North Korean Economy Watch

According to the Daily NK:

Today, the North Korean markets seem to have returned to the days before the currency redenomination. The price of rice appears to be rather stable, especially when compared with that of February or March. Especially, following Kim Jong Il’s trip to China, rumors indicating that food would be imported began to circulate, and this has made declining prices even more marked.

According to inside sources, the price of rice in Hoiryeong, North Hamkyung Province is now 480 won per kilo (June 4th), 420 won in Sinuiju (June 7th), 360 won in Sunam-district of Pyongyang (June 2nd), and 380 won in Sariwon (June 7th). The price of corn is approximately 50% that of rice, although recently in Hwanghae Province, households using corn as feed for pigs drove an unusual situation where the corn price reached almost 70% that of rice.

The exact nature of Chinese support for North Korea cannot be confirmed officially, however, the North Korean regime’s encouraging foreign currency earning enterprises to import food from China since March seems to have contributed to rice price stabilization.

One inside source added that the “reactivation of food smuggling on the border between North Korea and China” has also helped.

However, the main overall reason for the failure of the initial prediction, “When the farm hardship period comes in May and June, food prices will skyrocket” appears to have been the normalization of the market.

The source commented, “Compared with the situation prior to the currency redenomination, trading in industrial goods has decreased slightly, however, it is close to its previous condition. Since buyers and sellers can access that market any time, price volatility is not that great anymore.”

That being said, the opening hours of the market have been reduced since the authorities handed down a “rice planting battle order” in early May which stated, “Everyone must participate in the rice planting battle. The market should only be used for the purchase of food, side dishes and those necessities required for the day.”

The source explained, “Markets everywhere now open between 2 and 4 P.M. and close at sunset,” adding that there are small differences depending on the particular market. In North Hamkyung Province, the market normally closes at sunset; however, markets in Hwanghae Province and Pyongan Province, which are under heavier pressure due to the rice planting, close earlier, at around 6 P.M.

But concerns about food will not be solved even if the price of rice remains stable. Merchants are still watching prices with a concerned look since rumors constantly assert that food prices will increase again in July. The North Hamkyung Provincial Party Committee held a cadres meeting last May in which it released news that food distribution for the months from July to October must be prepared by each unit individually, meaning that the central authorities have no plans to assist.

The agricultural situation is one concern. North Korea has been suffering from a severe fertilizer crisis since the beginning of spring farm preparations. After Kim Jong Il’s visit to China, Chinese fertilizer was imported which temporarily alleviated the situation, but the rumor is that fertilizer for the summer has yet to arrive.

Recently, Kim Jong Il visited a domestic fertilizer production facility, Namheung Youth Chemical Works in Anju City, South Pyongan Province. There, he complimented factory management, saying, “It is a relief to know that fertilizer is being produced in Namheung.” The incident displays North Korea’s concerns about fertilizer.

Other factors which destabilize food prices are the icy inter-Korean relationship and international community sanctions.

Recently, around the North Korean market, the number of street vendors, so-called ‘grasshoppers’ has greatly increased. One source explained, “This situation has been caused by the middle class being demoted to the lower classes due to the big damage they incurred during the currency redenomination.”

Sharply decreasing trade in higher priced goods like home appliances and furniture is derived from the same source.

The tumbling credibility of the North Korean currency is another ongoing worry, as is a lack of small denomination bills. One source explained, “If you purchase a 30,000 won jumper from Sungyo Market in Pyongyang, the cost is $30 (market exchange rate, the equivalent of 27,000 won on the day), but it is 30,000 won if you pay in North Korean currency.” That’s a ten percent mark-up for people using local currency, the material representation of a lack of trust in the won.

In areas of Pyongyang, Wonsan, Sariwon, and Haeju, dollars and then Euros are preferred over won, but in Jagang Province, Yangkang Province, and North Hamkyung Province, Yuan are preferable to dollars. Places where all four; U.S. dollars, Yuan, Euros and won are being used are Sinujiu and the port city of Nampo on the west coast. One source explained that due to this situation, high-priced products like televisions, DVD players and refrigerators are being sold only for U.S. dollars or Yuan.

Also, he added, “There is a shortage of small bills which is causing some inconveniences in market trading.”

At the time of the currency redenomination, North Korea displayed 7 kinds of small bills and coins; 1 chon, 5 chon, 10 chon, 50 chon, 1 won, 5 won, and 10 won. The source explained that demand for the ‘chon’ unit coins is practically non-existent; the problem is that 1 won, 5 won, and 10 won are frequently used in market trading but a shortage of bills is causing inconvenience. Merchants are setting the price of goods mostly in increments of 10 won and 50 won as a result.

Read the full story here:
Everything Is Stable, But for How Long?
Daily NK
Park In-ho
6-9-2010

UPDATE 2: According to the Daily NK:

The recent shooting of four Chinese smugglers on the border between North Korea and China by a North Korean border guard was due to a quarrel between the Chinese smugglers and North Korean border guards about an antiques smuggling ring, according to a local trader.

The North Korean border guard shot the four smugglers on June 4th; three were killed and one was wounded. Afterwards, the North Korean authorities apparently issued an apology for the accident to the Dandong municipal government and paid compensation to the victims’ families.

The trader, Kim, who lives in Dandong, reported the details of the shooting accident to The Daily NK earlier this week. The spot where the accident happened was on a boat around Hwanggeumpyeong on Shin Island at the mouth of the Yalu River, he explained, where the facilities of the Shinuiju Shoe Factory are located.

According to Kim, although it was reported in some quarters that the North Korean border guard did not know who was on the boat and fired at it in the dark, in fact, both sides already had close relations.

They were well acquainted with each other thanks to smuggling, Kim said; the North Korean guard had apparently passed several antiques which he had obtained in the North to the Chinese smugglers. However, the Chinese smugglers did not pay for them and severed contacts with him.

The antiques the North Korean guard had procured included rare pieces of white Chosun dynasty china, he said.

After the Chinese smugglers disappeared, the guard tried to find them for a while, but then encountered them by chance while on his patrols.

The guard chased and eventually caught them, then they argued, but the smugglers refused to pay money for the antiques, claiming they were all imitations.

After a while, the smugglers said they would give other goods of equivalent value instead of money and then tried to leave, at which point the guard apparently shot them.

Kim also reported the details of the North’s official response. After the Chinese Ministry of Foreign Affairs released a statement heavily critical of the shooting, the North sent a delegate to Dandong on the 15th to apologize, he explained.

In a meeting with Dandong governmental officials, the North’s delegate reportedly said it happened accidentally, and expressed the North’s sincere apologies for the accident.

The delegate apparently added that the North would restrict shooting towards the Chinese side and suggested that both sides should strengthen their mutual regulations on smuggling. He also paid $3,000 for each death as per the stipulations of a treaty between the two countries.

Kim said, “I thought the compensation was too low, so I asked once again, but their answer was that it is stipulated by the treaty.”

He added, “They promised the Chinese side that the border guard who shot the Chinese would be severely punished on suspicion of smuggling antiques and killing citizens of an allied country.”

UPDATE 1:  According to Reuters:

The isolated North made the effort to soothe China, its sole major economic and political supporter, after North Korean border guards last week shot at the Chinese nationals crossing the river border near the northeast Chinese city of Dandong.

Three were killed and a fourth was wounded.

Chinese Foreign Ministry spokesman Qin Gang said both countries were now “further investigating and handling the case”. He provided no other details.

On Tuesday, the Foreign Ministry made a rare public complaint about its neighbor and now North Korea appears to be seeking to placate Beijing.

North Korean border authorities said an initial investigation showed the incident was an “accident”, China’s official Xinhua news agency reported.

“The North Korean side expressed its grief over the Chinese deaths, and offered condolences to the families of the dead and to the injured, and will severely punish the perpetrators,” said the report.

“The North Korean border security authorities will further investigate this incident and prevent such incidents from recurring.”

ORIGINAL POST: According to the Associated Press:

A North Korean border guard shot and killed three Chinese citizens and wounded a fourth on the countries’ border last week, China said Tuesday after lodging a formal diplomatic protest.

The guard shot the four residents of the northeastern border town of Dandong last Friday, apparently on suspicion they were crossing the border for illegal trade, Foreign Ministry spokesman Qin Gang said.

“On the morning of June 4, some residents of Dandong, in Liaoning province, were shot by a DPRK border guard on suspicion of crossing the border for trade activities, leaving three dead and one injured,” he said at a regularly scheduled news conference. He used the acronym for North Korea’s formal name, the Democratic People’s Republic of Korea.

“China attaches great importance to that and has immediately raised a solemn representation with the DPRK. Now the case is under investigation,” he said.

Dandong is a major shipping point and rail link for goods going into and out of North Korea from China.

Qin did not give any further information. There have been some reports in South Korean media on the incident, though North Korea has not acknowledged the shootings.

And how did the South Koreans react?  According to the Los Angeles Times:

The irony of China’s protest over last week’s shooting was not lost on South Korea.

“This time it is their citizens who are killed, and they show they are not so naive after all about North Korea,” said Kim Tae Jin, a North Korean defector and human rights activist in Seoul. However, he applauded China’s protest of the shooting. China needs to show North Korean leader Kim Jong Il “that he can’t get away with whatever he wants,” Kim said.

China’s public protest is unusual in that relations between China and North Korea are normally shrouded in secrecy, to be discussed only in the politburos of the longtime communist allies.

“It is rare for China to publicly complain. Usually there is a private apology or money paid,” said Kim Heung Gwang, a former North Korean college professor and head of Seoul-based North Korea Intellectuals Solidarity.

The stretch of the Yalu just south of Dandong is frequently trafficked by smugglers, some of them bringing North Korean-made drugs into China or banned Chinese products, such as DVDs or cellphones, into North Korea.

The North Korean government is especially strict about the export of copper, which has been looted from factories, electrical and telecommunications facilities by Northerners desperate for money. But the North’s border guards do not normally shoot to kill — at least not when the smugglers are Chinese.

“Only their own people,” said Kim.

Read the full stories here:
China says NKorean border guard killed 3 Chinese
Associated Press
Tini Tran
6/8/2010

China makes rare public protest against North Korea over killing of 3
Los Angeles Times
Barbara Demick
6/9/2010

North Korea seeks to soothe China over border shootings
Reuters
6/10/2010

The interview (in German) can be found here. A reader, however, sent in an English version:

Klaus-Martin Meyer: Mr. Kelber, you were recently in North Korea for the first time. Was this trip in what is certainly a totally different world consistent with your expectations?

Ulrich Kelber: Though I prepared myself with both oral and written accounts, there were things, both positive and negative, that surprised me. Among the negative things were the uniformity and control; among the positive were how well educated the people are, and their effort to bring the country forward.

Klaus-Martin Meyer: The political climate of the Korean peninsula is currently more tense than ever. The North Koreans described their version of the fall of Cheonan. How realistic is it?

Ulrich Kelber: I’m not an expert on these sorts of questions, which prevents a very detailed assessment. North Korea’s November threats of retribution alone aroused suspicions. But, in fact, South Korea has to allow questions. Why can’t an independent commission examine the evidence? Why aren’t the survivors permitted to testify publicly?

Klaus-Martin Meyer: In Pyongyang you also visited a German joint venture with the company Nosotek. As a member of the Bundestag, what are your impressions of the working conditions and day-to-day work of software developers in this sector of the North Korean economy? Are you convinced that Nosotek is actually developing for the international market?

Ulrich Kelber: Yes, we saw typical products for the international market, which, as a computer scientist, greatly interested me. The programmers and graphic designers are obviously very highly trained, with technical equipment up to Western standards. One significant exception to this is the lack of internet access in the company itself. Of course, this makes business and customer support more difficult, but isn’t an obstacle for actual software development.

The working conditions were the same as I have seen at German start-ups or in developing countries. No one could comment on the wages, which is also the customary rule in Germany. However, I had the feeling that the employees were part of the middle class, to whatever extent it exists in North Korea.

Klaus-Martin Meyer: How do you rate the opportunities and risks for foreign entrepreneurs in North Korea?

Ulrich Kelber: That’s hard to say after a single visit, but at Nosotek there seems to be little standing in the way of economic success. Possible risks would be the regime further shutting the country off, or wider-reaching sanctions. The well-trained employees, which I also can affirm in other areas such as the trades and agriculture, represent a great opportunity for all businesses.

Klaus-Martin Meyer: As usual in closing, our standard question (not just in interviews about communist countries.) Where do you see North Korea being in five years?

Ulrich Kelber: If the regime doesn’t open up economically, the country will barely progress, in spite of any efforts, for example, to maintain their infrastructure. Even with a little more openness, North Korea could make enormous economic gains, since both infrastructure and well-trained workers are available. The possibility of a political thaw depends both on the ability of the North Korean regime to resolve the succession issue, as well as whether or not South Korea’s hardliners keep calling the shots.

According to KBS:

The Unification Ministry has asked South Korean companies that trade with North Korea to put off paying for goods manufactured in the North.

Ministry spokesman Chun Hae-sung told reporters Monday that the ministry made the request in consideration of sanctions and the suspension of inter-Korean trade following the North’s sinking of the “Cheonan” naval ship.

South Korean companies operating at the Gaeseong Industrial Complex manufacture labor-intensive goods using North Korean manpower.

The South Korean government suspended inter-Korean trade except for production at the Gaeseong complex last month to punish the North after the Cheonan incident.

Read the full story here:
Firms Asked to Put Off Payments to NK
KBS
6/7/2010

UPDATE 2: According to Yonhap:

North Korea has inked a 10-year contract with British oil and gas company Aminex to explore and extract oil on the seabed off the country’s east coast, the Financial Times (FT) in London reported on June 1.

For the deal, North Korea presented Singapore-registered Chosun Energy as its representative to establish a 50-50 joint venture, Korex, with Aminex, the FT said, noting a filing with Singapore’s Accounting and Corporate Regulatory Authority.

Chosun Energy is an investment holding company operated by North Korea with a paid-up capital of US$1.2 million, according to the newspaper. But the newspaper did not elaborate further details on the company.

Korex will search for oil in an area of 50,681 square kilometers (20,272 square miles) in parts of North Korea’s east coast, Aminex said in a statement.

The contract with the British company, which is listed in London and Dublin, was signed around mid-May in London by officials from the North’s oil company and a head official for Aminex.

“Officials from North Korea’s state oil company traveled to London two weeks ago to conclude the 10-year contract. Lord Alton, chairman of Britain’s parliamentary North Korea group, says he showed the officials around parliament,” the FT added.

North Korea has contacted foreign companies and investors to attract foreign capital for searching for its rich natural resources, including crude oil. In 1997, the North claimed it had reserves of 5 to 40 billion barrels of oil.

North Korea has maintained ties with Animex since 1998. Aminex has been hunting for potential oil reserves in the North Korean portion of the Yellow sea since it signed with the country for joint oil and gas development in January 2005.

UPDATE 1: According to the AFP:

The head of a London-based energy firm that signed a deal to search for oil off North Korea said on Thursday he hoped to start exploring in a year but was closely monitoring tensions on the peninsula.

Aminex PLC executive chairman Brian Hall told AFP he expected “field work in about a year” off the communist nation’s east coast and aimed to “find substantial reserves”.

However, relations on the peninsula have become strained after North Korea was accused of carrying out a torpedo attack on a South Korean warship in March that left 46 sailors dead and stoked fears of an armed conflict.

Pyongyang has denied involvement in the sinking and threatened war in response to a trade suspension and other reprisals by the South.

Asked about the timing of the North Korea contract, Hall said “we have been working with (the) North Koreans for over a decade and an agreement such as the one we have recently signed takes many months to negotiate”.

He added: “Naturally we will keep a very close eye on the tensions on the peninsula, as we have done during previous incidents, but our project is of a long-term nature and well thought through.”

Aminex announced last week that an associate company had signed a 10-year contract with North Korea to search for oil in an area of about 50,681 square kilometres (20,272 square miles) in the Korean East Sea.

Hall declined to give an estimate of the potential deposits.

The contract was signed by Korex — a 50-50 venture between Aminex and Singapore-registered Chosun Energy — and the Korean Oil Exploration Company, the North’s state oil firm.

Victor Shum, an analyst with energy consultancy Purvin and Gertz, said there was every chance that oil would be found in the area but stressed the reserves must be of a significant size in order for exploration to progress further.

“The question is whether any oil reserves that may be discovered there are going to be economically viable to extract,” Singapore-based Shum told AFP.

“I think there has been interest certainly by oil companies so there is therefore a possibility of something there … So far the production isn’t large,” he said.

Aminex, with listings on the London and Irish stock exchanges, describes itself as an upstream oil and gas company with concessions in several countries including the United States, Kenya and Egypt.

According to a filing with Singapore’s Accounting and Corporate Regulatory Authority obtained by AFP, Aminex’s partner Chosun Energy is an investment holding company with a paid-up capital of 1.2 million dollars.

It listed its address as the German Centre in Singapore, a building that hosts small and medium-sized foreign companies, and named three directors — an American, one Briton and a Singaporean.

But staff at the German Centre told AFP the company had moved out.

Singapore is a major financial centre and corporate hub, attracting companies from all over the world because of the ease of doing business and access to funding.

North Korea, one of the world’s most impoverished countries, is starved of energy and foreign exchange after decades of isolation as well as economic sanctions, but is believed by US officials to have up to six nuclear weapons.

South Korea’s ban on most trade with North Korea in response to the ship sinking will cost the communist state hundreds of millions of dollars a year, according to figures from the Seoul-based Korea Development Institute.

ORIGINAL POST: According to the Financial Times:

Aminex, listed in London and Dublin, has formed a company, Korex, to pursue the project jointly with Chosun Energy, a Singapore-listed company that identifies James Passin as one of its directors, according to a filing with Singapore’s Accounting and Corporate Regulatory Authority.

Mr Passin is a New York-based fund manager. His Firebird Global Master Fund II half owns Chosun Energy and targets resource deals in frontier markets.

Officials from North Korea’s state oil company travelled to London two weeks ago to conclude the 10-year contract. Lord Alton, chairman of Britain’s parliamentary North Korea group, says he showed the officials around parliament.

Brian Hall, chairman of Aminex, acknowledged the contract had been concluded at a sensitive time given the rising tensions between Seoul and Pyongyang, but stressed he had opened ties with energy-starved North Korea in 1998. Since then, securing output rights from an exploration block had been “stop-go”.

Additional Information/thoughts: 
1. Here is a previous short post on Aminex.

2. The economics literature overwhelmingly suggests that natural resource windfalls are generally bad news for weak states/developing countries—often fueling corruption, repression, and violence.  The windfall almost never translates into better general working conditions or increases in general income (Botswana being an exception).  There are plenty of papers out there making this point (“Natural Resource Curse”), so feel free to refer to your favorite.

3. I would be weary of building an offshore oil rig in the DPRK.

4.  If oil is discovered in Korea’s East Sea, look for Japan, South Korea, and Russia to begin “drinking from their milkshake”.

Read the full stories here:
Oil firm says N.Korea exploration to start in a year
AFP
Bernice Han
6/2/2010

Anglo-Irish group seeks North Korean oil
Financial Times
Christian Oliver, Kevin Brown
6/1/2010

Institute for Far Eastern Studies (IFES)
NK Brief No. 10-05-27-1
5/27/2010

On May 24, the South Korean government announced, in response to the Cheonan incident, the cessation of inter-Korean exchanges and other sanctions against Pyongyang. These measures will directly impact the North, costing it 250~300 million USD. According to the Ministry of Unification, North Korea earned 245.19 million USD from inter-Korean cooperative schemes not related to the Kaesong Industrial Complex. This does not include additions monies for customs fees, transportation costs, mediation fees and other incidentals.

About 254 million USD worth of goods were produced on commission in the North after raw materials or partially manufactured products were sent from the South. 10~15 percent of this (25-38 million USD) covers labor and other costs. Therefore, by halting all exchanges and cooperative schemes other than the Kaesong Industrial Complex, North Korea stands to lose at least 200 million USD.

In particular, as the South has banned the import of North Korean sand and marine products, both known to be money-earners for the North’s military, it appears these sanctions have the potential to really pressure Pyongyang. In addition, preventing North Korean ships from using South Korean waters could cost an additional nine million USD. An additional 6 billion won-worth of government-related projects for the North has also been suspended. Ultimately, the cessation of inter-Korean exchange will cost North Korea 250~300 million USD.

The Korea Defense Institute estimates that through inter-Korean projects, tourism, and the Kaesong Industrial Complex, North Korea earned 180 million USD in 2004, but that jumped to 233 million USD in 2005, 341 million in 2006, and 534 million USD in 2007, before falling to 490 million in 2008, and 347 million USD last year.

It appears that the reduction in foreign currency earned by the North has somewhat impacted its economy. Now, the cessation of inter-Korean contacts means further reduction in the North’s access to foreign currency, possibly causing severe shortages of daily necessities because of a lack of trade and insufficient production capacity. If inter-Korean trade ceases, the North can no longer earn foreign capital from Seoul, and this could cause DPRK-PRC trade to drop off, if the North is unable to cover its bills.

It will also cause a loss of jobs for all those North Koreans involved in consignment production, fishing, farming, and other areas of the economy hit by the freeze in trade with the South. As the processing-on-consignment business has reached 30~35 million USD per year, labor involved in the industry nears that of the Kaesong Industrial Complex, and could mean the loss of as many as 40,000 jobs.

While the government has decided to maintain the Kaesong Industrial Complex, it plans to downsize the ROK manpower by 40-50 percent. The reason given is to be able to ensure the safety of the workers, but if the number of workers is cut by 50 percent, this cannot help but have a huge impact on production, raising concerns with North and South Korean employees alike.

UPDATE 4:  Global Security gives a rundown of the steps the DPRK is already taking:

North Korea has begun to freeze ties with the South, which already halted most trade with Pyongyang in retaliation for the sinking of a South Korean warship. The North has denied responsibility for the attack on the vessel and is accusing the South of launching a “smear campaign” against it.

Pyongyang has expelled eight South Korean government officials from a joint factory park in the North. And, it is threatening to block what little cross-border traffic exists.

The Unification Ministry in Seoul says hundreds of South Korean managers and other workers from the South were allowed to enter the industrial complex in the west coast Kaesong border city, Wednesday.

But ministry spokesman Chun Hae Sung tells reporters North Korea quickly acted on other aspects of its threat to cut all communications ties with the South.

He says Pyongyang Wednesday halted contact between the Red Cross delegations in the truce village, Panmunjom, and the North Korean Navy contacted the South to inform it that all marine communications between the two Korea’s are now cut.

Relations between the two Koreas have deteriorated steadily since the Cheonan, a South Korean naval vessel in the Yellow Sea, exploded a month ago, killing 46 crew members. An international investigation concluded last week that the coastal patrol warship was hit by a North Korean torpedo.

South Korea’s defense ministry tells VOA News that plans to send tens of thousands of leaflets northward by ballon have been delayed because of wind conditions, but they could go aloft as early as Thursday. Officials say the leaflets are intended to inform North Koreans about the sinking of the South Korean naval vessel. The North views Southern pamphleteering as hostile propaganda.

South Korea’s military is using loudspeakers along the border, silenced for six years, and re-instituting FM broadcasting to the North.

North Korea’s state television newscaster announced such propaganda will not be tolerated.

The North Korean newscaster says it will open fire on the South Korean loudspeakers and destroy them.

Pyongyang says a resumption of the propaganda campaign will also compel it to totally shut down the Kaesong industrial complex, where more than 100 South Korean firms employ about 42,000 North Korean workers.

The two countries have no diplomatic relations and technically remain at war following a 1953 truce which ended the three-year Korean War.

The United States, which has 28,000 troops in South Korea, has hurriedly announced plans for several joint military exercises in the coming month. In the past, Pyongyang has strongly condemned U.S.-South Korean drills, claiming they are preparations for an invasion of the North.

UPDATE 3: Pyongyang confirms it wants to keep running the Kaesong Zone.  According to Yonhap:

North Korea has said it wants to keep a joint industrial complex with South Korea going and will ban southern firms from taking factory equipment out of the zone, a Unification Ministry official said Monday.

An unidentified North Korean official made the remark Sunday to a South Korean staffer at a joint commission handling the operation of the factory park in the North’s border town of Kaesong, the official said on condition of anonymity.

The remark represents a softening of Pyongyang’s stance on the project as it contrasts with a threat to shut a cross-border route leading to the zone in anger over a series of steps South Korea announced in retaliation to the North’s sinking of a southern warship.

It also appears to reflect the North’s concern that the park’s closure would leave tens of thousands of its workers there without jobs and the regime without a key source of hard currency that has helped prop up the North’s moribund economy.

UPDATE 2:  Pyongyang has scrapped a joint-Korean agreement which ensures the safety of South Koreans crossing the Military Demarcation Line and threatened to close the Kaesong Zone if Seoul resumes propaganda broadcasts.  According to the Korea Times:

“Seoul will take stern measures if Pyongyang harms South Korean workers staying at the Gaeseong Industrial Complex, even by a tiny amount,” Lee Jong-joo, a spokeswoman at the Ministry of Unification, said.

The remark came a day after the communist North issued a statement that it would scrap an inter-Korean pact to ensure the safety of South Koreans crossing the Military Demarcation Line (MDL), which separates the two Koreas.

On Wednesday, Pyongyang also threatened to close the industrial park if Seoul begins broadcasting anti-North Korea propaganda through loudspeakers along the Demilitarized Zone (DMZ).

“We can neither let North Korea harm our citizens in retaliation to the resumption of psychological warfare against it, nor tolerate such rationale,” the spokeswoman said.

UPDATE 1:  According to the Washington Post work is continuing at the Kaesong Industrial Zone:

There was a semi-hopeful signal Wednesday that rising animosity over the sinking of a South Korean warship may not shatter all economic ties between the two Koreas.

Production continued at the Kaesong Industrial Complex, a six-year-old factory park just north of the heavily armed border that separates North and South Korea.

At the last remaining symbol of economic cooperation between the two countries, about 45,000 North Koreans went to work as usual for 121 South Korean companies located in the complex.

North Korea had threatened Tuesday that it would severe all relations with South Korea. Its move was in retaliation for trade and other sanctions that Seoul imposed Monday on Pyongyang for its apparent role in a stealthy submarine attack that torpedoed a South Korean ship and killed 46 sailors.

The North denies sinking the ship and threatens war if there is any move to punish it. But its actions at Kaesong were nearly not as uncompromising as its rhetoric.

North Korea allowed several hundred South Korean managers and engineers to cross the border Wednesday and go to work.

It did kick out at least eight South Korean government officials and cut North-South phone lines for some manufacturers. But one company official said that North Korean workers were allowed to work and South Korean managers were allowed to manage.

“The situation at Kaesong at this moment is that nothing much has changed,” said Song Ki-suk, former chairman of Korea Micro Filter, a South Korean auto parts company that employees 350 North Koreans.

…

Still, it appears that North Korea wants Kaesong to operate. The industrial park injects more than $60 million a year in rent, fees and worker salaries into the country’s moribund economy.

I would take issue with the last paragraph.  I am pretty sure that the vast majority of hard currency transfers from South to North mean very little to the broader North Korean economy.  Those revenues are held pretty tight.  However, jobs at the Kaesong Zone are among the most desired in the country and there is no doubt that the complex has improved life in the Kaesong Region.

Read the full story here.

ORIGINAL POST: On Monday the South Korean government announced it was severing nearly all trade relationships with the DPRK.  One notable exception to this policy was the Kaesong Industrial Zone.  Today, however, the DPRK announced that it is reciprocating. According to Reuters:

The following are key points from the text of the report issued by the North’s KCNA news agency.

“The Committee for the Peaceful Reunification of Korea, accordingly, formally declares that from now on it will put into force the resolute measures to totally freeze the inter-Korean relations, totally abrogate the agreement on non-aggression between the north and the south and completely halt the inter-Korean cooperation.

“In this connection, the following measures will be taken at the first phase:

“1. All relations with the puppet authorities will be severed.

“2. There will be neither dialogue nor contact between the authorities during (South Korean President) Lee Myung Bak’s tenure of office.

“3. The work of the Panmunjom Red Cross liaison representatives will be completely suspended.

“4. All communication links between the north and the south will be cut off.

“5. The Consultative Office for North-South Economic Cooperation in the Kaesong Industrial Zone will be frozen and dismantled and all the personnel concerned of the south side will be expelled without delay.

“6. We will start all-out counterattack against the puppet group’s ‘psychological warfare against the north.’

“7. The passage of south Korean ships and airliners through the territorial waters and air of our side will be totally banned.

“8. All the issues arising in the inter-Korean relations will be handled under a wartime law.

“There is no need to show any mercy or patience for such confrontation maniacs, sycophants and traitors and wicked warmongers as the (South Korean President) Lee Myung Bak group.”

The Choson Ilbo reports on some of the economic implications if the Kaesong complex was closed:

It would cost about US$500 million to shut the joint-Korean Kaesong Industrial Complex in the North, the government estimates.

A government official on Sunday said the estimate includes insurance payouts from the Inter-Korean Economic Cooperation Fund for South Korean businesses operating at the industrial park if the North decides to shut the industrial park or if Seoul decides to pull out South Korean staff for safety reasons.

The North has earned more than $96.81 million in cash from wages from 2004 to March this year. It expects to earn another $40 million this year.

“Some 100 of 121 South Korean firms at the industrial park are insured with the Inter-Korean Economic Cooperation Fund,” a Unification Ministry official said. “The indemnity insurance will compensate for up to W7 billion (US$1=W1,199) or up to 90 percent of their investment.”

But no firm that voluntarily withdraws before the North or the South shuts the industrial park is entitled to insurance payouts. An executive of a firm operating at the industrial park said, “The total investment South Korean firms made in the industrial park probably exceeds W1 trillion.” That means the $500 million estimate by the government is too low, and despite the insurance limit of W7 billion, quite a few firms have invested more than W20 billion, he added.

It is difficult for early starters to withdraw given that they are making profits now and the amount of their indemnity insurance has shrunk due to depreciation of their properties.

But many latecomers are ready to leave if there is an adequate compensation, though the ministry official said none have yet told the government they want to pull out.

The North Korean media have been repeatedly reporting a statement issued last Friday by the North’s Committee for the Peaceful Reunification of the Fatherland saying it considers itself at war and will respond resolutely to any action the South takes over the sinking of the Navy corvette Cheonan on March 26. It also threatened to cut off all ties with South Korea and scrap a bilateral non-aggression pact.

In 2007 the DPRK’s top trading partners were (in order) China, South Korea, Thailand, Russia, India, Brazil, Singapore, Germany, Netherlands, Taiwan, Algeria. In 2008, China and South Korea accounted for more than 80% of the DPRK’s total trade (China 67%).  Inter-Korean trade was nearly zero until 1988.

Andrei Lankov writes in the Korea Times:

Kim Jong-il’s recent visit to China was somewhat unusual: instead of going straight to Beijing, Kim visited a number of sites which are associated with China’s economic development.

He went first to the port city of Dalian and spent time there inspecting the harbor and hi-tech centers located nearby (including even a semi-conductor plant operated by Intel). While in Beijing, he continued such visits.

Had this happened a few years ago, we would expect a wave of optimistic speculation: such interest in modern technology would have been interpreted as a sure indicator of North Korea’s readiness to launch Chinese-style reforms. This time, it seems that even the optimists have become tired of making prophecies which never come true.

Nonetheless, the trip once again demonstrated a peculiar feature which the North Korean regime shares with the now-extinct Leninist regimes of Eastern Europe. The Pyongyang leaders have an almost religious belief in the miraculous power of modern technology.

They hope that all their problems can be easily and quickly fixed once a proper technology is found and applied (of course, application has to be done by state). However, the social dimensions of the economic problems are ignored.

It sounds very non-Marxist: after all, the founding fathers of Communism explicitly stated that it is the social structure and property relations, not technology, which determines the economic productivity. But their supposed disciples would never agree that the economic woes of the Communist countries were brought by the less than perfect social system.

This unwillingness is understandable: social change might become dangerous for those who are in power. Therefore they have a vested interest in presenting their system as perfect.

So, if there are problems, those problems should have an easy technocratic decision ― and the only force which can find and introduce such decision is, of course, the regime in power.

When in the early 1950s the Soviet agricultural industry was clearly in trouble, Stalin decided to do something about it. His solution was a program of planting forest strips which would decrease soil erosion.

Stalin was also much interested in the grotesque promises of Trofim Lysenko, a notorious charlatan who was talking about “educating” plants into yielding greater harvest.

Lysenko also enjoyed the support of Khrushchev, Stalin’s successor. Khrushchev’s pet technology was corn production, and insisted that the nationwide switch to this wonder plant would miraculously raise productivity.

However, corn, being a Mesoamerican plant, did not grow well near the polar circle, and plants did not show any sickness of being susceptible to `education’. Russia, once a major exporter of grain, became an increasingly voracious importer of food.

Of course, the problems of the Soviet agriculture were caused not by the insufficient attention paid to corn production. It was the social problems that made the Soviet agricultural system so inefficient: farmers, being badly paid employees of the government-run farms, had no reason to work diligently.

When they toiled the small patches of their own land, which they were legally allowed, they showed a remarkable level of productivity. But this was not what the Soviet government was willing to see.

It was Mao’s China, though, which produced the weirdest examples of belief in wonder technologies. It reached its height during the Great Leap Forward in the late 1950s.

Mao wanted small furnaces to be built everywhere: during the Great Leap even schools and farms were required to make their own steel in the backyard furnaces. Predictably, the home-made steel was useless because of the low quality.

Simultaneously, Mao told the farmers to use “close cropping.” Seeds were sown far more densely than normal on the “politically correct” assumption that “seeds of the same class would not compete with each other” (of course, crops were ruined).

The farmers were also ordered to plough two meters deep, since this would “encourage plants to develop extensive root systems.” The result was famine which killed between 20 and 30 million people. However, it seems that Mao and his henchmen never abandoned their belief in miraculous technologies.

North Korea is no different. Its leaders also are firm believers in the power of technology, if this technology is carefully selected by the state and introduced by its agents. Kim Il-sung, being a son of a farming family, paid special attention to the agriculture.

Among other things, he was a great enthusiast for terrace fields. He wanted to transform the barren hills of North Korea into rice-producing areas, and kept reminding his officials that no efforts should be spared to do so.

Predictably, the result was a disaster: in the 1990s terrace fields were washed away by floods while the few remaining became unusable since a large electric pump would be necessary to provide those high-rise fields with water.

Kim Jong-il shares the belief in wonders, but in his case the major hope is modern industrial technology, preferably related to computers (an approach clearly influenced by gadgetry).

The Dear Leader reputedly said that it was a great folly not to study computers, and most of his technological initiatives are clearly related to IT.

Since last year, for example, the Pyongyang streets have been covered with posters which tell about wonders of the CNC technology (in an unusual twist, the English acronym is used). CNC stands for “computer numerically controlled” technology and, to put it simply, describes computer-controlled industrial equipment.

It is remarkable that the present author heard the same slogans many decades ago, in the 1970s. Indeed, the Soviet leaders also had much hope about the CNC and worked hard to introduce it as a cure for the Soviet economy ― with the predictable lack of success.

Therefore, not much should be read from Kim Jong-il’s visit to Intel. He might dream of computer-operated giant plants, but he lives under severe political constraints, and these constraints ensure that North Korea will remain a very inhospitable environment for high technology (apart from some ultra-cool gadgetry for the chosen few, of course).

This might be changed only if the system itself will be changed, but this is clearly not what Kim wants.

Read the full story below:
Waiting for a miracle
Korea Times
Andrei Lankov
5/24/2010

According to the Washington Post:

South Korean President Lee Myung-bak said Monday that his country is stopping all trade and most investment with North Korea and closing its sea lanes to North Korean ships after the nation’s deadly attack on a South Korean warship.

Lee also called for a change in Pyongyang’s Stalinist regime.

The tough measures, announced in an address to his nation, were bound to ratchet up pressure on the isolated Pyongyang government and add a new flash point in U.S. relations with China.

“Fellow citizens, we have always tolerated North Korea’s brutality, time and again. We did so because we have always had a genuine longing for peace on the Korean Peninsula,” he said. “But now things are different. North Korea will pay a price corresponding to its provocative acts.”

Lee then said that “no North Korean ship will be allowed to make passage through any of the shipping lanes in the waters under our control” and that “any inter-Korean trade or other cooperative activity is meaningless.”

A senior U.S. official, traveling with Secretary of State Hillary Rodham Clinton in China, said the United States will back “all the steps the South Koreans are going to announce.” In an indication of the seriousness with which the Obama administration views the drama between the North and South, home to nearly 29,000 U.S. troops, he added: “We have not faced something like this in decades.” Lee apparently has ruled out military action because he does not want to trigger an all-out war.

The official said that, based on talks over the past two days, Chinese officials have not accepted the results of a South Korean investigation — backed by experts from the United States, Australia, Britain and Sweden — that implicated North Korea in the attack on the 1,200-ton Cheonan that killed 46 sailors. As such, it is unclear whether Beijing will support Lee’s measures or his call, also made in the speech, to take the issue to the U.N. Security Council.

China’s reluctance to agree with the report underscores the challenges the United States faces as it seeks to forge closer ties to Beijing. The U.S. official also noted Sunday that China and the United States still do not see eye to eye on the details of planned economic sanctions on Iran for its failure to stop its nuclear enrichment program. Of specific concern, he said, are disagreements between Beijing and Washington about how investments in Iran’s oil and gas sector will be treated. China has committed to investing more than $80 billion in Iran’s energy sector; tightened sanctions against Tehran could threaten those investments.

…

Tough options for China

The attack and its aftermath also threaten China’s place in the region and could force it to make an unwanted choice between South Korea and North Korea — two countries that it has handled deftly since normalizing relations with Seoul in 1992. South Korea wants China, which is a permanent member of the Security Council, to back Seoul’s call to take the Cheonan issue to the council. So does the United States, the U.S. official said.

But that could risk hurting Pyongyang, and China appears committed to maintaining the North Korean regime above all.

“For China,” the U.S. official said, “they are in uncharted waters.”

China reacted slowly to the Cheonan’s sinking, waiting almost a month before offering South Korea condolences. Then it feted North Korea’s Kim in May, apparently offering him another large package of aid, Asian diplomats said. China’s attitude has enraged South Korea.

Michael Green, a national security official during George W. Bush’s administration, said the Cheonan crisis highlights just how differently China views its security needs than the rest of the players in Northeast Asia. For years, as China worked with the United States, Russia, South Korea and Japan to try to persuade North Korea to give up its nuclear weapons programs, these differences were obscured. But the Cheonan’s sinking has changed that.

According to Yonhap, the Kaesong Industrial Zone will be spared from the chopping block:

South Korean Unification Minister Hyun In-taek said Monday that Seoul will still maintain the joint economic project in Kaesong despite the attack, but will “respond with resolute measures” to any bid by the communist neighbor to undermine the safety of its workers.

“If North Korea ignores our careful consideration to preserve the complex even under current circumstances, and subsequently threatens the safety of our citizens there, we will never tolerate any harm to our citizens,” Hyun said.

Hyun was speaking at a joint press briefing with the foreign and defense ministers following President Lee Myung-bak’s nationally televised speech condemning the North for the ship sinking.

Hyun was apparently referring to the half-year long detention of a South Korean worker in Kaesong last year amid deteriorating political ties between the countries.

Also according to Yonhap, some aid projects will be maintained:

Lee announced his government will suspend all trade and exchange programs with the North except for the Kaesong project, while maintaining minimum levels of humanitarian aid for infants and children living in the impoverished communist country.

“Under these circumstances, any inter-Korean trade or other cooperative activity is meaningless,” the president said, adding that North Korean ships will no longer be allowed to use South Korean waterways as short-cuts.

Yonhap reports:

A suspension of inter-Korean trade would deal a “direct blow” to North Korea by blocking its major source of hard currency needed to govern the reclusive and impoverished country, a Seoul think tank said Monday.

The state-run Korea Development Institute (KDI), however, noted in a report that such a move could fail to achieve its intended goal if other global powers like China do not agree, highlighting the importance of securing international cooperation.

…

“North Korea’s trade with the South has accounted for up to 38 percent of its total trade volume and makes up 13 percent of its gross domestic product. With the dollars obtained through inter-Korean trade, the North has expanded its businesses with China. It (the trade with the South) also helped Pyongyang to cushion any negative external risks such as sanctions by Japan, while acquiring dollars needed to govern the country,” the report said.

“If we push for a measure to suspend the trade, it could translate into a decline in its trade with China and make it tough to find other business partners as a result, dealing a direct blow to its regime by blocking it from obtaining dollars,” it added.

The report noted that a trade ban by the Seoul government would have a maximum level of impact if China follows suit, which it expects could place Pyongyang under a situation where “it has to think about its life or death.”

Currently, the North depends on South Korea and China for up to 80 percent of its external trade and 35 percent of its GDP, according to the report. Especially, China provides many strategically important materials such as oil to the North.

The report said that if China decides to support the North, it would reduce the overall impact but it will still destabilize its regime in the long term by making it heavily dependent on its closet ally and fast-emerging global economic power.

“It would weaken the regime’s principle not to depend solely on a single country even for its trade based on the so-called juche (self-reliance) doctrine. Also China’s support would prompt opening of the reclusive nation to outside, making it more difficult for the regime to keep its tight grip on domestic market and those who want and push for market opening,” the report said.

“In summary, a political choice by China would have some impact but in the end, a trade suspension with the South would cause a significant amount of pain to the country. We need to have to push for such an action with self-confidence if there is a consensus, while taking diverse efforts to persuade China over such a measure, while establishing an international cooperative framework with the United States and Japan as well,” it added.

Business Week (Bloomberg) reports on the impact of UN sanctions last year:

UN sanctions imposed on North Korea after its second nuclear test in May 2009 caused the North’s international commerce to shrink 9.7 percent last year, according to the Seoul-based Korea Trade-Investment Promotion Agency. Stripping out South Korea’s one-third share, China accounted for 78.5 percent of North Korea’s commerce, the agency said. North Korea, whose leader Kim visited China earlier this month, doesn’t release trade data.

The New York Times also has good coverage

The full text of President Lee’s speech can be found here.

All previous posts on the Cheonan are here.

Read full article here:
South Korea to halt all trade with North Korea over sinking of Cheonan warship
Washington Post
John Pomfret
5/24/2010

Geoffrey Cain writes in Time:

Few investors can boast the one-of-a-kind global pedigree of Felix Abt. Since 2002, the Swiss businessman has found his calling as a point man for Western investments in — of all places — North Korea, where he helped found the Pyongyang Business School in 2004. He also presided over the European Business Association in Pyongyang, a group in the capital that acts as a de facto chamber of commerce. A few years ago, that position led him to help set up the first “European Booth” featuring around 20 European companies each year at the Pyongyang Spring International Trade Fair, an annual gathering of 270 foreign and North Korean companies currently underway in the hermit kingdom until Thursday.

Yet Abt, 55, who lives in Vietnam and therefore won’t be attending the trade fair this year, laments the giant cloud hanging over the country: in recent years, political turmoil on the peninsula has raised the stakes even further for doing business in North Korea — even for the country’s main patron, China. Though investors have always faced the prospect of sanctions, he says, the situation has worsened after the United States ratcheted up sanctions on the government in 2006 on allegations that it was counterfeiting U.S. dollars. And in 2006 and 2009 the Kim Jong-il regime tested two small nuclear bombs, prompting heavier sanctions from the United Nations in 2006. Recently, tensions with Seoul have spiked over the March sinking of a South Korean corvette in waters near the North.(See pictures of the rise of Kim Jong-il.)

Those measures hit home for Abt. While he was running a pharmaceutical company in Pyongyang called Pyongsu in the mid-2000s, he learned that the U.N. Security Council had imposed sanctions on certain chemicals — a move that could have forced him to completely stop manufacturing medicine. Thankfully, he adds, he had already secured a large stock of the substance beforehand. “Whatever business you are involved in,” he says, “some day you may find out that some product or even a tiny but unavoidable component is banned by a U.S. or U.N. sanctions because it can, for example, also be used for military purposes.”

Those dilemmas haven’t stopped Abt. In 2007, he co-founded an information technology firm in Pyongyang called Nosotek, whose 50 or so employees design software applications for the iPhone and Facebook. The venture has already seen its share of success: one of its iPhone games ranked first in popularity for a short while on Apple’s Top 10 list for Germany — though he can’t name the software out of concern for protecting his contractors from bad publicity.(See pictures of North Koreans at the polls.)

For some companies, the stigma of a “Made in North Korea” label matters less than the competitive edge gained from having low overhead costs and a diligent workforce whose wages remain less than outsourcing powerhouses like China, Vietnam and India. In the past, North Korea has attracted the interest of multinational corporations looking for cheap labor in fields as diverse as electrical machinery and cartoon animation. Yet few multinationals show their faces at this month’s fair, a decline from the early 2000s when Abt says they were appearing regularly to look for opportunities in electricity, infrastructure, transportation and mining.

Not all foreign ventures in the North are driven by profit margins alone. The 2005 animated Korean movie Empress Cheung, a popular fantasy film drawn jointly by South and North Korean animators, brought attention to the animation industry in North Korea. Nelson Shin, head of the Seoul-based animation studio that started the project, claims he worked with North Korea for a greater cause than cheap labor. “It wasn’t so much because of cost efficiency as because of cultural exchange between the two Koreas,” he says.

For a country so poor, North Korea has churned out a remarkable number of talented engineers and scientists who fuel some of these small sectors (along with its controversial nuclear weapons program). In the 1960s and 1970s, the government pushed the country to become self-sufficient through development projects, a part of its ideology of “Juche” that promotes absolute autonomy from foreign powers. The communist regime of Kim Il-sung prided itself on its universities and public housing system, in particular. “It was an advance from pre-World War II days,” says Helen-Louise Hunter, a former CIA analyst now in Washington, D.C., who researched North Korea during those decades. “Kim Il-sung was genuinely interested in improving his people’s standard of living, and was off to a good start in a couple of areas compared to South Korea in those early days.”

Yet North Korea fell behind after the South’s own military dictators put their country into industrial overdrive throughout the 1970s and 1980s. Then the Soviet Union collapsed in 1989, depriving North Korea of valuable aid. Then came a famine in the mid-1990s that delivered the final blow, leaving up to 3 million people dead and crippling the capacities of the already isolated state.

Today, the pariah regime of Kim Jong-il is allegedly known to raise money through illicit activities like trafficking narcotics and money laundering. But it’s not known how much those activities figure into the country’s GDP of $28.2 billion in 2009 and its $2 billion worth of exports in 2008, the most recent year data is available. “Not that much income comes from illegitimate operations if you mean drugs and counterfeited dollars,” says Andrei Lankov, a North Korea expert at Kookmin University in Seoul. “More come from arms sales, though, but I would not describe this as an illegitimate trade.”

Abt shakes off the image of Pyongyang being the center of a mafia state. He sees himself and other foreign investors as the potential movers and changers of Kim’s hermit regime. “Cornering a country is ethically more questionable than engagement,” he says. “Foreigners engaging with North Koreans are change agents. The North Koreans are confronted with new ideas which they will observe and test, reject or adopt.”

Read the full story here:
Can North Korea Be Safe for Business?
Time
Geoffrey Cain
5/20/2010