North Korean Economy Watch

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-11-02-1
11/2/2009

The North Korean agricultural ministry has announced that the countries food shortages are expected to be even greater next year. Edition 302 of the newsletter “North Korea Today,” distributed by the group Good Friends, reports that the Ministry of Agriculture announced harvest predictions for farms in North and South Hwanghae and Pyongan provinces, North Korea’s ‘ricebowl region’. It stated that if the country was to avoid a food crisis next year, everyone would need to strictly manage this year’s crops. It was also reported that the central party authorities in North Korea, after receiving the report, called for the opening of all customs houses in the border region and for trading companies to seek new avenues for trade. An order was passed down to “relentlessly trade with the outside in order to bring in much food.”

With food shortages this year and last, and now news that there will be food problems next year as well, it is rumored that there is a growing number of angry people in the normally mild-mannered Hwanghae Province. In addition, this is driving a growing number of people to turn to crime in order to put food on the table. On October 26, Free North Korea Radio quoted a source as stating, “As rumors spread across North Korea that large-scale famine, the likes of which were seen in the mid-1990s, will again sweep through country next year, anxiety is shooting up among the people and crimes of necessity are on the rise.”

According to the source, “Crimes of necessity, like pillaging granaries on farms, are spreading like never before as people act quickly to ensure food supplies,” and, “Fighting has grown fierce between people trying to maintain their standard of living.” Furthermore, “The number of people in the Dancheon region of South Hamgyeong Province just ‘sitting down and starving to death’ is exploding,” and, “Not long ago, there was even one incident of and armed soldier guarding a threshing floor of one farm being attacked by a gang of thieves.”

The source explained, “People are well aware that this year yielded poor harvests, but that they cannot rely on aid from the international community because of the Kim Jong Il regime’s indiscriminant pursuit of nuclear development.” The source also added, “These days, people are rationalizing illegal activities in the belief that ‘you can rely on no one but yourself.’”

It was also reported that in Hyesan, Hyeryeong, Onseong and Musan, most food prices are at higher levels than what are usually seen in the spring, despite the fact that it is now fall harvest season. According to Free North Korea Radio, October 23rd prices of rice, flour and corn in Hyesan, Hyeryeong, Onseong, and Musan were as follows: Hyesan, rice = 2,550-2,750 won/1 kg, flour = 2,400-2,600 won/1 kg, corn = 850-900 won/1 kg; Hyeryeong, rice = 2,500-2,800 won/ 1 kg, flour = 2,400-2,700 won/ 1 kg, corn = 800-1,000 won/1 kg; Onseong, rice = 2,450-2,600 won/ 1 kg, flour = 2,500-2,700 won/1 kg, corn = 700-900 won/1 kg; Musan, rice = 2,500-2,700 won/1 kg, flour = 2,400-2,600 won/1 kg, corn = 850-1,000 won/1 kg

From a recent article in Time:

In recent years, bootlegged South Korean dramas have been flooding into the northern neighbor — part of a recent explosion across Asia in the popularity of South Korean TV shows and music known as the Korean Wave. On the black market in North Korea, American DVDs go for about 35¢; South Korean ones go for $3.75, because of the higher risk of execution for smuggling them in, according to two recent defectors from Pyongyang. The nation’s films and dramas have become so widespread across North Korea that the regime launched a crackdown this fall on North Korean university students, the movies’ biggest audience, and smugglers at the Chinese border, charging some with promoting the ideology of the enemy state.

It seems plausible that South Korean films are more expensive than American films due to political risk, but this cannot be the only factor.  DPRK politics aside, South Korean and American films are not perfect substitutes.  I am willing to bet that some of the price difference can be explained by the language barrier.  North Koreans can watch South Korean films and dramas without reading subtitles.  Some of the stories, characters, and motivations probably make more sense as well.

We can make apriory assumptions all day, however.  We need some data. There is a paper in here for an enterprising economics student living near Dandong.

Read the full story here:
Soap-Opera Diplomacy: North Koreans Crave Banned Videos
Geoffrey Cain
Time
10/29/2009

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-10-26-1
10/26/2009

Companies in the Kaesong Industrial Complex (KIC) are pushing for permission to transport goods manufactured within the complex along the railway running from Kaesong to Sinuiju and the highways connecting Kaesong, Pyongyang, Sinuiju and the Chinese city of Dandong.

Currently, the majority of goods exported from the KIC flow through the South Korean port of Incheon. They are then distributed elsewhere after arriving at the Chinese port of Dalian. This route is expensive and slow. Shipping by sea costs 1,900 USD per container and takes as many as 10 days, while if the railway infrastructure was built up between Kaesong and Sinuiju, both the cost and the time could be significantly reduced.

Seventeen percent of Kaesong goods are exported not only to China, but to Europe, the Middle East and Russia. In the mid- to long-term, Kaesong needs to be connected with Rajin-Sunbong, so that goods can be distributed throughout Russia and Europe via the Trans-Siberian Railway. In order to make this happen, companies within the KIC are seeking to attract foreign joint-ventures and investments while at the same time lobbying North Korean authorities in an effort to convince them of the need for such land transportation infrastructure.

These companies are also pushing for improvements in the highway spanning the 160 km between the KIC and Pyongyang and the injection of KIC goods into the Pyongyang markets, where they could compete with Chinese imports. One part of this effort is promoting the attachment of ‘Made In DPRK’ labels to goods produced in these factories.

It appears that North Korean authorities have been receptive to these ideas, but questions still remain on the logistics of the project. One source has said that the North Korean Central Special Direct General Bureau has shown interest recently in the idea of including KIC goods in the annual Pyongyang International Trade Fair.

On the one hand, the number of North Korean workers in the KIC has now topped 40,000; but on the other hand, given the number and size of the factories in the complex, the factories are about 26,000 workers short of full capacity. The effort to find suitable workers means that now people from Sariwon, Pyongyang and Hamheung have been brought in. Companies in the KIC are adamant that construction of dormitories in the complex needs to be sped up. At the same time, North Korean authorities are demanding that workers be paid according to their level of education, job description, and experience.

For the first time in 13 months, trade between the two Koreas began to rise again. In September 2009, inter-Korean trade amounted to 173.17 million USD, a 2.6 percent rise over the 166.86 million USD recorded in 2008. The economy has shown signs of recovery since last July, and as inter-Korean relations have inched toward improvement, trade has also risen.

From GPI:

PDF Brochure here.

In the current financial and economic situation, companies face many challenges. They must cut costs, develop new products and find new markets. In these fields, North-Korea might be an interesting option. Since a few years, it is opening its doors to foreign enterprises. The labor costs are the lowest of Asia, and its skilled labor is of a high quality. It established free trade zones to attract foreign investors and there are several sectors, including textile industry, shipbuilding, agro business, logistics, mining and Information Technology (computer games, animation) that can be considered for trade and investment. Heineken is an example of a  Dutch company, active in North-Korea. Its beer is now widely available (see photo).

In order to explore these business opportunities, a Dutch trade delegation visited North-Korea in September. See a report of this mission here. Are you interested as well? Then join our upcoming mission in May 2010, when we will also visit the annual Pyongyang Spring International Trade Fair. This fair can also be used by European companies to come in contact with potential buyers and suppliers in North-Korea, by using a booth. It is also possible for us to organize individual business tours, for participants from a single company.

With best regards,

Paul Tjia (director)
GPI Consultancy
P.O. Box 26151
3002 ED Rotterdam, The Netherlands
E-mail: paul@gpic.nl
tel: +31-10-4254172
fax: +31-10-4254317
Web: www.gpic.nl

The article was not as informative as I hoped.  But here are a few lines that I thought were interesting:

Q: When you were talking with Kim Jong Il, was it your impression that he wants more investment from South Korea? That he wants to do more business with your country?

A: He showed a lot of enthusiasm. He said he hopes the North and South Korean government can talk things through so to have a lot of South Korean companies enter the North, and he also said that since they have the natural resources and the South has the skills to sell, if both sides work together he expects the North and South to prosper.

Comment: There is a vast literature on the relationship between natural resources, economic growth, and conflict.  Natural resources tend to be the kiss of death for widespread economic development and “democracy.” Unfortunately, given the way the North Korean system is managed, I would expect most of the revenues from increased natural resources exports to go to the DPRK leadership with little tangible benefit to the North Korean people.

The Kaesong industrial complex, the joint facility run by North and South, what is the future of that complex?

Currently we are only operating the first block, but I am sure that once things get settled down by both governments, we have many plans for the second block as well. A hotel needs to be built. We need to have hospitals, post offices, so I am expecting gradually that we will expand business there.

I am more optimistic about the Kaesong Zone than I am about the DPRK’s desire for increasing natural resource exports because the workers at Kaesong actually process resources to build the textiles.  As a result, their productivity has increased over time and the workers have been able to capture some of that extra value themselves in the form of higher incomes (although at a ridiculously steep “tax rate” since the DPRK government keeps the vast majority of their salaries).  If Kaesong was closed down the workers would certainly be worse off, and so would all of those who depend on them.  Despite the DPRK’s efforts to increase tensions this year, business never closed down at Kaesong.  It could be that the DPRK leadership now considers Kaesong too big to fail.

Read the full interview below:
Doing business in North Korea
CNN
10/19/2009

According to Yonhap:

Inter-Korean trade grew for the first time in 13 months in September amid improving global economic conditions and eased cross-border tensions, customs data showed Monday.

According to data compiled by the Korea Customs Service, trade between South and North Korea amounted to US$173.17 million last month, up 2.6 percent from a year earlier when the global financial turbulence first began following the collapse of Lehman Brothers.

Also according to Yonhap however, the DPRK and RoK failed to agree on an aid-for-family reunions deal:

The two Koreas on Friday ended their day-long negotiations over further cross-border family reunions and other humanitarian issues without reaching any concrete agreement, with Pyongyang asking for resumption of aid by Seoul, officials said.

In the meeting arranged by Red Cross offices from both sides, South Korea proposed holding new rounds of reunions for families separated by the 1950-53 Korean War next month in both Seoul and Pyongyang, and again around February at the North’s Mount Kumgang resort.

But aid is not off the table.  According to the Korea Times today:

The government has been reviewing whether to subsidize non-government organizations through the inter-Korean cooperation fund in order to provide aid to North Korea, according to the Ministry of Unification, Monday.

“The government is mainly checking plans to offer health and medical care,” ministry spokesman Chun Hae-sung told reporters. “But details have yet to be determined.”

Chun reiterated that Seoul is sticking to its existing stance that it will provide North Korea with humanitarian assistance regardless of the political climate.

According to government sources, the subsidy would total less than 1 billion won (about $853,000).

The plan, however, is not related to North Korea’s request for humanitarian aid made during the inter-Korean Red Cross talks last Friday, the sources said.

Seoul has also been reviewing whether to provide the reclusive state with government-level support such as food and fertilizer aid, according to ministry officials.

The inter-Korean cooperation fund has served as a lifeline for cross-border business projects, including the Gaeseong Industrial Complex and the Mt. Geumgang tourism program, which has been suspended.

It is also a main source of South Korea’s economic aid to the impoverished North.

The cash pot was introduced in 1990 in order to boost personal exchanges, economic cooperation and trust-building between the two Koreas.

In August, the ministry approved a plan to subsidize 10 civic groups with approximately 3.6 billion won ($3 million) from the fund for relief activities involving North Korean babies, pregnant women and other social minorities.

The government originally planned to distribute the money starting from April but North Korea’s provocations postponed the plan.

As reported before, the South Korean government has spent just 5% of the funds it budgeted for inter-Korean projects this year.

At the same time North Korea is soliciting aid from South Korean and Western religious origanizations.  See here, here, and here in just the last few days.

UPDATE 8:   According to the BBC, Orascom claims the final plans for the hotel have yet to be approved:

Dozens of Egyptian engineers and some 2,000 local workers are working on the Ryugyong project, which Orascom’s chief operating officer Khaled Bichara tells the BBC is “progressing well”, despite reported problems with suspect concrete and misaligned lift shafts.

“There have been no issues that have caused us too much trouble,” Mr Bichara says. “Most of the work at the moment is coverage of different areas of the building. The first job is to finish the outside – you can’t work on the insides until the outside is covered.

“You can see that we have already completed the top of the building where the revolving restaurant will be. After 2010, that’s when it will be fully safe to start building from the inside.”

How the building will be divided up is not yet finalised the company says, but it will be a mixture of hotel accommodation, apartments and business facilities. Antennae and equipment for Orascom’s mobile network will nestle at the very top.

Mr Bichara denies reports that the company’s exclusive access to North Korea’s fledgling telecoms market is directly linked to the completion of the hotel.

But he says the job is a way of planting a rather tall flag in the ground. “We haven’t been given a deadline, we are not tied into doing it by a certain time,” he said.

“But when you work in a market like this, where we cannot sponsor things, a project of this kind is good to do – it’s word of mouth advertising for us, it builds good rapport with the people – on its own it’s a great symbol, one which cements our investment.”

Read the full article here:
Will ‘Hotel of Doom’ ever be finished?
BBC
10/15/2009

Read previous posts about the Ryugyong’s construction below: (more…)

Radio Free Asia
Jeong Young
10/9/2009

As millions go short of food in the last bastion of Stalinism, the privileged political elite of North Korea are drinking heavily: not wine, brandy, or even rice liquor, but instant coffee from rival South Korea.

Coffee first arrived on the Korean peninsula in 1895 as a gift from a Russian diplomatic envoy to the court of Emperor Gojong. It was furthered popularized in the South by U.S. troops during the 1950-53 Korean War.

Now high-ranking North Korean officials and their families are tipping back the beverage in a form that might surprise aficionados in more privileged economies: three-in-one instant coffee sachets.

These are so highly prized that they’re smuggled across the border from China, disguised as passenger luggage to evade Chinese customs controls.

China imposes restrictions on the amount of coffee that can be imported from South Korea, and that is why coffee is loaded on passenger ships at the South Korean port of Incheon and sent to the northeastern Chinese city of Dandong, to bypass the Chinese quota system.

“The coffee we send to Dandong sells for KRW 1,200 to 1,500 (U.S. $1.00-1.50),” a South Korean coffee trader said.

Smuggled in

“This coffee is sent across the China-Korea Friendship Bridge connecting Dandong in China and Shinuiju in North Korea, and subsequently smuggled into North Korea,” he said.

Another trader, Kim Tae-Sung of the Youngshin Trading Co., said even large containers are sent to China packed with instant coffee via this route.

“Small shipping companies can load and ship containers of all sizes on passenger ships,” Kim said. “One kilogram of coffee costs KRW 1,800 (U.S. $1.50).”

According to traders, since the South Korean coffee has to get through North Korean customs, they remove the original outside wrapper and put the sachets into a different jar.

They then bribe North Korean customs officials to turn a blind eye to their illicit cargo.

The sachets, often the South Korean Maxim brand, are then quietly sold at markets in the larger cities.

Glamorous and costly

A North Korean trader who recently arrived in China said that a growing number of household commodities are now available at unofficial markets in the North, but that most are well beyond the reach of ordinary North Koreans, who still struggle to find basic foodstuffs for their families.

“A lot of commodities are sold at markets, including coffee and milk,” he said. “There are big packs of coffee. There’s coffee imported from China or from Japan.”

“Generally, it’s the upper class people who drink it … How could the ordinary people afford to buy coffee?”

While the elite sips the sweet brew produced by a combination of coffee powder, creamer, and sugar, ordinary people are still unsure exactly what coffee is, according to North Koreans now living in Seoul.

Do Myung Hak, a North Korean defector who arrived in South Korea two years ago, said ordinary North Koreans had mostly come across coffee in a popular war movie, “Unsung Heroes,” in which characters ask, “Would you care for a cup of coffee?” giving it a glamorous image.

“But most people have never had a chance to taste coffee. They have no idea what it is or what it tastes like,” Do said.

“Some even believe that it’s an alcoholic drink that can make you drunk, while some believe that it’s so bitter and so dark that it can turn one’s entrails dark,” he said.

“Most North Koreans haven’t tasted coffee, so they’re simply clueless about it.”

North Korea’s elite first acquired the taste for the three-in-one brew after visiting tourists left surplus sachets behind them.

Later, in the jointly run Kaesong Industrial Zone, South Koreans continued to share the beverage with their co-workers from the North.

And a popular political joke says that customs officials drink coffee to stave off the hunger pangs that are a common experience for many ordinary people in North Korea.

UPDATE: Although South Korea has signaled willingness to increase spending in North Korea (below), it appears they have come nowhere close to spending their current budget.  According to Yonhap:

South Korea has so far this year spent less than 5 percent of its annual budget earmarked to promote reconciliation with North Korea, the Unification Ministry’s data showed Wednesday.

The meager spending of the inter-Korean cooperation budget mirrored stagnant economic exchanges yet to be enlivened despite a recent thaw in political relations.

The data showed that South Korea has set aside 1.16 trillion won (US$990.94 million) for this year’s inter-Korean cooperation budget, which includes 43 billion won transferred from last year, to support joint business projects and provide industrial and humanitarian aid to the North.

The budget spending as of the end of September amounted to 55.9 billion won, 4.8 percent of the total, according to the data.

In a detailed breakdown of expenditures, the ministry spent 10.6 billion won, or 11.3 percent of the 93.8 billion won budget earmarked for the South Korean-run factory park in the North’s border town of Kaesong. Planned projects to build a dormitory for North Korean workers and modernize roads there have also not begun. The Kaesong park hosts about 110 South Korean firms with 40,000 employees from the North.

Humanitarian aid was the area in which funds were held back most. Out of the earmarked 819.8 billion won, the ministry has spent a meager 0.9 percent, or 7.7 billion won, so far. Unification Minister Hyun In-taek said in a parliamentary audit Tuesday that Seoul will decide when to resume its rice and fertilizer aid, crucial to food supplies in the North, after “considering the climate of future inter-Korean relations.”

For social and cultural exchanges, the ministry spent 2.2 billion won, or 25.3 percent of the earmarked 8.7 billion won. Loans for inter-Korean cooperation projects amounted to 11.3 percent, or 21 billion won out of 186.6 billion won.

ORIGINAL POST: According to Yonhap:

South Korea’s government proposed a 30 percent increase in its budget spending aimed at supporting inter-Korean economic cooperation projects for next year, the finance ministry said Tuesday.

According to the Ministry of Strategy and Finance, the budget set aside for inter-Korean economic cooperation next year will amount to 398.2 billion won (US$339.6 million), compared with 304.6 billion won assigned for this year.

Citation:
Seoul proposes 30 pct increase in budget for inter-Korean economic cooperation
Yonhap
10/6/2009

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-30-1
9/30/2009

North Korean laborers in the Kaesong Industrial Complex are gaining attention as they are awarded with the government’s certificate of high quality, a certification difficult for even South Korean companies to earn. It is very rare for the North Koreans to earn in only about one year what it takes South Korean small and mid-sized businesses 2~3 years to get.

On September 25, the Korea Chamber of Commerce and Industry presented the food container-producing Sungrim factory, located in the KIC, with the Chamber’s ‘Single PPM Quality Certification’. This certification is awarded to the company that, during the last six months, have found less than 10 out of 1,000,000 products (0.001%, 10PPM) to be defective. To date, only 1,664 factories throughout Korea have earned the certificate, and this is the first time it has been awarded to a factory in the Kaesong Industrial Complex.

The Sungrim factory launched a ‘Single PPM’ project to boost the quality of its output in July of last year, and received the Korea Chamber of Commerce and Industry’s award just 14 months later. The KIC Sungrim factory was opened in April 2008, and manufactures food container lids for the CJ Corporation. It employs 88 North Korean workers and 3 South Korean supervisors.

When the factory first opened, the skill level of the workers was considerably lower than counterparts elsewhere, and this was reflected in the dissatisfaction of customers and large number of defective products. It appeared that workers were indoctrinated with the North Korean system of equality, in which production numbers were less important than providing meals, exercise facilities, and other benefits. However, as the workers became more loyal to the company, their efficiency improved as well, and employees even began repairing their own equipment in the event of a failure. The CJ management recognized this, and allowed the North Korean laborers to improve at their own pace, sparing no expense to support their efforts.

The result was that the factory which had produced as many as 650 defective goods per month at the beginning was able to reduce the number of maligned goods to 15 within a year, and eventually down to 1.8 PPM. This placed the factory more than 17 times higher than the 31.3 PPM average for the 111 companies receiving one of Korcham’s three certificates (Single PPM, 100 PPM, and 1000 PPM).