North Korean Economy Watch

Institute for Far Eastern Studies (IFES)
NK Brief No. 10-09-20-1
9-20-2010

The South Korean Ministry of Unification announced on September 14 that the number of ROK workers allowed in the Kaesong Industrial Complex, previously limited to fewer than 600, would be increased by two to three hundred. In response to the sinking of the ROKS Cheonan, the South Korean government limited inter-Korean economic cooperation through the May 24 Measure, sharply cutting the number of South Korean workers in the joint industrial complex from around 1,000 down to 500. However, after companies in the complex voiced complaints over production losses caused by the measure, the government slightly raised the number of workers allowed, to 600, in mid-July. With this latest decision, the number will return to almost as many as were working prior to the May 24 Measure. This is the first sanction among those passed on May 24 to be practically rescinded.

A spokesperson for the Ministry of Unification stated, “Companies in the KIC have been complaining about growing difficulties in maintaining quality and of worker fatigue due to the reduction of employees [allowed in the complex],” and announced that the ministry had decided to increase the number of workers since it sees no physical threat to them. This announcement came as inter-Korean relations, which took a sharp turn for the worse after the sinking of the ROKS Cheonan, appear to be improving, with North Korea returning South Korean fishermen seized last month, the ROK Red Cross decision on September 13 to send disaster relief in response to flooding in the North, and working-level discussions on a reunion for separated families being held. However, the spokesperson also stated that although the number of workers allowed to travel to North Korea was being increased, no new or additional investments were being allowed in the KIC, as originally dictated by the May 24 Measure.

Even before the announcement to increase the number of workers in the KIC, the South Korean government had shown flexibility when it came to the May 24 Measure; contracts made before the measure were honored, and North Korean manufactured and agricultural goods have continued to be imported under agreements reached before the sanctions. The government was flexible on humanitarian aid, as well, continuing to provide assistance to the most destitute in North Korea despite the decision to suspend aid on principle. Medical aid, particularly to prevent the spread of Malaria, has also continued. Recently, the South Korean government decided to allow the ROK Red Cross to send 5,000 tons of rice and 10,000 tons of cement, worth approximately 100 million won, to North Korea in response to massive flooding. This is the first time since the Lee Myung-bak administration came to power that any rice aid has been sent to the North. It is very likely that it will be sent as private-sector aid.

Seoul continues to ban visits to North Korea, but private-sector organizations have been allowed to travel to the Kaesong region. Despite the May 24 Measure, exceptions have been made for South Koreans involved with economic cooperation in the KIC and the Mount Keumgang areas. Among the sanctions passed in May, the ban on North Korean ships operating in South Korean waters and the ban on new investment in the North are still being enforced, but the suspension of inter-Korean exchanges, travel to the North, and provision of humanitarian aid have all been eased.

Among the Ministry of National Defense measures, the only psychological warfare tactic employed has been through radio broadcasts, while the distribution of leaflets and the broadcasting over loudspeakers were canceled after North Korean protests. Joint U.S.-ROK anti-submarine warfare exercises in the West Sea were postponed, while the U.S. put on a show of force with the deployment of an aircraft carrier to the East Sea in late July. Maritime interdiction drills led by the ROK military are planned for mid-October. The South Korean government insists that the May 24 Measure continues to stand unchanged, yet the enforcement and execution of the details is less than uniform.

The government’s position is that the restriction on workers in the KIC was not a sanction aimed at North Korea, but rather, a measure to protect South Korean workers; therefore, easing this restriction cannot be seen as a lifting of the May 24 Measure. Ultimately, it appears that a slight improvement in inter-Korean relations has led to a small amount of flexibility in implementing the May 24 Measure, but that the government will continue to enforce the measure until North Korea takes responsibility for sinking the ROKS Cheonan.

The German version of the Financial Times has published an interview (of sorts) with Volker Eloesser and his DPRK JV technology firm, Nosotek. Below I have posted an English translation of the article.

FT: You think the economy in North Korea is starving. That is right! Nevertheless, it attracts entrepreneurs there like Eloesser Volker from Germany. He tells Anna Lu the story of his life in the land of Kim Jong-il.

North Korea is one of the most isolated and inaccessible countries in the world. Nevertheless, there are millions of university trained Koreans and entrepreneurs living in the country. Volker Eloesser is one of the entrepreneurs. Eloesser runs a company in Pyongyang. The IT company is known as Nosotek and is a joint venture with the North Korean state. It is not very simple to talk to Eloesser about his life and work in North Korea. The lines are too unstable to North Korea, with numerous eavesdroppers. Not everything can be talked about openly. The following article is the outcome of countless emails between Pyongyang and Hamburg.

VE: “Why do we work in North Korea? There are signs that the country can develop into a booming region. Recently, a short report about the iPad was broadcast. Videos from South Korea are widely circulated amongst students. The policy change may not be imminent, but it is unstoppable. Once that happens, property prices will increase.

This is the strategy of most foreign companies here: Real estate speculation, even if the permits for foreigners are only granted in a joint venture status. Many of the companies produce products as a matter of form and do not make any significant profits. Other opportunities include buying up restaurants, shop buildings and swimming pools. Just imagine if someone would have built a restaurant in China in 1985 in Tiananmen Square. Or at Alexander Platz in East Berlin. Opportunities like these do not happen often in the world.

FT: Volker Eloesser operates an IT company in Pyongyang, North Korea and hopes the country develops into a booming region.

VE: Naturally, we only invest very little into production. Nosotek develops software and apps for the iPhone. We are quite successful. One time, we were even in the top ten in the App Store. Our customers do not want us to mention the name of our company or our employees’ names on the product. Although it is going well, we do not generate profits yet. Our headquarters is located in one of the most sought after residential areas in Pyongyang, not far from the center. The area boasts multi-story, stucco houses and easy metro access. These are some of the best conditions possible, so we are optimistic.

Unfortunately, many things are expensive here. The bulk of the goods are imported and therefore, cost twice as much as they would in China. Power, logistics and communications are almost prohibitive. However, wages are way below Chinese standards, which is a key benefit if you get good people. There are plenty here, all with a university degree in computer science or mathematics, some have doctorates. They seem to wait for an announcement of a job opening. I only have to ask my Korean partner and 14 days later new people are coming in for a trial. I can say nothing about the wages.

FT: In fact, the average salary in Pyongyang is around 3,000 Won a month. After a devastating currency reform and crop failures in recent years, this affords an employee about three kilos of rice. Eloesser does not say it, but we hear such things from aid workers in the region. The aid workers do not wish to be identified. Eloesser further:

Eating together in the common area.

VE: “In total we have 45 Korean employees, including five women. I, am the only European. We all eat in the company common area every single day. I particularly like the octopus salad and will miss it if I relocate. After work, colleagues remain a little longer and often sing songs to the guitar. The atmosphere is friendly. Nevertheless, it is not always easy. Koreans are very proud people who love their country and their culture and know nothing else.

It is not easy to convince them to do something differently. For many it is difficult to recognize a foreigner as an authority, and if they do not understand the meaning of a statement it is often not performed. However, the biggest difficulty is much different: We have an IT company without access to the internet. We solve this problem by delegating the development of online components to partner companies in China. Here in North Korea you can only do things offline. At home I have true internet access, but it is very slow and rather expensive.”

FT: In fact, one can only get on the internet via a satellite dish in North Korea. The acquisition cost to use the internet according to a local charity is the equivalent of 11,000 euros. The monthly expense may be up to 700 euros, depending on how many users share the connection.

VE: “Pyongyang itself has changed in the last few years. Since 2005, the first time I was here, the traffic has doubled. The days of empty roads are long gone, such images only haunt the internet. Instead of old taxis or Ladas, North Korean Pyonghwas and Malaysian Proton sedans are on the road now. Bicycles are hardly center. They may only drive on the sidewalks. There are lots of military jeeps or SUVs from Russian, Chinese and local manufacturers.

You meet uniformed people everywhere in North Korea, but not all are military. Civilians bear just as many olive green suits with no weapons or rank insignias. The rest are soldiers. Soldiers are often used to harvest and help with road and house construction. I never feel threatened by the military presence as a foreigner. I feel I am treated with respect. People think; if he was not important for our country, he would not be here. Nevertheless, I am of course aware that somebody writes reports about me. Wherever I go, if I am at a restaurant or at work, somebody knows me. He notes when and where I parked my car and statements like this interview will be read by the authorities. At first I thought they listened to me at my apartment. However, even if they have actually done this, I think it has become boring for them.

Sometimes I can understand their suspicions; the reports by many Western media outlets are biased. Recently, the North Korean government printed a picture of children splashing around in Wonsan. People abroad believed the picture was staged, but this type of activity is common in the summertime heat.

FT: Sense of unwritten prohibitions

VE: The authorities are particularly suspicious of journalists and tourists because they do not know their true intentions. We are entrepreneurs and largely left alone. We are not required to go to political events or memorials. As a business man you have one clear goal, business. It is understood and supported. Life would be easier if we knew what we can and cannot do. Unfortunately, this is not written anywhere. It is better to hold back. Over time, you develop a sense of unwritten prohibitions. I have my own opinion about the policy, but I will keep it to myself. I make sure I never have a camera with me, not even on my phone. I do this so no one thinks I want to photograph something without permission. I live in the Bulgarian Embassy because there are no mixed residences. I never visit North Koreans at home and do not talk to them on the street. I do talk to children occasionally. They are not afraid of foreigners and like to try out their English vocabulary. They will say things like; “How old are you?” Where do you come from? Bye-bye.” Then they run away giggling.

Basically, I lead a fairly normal life here. I can move around in my free time and go to the mountains and play golf or tennis. There is a night life in Pyongyang with bars and karaoke. More precisely, there are two types of night life, one for locals and one for foreigners. For example, I do not get tickets to the local cinema. Today I went to an amusement park that many North Koreans visit. The park was built in 2010 and is equipped with fair attractions like the kind they have once a year in small German towns.

Shopping is not a problem. There are no signs of a food shortage as the shops are packed. Curiously, a kilo of chicken on the market is often cheaper than a kilo of vegetables. This may be because chickens can live in backyards and on balconies. Vegetables cannot, that would require offseason greenhouses, which are not found in North Korea. Imported goods usually have astronomical prices. For example; a Hungarian salami costs the equivalent of 42 euros. Other products like yogurt cannot be found in the summer because the refrigeration is inadequate. Sometimes I shop at the diplomatic supermarket and buy things like Haribo, Mosel wine and milk chocolate.”

FT: Of course, the well-equipped shops have a catch; purchases must be paid for in euros.

VE: “By the way, last Saturday night something strange happened. I had an accident. A man ran out in front of my car. He was in dark clothing and came out of nowhere across the eight-lane main road. I slammed on the brakes, but the car hit him, and he fell onto the road. When someone came to help him up, he quickly departed from the scene of the accident. You call that a victim’s escape?

A short time later, three police officers arrived on motorcycles. They were friendly and professional, and they even offered me a cigarette. In some other countries, I would have been imprisoned or would have been asked to pay an exorbitant bribe. Here I was only given a warning, because I had forgotten my passport and driver’s license and the technical inspection (also here) was outdated by nine months. That was all. There was not a victim. Only screeching tires in the night.”

The original German verison can be found here:
Unser Mann in Pjöngjang
Financial Times (German edition)
9/12/2010

Aiden Foster-Carter has written an long piece in the Asia Times on North Korea’s geopolitics.  It is a fairly long piece, so here is the punch line:

So there’s our winner. Its rivals’ missteps have helped, but Beijing has long played a skillful, patient game. Like Moscow, it irked the North by recognizing South Korea (in 1992), but unlike the abrupt Russians it worked hard to soothe sensitivities.

Eighteen years on, guess which power is the top trade partner of both Koreas? Now, there’s subtle hegemony for you. No prizes either for guessing who’s snapping up North Korea’s mines, and beginning the lengthy, costly process of modernizing its decrepit infrastructure.

Face it: who else has the motive, or the means? As all agree, China’s overriding worry about North Korea is not Kim’s nukes but fear of collapse, and the chaos this could cause on its own borders. Beijing’s consistent strategy is not to paint Kim into a corner, no matter what.

Knowing that, how did policymakers in Seoul or Washington delude themselves that China would hurry to join a chorus of condemnation over the Cheonan? No way. Beijing squirmed a bit, but the game was worth the candle. Let Washington and Seoul huff and puff. All that achieved was to push an ever-more isolated North Korea further into China’s orbit and influence.

Nothing is certain, especially about North Korea where forecasts (this writer’s not least) have a habit of turning out wrong. I expected North Korea to collapse long ago: guilty as charged, m’lud. I understimated this tough regime’s staying power, or the horrors it would impose on its people – including famine – to cling to power while refusing to see sense.

But this can’t go on forever. The old game of militant mendicancy is finally up. Kim Jong-il’s frail health, a delicate succession, and an empty treasury – United Nations sanctions have hit arms exports, and crime doesn’t pay like it used to – make defying the entire world just too risky.

North Korea needs a sugar daddy. There is only one candidate left standing, and one who fits the bill perfectly. It may not be a marriage made in heaven, mind you. Pyongyang will keep squawking, and even try the old game of playing off its interlocutors – as in its latest thaw with Seoul.

But at the end of the day Beijing is making an offer no one else can match, and which North Korea can’t refuse. It goes roughly like this: Okay, we’ll bail you out, we’ll guarantee your security, we’ll even stomach your weird monarchical tendencies – unless the kid turns out to be a complete klutz, in which case you know what to do. Jang Song-taek (brother-in-law to Kim Jong-il) knows the score.

You can count on us too not to shame you by spelling all this out and giving the game away. But yes, we do need something in return. Two things. First: markets. For goodness sake just leave them alone, nay let ’em rip – as we’ve been telling you to, ever since Deng Xiaoping.

Look where we are now, and where you are. We’ll do the heavy lifting of investment, so you have functioning factories and railways again. But you have to let it happen. No going back.

Second: no more trouble. We know it may take time for you to give up your footling pesky nukes. But we need an absolute guarantee of no more tests, or else. No other provocations, either. Our People’s Liberation Army will teach your Korean People’s Army how to adapt and how to make money. The new North Korea will be a good global citizen, trading like we do. The returns are good. It beats mugging any day.

And guess what? You’ll love it, all of you. You’ll prosper. No more worries. Your people will eat; your elite will make money. What’s not to like? Just stop all that shouting and marching; what a relief, eh? The rest of the cult can stay, if you must. All hail the young general Kim Jong-eun, finally fulfilling grandpa’s dream of peace and prosperity for all! (With a bit of help from his friends, but we’re modest.) You’ll love him. You really will.

This seems to me a plausible scenario for North Korea’s future. In fact, I struggle to imagine any other. Korean reunification? Maybe in the very long run – but right now, who wants it?

Not the North, whose elite know the fate of their East German counterparts after unification. Can we really expect them to put their faith in the tender mercies of Lee Myung-bak? Even under Kim Dae-jung or Roh Moo-hyun it would have been tricky. What place would there be for most of them, frankly, in a reunified peninsula? Not a privileged one, that’s for sure.

Ordinary North Koreans, too, have learned, from the trickle who have made it to Seoul, that South Korea is no land of milk and honey. True, they’d like a life, and to eat. But China, or a North Korea open to and learning from China, might look a better bet on that score.

Nor is the South enthusiastic, despite all the rhetoric. It would be embarrassing and galling to see the North become a Chinese satellite – yet perhaps also a huge relief. Let Beijing bear the brunt, the burden, and the costs of transforming the madhouse they have long sustained.

Further down the line, blood could prove thicker. By 2040 or so, a by then semi-transformed North Korea may tire of great Han chauvinism, slough off the Chinese yoke, and embrace the cousins south of the demilitarized zone (which would long ago have become more permeable). They’d be easier to absorb, too, now smoothed by a few decades of Chinese-style modernity.

Speculative, to be sure. But what other scenarios are there? And though from one viewpoint China has edged out rival powers as argued above, presumably to their chagrin, might some of them in truth be quietly relieved to be spared the responsibility? Let China take it on and deliver a new-style North Korea, vibrant and fit for a new century. It could last a long time, and spare the region and world much headache and risk. Does anyone have an alternative?

Aidan Foster-Carter is honorary senior research fellow in sociology and modern Korea at Leeds University, and a freelance consultant, writer and broadcaster on Korean affairs. A regular visitor to the peninsula, he has followed North Korea for over 40 years.

You can read the full article here:
How North Korea was lost – to China
Asia Times
Aidan Foster-Carter
9/16/2010

Here is the report (in Korean) on the KFI web page.   Here is that page translated with Google Translate.

The report was also carried in the English language media. 

According to Reuters:

The cost of reunifying the two Koreas, split since shortly after World War Two, would tot up to about 3,500 trillion won ($3 trillion), the Federation of Korean Industries said on Tuesday.

Not one of 20 economists surveyed by the federation expected reunification in the next five years but almost half said it would happen in 10 to 20 years.

Nearly half also said the largest cost associated with reunification would be in efforts to cut the wealth gap between the wealthy South and the impoverished North.

“The costs to minimize the gap between South and North Korea over the long-term are expected to be greater than the initial cost of reunification,” the federation said in its report.

South Koreans earn an average about $19,230 a year while North Koreans earned about $1,065 in 2008, according to South Korea’s Unification Ministry.

Concerns about the costs prompted South Korean President Lee Myung-bak to propose a “reunification tax” last month.

“In the short term the shock to the Korean economy will be great but in the long-term reunification will be positive,” the survey said.

The two Koreas are still technically at war as hostilities in 1950-53 Korean War conflict ended in a truce, not a peace treaty.

Yonhap also covered the report:

Most of the experts also said the divided Koreas will likely be reunified within the next 30 years, according to the survey conducted by the Federation of Korean Industries (FKI), the largest business lobby in South Korea.

The questions raised by the FKI came after President Lee Myung-bak proposed introducing a new “unification tax,” which he said will help lessen the financial burden of reuniting with the communist North.

Of the 20 experts surveyed, 63.1 percent said the reunification of the two Koreas will cost more than that of Germany, about $3 trillion. The amount includes the initial costs of stabilizing the nation following a reunification, but also the costs of eradicating any economic and social disparities between the two Koreas.

Half of the respondents said the country needed to begin discussing ways to pay such enormous costs of reunification, while 20 percent said such discussions must begin immediately.

“It also showed every respondent saw the need for such discussions as no one answered such discussions were unnecessary,” FKI said in a press release.

None of the respondents said the reunification will take place within the next five years, but 95 percent, or 19 out of the people surveyed, said the two Koreas will likely be unified before 2040.

They all agreed the unification with North Korea will be a great burden on the South Korean economy in its near future, but a great opportunity in the long term.

Here are links to previous posts on this topic.

Read the full stories here:
The cost of reunifying Korea? About $3 trillion
Reuters
9/14/2010

Experts say Korean unification will cost over US$3 trillion
Yonhap
9/14/2010

According ot the Daily NK:

Since the North Korean security forces have been on special alert for the last two weeks in advance of the Delegates’ Conference, there has been a contraction in market activity, and this is forcing up rice prices.

In September, when farmers normally start harvesting, rice prices tend to drop, but because regular citizens do not know when the Delegates’ Conference is going to start, things are not easy this year.

A source from North Hamkyung Province told The Daily NK yesterday, “In Hoiryeong Market, rice was 1,000 won per kilo in late August, but today it is 1,300 won. The reason is that the special alert has been in force for around two weeks in the run up to the Delegates’ Conference, so there is less food trading going on.”

During any “special alert,” which the authorities impose in preparation for important political events, controls over migration and so-called “anti-socialist” activities are reinforced on pretexts of national security and rooting out espionage agents. The selling of rice is one thing which is subject to control.

Meanwhile, the most desirable corn is currently worth 750 won per kilo, according to source. This is corn produced last year; newly harvested corn costs 500 won. People tend to prefer old corn to this year’s corn because when they put it in water to cook, its volume increases more.

The source also explained that the people know exactly who to blame, saying, “People are complaining that last spring the authorities irritated them in order to wage war against South Chosun, and now they are being bothered with the Delegates’ Conference, which is still on hold.”

“Due to a crackdown on ‘grasshopper traders’ around markets, only traders who can afford a stall within the market can do business,” he went on. “It is natural for rice prices to rise because there are fewer rice sellers.”

Grasshopper trader means one who does business in alley markets, moving location in order to avoid the authorities.

The source noted, “In late October or early November, food prices may stabilize, but I am not sure because flood damage was so serious this year.”

With rising rice prices, exchange rates also rose; in Hoiryeong, one Yuan is now worth 235 won, which is 10% more than in late August.

See Andrei Lankov’s comments on the delay in the party conference here.

Read the full story here:
Conference Security Hitting Cost of Rice
Daily NK
Yoo Gwan Hee
9/14/2010

According ot the Daily NK:

An official in the Ministry of Unification has revealed that the government is planning to allow an increase in the number of South Korean nationals permitted to overnight within the Kaesong Industrial Complex.

The new standard will allow a 50% increase in South Koreans staying in the Complex, from the current 600 to a maximum of 900, with the new limits set to take effect after the “Chuseok” harvest festival later this month.

Explaining the plan, the official said, “While the restrictions on residing personnel have been in place, fatigue has accumulated and problems have constantly occurred with companies having a great many production and quality errors,” adding, “So we can expect the government to select this course of expanding the number of residing personnel to between 800 and 900 this week.”

“Especially, maintaining production quality during the period of high demand starting in September with the current staffing levels would be difficult,” the official went on, “so companies have requested an increase in staffing levels, and the government has been considering the companies difficulties and requests.”

However, the official stressed that the move doesn’t mean the government is softening its stance in terms of post-Cheonan sanctions measures, saying, “The May 24th Measures will stay in place, and restrictions on new business investment and new investment in existing businesses will continue.”

At the time of the May 24th Measure, the number of personnel permitted to overnight in the Complex was fixed at 550 from its original limit of 1,000, though the real average was only around 500. However, the limit was increased to around 590 in July based, the Ministry of Unification announced at the time, on the “stances of the corporations and (the government’s) experience of running the complex.”

Read the full story here:
Government Plans Kaesong Personnel Change
Daily NK
Chris GReen
9/14/2010

The video was originally released by the Choson Ilbo, but the Telegraph (Britain) has posted a high-quality version of it:

Click image to link to video

According to the Telegraph:

The video, obtained by Chosun Ilbo media agency, shows people [in Sinuiju] living in tents on streets with their water damaged belongings. Others can be seen buying water from a salesman.

The price of water has increased since the floods, according to the agency’s source, with a bowl costing 6 pence. The usual monthly wages are around £1.30.

Heavy rains in July and August have hit food production that, even in a good year, falls a million tonnes short of the amount needed to feed North Korea’s 23 million people.

According to the Chosun Ilbo, North Koreans in Shinuiju were complaining about the government and their inability to help the area properly.

Last week the South Korean government offered to provide £5.5m in emergency aid, including food, relief materials and first aid kits – but not rice nor construction equipment, as per Pyongyang’s request.

North Korea’s request was made through the Red Cross at the weekend, and is being reviewed, the Unification Ministry said in a statement.

South Korea has been reluctant to give rice to the North because it is worried it will not reach the people who need it most.

Pictures of the flooding can be found here.

Read the full story here:
Rare footage from inside North Korea reveals aftermath of floods
Telegraph
9/7/2010

According to the Daily NK:

A new survey [in South Korea] has suggested that the May 24th Measure, which was put in place in response to the sinking of the Cheonan in March, has had a serious effect on entities doing business with North Korea, in many cases harming them in a way capable of putting them out of business altogether.

The survey, conducted by the Korea Chamber of Commerce and Industry, included a total of 500 companies; 200 with trade ties to the North and 300 without.

Of that 200, 93.9% said they have suffered what they characterized as substantial losses since the May 24th Measure imposed a trade ban with the North, while 66.5% said this was enough to put them out of business.

The survey put the average losses of those firms with ties to the North at approximately $800,000.

Meanwhile, around 8 out of 10, or 83%, of the 500 said that they now have no interest in developing business ties with the North, regardless of the political and economic environment.

Read the full story here:
Survey Reveals Effect of Trade Ban
Daily NK
Chris Green
9/8/2010

Institute for Far Eastern Studies (IFES)
NK Brief No. 10-09-07-1
9/7/2010

Construction on a day-care center for the children of North Korean workers in the Kaesong Industrial Complex (KIC) has been completed, and the center was opened on September 1. The ROK Ministry of Unification released a statement announcing that “a child-care center has been built with the aim of providing care for the children of North Korean female laborers in the KIC and to improve productivity of the industries in the complex.” With the opening of the new center, more than 300 additional children can be cared for, along with the more than 200 children that are currently attending day-care in the complex.

Ground broke on the new facility, with over 3,100 square meters of floorspace, on September 24, 2009, and it took over a year to complete. The real estate was provided by the North, with the South-North Cooperation Fund providing 900 million won for the build. The Kaesong Industrial District Management Committee has turned over the management of the center to the North, and factories in the complex pay approximately fifteen dollars per child per month to send employees’ children to day-care.

In addition, the Kaesong Industrial District Management Committee and the North Korean Central Special Zone Development Guidance General Bureau agreed on August 5 to raise the minimum wage of North Korean workers in the complex by five percent, from 57.881 USD/month to 60.775 USD/month. The raise took effect on August 1 and will need to be reevaluated before July 31, 2011.

Along with the five percent raise in the minimum wage, South Korean companies will gain more control over the hiring process. North and South Korean authorities agreed to strengthen adherence to existing regulations, both on hiring and assigning workers to various positions. Previously, North Korean labor representatives could control work assignments for North Korean workers, but that will be falling under the authority of managers of each business.

According to the guidelines regulating the KIC, North Korean workers will receive a raise of no more than five percent per year, and they have received a five percent raise each year since 2007. North and South have now agreed to continue raises at a rate palatable to businesses in the complex, and to allow South Korean businesses more control over employees.

According to the Daily NK:

An inside source reports that popular dependence on foreign currencies for trading continues in spite of last year’s currency redenomination, to the extent that market traders are openly setting separate prices in U.S. dollars or Yuan alongside the depreciating North Korean won.

The inside source from Pyongyang explained to The Daily NK on September 5th, “In recent market trading, usage of dollars has increased rapidly, and now market prices are being set according to a dollar standard. Even when money is loaned and repaid, the amount for repayment is decided based on the dollar standard.”

As of September 2nd, the exchange rate in Pyongyang was around 150,000 won to $100, as North Korean people refer to it. Loans made in North Korean won are always calculated according to the value of the dollar, and the value of the loan fluctuates accordingly.

The source added, “Recently, market merchants have been setting separate Yuan or dollar prices, except for on rice, corn, and ingredients for side-dishes. The fabric stalls in Sunkyo market in Pyongyang put up all their prices in dollars.”

“Especially in the case of wholesalers,” he added, “they are all trading in dollars or Yuan. They depend on foreign currency since the value of the North Korean currency has fallen so badly and also because there is a lack of large-denomination bills.”

Since 2000, Yuan has been in common use alongside the North Korean currency in border regions. The popularity of dollars is higher in Pyongyang and North and South Hwanghae Provinces. Especially in cases where the unit price of the item is high, such as for home appliances or industrial products, most are dealt with in dollars or Yuan.

However, this is also now spreading to lower value consumer goods like shoes and clothing. Dollar and Yuan prices are applied to such items even when the seller is not a foreign currency store or international hotel.

Despite the fact that the North Korean currency was redenominated at a rate of 100:1 on November 30th, 2009, the monetary authorities have not been able to break North Korea’s inflationary cycle. Currently, rice in North Korean markets goes for around 900 won per kilo, which is only around half the 2,000 won it cost prior to the redenomination, far from the approximately 20 won it would cost in a more stable economy.

The source explained, “The value of the won is unstable, making foreign currency exchange rates more volatile. So merchants are selling products at higher prices than normal to compensate for their losses. This phenomenon is creating in them the mentality of raising their product prices.”

He also emphasized, “Prices for all products imported from China are set in dollars or Yuan. Considering the fact more than 90% of products in the North Korean market come from China, it looks like a world in which the North Korean currency is useless is coming.”

The source added, “Since Yuan are used quite commonly in North Hamkyung Province, Yangkang Province, and Shinuiju, a phrase, ‘This is Chinese land!’ is spreading. At the same time, since the dollar is used a lot in Pyongyang, Sariwon, Haeju, and Wonsan, another joke suggesting that ‘here is U.S. soil!’ is going around as well.”

IFES also covered this story:

With last November’s currency reform, North Korea’s dependence on foreign currency has increased to the point that market prices today are determined in terms of dollars or yuan.

According to Daily NK’s internal sources in Pyongyang, a recent surge in the use of dollars in market transactions has meant that market prices of goods are now determined based on dollars. Moreover, it has been revealed that individuals lending and borrowing money from one another collect and pay the interest in dollars.

As of September 2, the exchange rate in Pyongyang was about 100 US dollars to 150,000 won. If someone was to borrow 150,000 North Korean won from a friend, he would later have to repay that loan in however much North Korean won is equivalent to 100 US dollars at the time.

The source said, “These days, the merchants in the market charge everything in yuan and dollars, except for rice, corn or side dishes,” and, “Clothing stores in Pyongyang’s Seonkyo Market have actually put up signs indicating prices in dollars.”

The source added, “Wholesale merchants, especially, do all of their business in dollars or yuan now,” and “The value of North Korean money has fallen, and there are no more large bills anymore, so everyone is dependent on foreign currency.”

After 2000, the yuan and the North Korean won were both came into common use in the border area between North Korea and China, while the dollar became popular in Pyongyang and Hwanghae Province. Expensive items, such as electric home appliance or industrial goods, were more often than not bought and sold in terms of dollars or yuan, bypassing North Korean currency altogether.

However, recent trends show that the use of dollars and yuan has spread to the sale of shoes, clothes, and other everyday consumer goods. Stores put up signs indicating prices in dollars and yuan, once done exclusively by currency exchange shops or hotel restaurants frequented by foreigners.

Last year, North Korea depreciated its currency at a rate of 1:100 in an attempt to reform its currency, but the efforts to control inflation throughout the country failed. The price of rice in North Korean markets today is about 900 won per kilogram, about half the price it was before currency reform (about 2000 won per kilogram).
The source explained, “Because the value of the won is unstable, the exchange rate varies wildly. In order to not lose money, merchants have been fixing their prices higher than normal.”

The source emphasized, “Goods from China are all sold in dollars or yuan,” and “Considering that over 90% of the commodities circulating in the markets today are from China, it appears that North Korean money will be rendered useless in the near future.”

“In North Hamkyeong Province, Yangkang Province, and Sinuiju, where the yuan is often used, they say ‘This is Chinese land,’ and in Pyongyang, Sariwon, Haeju, and Wonsan, where the dollar is often used, they joke, ‘This is American land,’” added the [sic].

Read the full stories here:
North Korea’s Fiscal Sovereignty Collapsing
Daily NK
Park In-ho
9/6/2010

North Korea’s dependence on foreign currency increases
Institute for Far Eastern Studies
NK Brief No.10-09-07-2
9/7/2010