North Korean Economy Watch

Sometimes the headlines write themselves.

According to the Union of Catholic Asian News (excerpt):

For the first time in almost 60 years, a Catholic priest will stay in North Korea, and look after the welfare of local workers.

Franciscan Father Paul Kim Kwon-soon says he will stay in Pyongyang, probably beginning in late November, and serve as a “social worker” for factory workers in the first joint North-South business venture.

Returning to South Korea from a visit, Father Kim told UCA News on Nov. 4 that North Korea is allowing him to run a newly built welfare center in Pyongyang that houses a soup kitchen, a free clinic and a public bath, even though “they know I am a Catholic priest.” As a visitor, he will have to renew his visa every two months.

According to Father Kim, the three-story welfare center he will manage is within the factory premises and will provide the workers with services such as medical checkups, meals and haircuts. It will have the capacity to offer free meals to up to 1,500 workers a day.

“I can say that the center will be a turning point in the humanitarian aid to the North,” the priest noted. “We only could send aid materials” in the past, he pointed out, whereas he can now bring aid materials to the North and provide direct service.

Saebyol General agreed last February to establish the center after three years of “great efforts” on the part of his Order of Friars Minor, Father Kim explained.

During the four-day visit to the North, Bishop Lazzaro You Heung-sik of Daejeon presided at the opening ceremony of the center on Oct. 30, the priest reported.

On Nov. 1 Bishop You, former president of Caritas Corea, the Korean bishops’ social service organization, celebrated a Mass at Changchung Church, the only Catholic church in North Korea, to thank God for opening the center. About 50 South Korean Catholics including eight priests and four Religious took part. No North Korean Catholics attended.

Father Michael Lee Chang-jun, secretary of Caritas Corea, accompanied Bishop You. He told UCA News on Nov. 5 that he wished “the center could provide its service not only for the workers, but other North Korean people in the neighborhood.”

Cecilia Lee Seung-jung, North Korea program manager for Caritas Internationalis, the worldwide confederation of Caritas organizations, earlier called the agreement on the center a significant development. She pointed out that inter-Korean exchanges have been limited since the current government in Seoul assumed office last February.

Records of South Korea’s Unification Ministry show aid to North Korea from the South Korean government and civil groups amounting to US$63.6 million from January to September 2008, while in 2007 it totaled US$304.6 million.

According to Church sources, North Korea maintains that 3,000 Catholics in North Korea practice their faith at “home worship places” across the country, with no residing priest or nun. Between 1949 and 1950 all priests and nuns who remained in the North were executed or disappeared.

It is very interesting that the mission will be operated out of a South/North joint venture company rather than North Korea’s Changchung Cathedral in eastern Pyongyang.  There are countless reasons why concerned parties believe this to be a superior arrangement.

To learn more about Pyongyang’s new hemp factory, click here.

To read the full story mentioned ablove, click below:
Catholic Priest To Work In North For Social Welfare
Union of Catholic Asian News
11/6/2008

According to Yonhap (hat tip to Oliver):

North Korean authorities are clamping down on private markets that have cropped up across the country, citing concerns that such business activities can compromise centralized control, a local civic group said Thursday.

Good Friends claimed in its recent newsletter that the government will allow private markets to operate only once a month beginning in 2009. Markets operate on the first, 11th and 21st days of the month at present.

In North Korea’s capital and largest city of Pyongyang, such measures have been implemented since October, said Good Friends.

The Seoul-based relief group said North Korean authorities expressed concerns that merchants who make a living by selling goods at these markets could contest or circumvent decisions and rules made by the state.

The markets have become an integral part of the local landscape, as they are used by many people to supplement their meager state rations.

Quoting an anonymous North Korean official, the group said the government’s ultimate goal is to shut down the markets altogether.

Although I am sure North Korea’s leadership does not enjoy competing against thousands of their uppity subjects (entrepreneurs) in the production of consumer goods and services, the scale of the DPRK’s marketization over the last decade is simply too large and ingrained in the social fabric to be eliminated now.  Preventing entrepreneurs from emerging into a powerful political force (and making sure they pay their “taxes”) while maintaining control of the economy’s “commanding heights” seems a more likely policy direction for the North Korean government at this point.

As an aside, I have located dozens of North Korea’s markets (including the largest in Pyongsong) on Google Earth (Download here).

Link to the full article below:
N. Korea clamps down on private markets
Yonhap
11/6/2008

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-11-3-1
11/3/2008

The Daily NK has reported that the use of bicycles for business and transportation around the city of Pyongyang is becoming more and more commonplace, with 7 out of 10 households owning a bike, despite the fact that the cost of a bicycle in the capital city has doubled in the last twelve months alone.

According to North Korean defectors, until the early part of the 21st century, bicycles were the most sought-after purchases, with only 30~40 percent of families able to buy them.

According to a source in Pyongyang, “If you go to a [market] these days, you’d see that people who sell or purchase goods mostly use bicycles,” adding, “With the exception of those houses with extremely difficult situations, most households have a bike.”

The source explained that the growing use of bicycles is not due to improvements in the lives of the people, but rather, due to a shift in mentality. In the past, someone wishing to purchase a bike would first have to save up money for it, while today they think they can borrow the money, even at high interest rates, and then repay the loan through business profits.

The Daily NK explains, “With the ubiquity of [market] trading and the increase in business competition, bicycles have become must-have items.”

In Sinuiju, as well, bicycles have become a necessity for traders. A source there reported, “In farmlands that are distant from the [market], bicycles are an important means of linking to city markets. The merchants can triple or quadruple their profit, compared with those that don’t own bicycles.”

Most traders with bicycles take orders from those living in farming villages, fill the orders in city markets, then barter the items in the villages for vegetables and grains which they then turn around and sell in markets for a profit. Competition is stiff as traders follow price differences between the markets in order to squeeze out even a 100 won profit.

Read two recent stories on North Korea’s bicycle culture here:
70% of Households Use Bikes
Daily NK
Jung Kwon Ho
10/30/2008

People’s Safety Agency Targeting Women Cyclists
Daily NK
Jung Kwon Ho
11/6/2008

Although removal from the US list of state sponsors of terror carries little economic significance for the DPRK, its government has made this one of its top policy priorities.  Now that this has been accomplished, we must ask what the DPRK’s next move is in terms of international economic integration.  Will they push for removal of more economically-significant legal barriers which isolate them, to a large degree, from global markets (indicating reform is an important policy goal), or will we continue to see mixed signals and muddle-through policies (indicating a desire to maintain the status quo)? 

We cannot answer this question without knowing the DPRK’s overall strategy.  Today, however, a North Korean academic quoted in the Japanese media acknowledges that de-listing changes little economically, and signals that we should not expect to see much change in the DPRK’s economic environment:

Ri Gi Song, professor at North Korea’s Academy of Social Sciences, told Kyodo News in an interview that other international sanctions are still in place and “there should be no illusions” about the country’s trade environment.

“The delisting from the terror list is expected to have a certain level of beneficial impact, but this does not mean that all (international) economic restrictions have been taken away,” he said.

Ri also said Japan’s sanctions against North Korea have not had a major impact on the country’s economy but are hurting Korean residents of Japan who do business with North Korea.

“There is little impact from these restrictions on the economic development of the country, but I think there is an impact on businessmen of Chongryon,” he said, referring to the pro-Pyongyang General Association of Korean Residents in Japan.

“The Korean residents of Japan cannot come and go as they please,” Ri said.

Japan’s sanctions include a ban on port calls by North Korean vessels including a cargo-passenger ferry that provided a major means of transportation for Koreans in Japan traveling to North Korea. The sanctions also ban imports from North Korea and exports of luxury goods to the country.

The sanctions were first imposed in 2006 in the wake of an impasse in the issue of past abductions of Japanese nationals by North Korea. The sanctions are subject to review every six months and were extended in October for the fourth time.

Ri said he does not think North Korea’s centrally planned economy will be affected by the current global financial turmoil that began with the U.S. subprime mortgage meltdown.

“I don’t think it will have a direct impact on our economy, as our economy is not part of the capitalist market mechanism,” he said. (Kyodo – link requires subscription)

As an aside, Mr. [Dr.?] Ri might be surprised to learn just how exposed his country is to the “capitalist market mechanism”.

(Hat tip to Oliver for the article)

The full article can be read here:
N Korea Trade To Gain From U.S. Terror Delisting: N Korea Expert
Kyodo (subscription required)
11/4/2008

Peterson Institute Working Paper
WP 08 – October 2008
Stephan Haggard and Marcus Noland

Read the paper here

Abstract: In the 1990s, 600,000 to 1 million North Koreans, or about 3 to 5 percent of the precrisis population, perished in one of the worst famines of the 20th century. North Korea is once again poised on the brink of famine. Although the renewed provision of aid is likely to avert a disaster on the scale of the 1990s, hunger-related deaths are already occurring and a dynamic has been set in motion that will carry the crisis into 2009. North Korea is a complex humanitarian emergency characterized by highly imperfect information. This paper triangulates quantity and price evidence with direct observation to assess food insecurity in North Korea and its causes. We critique the widely cited UN figures and present original data on grain quantities and prices. These data demonstrate that for the first time since the 1990s famine, the aggregate grain balance has gone into deficit. Prices have also risen steeply. The reemergence of pathologies from the famine era is documented through direct observation. Although exogenous shocks have played a role, foreign and domestic policy choices have been key.

Keywords: Famine, North Korea
JEL codes: Q1, O1, P2

Although many would assume that North Korea’s economic isolation would insulate it from recent global financial instability, this does not appear to be the case.  According to the Wall Street Journal:

North Korea does little trade with the rest of the world — about $2 billion annually — and now it’s being hurt by lower prices paid by its biggest trading partner, China, according to report from a South Korean institute that specializes in North Korea research.

In recent weeks, the Chinese companies that buy North Korean ores and minerals like zinc, which are some of its biggest exports, have slashed the prices they’re willing to pay. That’s forced some North Korean mining firms to halt production and even produced a drop in the smuggling of ore and scrap, trade that’s illegal in the North but is believed to play an important role in supporting the impoverished country.

Lim Eul-chul, a professor at the Seoul-based Institute for Far Eastern Studies who wrote the report issued Thursday, said he learned about the commodity-trade problems from North Koreans doing business in China

“Chinese companies that are affected by global trends don’t want to pay as much as they used to for North Korean raw materials or resources,” Mr. Lim said. “Thus, North Korean merchants can’t make profits from trade.”

The price pressure exerted by Chinese traders on North Korean companies is in line with the broader drop in commodity prices in recent months. But it has imposed new burdens on North Korea in what is shaping up to be a terrible year there.

Official North Korean media have published reports saying the global financial crisis will ruin the U.S. and other industrial powers. But in the report, the Institute for Far Eastern Studies said “North Korean people are becoming very anxious over the possibility of the international economic crisis having a long-term impact.”

Below is the IFES report mentioned in the Wall Street Journal:

Global Financial Crisis hits DPRK economy by way of China 
NK Brief No. 08-10-29-1
10/29/2008

Contacts within North Korea are reporting that the North Korean people are becoming very anxious over the possibility of the international economic crisis having a long term impact as not only exports have dropped, but even cross-border smuggling is taking a hit.

Recently, as Chinese traders have more than halved the price of North Korea’s main export goods such as minerals and scrap iron, North Korea’s markets and even construction industry have felt the blow.

As North Korean state-run media outlets report the current financial crisis as the ruin of the United States and other capitalist world powers, they report as if North Korea were completed unaffected by it. On the 20th, the Rodong Sinmun emphasized that the the U.S.’ financial management system was ‘like a candle in the wind.’

However, it has been leaked that since last week, businesses in North Korea have been shutting their doors as a result of the financial crisis. In particular, the value of the North Korean Won has dropped sharply against the Chinese Yuan, and combined with Chinese traders’ reluctance to purchase North Korean goods and calls to lower prices, very little business is being conducted. This has led mines in Hyesan to halt exports of lead and zinc, and with the drop in legitimate exports, of course smuggling has dropped of, as well.

Furthermore, as raw materials from China are not being supplied, construction projects in the North are also grinding to a halt. 

(UPDATE) Barbara Demick reports in the Los Angeles Times:

Despite efforts to keep North Korea’s extreme poverty out of view, a glance around the countryside shows a population in distress. At the root of the problem is a chronic food shortage, the result of inflation, strained relations with neighboring countries and flooding in previous years.

Aid agencies say the level of hunger is not at the point it was in the 1990s, when it was defined as a famine, although they have found a few cases of children suffering from kwashiorkor, the swollen belly syndrome associated with malnutrition. Mostly what they are seeing is a kind of collective listlessness — the kind shown by the people on the streets of Nampo.

“Teachers report that children lack energy and are lagging in social and cognitive development,” reported a group of five U.S. humanitarian agencies in a summer assessment of the food situation. “Workers are unable to put in full days and take longer to complete tasks — which has implications for the success of the early and main harvests.”

Hospitals complained to aid workers of rising infant mortality and declining birth weights. They also said they were seeing 20% to 40% more patients with digestive disorders caused largely by poor nutrition.

The U.N. World Food Program reached similar conclusions. In a recent survey of 375 households, more than 70% were found to be supplementing their diet with weeds and grasses foraged from the countryside. Such wild foods are difficult to digest, especially for children and the elderly. The survey also determined that most adults had started skipping lunch, reducing their diet to two meals a day.

These are some of the same signs that augured the mid-1990s famine, which killed as many as 2 million people, 10% of the population.

“The current situation hasn’t reached the famine proportions that it did during the 1990s. Our hope and goal is to keep it from going over the precipice,” said Nancy Lindborg, president of Mercy Corps, one of the U.S. aid organizations working in North Korea. “You have a number of factors that have conspired to create a really tough food situation.”

In Pyongyang, the capital, residence in which is reserved for the most politically loyal North Koreans, plenty of food is available on sale. A grocery inside the Rakwon Department Store carries Froot Loops and frozen beef. At open-air markets, you can find mangoes, kiwis and pineapples

But the products are far too expensive for most North Koreans, whose official salaries are less than $1 a month — 60 to 75 cents monthly for the workers surveyed by the World Food Program. And the farther you get from Pyongyang, the poorer are the people.

Nampo is 25 miles southwest of the capital, on the Yellow Sea. It used to be a thriving port city, but nowadays its harbor is used mostly for shipments of humanitarian aid. On a weekday morning, many people sit along the sidewalk watching the few cars pass by. They appear to be unemployed or homeless.

North Koreans say that the food situation is improving and that a good harvest is expected this autumn, as a result of improved weather conditions. The last two years were disastrous because of heavy flooding.

“There was a problem before, but it is getting better. We expect a bumper harvest,” said Choe Jong Hun, an official of the Committee for Cultural Relations With Foreign Countries.

North Korea experts, however, are skeptical. “One good harvest is not really going to alter the picture,” said Stephan Haggard, a UC San Diego professor who has written widely on the North Korean famine.

The World Food Program and the U.S. aid organizations are providing food for the most vulnerable, including children and pregnant women. A U.S. ship carrying more than 27,000 tons of bulk corn and soy is slated to arrive in Nampo within days.

International agencies have been trying to raise money to expand their food aid to the general population. Many urban North Koreans are dependent on food rations, which have dwindled to 150 grams a day, or a little more than 5 ounces.

Even in Pyongyang, one can see signs of scarcity behind the facade of what is supposed to be a showcase capital. Foreign residents say they have seen homeless children in the last few months — a notable sight in a totalitarian country where nobody is supposed to wander away from their legal residence. (Los Angeles Times)

Read the full Wall Street Journal articles below:
North Korea Feels Effects of the Crisis
Wall Street Journal
Evan Ramstad and Sungha Park
10/31/2008

North Korean facade of self-sufficiency can’t hide signs of hunger
Los Angeles Times
Barbara Demick
11/2/2008

UPDATE: A Catholic Priest will be operating a mission out of the factory.  Read more about this here. 

ORIGINAL POST: Yes, you read the title correctly.  Billed by Yonhap as the first inter-Korean joint venture in Pyongyang:

Pyongyang Hemp Textiles is a cooperative effort between the South’s Andong Hemp Textiles and the North’s Saebyol General Trading Co., with a total investment of US$30 million shared equally by the two sides, according to the officials.

Around 1,000 North Koreans will be working for the textiles and logistics firm, which is built on 47,000 square meters of land in Pyongyang, they said.

…The opening ceremony for the joint venture was delayed for close to two months due to deteriorating inter-Korean relations, which worsened after a South Korean woman was shot to death while traveling the communist country in early July. Pyongyang refused to apologize for the shooting, and denied requests from Seoul to cooperate in a fact-finding mission into the death.

If anyone has any idea where this company is located on Google Earth, please let me know. 

According to Wikipedia, which is not an authoritative source:

Industrial Hemp is produced in many countries around the world. Major producers include Canada, France, and China. The United States is the only industrialized nation to continue to ban industrial hemp. While the Hemp is imported to the United States more than to any other country, the United States Government does not distinguish between marijuana and non-psychoactive Cannabis used for industrial and commercial purposes.

The South Korean government seems to have made some significant changes to the way business is to be conducted between themselves and the North.  It seems regulations have been eased on South Korean companies seeking permission to operate in the North—and some new subsidies have been put on the table.

From the Korea Times:

The government Tuesday abolished a system under which companies here must receive a permit to do business in North Korea.

As a result, companies which have been seeking to operate in the reclusive state would see simplified procedures when they start inter-Korean projects.

The Cabinet approved revisions of the law governing trade and cooperation between South and North Korea.

Under the previous licensing system, a permit for both companies and projects were necessary.

But now, companies have to get approval for their projects only and inter-Korean cooperation programs designated by a presidential decree can proceed without the approval.

If firms get the license in a dishonest way, the government can cancel it.

In a bid to diversify trade between the two Koreas, the revision allows services and intangible things as well as goods to be exchanged.

The government also approved a revision bill to encourage foreign investors to invest in inter-Korean trade.

It says that foreigners who invest $10 million or more can get some incentives such as cash grants.

The legislation on South-North cooperation was introduced in 1990 to support exchanges and cooperation between the two Koreas.

The Ministry of Unification has a committee under itself to coordinate related policies and make a decision on important inter-Korean cooperation issues.

To promote economic, cultural and social exchange projects, a permit from the minister has been required.

If caught violating the law, the person will be sentenced to up to three years imprisonment or fined up to 10 million won ($6,770).

Read the full article here:
Inter-Korean Business Procedures Simplified
Korea Times
Kim Sue-young
10/28/2008

According to Yonhap:

North Korea has begun to more harshly censor South Korean newspapers subscribed to by firms operating in the inter-Korean Kaesong industrial complex, apparently to prevent workers there from reading reports on their leader Kim Jong-il’s health, officials said Monday.

“The North began to allow South Korean dailies to pass through customs only after cutting out articles critical of the country as of Oct. 20,” a Unification Ministry official told reporters on condition of anonymity.

About 30 copies of nine different papers cross the inter-Korean border every day for delivery to the Kaesong Industrial District Management Committee in the complex, a civilian administrative body of South Korean firms there, according to the official.

The North is strictly enforcing customs regulations barring the entry of overseas publications critical of Pyongyang, the official said.

It is not known exactly what types of articles have been censored by the North, but officials say the measure could be related to recent reports that Kim is ailing.

South Koreans are forbidden to carry the newspapers when they leave the office, but some have received warnings from North Korean authorities for violating the rule, according to the Unification Ministry official.

Read the full article here:
N. Korea intensifies control of S. Korean dailies sent to Kaesong
Yonhap
Shim Sun-ah
10/27/2008

After a 56 year hiatus, regular freight rail service between the two Koreas resumed on December 11, 2007.  According to reports at the time:

The new service is expected to slash the cost of transporting products to and from the [Kaesong Industrial Zone], just north of the border, considered a major achievement of Seoul’s “sunshine” policy of engaging the North over the past decade.

South Korean officials hope the cargo train service will lay the groundwork for a regular train service for passengers and the railway will be linked through North Korea to the Trans-China and Trans-Siberian railroads.

A 12-car train carrying curbstones and other construction materials left left South Korea’s Dorasan Station at 8:20 a.m. and arrived at North Korea’s Panmun Station 20 minutes later. A joint ceremony was held at the North Korean station around 11 a.m. with the attendance of some 180 officials from both Koreas.

The train returned to the South later in the day with goods including shoes, clothes and watches made at the industrial complex.

Trains will run daily on weekdays from Dorasan Station in Munsan to Panmun, carrying up to 10,000 tons of cargo on each run. The train service begins at 9 a.m. and returns from the North Korean station at 2 p.m. Trains are restricted to a maximum speed of 60 kilometers per hour when traversing the closely guarded frontier. (Korea Times)

However, the following January 29, a mere six weeks after launch, South Korea sought to scale back the rail service:

On the first day of working-level talks in North Korea on Tuesday, the two Koreas discussed scaling back their first regular inter-Korean railway service to run in more than a half century, as the trains are often empty, South Korean officials said. (Yonhap)

Since that time, though, things have not gotten much better:

A daily train service between South and North Korea that was opened as a symbol of reconciliation is nearly always completely empty, according to rail operators.

But in the first ten months, it carried only 340 tons of goods, the operators said in a report to the Seoul parliament. On 150 out of 163 return trips so far, it was a ghost train, carrying nothing at all.

“It may not make sense for cargo trains to run empty but this is too symbolic a project to stop now,” a Korail spokesman said. “It should be viewed in terms of the nation’s future economy.”

Officials said the firms working at the Kaesong park, the only customers for the service, found it easier and cheaper to use the road link previously opened to service it. (Telegraph of London)

Given the nature of political institutions and decision-making, it should not surprise anyone that this service is still in operation.  White elephants of this sort have been justified by any number of quasi-economic excuses: 1. The construction and operation of these projects creates jobs 2. Projects of this sort boost aggregate demand (Keynesian justification) 3. These projects provide some sort of political benefit to which a price cannot be easily attached 4. Capital markets are too short term to see value in these “long-term” projects (market failure argument). 

The dedicated public servant from Korail (qouted above) creatively combines cases 3 and 4 to justify the continued operation of an empty train.  Most of these claims, however, have been long debunked in the economics and political science literatures.  Sunk costs are sunk, so there is no need to fret about them now, but it is a waste to continue subsidizing an empty train.  Surely the South Koreans have a long list of investment projects they could attempt in the DPRK with these funds.  I am sure many in the DPRK would also prefer aid that actually helps as well.