North Korean Economy Watch

Institute for Far Eastern Studies (IFES)
2011-9-21

The minimum monthly wage at the Rajin-Sonbong (Rason) Economic and Trade Zone has been set at 80 USD.

The Rason Economic and Trade Zone is a joint development project between China and the DPRK. Recently, a booklet on the “Tax Policy in the Rason Economic and Trade Zone” was published by Rason city’s tax bureau to introduce the zone’s tax policy to foreign investors. The booklet designates the monthly minimum wage for local employees at 80 USD.

The Rason Economic and Trade Zone Law was revised in January 2010, handing to local Rason authorities the jurisdiction to decide on the minimum wage for the North Korean workers working for foreign companies in the region.

With wages in China rising, Chinese firms are tending to look at Vietnam and Indonesia to build factories. The Rason Economic Zone is also becoming an attractive alternative, especially for those investors from companies situated in China’s northeastern provinces.

The monthly minimum wage at Rason will be 25.3 percent higher than the Kaesong Industrial Complex (KIC), which is set at 63.814 USD. However, the minimum wage at Rason still remains below half of the minimum wage of workers in China. According to the (South) Korea Trade-Investment Promotion Agency (KOTRA), the monthly minimum wage in China is 167 USD.

The booklet also provides detailed descriptions of tax related information in the Rason area.

For buildings obtained with one’s own funds, property tax will be exempted for five years. It will also be possible to make inheritance tax payments in installments, if it exceeds 20,000 Euros.

The corporate income tax rates range from 10 to 14 percent. Those companies that invest over 30 million Euros will be exempt from income tax for four years from the year they record a profit. Afterward for the next three years they will receive a 50 percent tax reduction. Other taxes such as sales and transaction taxes are set at 0.6 to 5 and 0.3 to 2.5 percent.

In addition, tax payments are permitted at banks and the tax bureau directly.

Kim Jong Il made a visit to Rason in 2009 where he announced to focus on three main sectors to revive the North Korean economy: manufacturing, transportation, and tourism.

According to a North Korean authority, “Investing in labor intensive industries will be profitable in many ways. Many Chinese and even Taiwanese textile companies are expressing interest in building factories in the Rason area.”

In addition, Rason authorities expressed future plans to attract businesses in the tools, shipbuilding, automobile, and high-tech industries, and are making great efforts to attract foreign investments to the area by promoting the zone’s geographical proximity to China and Russia, cheap labor, and tax benefits.

Additional Information:
1. Read more about the Rason tax and wage policies here.

2. Read previous posts on the Rason Zone here.

According to Yonhap:

The price of rice in North Korea has risen constantly over the past six months, reaching as much as 2,400 North Korean won (US$17.18) per kilogram early this month, South Korea’s Unification Ministry said Friday.

After falling to as low as 1,400 won per kilogram, rice prices started to increase in April and reached between 2,200 and 2,400 won by early this month, according to the ministry, which handles inter-Korean affairs.

Here is a compendium of stories about thie DPRK’s alleged food shortage and food aid this year.

Read the full story here:
Price of rice in N. Korea rises over past 6 months: ministry
Yonhap
2011-9-23

Pictured above (Google Earth): An unofficial street market in Sinchon (신천) is bustling while the nearby official marketplace is closed.  See in Google Maps here.

The Choson Ilbo posted a few factoids about the official and unofficial economies of the DPRK:

The rationing system, the backbone of the socialist planned economy, has nearly collapsed. Some 4 million people still live on rations — 2.6 million in Pyongyang and 1.2 million soldiers.

But a senior South Korean government official said 20 million North Koreans rely absolutely on the underground economy.

“A North Korean family needs 90,000-100,000 North Korean won for living costs per month, but workers at state-run factories or enterprises earn a mere 2,000-8,000 won,” the source said. “So North Koreans have no choice but to become market traders, cottage industrialists or transport entrepreneurs to make up for shortages.”

Many stores, restaurants, and beauty parlors are privately owned. Private tutors teach music or foreign languages. Carpenters have evolved as quasi-manufacturers who receive orders and make furniture on a massive scale. They earn 80,000-90,000 won per month on average.

It is common to find people in front of railway stations or in markets who wait to earn a few extra won by carrying luggage or purchases in their handcarts. Like taxis, their fees are calculated on a basic fee and the distance covered.

In the countryside, people earn money by selling corn or beans grown in their own vegetable gardens in the back yard or in the hills. They can harvest 700 kg of corn a year from a 1,600 sq.m. lot. And by selling 50 kg of corn a month they make 30,000-40,000 won on top of their daily living costs.

“Ordinary North Koreans have become so dependent on the private economy that they get 80-90 percent of daily necessities and 60-70 percent of food from the markets,” the security official said.

Noland and Haggard’s recent book, Witness to Transformation, contains thorough and revealing data on market utilization in the PDRK. More here.

According to Yonhap:

North Korea owes about 1.8 trillion won (US$1.5 billion) to South Korea in food and other shipments, with its first repayment due next June, but chances of repayment are slim given the country’s crumbling economy, a government report said Monday.

The debt is for food, railway equipment and raw materials South Korea has provided to its impoverished communist neighbor in the form of loans over the past decade, according to the Unification Ministry report submitted for the annual parliamentary audit.

South Korea had been one of the largest aid providers to the North, but such shipments were halted after President Lee Myung-bak took office in early 2008 with a pledge to link aid to progress in efforts to end Pyongyang’s nuclear weapons programs.

Repayment of the loans was scheduled over 20 years with a 10-year grace period, at 1 percent annual interest. The North is scheduled to make its first repayment in June of next year for a $5.83 million food loan extended in 2000.

South Korean officials, however, have cast doubt on that repayment given the North’s dire economic situation.

The DPRK remains in debt default from loans taken in the 1960s and 1970s. The Russians are in talks to forgive DPRK debts (Likely in connection with developments of the Rason economic zone and/or natural gas pipeline).

You can learn more about speculating on the repayment of North Korean debt here.

Pictured above (Google Earth): Hyesan Youth Copper Mine.  See in Google Maps here.

According to Xinhua (China):

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.

According to Reuters:

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.

According to KCNA:

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.

Although foreign investors and aid groups frequently build/ repair / upgrade North Korea’s state owned enterprises, it is rare that they are given any credit for their work in the official media.

Previous posts about the Hyesan Mine:
1. Poor electricity supply (2011-5-16)

3. Mine is flooded (2007-11-1)

4. China investing in mine (2007-4-12)

5. Chinese investing in mine (2006-12-24)

Additional mining information:
1. DPRK – China minerals for food program (2011-8-19)

2. DPRK looking to export rare earths (2011-7-23)

3. DPRK – China trade: 1995 – 2009 (2011-6-7)

4. Increase in DPRK’s mineral resources exports to China expected again for this year (2011-2-28)

5. DPRK – China mining deal (2011-2-6)

6. China expanding mining rights in DPRK (2010-1-15)

Institute for Far Eastern Studies (IFES)
2011-9-14

At the seventh China Jilin and Northeast Asia Investment and Trade Expo (NEASIAEXPO), the North Korean delegation actively promoted the Rajin-Sonbong (Rajin) Economic and Trade Zone to attract investment.

During the expo, the DPRK’s Ministry of Trade and China’s Ministry of Commerce and People’s Government of Jilin Province co-sponsored the “(North) Korean Business Day and China-DPRK Trade and Investment Session” at the Changchun International Conference and Exhibition Center on September 7. Hwang Chol-nam, the vice mayor of Rason City, briefed the attendees on the current situation, advantages, and special benefits of his city.

According to Hwang, “The spacious 470 square-kilometer Rason Economic and Trade Zone is one of the largest economic trade zones,” and advertised the geographic and economic advantages of Rason as the “transportation hub of Northeast Asia that connects China and Russia via Tumen River and with Japan across the East Sea.”

He also introduced the three ports in the region. “Rajin Port is equipped with the annual loading capacity of 3 million ton and Sonbong Harbor is able to transport 2 to 3 million ton of oil while Ungsang Harbor is able to handle up to 600,000 cubic-meter of lumber annually.” He also boasted the ports to be deep enough where it does not freeze during the winter.

Rason was also introduced to have received the “special city” designation in 2010 and will grow to have a population of one million. The recently amended “Law on the Rason Economic and Trade Zone” was revised and supplement with over 50 articles.

Hwang also elaborated on the eight preferential policies providing special tax benefits to foreign investors. He asserted, “The government of North Korea will guarantee the investment of the foreign investors by not nationalizing or demanding requisitions. For inevitable cases where such demands occur, proper compensation will be provided.”

The income tax is also at 14 percent, which is 11 percent lower than other areas in North Korea. For companies with business plans over ten years, foreign capital companies will receive three years of tax-free benefit starting from the profit earning year and two years thereon after will receive 50 percent tax-free benefits. According to Hwang, over 100 foreign companies and offices are operating businesses currently in the special economic zone.

He also announced that the current highway construction project connecting Rajin with Wonjung is expected to be completed in October, and that the Tumen-Rajin port railway system is to be upgraded to a broad gauge railway next month.

Specifically, Russian Railways reached an agreement with North Korea to repair the Hasan-Rajin Railway and improve the Rajin port facilities, especially focusing on Pier 3. The plans include upgrading Rajin as a container harbor to be capable of transporting twenty-foot equivalent units annually. Russia and the DPRK have already conducted measurement and geological surveys and reached the process design phase.

However, Seo Gil-bok, the DPRK’s vice minister of commerce, stated in a speech that North Korea would “actively work hard to make the Rason region a successful collaboration between the DPRK and China,” saying further that they would “pull out all the stops to realize the goals agreed by the best leaders from both nations.”

Many foreign media and correspondents were present at the event to cover the “Korean Business Day.” At the event, North Korea actively promoted the Rason Economic and Trade Zone by also presenting a promotional video of the zone.

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.

Additional Information:

1. Previous posts on Rason can be found here.

2. Additional information can be found here.

3. Source:
Tending a Small Patch of Capitalism
New York Times
Edward Wong
2011-10-12

Institute for Far Eastern Studies (IFES)
2011-9-7

An article entitled, “Joint energy project on the agenda” was featured in the KCNA on August 31, which elaborated on the agreement reached between the DPRK and Russia on August 24 for the construction of a gas pipeline. The joint project is also inclusive of South Korea.

The KCNA said in the article, “The three countries have explored various options in transporting gas and have reached a consensus on building a gas pipeline running through North Korea will be the most cost-effective option.”

It also stressed this project will be beneficial for all three parties. In addition, Russia was commended as the major world power in natural gas and oil reserves and production and stressed Russia is turning its attention to expanding the energy sector.

When the Sakhalin – Komsomolsk – Khabarovsk pipeline that began construction in 2009 is completed, it will be equipped to provide enough gas not only domestically but across the Pacific-Asia region, producing a capacity of 30 billion cubic meters of gas per year.

The news also covered the specific plans of the Russian government to expand its energy supply; to boost the exports of oil and gas from three to thirty percent and five to twenty-five percent respectively, until the year 2020.

Therefore, the inter-Korean gas pipeline construction between the DPRK and Russia will be a vital project for Russia.

On August 30, the ROK’s Grand National Party (GNP) chairman Hong Jun-pyo declared, “The trilateral negotiation will be expected to take place sometime in November on the inter-Korean gas pipeline project.”

Hong also stated, “The ROK-Russia and the DPRK-Russia bilateral agreements have already been reached. Once the three parties meet to sign the tripartite agreement, the project will soon take off.” He also added, “President Lee Myung-bak has quietly pushed forward with the gas pipeline project since he first took office and it will be his major accomplishment.”

After the bilateral summit was held between the two leaders of Russia and the DPRK on August 24, the two nations have consented to establish a special commission to work cooperatively on the gas transit project running through the territories of North Korea to South Korea.

China has reportedly agreed to provide electricity to the Rason special economic zone, and the minimum wage investors can expect to pay the North Korean government to employ North Korean citizens qill be approximately US$80.

According to the Korea Times:

China has agreed to provide electricity to a special economic zone in North Korea’s northeast, a source said Tuesday.

The agreement to provide power to the Rason economic zone was signed between Jang Song-thaek, vice chairman of the North’s powerful National Defense Commission, and China’s Commerce Minister Chen Deming, during an economic meeting on June 8, the source said.

The source cited Chinese officials familiar with the project.

The project calls for laying high-voltage power distribution lines between the Chinese border city of Hunchun and the North’s city of Rajin as well as building a thermal power plant in Rason, the source said.

Construction for the power lines is likely to begin soon while the two sides are in talks to work out details for the envisioned power plant, the source said.

“Power is an important infrastructure in developing the Rason special economic zone,” said Cho Bong Hyun, an expert at the Seoul-based IBK Economic Research Institute. “China’s agreement to provide power increases the chances of the zone’s success.”

The North designated Rason as a special economic zone in 1991 and has since striven to develop it into a regional transportation hub, though no major progress has been made. (Yonhap)

According to Yonhap:

The minimum monthly wage for workers at a North Korean special economic zone has been set at US$80, a source familiar with the reclusive state said Thursday, a small enough sum that could attract Chinese firms to invest there.

North Korea designated Rason as a special economic zone in 1991 with the aim of developing it into a regional transportation hub. Amid few signs of progress, the country broke ground in June on a joint project to develop it into an economic and trade zone with China. The northeastern port city borders both China and Russia.

“According to a booklet I obtained on the tax policy of the Rason economic and trade zone, the minimum monthly wage for workers is $80,” said the source, who spoke on the condition of anonymity.

Under a North Korean law for the Rason economic zone, revised in January last year, the minimum monthly wage for local employees at foreign firms is set jointly by the employer and the municipal authorities.

The amount is higher than the $63.814 recently set as the minimum wage for North Korean workers at the inter-Korean industrial park in Kaesong, the North’s western city bordering South Korea, but less than the average salary of Chinese workers. According to the South’s state-run Korea Trade-Investment Promotion Agency (KOTRA), Chinese workers are paid a minimum of $167 per month.

Experts say this wage gap could attract Chinese investors to Rason, as they have already started showing signs of relocating operations to Vietnam, Indonesia and other countries with cheaper labor than China.

The booklet also contains details of Rason’s tax policy, including a five-year property tax exemption for buildings purchased through private funds and a corporate income tax rate of up to 14 percent, according to the source.

“The booklet was made by Rason’s tax bureau in July-August to introduce foreigners to its tax policy,” the source said.

And according to the Institute for Far Eastern Studies (IFES):

Hwang also elaborated on the eight preferential policies providing special tax benefits to foreign investors. He asserted, “The government of North Korea will guarantee the investment of the foreign investors by not nationalizing or demanding requisitions. For inevitable cases where such demands occur, proper compensation will be provided.”

The income tax is also at 14 percent, which is 11 percent lower than other areas in North Korea. For companies with business plans over ten years, foreign capital companies will receive three years of tax-free benefit starting from the profit earning year and two years thereon after will receive 50 percent tax-free benefits. According to Hwang, over 100 foreign companies and offices are operating businesses currently in the special economic zone.

Read the full stories here:
China agrees to provide power to NK’s Rason economic zone
Korea Times
2011-9-13

Minimum wage at N. Korean special economic zone set at US$80: source
Yonhap
2011-9-8

According to Yonahp:

South Korean firms operating at an inter-Korean industrial complex have asked the government to grant a grace period for their debt repayments, saying the two Koreas’ strained political relations have adversely affected their business, officials at the complex said Wednesday.

The officials said an association of South Korean firms at the factory park collected signatures from some 40 firms operating there and submitted the request to the Ministry of Unification last week. The ministry is tasked with handling inter-Korean affairs.

“Although the total amount of production at the complex has increased this year, about 30 percent of our firms are experiencing significant difficulties,” said one of the officials, who wished to remain unidentified.

In the letter, the firms said their businesses are struggling due to the months-long political standoff triggered by North Korea’s deadly military attacks against the South last year. Seoul suspended nearly all ties with Pyongyang last year over the March sinking of the South Korean warship Cheonan and the artillery shelling of the front-line island Yeonpyeong, which killed a total of 50 South Koreans.

“With a growing number of firms facing the risk of bankruptcy, (we) need emergency measures from financial institutions, including an extension of grace periods and the deferral of debt repayments,” the firms said in the letter.

The association sent a similar request to Rep. Park Joo-sun of the main opposition Democratic Party last week, prompting lawmakers from a special parliamentary committee on inter-Korean relations to plan a trip to the joint industrial zone. The visit was canceled, however, after the Unification Ministry effectively denied their entry. All trips to North Korea are subject to prior approval from the ministry, as the Koreas remain in a technical state of war following a cease-fire at the end of the 1950-53 Korean War.

The industrial complex in the North Korean border city of Kaesong, an achievement of the first-ever inter-Korean summit in Pyongyang in 2000, combines South Korea’s capital and technology with the North’s cheap labor to produce clothes, utensils, watches and other goods.

Read previous stories on the Kaesong Industrial Zone here.

Read the full story here:
Kaesong firms request deferral of debt repayments
Yonahp
2011-8-31