North Korean Economy Watch

UPDATE 5 - July 17: The North’s story has changed.  DPRK rejects South’s inspectors. Seventy percent of officials of the United Front Department who were in charge of foreign affairs with South Korea were expelled from their positions early this year. It seemed to be an initiative step for taming the Lee administration and controlling the South’s policy (Daily NK).

UPDATE 4 - July 15: South Korea ups the ante by threatening to suspend tours of Kaesong unless the DPRK participates in the Kumgang shooting investigation (Bloomberg). 

NKeconWatch analysis: Suspending tours to Kumgang is relatively expensive for both North and South.  Hyundai and the South Korean government spent a lot of money developing the facilities, and by this time, the North Koreans who were earning from the project have grown accustomed to the cash flow.  The tours of Kaesong are different, however.  The South invested relatively little capital in the Kaesong tours, so suspending them idles few of their resources but hits the pocketbooks of the North Koreans who sponsor the program.  Could the Kaesong Industrial Zone be turned into a bargaining chip? 

UPDATE 3 - July 14: South Korea officially casts doubt on North Korea’s portrayal of events leading up to the shooting based on CCTV video and an eyewitness account. (Choson Ilbo) 

UPDATE 2: This story in the Korea Times (h/t ROK Drop) seems to indicate that there was a witness to the shooting and that there were no substantial barriers or warnings that vacationers could wander into a restricted military zone.   

UPDATE 1: The North Koreans expressed regret for the shooting, but says the responsibility lies entirely with Seoul.  They also refuse to cooperate with the South Korean government in an investigation of the incident citing that they have already sorted things out with Hyundai Asan. Although South Korea’s President Lee Myung-Bak ignored the situation in a parliamentary speech he gave shortly after the shooting, the Unification Ministry has now publicly stated that the shooting was “wrong by any measure, unimaginable, and should not have occurred at all.” 

ORIGINAL POST:Tourism numbers at the Kumgnag resort were up this year, despite high political tensions. 

From the AP:

A North Korean soldier fatally shot a South Korean tourist Friday at a mountain resort in the communist North, prompting the South to suspend the high-profile tour program just as South Korean’s new president sought to rekindle strained ties between the divided countries.

The news of the unprecedented shooting of a 53-year-old woman at Diamond Mountain resort emerged just hours after new President Lee Myung-bak delivered a nationwide address calling for restored contacts between the two Koreas, which have been on hold since he took office in February.

Kim said South Korea would suspend future Diamond Mountain tours until it completes an investigation. The other some 1,200 tourists already at the resort are to complete their tours as scheduled by as late as Sunday, said Hyundai Asan, the South Korean company that operates the resort.

Links to full stories below the fold:

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The DPRK’s golf facilities are all easily recognizable from Google Earth:  There is the 18 hole course half-way between Pyongyang and Nampo; there is a smaller 9-hole course next to the Yangakdo Hotel; there is a driving range in the Sosan sports district; and there is even a three hole course east of town just south of the Ponghwa Barrage on the Taedong River (This area could be the Ponghwa Executive Apartments mentioned in Kim il Song’s North Korea).

According to Yonhap, the DPRK has successfully expanded their number of golf holes by 60%–increasing them from 30 to 48:

The “Kumgang Ananti Golf and Spa Resort,” including a 18-hole golf course, will open to the public Wednesday after nearly four years of construction, Emerson Pacific Group, a Seoul-based leisure firm, said.

Built on about 1.7 million square meters of land, the resort also has a spa, a hotel and restaurants that provide nice sea and mountain views, according to Kim Min-jeong, a publicity official of the company.

The golf course has already drawn media attention over its 929-meter number three hole, the world’s longest.

The facility, however, will be operated on a membership-only basis for the time being, Kim said, adding that the company plans to open the facility to individual tourists around next year.

Emerson Pacific is waiting for Pyongyang to give the company permission to employ about 200 North Koreans, including 60 caddies, at the resort, the official said.

Read the full story here:
Golf course to open at North Korea’s Mt. Geumgang
Yonhap
5/27/2008

The most authoritative map of North Korea on Google Earth
Download it here

This map covers North Korea’s agriculture, aviation, cultural locations, markets, manufacturing facilities, railroad, energy infrastructure, politics, sports venues, military establishments, religious facilities, leisure destinations, and national parks. It is continually expanding and undergoing revisions. This is the tenth version.

This version includes: Expansion of infrastructure (railroads, electricity grid, elite areas, political monuments, burial mounds, dams, military facilities, and factories) in Hamhung, Chongjin, Sariwon, Raijin-Songbon (Rason) and other cities. Updates in Pyongyang: Pothonggang Exhibition Hall, Ssuk Island, Patriotic Martyrs Cemetary, Ostrich Farm, Kang Pan Sok Revolutionary School, Kumsong School, Manyongdae 1,000 Seat Restaurant. Specific manufacturing facilities and companies: Wonsan Rolling Stock Factory (RR manufacturer), Songnim-Hwanghae Iron and Steel Complex, Bukchang Thermal Power Plant, Sunchon Cement Factory, Namhung Youth Chemical Complex, Feb 8 Vinalon Complex, Hamhung Wood Carving Factory, Chongjin Chemical Fiber Complex, Unjong-ri Cooperative Farm, Sariwon Chicken Farm, Kanggye Chicken and Duck Farm, Hungju Youth Power Station, Korea Rason Taehung Trading Corporation. Updated Cultural Locations: Paeksang Pavilion (Anju), site of the DPRK’s first cricket game (2008), Sariwon Folk Village, Sinpha Revolutionary Site, International Friendship Exhibition, Paeksang Pavilion, Lake Sijung. Other locations: air force test bombing range, Kyo hwa so 1: Kaechon (overlay). Additinoally, most canals were eliminated from this version except the major projects on the west coast.

Disclaimer: I cannot vouch for the authenticity of many locations since I have not seen or been to them, but great efforts have been made to check for authenticity. These efforts include pouring over books, maps, conducting interviews, and keeping up with other peoples’ discoveries. In many cases, I have posted sources, though not for all. This is a thorough compilation of lots of material, but I will leave it up to the reader to make up their own minds as to what they see. I cannot catch everything and I welcome contributions.

Institute for Far Easter Studies (IFES)
NK Brief No. 08-5-22-1
5/22/2008

Earlier this month, the South Korean government announced that it would seek to relax regulations concerning cooperative ventures and exchanges with North Korea. Currently, South Korean companies, organizations or individuals wishing to enter into business agreements with North Korean partners were required to get government permission not only for the project, but for the individuals involved in the project.

On May 8, the Ministry of Unification announced plans to abolish the system granting (or denying) permission to individuals involved in these ventures, and to maintain only the system through which it grants authority to carry out specific projects.

Cross-border traffic faced similar red tape, as permission was required not only for goods being imported or exported, but for the importers and exporters themselves. The new plan includes measures for these import and export regulations to be loosened so that it is only the goods that need review, not the people involved in the trade. In addition, trucks and other equipment used to carry goods across the border will be certified for a period of five years, more than twice as long as the current two-year licensing system.

The government is also moving to ease requirements calling for South Korean citizens to report all contact with North Koreans, and instead to require reports on conversations only if the topic falls outside that of the approved project.

Reflecting the growing amount and diverse nature of inter-Korean cooperative projects, and the ROK government’s policy of encouraging such exchange, this new proposal is aimed at reducing the red tape and paperwork hassles necessary to launch and carry out these projects by reducing the amount of information required by the applicant and the volume of cross-checking required by government offices. At the same time, the proposal calls for the introduction of fines for those found to be filing false applications or reports.

If this proposal does not get mired in the Cabinet or other committees, it is expected to reach the floor of the National Assembly sometime in June.

UPDATE: Although the Daily NK originally reported stellar growth rates in 2008 for Hyundai’s North Korea projects, today the Choson Ilbo highlights that profits are still elusive:

According to the Financial Supervisory Service on Sunday, Hyundai Asan suffered a net loss of W9.64 billion (US$1=W1,041) in the first quarter this year, three times greater than the W3.34 billion in the corresponding quarter last year.

Despite the large number of tourists, which, at 125,000 as of mid May this year, nearly doubled since last year, it is the largest loss reported since the tours to Mt. Kumgang began in 2004. Over 45,000 people have traveled to the North Korean city of Kaesong since the tour program began in December 2007, and it is almost certain that the company would reach its goal of 100,000 tourists for this year.

So what is the explanation given for this?

The reason for such struggle is the weakness of the won against the U.S. dollar, since North Korea charges admission fees to Kaesong and Mt. Kumgang in dollars — US$ 100 for one and $80 for the other per person for three days and two nights. As the dollar has risen more than 10 percent since the beginning of the year, from W940 to W 1,040, so has the initial cost. The tour program to Kaesong has reportedly gone into the red already. Moreover, Asan has to pay off $200 million of North Korean foreign debt in return for the license to develop Mt. Kumgang granted in 1999.   

ORIGINAL POST
From the Daily NK:

According to the Ministry of Unification, despite the stalemate between North and South Korea, cooperation and exchange at the civilian level have increased rapidly in the months of January to April compared to the previous year.

Compared to the same period last year, North-South trade increased by 37% (corresponding to USD 410.099 million the same period last year) and the coming and going of people and the tour of Geumgang Mountain increased by 144% and 76% respectively, contributing to a significant rise in civilian cooperation and exchange.

Related to the North-South trade, following the expansion in economic cooperation, commercial transactions (regular trade + processing of brought-in materials + economic cooperation) increased by 53.3% (to USD 531,960,000) compared to the same period last year (USD 346,990,900). Only, uncommercial trade decreased by 53.8%, recorded at USD 29,570,000 according to the reduction in aid to North Korea.

69 enterprises are operating in the Kaesong Industrial Complex as of April 2008 and 44 of them seem to be constructing factories. It is anticipated that 100-some enterprises will be operating by the end of the year.

The first quarter production volume increased 71% or by USD 6,770,000 compared to the same period last year. The export amount declined 58% to USD 13,280,000. The total number of North Korean workers is 26,885 and South Korean sojourners 1,018, the latter rising by 52.6% from the previous year, despite the evacuation of South Korean personnel.

The Mount Geumgang and Kaesong tours, compared to last year, are maintaining a huge growth rate. The number of Mt. Geumgang tourists have increased 76% to 100,510 and the Kaesong tour, which began in December of last year, logged 40,525 visitors thus far.

The number of coming and going of people, excluding the Mt. Geumgang and Kaesong Complex tourists, increased by 144% within the year to 93,019 and such a growth rate seems to have originated from the hike in visitors related to economic cooperation and North-South trade as well as the Complex itself. Only, the number of visitors related to aid to North Korea was reduced from 2,935 to 1,129.

Although the increase in tourism numbers was expected, the positive spin put on the Kaesong Zone contradicts earlier reports.  

Read the full stories here:
North and South, Politics at a Stalemate, Economic Cooperation Is Bright
Daily NK
5/14/2008
Jeong Jae Sung

Hyundai Asan Losses From N.Korea Tours Mounting
Choson Ilbo
5/19/2008

Although business seems to have stalled in the Kaesong Industrial Zone, Hyundai Asan’s tourism projects have picked up this year.

From Yonhap: 

As many as 100,300 South Koreans toured Mount Geumgang so far this year, up from 58,000 a year earlier, according to a spokesman for Hyundai Asan, Hyundai Group’s arm dealing with business with North Korea.

Hyundai Asan officials expect more than 500,000 South Korean to visit the North’s mountain resort this year alone, up from last year’s 350,000.

A total of 40,090 South Koreans also visited the North’s medieval capital city of Kaesong during the first four months this year, Hyundai officials said, adding they recently increased the daily quota for South Korean visitors to Kaesong to 500 from 300.

Read the full article here:
More South Koreans toured North Korea despite chill in ties
Yonhap
5/4/2008

How pervasive is the flow of outside information in North Korea?  Typically stories in the media answer this question as though geography is the determinate variable: Cities near the Chinese border are the most influenced by heterodox ideas (since cell phones, clear television signals, and smuggling have been commonplace for years), and cities in the south (along the DMZ) are the most isolated (aside from Kaesong).  North Korea’s internal travel restrictions prevent foreign ideas from spreading.  This view was recently repeated by Andrei Lankov.

“The Kaesong exception” is thought to be correlated to the growth of the the Kaesong Industrial Zone.  The theory goes that the thousands of North Koreans who are employed in Kaesong (who work in South Korean facilities for South Korean managers) pick up bits of outside information at the margin and share it with their friends and family back home.  It is not an unreasonable theory.   

A new story in the Daily NK, however, presents evidence which points to ideological contamination on a nationwide scale (irrespective of geography).  The story claims that the city of Haeju is not only thoroughly exposed to South Korean radio and television - it is a production hub of a pirate video market:

“We can receive the TV broadcast of KBS (Korean Broadcasting System) and SBS (Seoul Broadcasting System) fine in Haeju. Sometimes, we can watch MBC (Moonhwa Broadcasting Corporation) as well. I watched Dae Jo Yong (a popular TV drama from KBS) on TV. However, I wanted to watch it again, so I bought a CD and watched it several more time.” He said, “We can get copies of South Korean TV programs from China. However, a great number of copies are also produced in Haeju.”

In a nod to communist efficiency, the subject interviewed in the Daily NK story even claims that in Haeju it is easier to pick up South Korean television signals than those from North Korea! 

With a “manufacturing” facility in Haeju, black market DVDs or VCDs can be copied and distributed throughout the south east even if security is tighter along the Chinese border.  Additionally, these DVDs/VCDs would be cheaper and more widely distributed because they are produced locally (as opposed to using Chinese labor/capital) and will require fewer middlemen to get them across the border and into the hands of consumers.  If this has been going on for some time, then it is safe to assume that most urban centers from Haeju to Pyongyang have regular access to South Korean media! 

Of course a decline in acceptance of the state ideology means the government must rely on external controls (rather than an individual’s self-control) to maintain the system.  The good news is that external controls can be avoided through technolgy, corruption, or both: 

“In the border areas with China and South Korea such as Hwanghae and Kangwon Province, the North Korean authorities try to prevent people from watching S. Korean TV by soldering and pre-tuning TV sets to Chonsun (North Korea) Central TV. Lately, the authorities also attempt to restrict the usage of remote control by covering the sensor with silver paper.

However, North Korean people circumvent the regulation. Instead of giving away their remote control to the authorities, they purchase an extra and watch the TV as they please after removing the silver paper. After all, the authorities’ efforts to control TV channels turn out to be futile for those who have remote control TV sets.

The full article can be found here:
North Korean People Copy South Korean TV Drama for Trade
Daily NK
Lee Sung Jin
2/22/2008

Update:
It seems opposition efforts to spare the South Korean Ministry of Unification were not entirely successful. Yonhap is reporting that even though the ministry will retain its name, much of the rest of it is on the chopping block.

Sources said that if the ministry is retained, its five divisions and one office may be reduced to a single office and three bureaus, with part of its work transferred to the other ministries.

The ministry’s five division headquarters — including unification policy, economic cooperation and cultural exchange — are likely to be reorganized into smaller bureaus, with public relations and information analysis to come under the direct control of the minister.

The office in charge of the Kaesong industrial complex may be turned over to the newly created Ministry of Knowledge-based Economy.

However, the ministry may retain control of inter-Korean dialogue headquarters, the inter-Korean transit office, and a settlement support team for people who have fled North Korea.  (Yonhap)

Although I personally favor an engagement policy with the DPRK, sending the signal that MoU standard practices will no longer be tolerated might actually encourage the DPRK to use donated funds and supplies in an acceptible way.  Remember: carrots AND sticks.  See the game theory here.  However, since the DPRK’s new game seems to play the US, China, Russia, and South Korea off of each other, some are concerned that pushing the DPRK too hard on accoutability and transparency in managing their donations might simply shift North Korea more firmly into China’s corner–which according to Lankov, they already have a strong incentive to do… 

Original Post: 2/8/2008
In the political shake up following the recent South Korean elections, incoming President Lee Myung-bak floated the idea of merging the Ministry of Unification (responsible for the North Korea protfolio) with the South Korean Foreign Ministry.  The story is here.

Today, Reuters is reporting that the Unification Ministry is here to stay.  Afterall, the first rule of bureaucracy is, “Why have one ministry when you can have two at twice the cost!” 

South Korean lawmakers have agreed to spare the ministry responsible for relations with North Korea and reject a call for its closure made by the president-elect, local media reported on Saturday.

The compromise allows the Unification Ministry to stay while lawmakers try to strike a deal to shut other ministries in a plan backed by Lee to streamline government, local media reported lawmakers as saying.

Critics say Lee’s proposal to close the ministry primarily responsible for relations with North Korea could send the wrong signal to Pyongyang, which has long accused Lee’s conservative party of plotting to keep the peninsula divided.

The Unification Ministry has been at the centre of criticism that the outgoing government had been too soft on the impoverished North, pouring aid across the border despite internationally condemned missile and nuclear tests. (Reuters)

The full article can be found here:
South Korea to keep ministry on North: media
Reuters
Rhee So-eui
2/8/2008

New gov’t to downsize Unification Ministry
Yonhap
2/17/2008

Kang: North Korean Trade Potential
Council on Foreign Relations
12/17/2007

Last December, David C. Kang, a professor of government at Dartmouth College and an adjunct professor at Tuck Business School, discussed the North Korean economy for the Council on Foreign Relations. I have excerpted some of his comments below.

His view on the new North-South cargo train service:

It doesn’t have huge economic significance in the overall GDP of North Korea. But it does have major economic significance in the fact that what North Korea had to do in order to let a train go through was an awful lot of adjustment[…]in terms of linking up the railroad, all the ministries had to prepare.  The old [Korean Energy Development Organization] had this problem as well. [W]hen they wanted Americans and South Koreans working in North Korea to build this light-water reactor, [they] had to set up protocols [Post offices, phone calls, where they were going to stay, etc]. It is pretty significant in terms of how much they had to adjust.

He quoted the following figures on North - South trade:

From $200 million in 1998, to now exceeding $1.7 billion in 2007.   South Korea’s total trade volume is $250 billion.

His opinion on the direction of the North Korean economy:

At this point what we’re seeing is very initial steps on the part of North Korea as they try to open up reform and yet maintain control. At the same time, they are being forced into a number of institutional changes and mind-set changes that are the first step forward in this process.

His view of North Korea’s comparative advantage:

Most of the companies that have gone in—the South Korean companies that have gone in—are assembly and light manufactures, such as or textiles and light consumer goods. This is the sort of obvious point of departure. It’s not hugely capital intensive in terms of building factories, and can take advantage of North Korean cheap labor and South Korean technological advantages.

There are a lot of potential mineral resources in North Korea, which would require a whole infrastructure of legal reforms to happen before anyone would take care of them. But at this point the safest bets are the ones that are on the order of assembly and light manufactures in the North and then exporting them out.

His view of South Korea’s long term goals:

If there’s unification, or even better relations, and South Korean companies can use cheap North Korean labor, instead of having to send those factories to China or Vietnam—not only do they speak Korean, they’re culturally similar, and the labor would be cheaper.

[I]f you could reconnect the railroads, from Japan, through Pusan [South Korea], up through North Korea, then out to China and Russia, you would be linking up all these economies in a much more efficient way than they are now. So everybody wants that. But obviously there’s the political problem. And even on the infrastructure side, the North Korean rail system is so old and so decrepit, that basically it would have to be rebuilt from zero. But the potential upsides are massive, in the long run.

His view of China’s engagement:

China has been essentially as deeply involved in economic engagement with North Korea as has South Korea—and by some measures, actually more so. Whereas South Koreans just do this assembling, some Chinese companies are moving in and building full factories in the North. There’s a lot of interest in Chinese-North Korean economic relations on both sides.

Yesterday the Jong Ang Daily reported that Hyundai Asan hopes to draw more tourists to the DPRK this fall, but their forecasting record is not exactly stellar:

The number of tourists to Mount Kumgang tallied 350,000 last year. The North Korean tour unit of Hyundai Asan hopes to pull the number of visitors up to 430,000 this year, 10,000 of whom would head to Kaesong, which began tours in December, and 15,000 of whom would visit Mount Paektu, with tours slated to start in May.

Hyundai Asan had marked annual losses from 1999 until it made profits in 2005. Its 2007 profits totaled 10 billion won.

Today, Andrei Lankov, writing in the Asia Times, chimes in on his experiences with the new Kaesong Tour and gives a rationale for western participation in such activities:

The Kaesong tour is the first project which gives the average South Korean, Mr Kim or Ms Pak, an opportunity to see a semblance of North Korean life. Hitherto, only a handful of South Koreans, most of them government officials, have been able to visit North Korean cities. Now, for the first time in 60-odd years, a very limited opportunity is open for an anybody who is willing to pay a fee.

Of course, North Korean authorities went to extraordinary lengths to prevent any interaction between locals and visitors. The list of prohibited items is quite impressive. Tourists cannot take any kind of printed material, computers and computer equipment, mobile phones, radios and video cameras, universal serial bus and other memory devices. The old film cameras are banned as well. Only digital cameras are allowed into the North, since at the border check point North Korean police officials check every single picture taken by every single tourist.

Despit the limitations, Lankov still feels that these types of exchanges are ultimately worthwhile…

The extraordinary security measures undertaken by the North Korean authorities ensure that only a very limited number of northerners are allowed to approach the visitors. Nonetheless, the tours are a major event.

Every single day, a small city is invaded by an impressive motorcade: 10 large imposing buses, half a dozen jeeps and other vehicles - incidentally, produced in South Korea. The preparations are thorough and, one might suspect, seriously disrupt the city’s routine. The North Koreans can see, albeit from the distance, the visitors - their dress, their height, their behavior. The South Koreans can immediately see how poor the North is. It seems that North Koreans, being necessarily street-smart, also instantly feel the South Korean prosperity.

The waitresses, girls in small stalls and even a handful of genuine guides (not the plaincloth intelligence operatives) who can see the visitors will also notice a lot. Even the willingness of the guests to spend a dollar on a cup of instant coffee or a few cookies is an important sign to them - after all, the average monthly salary in Kaesong is about $4. Those South Korean guests definitely do not look like impoverished victims of evil US imperialism. For a while it will be possible to explain away their extravagant behavior by insisting that those people come from the exploitive elite. But the longer the tours continue, the more difficult the task will become.

So why did the North decide to open Kaesong in the first place? It seems that the major reason is the easy currency income the project brings to Pyongyang. Every visitor pays 180,000 won ($190) - a hefty sum for a one-day bus trip. Out of this amount, 100,000 won goes to the North Korean authorities. All investment into necessary infrastructure is done by Hyundai Asan, so for the North this is easy money. Since 17,000 visitors joined the tours during the first two months of its operations, annual earnings could be in excess of $10 million.

At the same time, they might believe that the Kaesong area has become ideologically contaminated anyway. The Kaesong industrial park is located just a few kilometers from the city. In this facility, some 15,000 North Korean workers are employed in factories owned and run by South Korean capital, largely small businesses which are in desperate need of “cheap labor”.

These workers interact with South Koreans regularly, and they also see life inside the industrial park, which presents a remarkable contrast with their native towns or villages: well-paved roads, trees planted everywhere, modern buildings and round-the-clock supply of water and electricity. Even traffic lights, famously absent from North Korea, are present in this de-facto South Korean enclave.

So why did the North decide to open Kaesong in the first place? It seems that the major reason is the easy currency income the project brings to Pyongyang. Every visitor pays 180,000 won ($190) - a hefty sum for a one-day bus trip. Out of this amount, 100,000 won goes to the North Korean authorities. All investment into necessary infrastructure is done by Hyundai Asan, so for the North this is easy money. Since 17,000 visitors joined the tours during the first two months of its operations, annual earnings could be in excess of $10 million.

The only way to promote change, evolutionary or revolutionary, is to bring North Koreans into contact with the outside world. The North Korean dictator and his elite might see partial exchanges as an easy way to earn money, which is necessary for them to maintain their caviar and cognac lifestyle. In the short term they are probably right. But in the long term, the exchanges will make breaches in the once monolith wall of information blockade. Sooner or later, those breaches will become decisive.

The full articles can be found here:
Tourism boost to North in works
Joong ang Daily
Moon So-young
2/6/2008

A breach in North Korea’s iron curtain
Asia Times
Andrei Lankov
2/7/2008