments in the past. In other words, it is going to have to slowly build up its reputation capital again by increasing the incomes of workers through a policy that is not likely to pay off for several years. It is only after workers again feel confident that the state will not back-peddle on the promise to let them retain 30% of their output that they will increase labor supply and output.

Read the full story here:
6.28 Agriculture Policy on the Back Foot
Daily NK
Lee Sang Yong
2012-10-12

UPDATE 5 (2012-11-7): The China Daily’s English-language Dandong page offers additional details of the expo:

Despite the global economic slowdown, more than 6,000 business representatives from 20 countries signed agreements on more than 200 cooperative projects. Some 72 of the largest projects have a total combined value of $1.26 billion.

…

During the 11th Five-Year Plan period (2006-2010), total trade value between Dandong and DPRK amounted to $3 billion. Imports and exports between Dandong and the DPRK reached $1.86 billion in 2011.

So far, trade between Dandong and DPRK accounts for 40 percent of total China-DPRK trade, and the volume of the cross-border cargo trade via Dandong port makes up 80 percent of the total Sino-DPRK trade volume.

UPDATE 4 (2012-10-16): Xinhua reports on the closing of the expo:

The five-day 2012 China-DPRK Economic, Trade, Culture and Tourism Expo, held in the border city of Dandong, concluded on Tuesday with 72 agreements of cooperation intent signed. They have a combined value of 1.26 billion US dollars.

Pan Shuang, vice mayor of Dandong, said more than 6,000 Chinese and overseas people from over 20 countries and regions exhibited at and attended the expo. There were talks on 200 projects.

He said the projects related to industries ranging from aquaculture, clothes manufacturing, chemical production, wind power generation equipment, iron steel production to hotel construction.

AT THE EXPO

At the exhibition, the DPRK delegation exhibited ginseng products, food specialties, hand-made Hanbok, a traditional Korean costume, as well as mining and machinery equipment.

Ri Yong Chol, sales manager of Korea Roksan General Trading Corp., which is a ginseng supplier, said “I came to look for Chinese friends and potential business partners. Our company is also seeking opportunities to set up a subsidiary in China to get better access to the Chinese market.”

A Korean girl wearing brightly-colored Hanbok and traditional ornaments was selling costumes. “Our factory can make 20 such hand-made Hanboks a day. The clothes are for important occasions with exquisite workmanship and high-quality material,” she said.

Liu Songyu, chairman of a Korean garment firm from Yanbian Korean Autonomous Prefecture of Jilin Province, was interested in the business.

“Chinese labor costs have been rising fast. In Yanbian, a garment-factory worker’s salary has risen to 2,000 yuan (319 US dollars) a month. While, if the company had a factory in DPRK, it would save a considerable amount on labor costs. I would give a serious thought to that,” he said.

Yanbian is a heavily Korean ethnic populated region in China, where people also wear Hanbok during important occasions.

Elsewhere, Huang Zijun, an authorized dealer of Total Petrochemcial, was overwhelmed to obtain 20 orders from the DPRK delegation during the expo.

“I felt their enthusiasm in promoting business at the expo. I believe the DPRK is a big market for petrochemical products like lubricating oil,” he said.

Here is coverage of the closing in the Daily NK.

UPDATE 3 (2012-10-14): Martyn Williams pointed out this video to me which readers may also find interesting:

Click image to see video at CCTV web page

UPDATE 2 (2012-10-14): According to Xinhua:

An economic, trade, culture and tourism expo jointly initiated by China and the Democratic People’s Republic of Korea (DPRK) opened Friday in the border city of Dandong in northeast China’s Liaoning Province.

A delegation of 500 members from the DPRK is attending the 2012 China-DPRK Economic, Trade, Culture and Tourism Expo, which is scheduled to run from Friday to Tuesday, the event’s organizers said.

Over 400 Chinese companies from 12 industries are also attending the expo.

With the theme of “friendship, cooperation and development,” the expo consists of commodity exhibitions, trade fairs, DPRK art performances, craftwork exhibitions, a border trip to the Yalu River and an exhibition for the tourism resources of the two countries.

Supported by the China Council for the Promotion of International Trade, the event is being organized by the Liaoning Provincial Government.

China is DPRK’s biggest trade partner. Statistics show that bilateral trade volume went up 62.4 percent year on year to 5.64 billion U.S. dollars last year.

Xinhua posted these official photos.

CCTV also covered the expo.  Here is their English-language report:

Here is KCNA coverage of the expo:

The Daily NK also reported on the expo:

A source from Dandong described the unusually vibrant scene to Daily NK yesterday, saying, “The North Korean authorities have mobilized companies from Pyongyang and from here in China to sell goods and pitch for joint venture opportunities. There are loads of people; it’s standing room only.”

The source added that North Korean companies attending the event are pushing very hard to attract investment; notably, by distributing their own promotional literature expounding upon the given company’s superior virtues and providing exact contact details for follow-up inquiries. It is not hard to find meetings continuing in local North Korean eateries, as the North Korean side tries to woo potential sources of capital.

Chinese companies are keen to hear about the joint venture opportunities available, the source also said; and with most of the larger enterprises from China’s three northeastern provinces sending representatives to Dandong for the event, which runs until the 16th, most of the city’s hotels are apparently full to bursting.

However, due to past and present cases of lip service being paid to contractual obligations by North Korean companies whose only goal has been to attract funding rather than build business, Chinese representatives are still very cautious about actually signing on the dotted line.

One such representative from a Dandong-based company with a 10-year history of doing business with North Korea pointed out to Daily NK, “We have seen countless examples of companies making contracts and then there being little contact between the partners thereafter. Unbelievably, one manager I tried some minerals business with last year just changed the name of the company and came back again this year.”

Additional Information:

1. Here is IFES coverage of the expo.

2. The DPRK also held investment seminars back in late September.

UPDATE 1 (2012-6-7): The expo appears to have been pushed back to October 2012. According to KBS:

North Korea and China will jointly hold a fair on economy, trade, culture and tourism in the Chinese border city of Dandong for five days from October 12th.

A Dandong-based newspaper reports that this will be the first comprehensive fair covering several fields that the two countries hold. The paper said the fair will exhibit products, offer trade consultations, hold cultural and art performances and introduce both nations’ tourist attractions.

Roughly 400 Chinese companies exporting to North Korea will participate in the event. About 100 North Korean companies and cultural troupes will partake.

Dandong is China’s largest base for trade with North Korea, with 70 percent of its trade with North Korea running through the border city.

Read the full story here:
N.Korea, China to Hold Joint Industrial Fair in October
KBS
2012-6-7

ORIGINAL POST (2011-12-3): Dandong to host Sino-DPRK economic and cultural expo. According to Xinhua:

The northeastern Chinese city of Dandong, which borders the Democratic People’s Republic of Korea (DPRK), will host a Sino-DPRK economic, trade and cultural exposition in June next year, a local Chinese official said Saturday.

A series of activities, including a commodity fair, investment and trade talks, tourism exhibition and arts exhibition, will be staged during the exposition, said a spokesman with the Publicity Department of the Dandong Municipal Committee of the Communist Party of China.

The Phibada Opera Troupe of the DPRK, an artists group well known to Chinese people, will give performances during the event, he said.

Adam Cathcart took the time to send me this interesting link to the official Dandong web page.  It contains some videos (in Chinese) in which local officials promote the changes they expect to come to this city as it transitions into a regional trade hub.

Below I have added some links to recent blog posts that a re related to Dandong:

1. Dandong customs house is busy, busy, busy (2011-9-13)

2. Chinese foreign ministry publication frank on Rason and Hwanggumphyong (2011-8-31)

3. New Yalu River bridge in south-west Dandong (2011-6-25)

4. Some alleged guidelines for the Hwanggumphyong SEZ (2011-6-24)

5. DPRK and PRC launch joint Yalu patrols (2011-6-15)

6. Sinuiju SEZ Version 5: Hwanggumphyong-ri and Wihwa Island (2011-6-14)

7. Dandong-DPRK trade and growth (2010-12-2)

8. Future Sinuiju development affecting Dandong today (2010-10-19)

9. DPRK-China trade and investment growing (2010-10-1)

10. Dandong launches DPRK trade program (2010-8-19)

According to Yonhap (via Korea Herald):

North Korea’s trade with China nearly tripled over the past five years, South Korean government data showed Sunday, underscoring the isolated North’s growing economic reliance on its major ally.

Trade between North Korea and China stood at US$5.63 billion last year, up 284 percent from $1.98 billion in 2007, Seoul’s unification ministry said in a report to the National Assembly.

North Korea’s exports to China almost quadrupled to $2.46 billion in 2011, compared with $580 million in 2007, the data showed. Imports rose to $3.17 billion last year, from $1.39 billion in 2007.

The North’s main export items were coal and iron ore, while primary imports from China were crude oil, gasoline and cargo trucks, it said.

A separate story on the report which also appeared in the Korea Herald featured these additional stats:

China accounted for only 67 percent of the North’s total trading with foreign countries, also including Russia, Thailand and Japan in 2007. But the dependency rate grew to 72.9 percent in 2008 and 82.9 percent in 2010 before hitting 89.1 percent last year, the report showed.

…

Annual food imports from China stood at 155,000 tons in 2008 and they have steadily grown to reach 380,000 tons for the whole of 2011, it said.

The same story had data on wages in the Kaesong Industrial Zone:

Another ministry audit report also showed that since 2004, South Korea has so far paid a total of $245.7 million in salary to North Korean laborers working in the Kaesong Industrial Complex, a joint inter-Korean industrial project in the North Korean village of Kaesong.

…

The report showed that a North Korean worker in the industrial zone earns an average $128.3 every month as of the first half of this year.

The average monthly pay stood at $68.1 in 2006 before steadily growing to $109.3 for last year.

Read the full story here:
N. Korea’s trade with China nearly tripled over past 5 years
Yonhap (via Korea Herald)
2012-10-7

N. Korea’s trade with China surges due to U.N. sanctions
Korea Herald
2012-10-8

UPDATE 43 (2015-6-17): Gazprom official claims pipeline not feasible. According to NK News:

The deputy CEO of Russia’s Gazprom told reporters that connecting South Korea to Russian gas supplies is economically attractive but politically infeasible on Tuesday.

The long-gestating pipeline project would extend through the DPRK and provide natural gas to energy-hungry South Korea.

But Alexander Medvedev, speaking from a press conference in Moscow yesterday, said the project was too difficult in the current climate.

“The level of communications, the level of cooperation is not that which would make it possible to speak of advancing to the feasibility study stage, let alone implementing a project to supply gas via North Korea.”

Despite the political hurdles, the project is still interesting from an economic standpoint.

“From the economic standpoint, this would probably be the most efficient option for supplying gas to Korea … There is demand for pipeline gas,” Medvedev added.

…

Despite the numerous roadblocks, the deputy CEO of the world’s largest gas producer remained hopeful that political changes could move the project forward.

“The opportunity remains all the same, but it depends on a resolution of the political issues between the DPRK and the Republic of Korea. There are certain positive signals, but there are negative signals too,” Medvedev said at the press conference.

Post 42 (2014-6-18): According to Leonid Petrov, “Russian GAZPROM postpones Trans-Korean gas pipeline construction project ‘due to unstable political situation in South Korea'”. Here is the source (in Russian).

Post 41 (2014-3-29): According to Yonhap, the Russians and the North Koreans held talks on a number of issues including the Kaesong Industrial Complex, Iron Silk Road, and the gas pipeline.  No information on the pipeline was made public.

Post 40 (2013-11-13): The Russians and South Koreans most recently discussed the Russia – South Korea gas pipeline at a presidential meeting in Seoul. No decisions were made. Read more here.

Post 39 (2012-10-4): The Choson Ilbo reports that the pipeline talks are delayed because DPRK is asking for transit rates above the international norm:

A South Korean government source said talks have dragged on because the North is demanding a transit fee that is two to three times more than international rates.

Based on a method of calculation used by Ukraine — about $2 per 1,000 cubic meters of natural gas for 1 km of pipeline — a reasonable fee would be about US$150 million a year given the estimated amount of gas South Korea would import from Russia and the 700-800 km of the gas pipeline running through the North. But the North reportedly demanded $300-500 million a year.

“It’s likely that the North asked for such a high price in the first place to gain the upper hand in future talks,” the source added. “There have been no full-fledged talks yet. At the moment, Pyongyang, Seoul and Moscow are just trying to read each other’s minds.”

Post 38 (2012-2-27): The Daily NK reports on details being discussed in the pipeline talks:

The Republic of Korea Ambassador to Russia, former chief nuclear negotiator Wi Sung Lac, says there has been progress on a gas pipeline connecting Russia, North Korea and South Korea.

“At the moment it is at the stage of enterprises discussing commercial conditions, and I am aware that there has been progress. North Korea and Russia are also discussing issues of transit and transit fees via working-level consultations,” he explained to reporters on a visit to Seoul today.

Wi would not be drawn on what kind of progress has been achieved, saying, “It’s about commercial details and so is hard to explain, but it appears there has been progress on supply quantities and supply conditions.”

Post 37 (2012-2-20): Gazprom reports “progress” in talks with North Korean government. According to Bloomberg:

OAO Gazprom, Russia’s natural gas exporter, said it made progress in talks to supply Korea Gas Corp. (036460) through a pipeline across North Korea, the Moscow-based company said today in an e-mailed statement.

Gazprom and Kogas, as the Korean company is called, plan to meet again in Moscow next month to continue talks, Gazprom said.

(more…)

These are all interesting data points. Do you think they offer reasonable journalistic evidence that the DPRK is practicing inflationary public finance?

First, Yonhap reports on DPRK food imports from China (2012-9-29):

North Korea’s grain imports from China slipped 16.3 percent on year in the first eight months of this year, in an apparent sign that the North may diversify its supply channels of grain, a Seoul researcher said Saturday.

North Korea imported 181,264 tons of rice, flour, corn and other grains from China in the eight-month period, compared with 216,535 tons for the same period last year, said Kwon Tae-jin of the state-run Korea Rural Economic Institute.

The decline in grain imports from China may be attributed to a rise in food aid from China and purchases from non-China markets such as Europe and South America, Kwon said.

“Including imports from non-China markets, North Korea’s total grain imports appeared to rise this year,” Kwon said in a report posted on his Web site, adding Pyongyang may “diversify its import channels.”

At the same time the Daily NK reports that food prices continue to rise (2012-10-2):

Internal sources informed Daily NK over the holiday that on September 29th the price of rice was 6,700 won/kg in Pyongyang, 7,000 won/kg in Onsung, North Hamkyung Province and 6,500 won/kg further west in Hyesan, Yangkang Province.

Not only do these prices far exceed those of Chuseok 2011, they even far exceed those of earlier this year.

The Hyesan source explained that on the day before the Chuseok holiday (Saturday) the atmosphere in the market was thus rather uncomfortable. “It was very slack,” she said. “People couldn’t buy anything easily, so most just seemed to be looking.”

Secondly, Yonhap reports that despite situations like those experienced by Xiyang or in Musan, mineral exports to China are up (2012-10-2):

North Korea’s exports of mineral resources recorded a 33-fold jump over the past decade with China remaining the biggest importer of the North’s iron ore and coal, a report showed Tuesday.

North Korea’s mineral exports stood at a meager US$50 million in 2001, accounting for 7.8 percent of its total exports, according to the report by Seoul’s Korea Trade and Investment Promotion Agency.

The mineral exports soared to $243 million in 2005 and $1.65 billion in 2011, accounting for 59.4 percent of the North’s total exports last year, the report said.

South Korea has estimated the total values of mineral deposits in North Korea at some $6.3 trillion.

Last year, North Korea exported $1.17 billion worth of anthracite coal and $405 million worth of iron ore, with China importing almost 100 percent of anthracite coal and iron ore, it said.

Back in March 2011, KCNA posted this video clip to their web page:

Unfortunately for the North Koreans, actions speak louder than words.

The North Koreans appear to be worried that the unwanted attention brought about by the Xiyang story will have a negative effect on investment in the country’s special economic zones along the Chinese border. In order to combat these growing negative perceptions among Chinese investors, the North Koreans have begun holding a series of invitation-only seminars to tout the benefits of investing in Hwanggumphyong and Rason.

Here is coverage of the seminar in the Global Times (PRC) of the most recent seminar:

The officials told Chinese investors attending a seminar in Beijing that North Korea will allow the Chinese yuan to be used in business transactions, offer tax incentives to targeted industries and ease visa requirements.

North Korea is hoping to spur development of the Hwanggumpyong and the Wihwa Islands, two special economic zones on the Yalu River, which also runs through the Chinese border city of Dandong, Liaoning Province, reported the Beijing News. Favorable policies regarding the Rason Economic Trade Zone, which is closer to Jilin Province, were also discussed.

A North Korean official told the seminar that his country hopes to transform the economic zones into “world-class business districts.”

More than 200 Chinese companies, including State-owned enterprises and private corporations, participated in the seminar.

China’s Vice-Minister of Commerce Chen Jian said cooperation between China and North Korea on the development of the new economic zones is going smoothly.

Despite the enthusiasm from officials on both sides, entrepreneurs expressed concern over the veracity of the country’s legal framework needed to protect their investment.

“North Korea has significant iron ore and coal reserves, but I wouldn’t rush to invest unless I am sure it can be protected by their law,” a Chinese mining entrepreneur who requested anonymity told the Global Times.

The Daily NK provides additional details:

What the People’s Daily article did do was make clear how the two sides foresee the function of the SEZ areas. Rasun, it said, “will focus on the development of raw materials, equipment, high tech products, light industry, the service sector and modern agriculture.” Conversely, Hwanggeumpyong and Wihwa Island “will focus on the development of information industries, tourism, modern agriculture and garment manufacturing.”

The Chinese Ministry of Commerce has also moved to back efforts to stimulate interest in the SEZs.

The Hankyoreh offers some additional details on this and previous seminars:

Cars pulled up one after another on Sept. 26 in front of the Bridge Art Center in downtown Beijing, where a big blue sign read “Introduction to the Choson (North Korea) investment environment and counseling on investment areas.” The Chinese corporate executives who stepped out of the vehicles filed into the venue for a briefing on investment in North Korea.

The North Korean Committee for the Promotion of Economic Cooperation and China’s private GBD Public Diplomacy and Culture Exchange Center staged the event over two days in the hope of attracting investment by introducing “promising investment areas” for Chinese entrepreneurs.

The event was invite-only. Attendees walked around the venue, where they were asked not to take pictures. A screen at the front of the conference room displayed videos on the Rason and Hwanggumpyong special economic zones and the tax breaks available to investors. Around 100 Chinese businesspeople sat in their chairs to watch.

At the entrance was a list of around thirty participating North Korean businesses. Many were in areas such as natural resource development (iron and gold mining), seafood farming, and garments. Trade companies also stood out on the list, including the Daesong General Trading Corporation and the Jangsu Trading Company. Thirty-six officials from state-run North Korean businesses provided information about 43 investment projects. The afternoon saw one-on-one talks between North Korean officials and Chinese executives.

A senior official with GBD said hundreds of Chinese businesses would be participating on Sept. 26 and 27.

“There are quite a lot of Chinese businesses interested in investing in North Korea,” the official said.

On the invitations, the organizers touted the investment briefing as an “important opportunity for Chinese businesses to invest in North Korea.”

“Choson’s new leader Kim Jong-un declared that economic development and improving people’s livelihoods are important goals of the Workers’ Party of Korea,” they read.

This is just one of many such briefings that North Korea has organized all over China. On Sept. 7, a counseling session was held in Changchun, Jilin province, for “North Korea Day and China-Choson trade investment projects.” Another investment briefing on Sept. 9 was staged concurrently with the 16th China International Fair for Investment and Trade in Xiamen, Fujian province. A joint China-North Korea economic trade briefing on Oct. 14 in Dandong, Liaoning province, is scheduled to include counseling sessions for the three areas of trade, investment, and labor between 60 North Korean national trade company officials and 100 Chinese businesspeople.

Meanwhile, the Chosun Investment Office of Joint Venture and Investment Committee, North Korea’s body for attracting foreign investment, signed a contract in Beijing on Sept. 22 with China Overseas Investment to set up an exclusive North Korea investment fund of 3 billion RMB, or about US$476 million.

China’s private investors have shown much interest amid signs of change from Pyongyang, but sources said this had not yet led to actual investments.

“In staging investment briefings, North Korea is showing that it has decided on a course of change for the sake of the economy and the public welfare,” said a source in Beijing.

“In China, people have kept asking for Pyongyang to establish more laws and regulations to allay the fears of businesses investing there, so it’s going to take some time to see the kind of investment North Korean really needs for its own economic development beyond things like mining,” the source added.

Reuters also seems to have been invited:

But after listening to a presentation from Chinese and North Korean officials at one of Beijing’s most expensive hotels laying out the supposed allure of the two zones, the head of one company gave an emphatic “no” when asked if she was convinced.

“We’re not thinking about it at the moment,” said Li Guilian, chairwoman of Dalian-based clothing company Dayang Trands. “We might go and have a look at Hwanggumphyong, but I don’t think we’ll invest.”

She nodded her head vigorously when asked if she thought it was risky investing in such an isolated and backward country.

“Investors need first of all to consider the environment. If there’s a problem with the environment, then there’s no way people are going to commit money,” Li told Reuters.

Following (or perhaps concurrently with) the story on the Russia – DPRK debt forgiveness deal, Andrei Lankov writes about DPRK trade and investment in the Asia Times:

But a brief look at trade statistics makes one suspicious about claims in regard to Russia’s prominence in North Korean issues. It is not widely understood that summits and official rhetoric notwithstanding, actual trade between North Korea and Russia is miniscule, even by the meager standards of North Korea.

In 2011, trade volume between the two countries was merely US$0.12 billion. As inter-state trade goes, this practically means that Russia and North Korea have close to no trade. In the same year, Sino-Korean trade hit the $5.6 billion mark. If you compare this with other East Asian countries this is still peanuts, but it is nonetheless almost fifty times the level of Russo-North Korean trade.

One also might notice that the improvement in political relations between Russia and North Korea had absolutely no impact on Russo-North Korean bilateral trade volumes. If anything, the trade declined when the politicians were smiling and exchanging niceties.

Over the past 15 years, Russo-North Korean trade on an annual basis has fluctuated around the $100-$250 million mark (in a clear downward trend). Throughout the same period, Sino-North Korean trade has increased almost 10-fold.

It is strange that these obvious facts do not attract enough attention among those who like to talk about Russia’s supposed leverage in Pyongyang. These figures are easily obtainable and yet almost entirely overlooked. This seems to be because the figures do not easily fit into preconceived notions about Russo-North Korean relations; the inconvenient truth is that the political rhetoric shared between the two countries is often very shallow and lacking in an economic basis.

To be blunt, Russian businesses have no interest in North Korea.

North Korea is a very poor place that has few comparative advantages in the world market. Nonetheless such advantages do exist. First, North Korea has some mineral resources (iron ore,coal, copper, lead and so forth) which are largely to be found in the northern most part of the country. Second, it has a rather skilled and unbelievably cheap workforce. North Korean workers consider themselves lucky if they are paid $25 a month. But none of these two advantages are of any significance to corporate Russia.

Russian mining companies have all of Siberia at their disposal, and North Korea’s mineral deposits do not look all that impressive by comparison. Things are made even worse by the constant threat of political instability and the gross underdevelopment of transportation and infrastructure in general. Therefore, no major Russian mining firm is willing to invest in North Korea (some have been courted by Pyongyang, have always responded in the negative).

The pull of cheap labor is also not all that attractive to Russian companies. The Russian developmental model does not involve heavy reliance on light industry in general, nor in particular the manufacture of T-shirts and running shoes. There is a moderate need for cheap North Korean labor in Russia itself, and so for many decades North Korean workers have been employed in Russia. But the scale of these operations is quite limited, and likely to remain so (10-20,000 workers at most).

One can of course point at two much discussed projects of economic cooperation between Russia and North Korea – the proposed trans-Korean railway and proposed natural gas pipeline. The pipeline project was discussed during Kim Jong-il’s last trip to Russia in 2011, and as a result still attracts much attention. However, we should remember that the very similar trans-Korean railway was first officially approved in the late 1990s, but still remains on the drawing board and as elusive as ever. There is good reason to believe that a similar fate awaits the pipeline project: for years there will be talks, enthusiastic newspaper articles, even official visits, but not much in terms of actual construction.

Both railway and pipeline projects share one common feature: North Korea is treated as a space to traverse. Had this area been covered with tropical rainforest, or desert, it would have little impact on either of these projects, whose main task is to facilitate interactions between Russia and South Korea.

From a purely commercial view, a short-cut through North Korea makes perfect sense, but there are many political problems which ensure that we will have to wait for many years before any of these projects will begin in earnest.

The major problem is recurrent and perhaps incurable instability which blights the Korean peninsula. Once Russian companies start real construction, they will become hostages of the complex and often unpredictable clashes of power interests in and around the Korean peninsula.

Additional Information
1. Read more about the Rason railway project here.

2. Read more about the pipeline project here.

3. more economic statistics can be found on my DPRK Economic Statistics page

Read the full story here:
North Korea lacks rich relation in Russia
Andrei Lankov
Asia Times
2012-9-18

Pictured above (Google Earth): Chongjin’s two ports and shipyard

The PRC’s Global Times reports that in addition to use of the Rason Port, another Chinese SOE has taken out a lease/investment deal on the Chongjin Port. According to the article:

The official news website of the Yanbian Korean Autonomous Prefecture in Jilin Province reported on Thursday that the Yanbian Haihua Group inked a deal in Pyongyang on September 1 and established with its counterpart a $7.83 million joint venture company.

Under the deal, Haihua Group holds a 60.46 percent stake while the North Korean side owns the rest, to operate the Chongjin port’s No.3 and 4 wharves for 30 years.

The ports will be capable of processing 7 million tons of cargo a year and be put into use this year.

…

The prefecture’s public relations department and the Yanbian Haihua Group did not comment on the joint venture when contacted by the Global Times yesterday.

Although the Global Times reports a $7.83m price tag, the actual size of the deal appears much larger. According to the Donga Ilbo:

The North Korean regime has received 6.12 million euros ($7.82 million) of rental charges for the 3,180 square-meter (34,229 square-feet) piers and a 4,000 square-meter cargo yard from the Chinese company and paid the money to fund the newly-built joint venture, the newspaper said.

The Chinese company will invest a total of 13 billion won (USD $12m) on developing the port, such as building new equipment and facilities, which accounts for about 60 percent of the entire capital spent on the project.

According to the daily, they have already set up a series of detailed regulations on employment management, profit distribution and the formation of a new board with a goal to raise cargo traffic to one million tons by 2015.

The Yanbian group already spent 60 million yuan ($9.47 million) on manufacturing cranes and building necessary equipment, the newspaper said, and also completed work on stabilizing the 36,000-square meter grounds of the construction site.

They are scheduled to finish manufacturing cranes within the year to begin a full-fledged plan for domestic and international transportation through the port.

Yonhap and the Daily NK reported back in 2010 that this very same Chinese firm had leased the Chongjin Port for exports to South Korea and other parts of China:

The report, citing an anonymous government official from Tumen in China’s far northeast, across the Tumen River from Namyang in North Hamkyung Province, said that the usage rights have been sold to a “Chinese state company, Yanbian Haihua Import-Export Trade Company.”

He predicted, “Yanbian Haihua Import-Export Trade Company will start shipping between Chongjin port and Busan by container ship in September, and will start shipments to southern regions of China soon.”

The anonymous official also revealed that North Korea has agreed to allow the Chinese company to use the railroad between Tumen and Chongjin as part of the deal. The deal, the official said, will “facilitate trade from Tumen,” and added that the Chinese company which inked it is planning to use it to fulfill shipping contracts with three other Chinese companies.

The Chinese company is reportedly investing 10 million Yuan ($1.48 million approx.) in shipping cranes and other construction at Chongjin, and is having 150 freight cars produced to add to 50 already sent.

It would be interesting to know if the fiasco surrounding the Xiyang contract let to a renegotiation of terms of this deal in any way: Either by altering the ownership shares, time horizon, or if greater assurances against ex post expropriation were added. Since the contract is not ever likely to be made public, we may never know.

UPDATE 1 (2012-9-18): The Hankyoreh reports that quite a few ports on the DPRK’s eastern shore are being renovated by the Chinese. According to the article:

North Korea and China will develop 4 or 5 ports in the eastern coastal area of North Korea.
A source in Beijing said on Sept. 17 that it was confirmed through a Chinese government official that “4 to 5 ports in the eastern coastal area of North Korea in locations such as Seon-bong, Rajin, Cheong-jin, Gim-chaek, Dan-cheon, Heung-nam and Won-san are being jointly developed by North Korean and Chinese companies.” The source added that in addition to the two ports that are being developed in Rajin and Chongjin currently, businesses in the two countries are discussing specific conditions for development in the other areas. This is the first time that this information has been confirmed by a Chinese government official.

The Tanchon Port has been featured prominently in the DPRK media. Learn more about it here.

KCNA reports that a groundbreaking ceremony for a new management board building at the Hwanggumphyong Economic Zone (HGP EZ) took place on 2012-9-15:

Ground-breaking Ceremony for Hwanggumphyong EZ Management Board Building Held

Pyongyang, September 15 (KCNA) — A ground-breaking ceremony for a building of the management board for the Hwanggumphyong Economic Zone to be jointly developed and run by the Democratic People’s Republic of Korea and China, took place on Hwanggumphyong Islet on Saturday.

Present there were Hong Kil Nam, vice-chairman of the North Phyongan Provincial People’s Committee, and officials concerned in the province and Sinuiju City from the DPRK side and Bing Zhigang, vice-governor of the Liaoning Provincial People’s Government of China and officials concerned in the province and Dandong City from the Chinese side.

Speeches were made at the ceremony.

The speakers noted that after leader Kim Jong Il and President Hu Jintao reached an agreement on jointly developing and managing the two economic zones, a series of issues have been settled for the development of the Hwanggumphyong Economic Zone, with a substantial progress made.

They stressed that the joint development and operation of the zone would be conducive to furthering the DPRK-China friendly relations sealed in blood and attaining co-prosperity.

A ground-breaking milestone was erected there.

The Daily NK adds the following:

North Korea hopes that the groundbreaking ceremony will mark the beginning of serious SEZ development at Hwanggeumpyong, which remained a sleepy agricultural backwater even after last June’s launching ceremony, a fact that led to rampant speculation about problems related to the legal framework for the development of the area.

However, development began to accelerate once again after Jang Sung Taek, the director of the Chosun Workers’ Party Department of Administration, concluded the establishment of the management committee during his visit to China last month.

Rhetoric emerging from the Chinese side is also more positive than it has been for some time. In a recent media interview, the deputy mayor of Dandong, which borders Shinuiju, commented, “Now that the Hwanggeumpyong Management Committee has been established, construction has begun on basic infrastructure including roads. From the 15th, the business of developing Hwanggeumpyong will formally begin.”

“Both governments have decided to develop Hwanggeumpyong first then go on to discuss the development of Wihwa Island,” he added. “When the construction of the New Yalu River Bridge and bridges to Hwanggeumpyong and Wihwado are complete, China-North Korea trade, culture, travel and other exchanges will become more active and the two countries will grow closer.”

Additional Information:

1. Chinese working to attract investment  (2012-9-14)

2. On Jang Song-thaek’s recent visit to China (2012-8-23)

3. Yalu River Bridge (2011-6-25)

4. HGP Announced (2011-6-14)

5. Laws governing HGP (2012-3-19)

6. Previous posts on Hwanggumphyong Economic Zone

Institute for Far Eastern Studies

North Korea is exerting efforts in pulling Chinese investments into its special economic zones (SEZs).

On September 7, the 8th Jilin, China-Northeast Asia Investment and Trade Expo was held in Changchun, China as well as the 6th high-level forum for Northeast Asian economic and trade joint venture to promote the joint investment projects of Rason and Hwanggumpyong special economic zones.

At the event, North Korean officials focused on explaining the advantages and favorable conditions for foreign investors, including the joint management committee to be operated by both countries and laws and regulations installed for investment protection.

In the past, North Korea mainly focused on Rason SEZ but this time around, the spotlight was turned to Hwanggumpyong. Chinese officials went on to explain the details of 14.4 square-kilometer Hwanggumpyong SEZ, where five major industries – textiles, modern agriculture, electronics and communications, culture and industrial and trade services – with industry, culture, and service serving as the three major functions of Hwanggumpyong.

Furthermore, the tariff, tax and other benefits will be provided to various industries. The processing trade industry will be exempt from tariffs, and those companies operating for more than ten years will be granted tax exemptions, while those companies contributing to the infrastructure construction, tourism and hotels will be given priority and other favorable conditions. Last year, North Korea only centered its attention to Rason SEZ, with no mentioning of Hwanggumpyong.

Out of the thirty companies that participated at the North Korean exhibit, were from Rason SEZ. These companies represent the successful cases of Rason, recognized for abundant seafood, processed foods, and textile production.

One company from Rason stated, “repair and expansion project for the road connecting Hunchun with Rason will be completed by the end of this year, which will stabilize power supply that can attract more foreign investment from China.” According to a North Korean businessperson, there are 216 companies currently operating in Rason and over 80 percent are joint venture through foreign capital.

Since January 2010, the city of Rason received the designation as the metropolitan city and has improved the business conditions. Foreign companies inviting their business partners from home to Rason became easier, where visas were processed efficiently, as quickly as a day.

There are plans of more briefing sessions for North Korean SEZs to be held in Beijing, later this month. It is planned to be held from September 26 to 27 with over 30 state managed companies and over 100 representatives participating to explain 50 new investment projects.

The invitation of this event reiterated, the purpose of this briefing session was to attract Chinese investment for North Korean companies, for the contribution of economic development and improvement of people’s lives in North Korea.”