North Korean Economy Watch

Korea Business Consultants has published their latest newsletter.  You may download it here.

Topics covered include:
Six Party Talk progress
South Korea/Russia gas deal
More factories opening in the DPRK
UN survey of DPRK population
Summit pledges
Pyongynag hosts autumn trade fair
KEPCO to Abandon NK Reactor Gear
Trust Company Handling DPRK’s Overseas Business
DPRK-Russia Railway Work Begins
ROK Opposition Calls for Renewed Cooperation with DPRK
ROK Delegation Leaves for DPRK
ROK Aid Workers Leave for DPRK
“ROK Makes US$27.6 Billion from DPRK Trade”
“Kaesong Output Tops US$400 Million”
DPRK, Kenya Set Up Diplomatic Ties
Medvedev Hails DPRK Anniversary
Claim to North Korean rock fame
International Film Festival Opens
Ginseng

According to Yonhap:

Hyundai Asan Corp., a unit of the South’s Hyundai Group in charge of businesses in North Korea, opened the tour to Kaesong in December last year. Everyday, about 370 people visit the North Korean city, about 70 kilometers north of the frontier separating the two Koreas.

The high number of tourists to Kaesong comes as the two Koreas are still bickering over responsibility in the July death of the South Korean tourist, who was fatally shot dead by a North Korean soldier while touring the North’s scenic mountain resort of Geumgang.

Since then tours to Mt. Geumgang, which began in 1998, have been indefinitely suspended.

In a ceremony to celebrate the 100,000th tourist, Hyundai Asan Chief Executive Officer Cho Kun-shik expressed hope that the two Koreas could amicably resolve the impasse over the shooting death.

According to the Associated Press (via the New Zealand Hearld):

Company officials said most of the tourists have been South Koreans but about 2,600 Americans, Japanese and other foreigners also have taken part in the programme.

Before the [Kumgangsan] shooting incident, about 10,000 people travelled to Kaesong every month, but the number of monthly visitors declined to about 7,450 in August and 5,770 in September, according to Hyundai Asan.

Facts:

1. By May 2008, 40,090 tourists had visited Kaesong, and the daily quota was increased from 300 to 500.  

2. Last August, Hyundai announced it was sending $928,560 to North Korea for the Kaesong tours. 

3. According to Dr. Lankov, the price to customers is W180,000, W100,000 of which is paid to the DPRK.  Additionally, Hyundai pays for all infrastructure improvements.  If these numbers are correct, the DPRK has grossed (and probably netted) W10,000,000,000  since the project was launched (appx. US$9,800,000 using an average interbank exchange rate from January through today).

4.  Although Hyundai Asan asserts (above) that appx. 370 tourists visit Kaesong per day, the most recent monthly figures (5,770 in September) indicate a mere 192/day.  370 is the number derived by taking the total (100,000) and dividing it by the number of days the project has run (appx. 270 this year)…so the daily average trend by month is now well below the annualized daily average.

Read more here:
N. Korean city draws 100,000 tourists from South despite shooting impasse
Yonhap
10/15/2008

North Korea: Border city draws 100,000 tourists
Associated Press (via the New Zealand Hearld)
10/16/2008

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-10-7-1
10/17/2008

It appears that many in North Korea are expecting an exceptionally large increase in this years’ harvest. According to a report issued on September 30 by Daily NK, a South Korean organization working for North Korean human rights, rice and corn market traders and those involved in food distribution are saying that grain harvests this year are significantly larger than last year, that by the end of the harvest season in November, North Korea’s food shortage crisis will be considerably eased, and that the price of rice will stabilize as well.

A source involved in China-North Korea trade at a company in Shenyang was quoted on the 30th as saying, “[North Korean] rice traders are expecting this year’s food production to be considerably improved compared to last year,” and, “This year, with no large natural disasters, rice paddies and crop fields are doing well, and crop production will probably be much greater than last year.”

In a related matter, one North Korean insider reported, “With the [North Korean] food situation, no one is doing as well as the wholesalers,” and, “As the fall harvest season has come, traders have come by farms in each province and reported that rice and corn harvests are very good.”

The source went on to say, “This year, farming was not difficult, so as autumn passes, the market price of rice looks likely to fall. The price of corn will fall even faster, hitting the 1000 won per kilogram level by mid October.” In fact, by the end of this year’s fall harvest, the price of food is expected to return to pre-shock levels. Currently, rice is selling for 2200 won and corn for 1300 won per kilogram in North Korean markets.

The reason harvests are expected to be more abundant this year is that the North has not suffered from flooding, as it had for the past several years in a row. Therefore, the government has called on the people to take care not to let any grain go to waste as harvesting is already in full swing in Hwanghae and South Pyungan provinces.

North Korean food wholesalers have become the suppliers of rice for markets since the government ceased to ration foodstuffs. They now contract with farms, paying in advance of harvest seasons so that the farms can use the funds to purchase fuel and other supplies necessary for preparing and transporting the food.

Because these traders personally visit the farms to predict harvests and set prices, the information is considered to be relatively accurate. These traders were also the first to predict the jump in prices earlier this year, warning of shortages even before last year’s fall harvest.

North Korea Uncovered: Version 12
Download it here

About this Project: This map covers North Korea’s agriculture, aviation, cultural locations, markets, manufacturing facilities, energy infrastructure, political facilities, sports venues, military establishments, religious facilities, leisure destinations, national parks, shipping, mining, and railway infrastructure. It is continually expanding and undergoing revisions. This is the 12th version.

Additions include: Tongch’ang-dong launch facility overlay (thanks to Mr. Bermudez), Yongbyon overlay with destroyed cooling tower (thanks to Jung Min Noh), “The Barn” (where the Pueblo crew were kept), Kim Chaek Taehung Fishing Enterprise, Hamhung University of education, Haeju Zoo, Pyongyang: Kim il Sung Institute of Politics, Polish Embassy, Munsu Diplomatic Store, Munsu Gas Station, Munsu Friendship Restaurant, Mongolian Embassy, Nigerian Embassy, UN World Food Program Building, CONCERN House, Czech Republic Embassy, Rungnang Cinema, Pyongyang University of Science and Technology, Pyongyang Number 3 Hospital, Electric Machines Facotry, Bonghuajinlyoso, Second National Academy of Sciences, Central Committee Building, Party Administration Building, Central Statistics Bureau, Willow Capital Food House, Thongounjong Pleasure Ground, Onpho spa, Phipa Resort Hotel, Sunoni Chemical Complex (east coast refinery), Ponghwa Chemical complex (west coast refinery), Songbon Port Revolutionary Monument, Hoeryong People’s Library, Pyongyang Monument to the anti Japanese martyrs, tideland reclamation project on Taegye Island. Additionally the electricity grid was expanded and the thermal power plants have been better organized. Additional thanks to Ryan for his pointers.

I hope this map will increase interest in North Korea. There is still plenty more to learn, and I look forward to receiving your contributions to this project.

Version 12 available: Download it here

The DPRK’s recent efforts to reconstruct the Yongbyon 5MW nuclear reactor seem to have brought implementation of the “second” Agreed Framework to a halt, though it was already behind schedule.  This week the US sent Chris Hill to Pyongyang to try and rescue the process which is hung up on verification protocol.   The North claims to have sufficiently declared their nuclear capabilities and believe they should be removed from the US list of state sponsors of terror.  The US does not believe this condition has been met and seeks to establish a protocol to verify if the North’s declaration is accurate.

Japan is also set to extend sanctions (due to expire) on the DPRK.  According to Bloomberg:

Japan’s ruling Liberal Democratic Party decided to extend sanctions against North Korea for six months after their Oct. 13 expiration date, Jiji Press reported.

LDP lawmakers agreed to extend the sanctions because North Korea took steps to reactivate its nuclear program and made little progress in an investigation into Japanese nationals abducted by North Korean agents, Jiji reported.

Prime Minister Taro Aso’s Cabinet is likely to endorse the extension by Oct. 10., the Japanese wire service said.

The sanctions include a ban on North Korean imports and the entry of North Korean ships into Japanese ports. The extension will be the fourth since sanctions began after North Korea’s October 2006 nuclear test, Jiji said.

Just as the DPRKs hopes of restoring/establishing relations with Japan and the US start to dim, however, they have reached out to South Korea, with whom political relations had recently gone sour due to the South’s policy change from unsupervised aid provision under the “sunshine policy” to a quid-pro-quo relationship under a “policy of mutual benefits and common prosperity“.  Additionally, the fatal shooting of a South Korean tourist in Kumgangsan led to a deterioration in cooperation between the two governments and suspension of the inter-Korean project (a cash cow for the North).

How much was the Sunshine Policy worth to the North?  South Korean GNP lawmaker Jin Yeong, who analzed data submitted by the Unification Ministry and the Export-Import Bank of Korea, claims that the Kim and Roh administrations oversaw the transfer of 8.38 trillion South Korean Won in aid and loans since 1998.

Taking office in February 2003 after the second North Korean nuclear crisis emerged in September 2002, Roh doled out 5.68 trillion won to Pyongyang over his five-year term, double that of his predecessor Kim (2.70 trillion won).

Kim and Roh gave to North Korea 2.4 trillion won for building light-water reactors and in food aid; 2.5 trillion won to pin the price of rice aid to that of the global market; 2.8 trillion won for other aid including fertilizer; and 696 billion won in aid from advocacy groups and provincial governments.

In 2003, South Korean aid to the North reached a high of 1.56 trillion won. Then after North Korean leader Kim Jong Il declared that his country had gone nuclear in 2005, the Roh administration sent 1.48 trillion won to the North.

Jin said, “South Korea gave a loan with rice first in 2000. Payments on the loan are deferred for 10 years. Thus, we are to receive the first repayment installment in 2010. But most of the 2.4 trillion won in loans seem irrecoverable.”

PricewaterhouseCoopers Korea audited the fiscal 2007 accounts of Seoul`s inter-Korean cooperation funds, saying, “Considering the characteristics of the North Korean government, grave uncertainty exists over the possibility of redeeming the loans given to the regime. The ultimate outcome depends heavily on the conditions around the Korean Peninsula.”

Since President Lee Myung-bak took office this year, exchanges between the two Koreas have been rare. Still, aid to the light-water reactor and the Gaesong industrial complex projects and civilian donations have continued, amounting to a combined 211.3 billion won. (Donga Ilbo)

It appears the Russians are doing their part to bring the North and South together through a project they can all agree on—building a natural gas pipeline from Russia to South Korea via the DPRK:

South Korea plans to import $90 billion of natural gas from Russia via North Korea, with which it shares one of the world’s most heavily fortified borders, to reduce its reliance on more expensive cargoes arriving by sea.

State-run Korea Gas Corp. signed a preliminary agreement with OAO Gazprom, Russia’s largest energy company, to import 10 billion cubic meters of natural gas over 30 years starting in 2015, the Ministry of Knowledge Economy said in a statement. The accord was signed in Moscow during President Lee Myung Bak’s three-day visit that began yesterday.

Gazprom Chief Executive Officer Alexei Miller said after talks today between Lee and Russian President Dmitry Medvedev that the exact delivery route hasn’t been determined and that shipments could begin as early as 2015.

“Russia suggested a pipeline via North Korea, which is expected to be more economical than other possible routes,” the minister said in a news briefing. “Russia will contact the North to discuss this.”

“Transporting gas through North Korea could be risky for South Korea,” said Kim Jin Woo, a senior research analyst at Korea Energy Economics Institute. “But the project will ease tensions on the Korean peninsula if Russia successfully persuades North Korea” to accept the plan.

North Korea could earn $100 million a year from the gas- pipeline project, the Ministry of Knowledge Economy said.

“Russia will supply the fuel in the form of LNG or compressed natural gas if negotiations with North Korea do not work out,” according to the ministry’s statement. South Korea and Russia will sign a final agreement in 2010 when a study on the route is completed.

South Korea is turning to Russia, holder of the world’s biggest proven gas reserves, as it faces intensifying competition for energy resources from China and Japan. Asia’s fourth-largest economy depends on gas for 16 percent of its power generation.

Under the agreement, a pipeline to South Korea will be laid via North Korea from gas fields on Sakhalin Island in Russia’s Far East. The pipeline would initially carry 10 billion cubic meters of gas a year, or about 20 percent of South Korea’s annual consumption. The cost of the gas link’s construction is estimated at $3 billion, the ministry said.

Read the full articles here:
South Korea Seeks $90 Billion of Russian Natural Gas
Bloomberg
Shinhye Kang
9/29/2008

Liberal Gov`ts Gave W8.38 Bln to North Korea`
Donga Ilbo
9/30/2008

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-9-23-1
9/23/2008

North Korea’s Chosun International Development Trust Company, founded less than four years ago, is quickly emerging as the center for all of North Korea’s overseas business transactions. This was made public in an article published in the September 18 edition of the Chosun Sinbo, the newspaper of the Jochongryeon, an organization representing the North Korean diaspora in Japan.

The newspaper introduced the trust as being involved in “business and trade dealings with other countries, investment trust activities, financial services and other activities,” while “raising the credit rating of related domestic enterprises through solid business practices and broadly and continuously expanding business transactions with foreign enterprises.” This trust was founded in April 2004, and handles import-export business and investment trust services, as well as financial services and other activities for foreign enterprises. The main imports of the trust are soybean oil and other foodstuffs, fertilizer, and farm-use products such as vinyl sheeting, which are high on the list of consumer demands within North Korea. The trust has set up an exchange market in the Botong River area of Pyongyang, and is responsible for providing production materials to the North’s businesses and farming towns.

This business also focuses on trust investment and financial services. According to the Chosun Sinbo, the trust is “solidifying economic utility and connecting domestic and international firms that are promoting positive prospective plans, guaranteeing and investing capital necessary for the development of national businesses.” The paper also explained that the trust “also provides financial services, actively promoting the management of domestic enterprises.” According to the article, it appears that the Chosun International Investment Trust Company is receiving foreign capital and investing it in North Korea’s domestic businesses.

The trust seeks capital, particularly Chinese capital in Beijing and Jilin, and invests this foreign capital in the building and operating of a leaf tobacco processing plant, a hygienic products production plant, food processing facilities, automobile repair facilities, and other joint venture and cooperative venture projects.

Capital Club, Beijing
Sept 29, 2008

Spearkers include: Dr. Leonid Petrov and Paul Tija
Agenda and reservation information here: dprk_seminar.pdf

The DPRK (North-Korea) is in need of many foreign products and investments, while there are also opportunities for production and outsourcing. From the end of September to 4 October 2008, a Dutch economic mission will investigate the business climate in this country, with participants from different business sectors, including agribusiness, light industry and computer software.   
 
Before leaving for Pyongyang, the trade mission will start its tour in Beijing. On 29 September, some of the participants will join the BenCham (Benelux Chamber of Commerce) event: “Doing business with North-Korea”. This dinner/seminar takes place at the famous Capital Club and will start at 18:30. The leader of the trade delegation, Paul Tjia of GPI Consultancy, will give a presentation. If you or your colleagues in China are interested, then you are welcome to join the event. Program details (including information on registration and dress code) can be found in the PDF file above.       
 
Due to the growing European interest in trading with the DPRK, we are planning to organize another trade mission to North-Korea in 2009. This trip will be open for business participants from other countries as well. If you are interested in joining a future trade mission, or wishing to cooperate, please contact us for further details.    
 
With best regards,
Paul Tjia (sr. consultant ‘offshore sourcing’)
GPI Consultancy, P.O. Box 26151, 3002 ED Rotterdam, The Netherlands
E-mail: paul@gpic.nl tel: +31-10-4254172  fax: +31-10-4254317 Website: www.gpic.nl

Markets work because price increases send entrepreners strong signals of relative scarcity and potential profit opporunities (unless these price increases are caused by inflation).  Entrepreneurs who pick up on these signals, then, have a strong incentive to move the desired resources from where they are valued less to where they are valued more.

A Chinese official in Jilin claims entrepreneurs in his province hear these signals loud and clear—and they respond the way humans have for thousands of years–they arbitrage:

The head of the grains bureau of Jilin, the Chinese province bordering North Korea, Zhu Yehui, says a drought in North Korea is very serious, and there is a lot of corn smuggling from China into North Korea.

He says the price in North Korea is more than 10 times the domestic price in China.

I am going to go out on a limb to suggest that these Chinese smugglers (entrepreneurs) are also delivering food more cheaply (on average) than the World Food Program, and I also am willing to wager that they have better access to “sensitive areas.” 

Addendum: According to Yonhap North Korea’s grain crop last year reportedly amounted to 4 million tons. The U.N. Food and Agricultural Organization told U.S.-based Radio Free Asia last month that the North will harvest a half million tons less than last year.

Read the full article here:
China reports grain smuggling business active into North Korea
Australian Broadacsting Corporation
9/17/2008

Jerry Guo, a Yale University economics student who recently traveled to Pyongyang, wrote some interesting articles this week detailing his illicit adventures into Pyongyang’s Central Market (pictures below).

Pyongyang’s Central Market is located along the shore of the Taedong River and is visible from the Yanggakdo Hotel.  Unlike the larger Tongil Market located on the south side of town, the Central Market does not receive tourists or foreign visitors—and given the location, its customers would probably prefer to keep it that way.  So in a sense, an impromptu stroll to the Central Market offers every visitor to the DPRK exactly what they are looking for: a spontaneous glimpse at every-day life in Pyongyang.

According to Guo, that is exactly what he received:

But I wanted to catch a real glimpse of Pyongyang nightlife, so late one afternoon, I sneaked off unsupervised and hit the city streets. And much to my surprise, I didn’t see a single People’s Army cadet goose-step past me with those missile-launchers-on-wheels that appear on the nightly news. What I did witness: a mother buying a soda for her daughter from a sidewalk snack cart; two older women sitting on a bench, gossiping and eating pears; businessmen coming out of the subway, sans Bluetooth headsets; a grimacing teenage boy getting a haircut at a salon. (Washington Post)

Eventually he meandered into the Central District Market:

I had found myself in the North Korean version of Macy’s, but here, every day is the Friday after Thanksgiving. There were delicate blouses and dresses for around 15,000 won (roughly $4 at black market exchange rates), all sorts of fruit — thought to be nearly impossible to find in this mountainous hermit kingdom — and enough varieties of mystery meats to make my high school cafeteria green with envy.

…and he took some pictures (These pictures belong to Mr. Guo, and I thank him for letting me post them):

Above: Fruits and chickens for sale

Above: Side dishes/Sauces and clothing for sale

Above: View of the Central Market from the Yanggakdo Hotel

Taking these pictures, however, ushered in an unpleasant afternoon:

No one paid much attention to me, until I stopped to snap a few photos. Then a group of stocky women in pink dresses magically appeared. They half-wrestled me to a second-floor office while blowing fiercely on blue whistles, as if to announce, “Look at me! My first American spy!” For the next six hours, I was questioned and scrutinized by a procession of Public Safety Bureau officers, their rank identifiable by the quality of their outfits: the first wore an undershirt, the last what seemed to be a custom Italian suit.[…]

Eventually, they forced me to write a hyperbolic but harmless self-criticism, describing myself as “an American student,” “an incompetent trouble-maker” and “a genuine lover of the Korean people.” Then they booted me back to my five-star hotel.

Mr. Guo’s adventures have been chronicled in the following publications and they are well worth checking out:

My Excellent North Korean Adventure
Washington Post
Jerry Guo
9/14/2008; Page B02

A writer journeys into North Korea with Chinese tourists
Christian Science Monitor
Jerry Guo
9/16/2008

Yale Senior Enjoys Uncensored Day in N. Korea
National Public Radio
9/15/2008

And a caveat for future visitors: Although I personally appreciate knowing this type of information about the DPRK, I do not recommend other tourists take this course of action for numerous reasons!

The South Korean Ministry of Unification has reports on economic output at the Kaesong Industrial Zone.  Below are the highlights from Yonhap:

The total output by South Korean factories operating in North Korea has exceeded US$400 million, Seoul’s Unification Ministry said Monday.

Companies at the Kaesong industrial complex produced goods worth a total of US$410 million between January 2005, when the compound was opened, and July this year. One-fifth of all goods produced were exported, according to the ministry handling inter-Korean affairs.

The output in the first seven months of this year amounted to $140 million, up 51 percent from the same period last year.

As of August, 79 firms operated in the area, employing more than 32,000 North Korean workers, mostly women.

Read the full article here:
Production in inter-Korean business town tops $400 million
Yonhap
9/15/2008