North Korean Economy Watch

Pictured above (Google Earth): The approximate location for the North Hamgyong Provincial Onsong Island Tourist Development Zone

According to China’s Global Times:

A contract has been signed between North Korea and a Chinese border city to develop a special economic zone in North Hamkyung Province, one day after North Korea removed Kim Jong-un’s once all-powerful uncle from his post.

North Korea on Monday signed the contract for Onsong Economic Development Zone with Tumen, a Chinese city under the administration of Yanbian Korean Autonomous Prefecture in Northeast China’s Jilin Province, South Korea’s JoongAng Daily reported Thursday.

On Sunday, North Korea dismissed Jang Song-thaek, widely considered the second-most powerful figure in the country, and expelled him from the Workers’ Party of Korea. Jang was accused of “anti-party, counter-revolutionary factional acts” and womanizing.

Considered an economic reformist, Jang led a delegation to China in August last year to discuss the development of two economic zones in Rason City and the Hwanggumpyong and Wihwa islands near the Chinese border.

An official from Tumen said the city government expressed concerns regarding possible postponement of the contract signing due to Jang’s ouster, but North Korea requested they sign the contract as scheduled, according to the daily.

“Jang’s involvement in economic projects had been diminished significantly this year, so his purge would not have much impact on the speed of economic reform in North Korea,” Kim Kyu-chol, head of non-government Forum for Inter-Korean Relations, a Seoul-based group monitoring inter-Korean business relations, told the Global Times on Thursday. “Actually  economic reform will speed up next year as North Korea will focus on the economy next year, the third of Kim Jong-un’s rule.”

North Korea was in the process of forming the new National Committee for Economic Development earlier this year, which technocrats who had prior experience with the nation’s former economic development bureau, will have joined, Kim Kyu-chol said.

North Korea also reached an agreement with China on Sunday over a 380-kilometer high-speed railway to connect Sinuiju, the city across the border from Dandong in Liaoning Province, through to Pyongyang and Kaesong, South Korean Democratic Party lawmaker Hong Ik-pyo told a seminar at the National Assembly.

Pyongyang’s insistence on inking the contract sends a signal that its economic ties with China will not be affected by Jang’s dismissal and that North Korea wants to strengthen cooperation with China, said Jiang Longfan, a North Korea expert at Yanbian University.

“Kim wants to consolidate his absolute authority through purging Jang, but in the meantime the commitment to economic development has to be maintained to win people’s support,” Jiang said.

Sinuiju Special Zone located at the estuary of the Yalu River is expected to see the ground-breaking of a major project in February next year, with backing from Hong Kong. North Korea also signed a contract with investors from Singapore, Hong Kong, and the Chinese mainland to invest in the Kangryong Green Development Zone in South Hwanghae Province in mid-November, Tongil News reported on Tuesday.

The Onsong Economic Development Zone is one of the 14 special economic zones North Korea has designated this year to attract foreign investment.

North Korea planned to develop the zone into a tourism resort that includes a golf course, swimming pool, horse racing, and restaurants to attract foreigners, said Jin Hualin, an expert on North Korea economy at Yanbian University.

“But the exact development agenda hasn’t been set as Tumen will invite investors to make their decisions,” he said.

He is optimistic about the economic prospects for the zone, which, located in mysterious North Korea, will be attractive to foreigners, he said.

Next year, North Korea aims to host 1 million foreign tourists and thus further tourism projects are expected to be announced, Kim Kyu-chol said.

Some 250,000 foreign tourists, more than 90 percent of whom were Chinese, visited North Korea last year, Kim said.

Read the full story here:
N.Korea inks border town economic deal
Global Times
Sun Xiaobo and Park Gayoung
2013-12-13

Bradley Babson
38 North
2013-12-12

In recent weeks North Korea has actively publicized in domestic and foreign news media its determination to pursue an aggressive strategy to develop special enterprise zones (SEZs) throughout the country. This follows and complements the agreement reached between the two Koreas in September to reopen the Kaesong Industrial Complex (KIC)—which was closed unilaterally by the North in April—and to establish new joint management arrangements for that zone designed to ensure its stability in the future and to attract international, not just South Korean, investors.

Both developments have been met with considerable skepticism following erratic North Korean decision-making and the significantly negative impact of the KIC’s closure on South Korean companies as well as on investor risk perceptions of the reliability of investing in North Korea at all. Clearly, whether rebuilding and internationalizing the KIC or proceeding with ambitious plans to expand the role of SEZs as an economic development strategy, North Korea faces major uphill challenges in attracting investors and finding a formula for success. To many experts and economists, these challenges seem near insurmountable, given the current state of North Korea’s economy and investment climate. This leads us to ask:  should anyone take this new SEZ development strategy seriously?

Read more from Dr. Babason here.

Previous NKeconWatch posts on the Economic Development Commission here.

The Asahi Shimbun reports on the Hwanggumphyong SEZ (2013-12-19):

The execution last week of Jang Song Thaek, North Korea’s de facto No. 2 leader, has taken its toll on a joint project with China to develop Hwanggumphyong island across the border from this city in Liaoning province.

Jang, uncle of North Korean leader Kim Jong Un, was believed to be in charge of relations with China and overall economic affairs. His purge could continue to have further ramifications on economic cooperation with and investment from China.

Hwanggumphyong island is an 11-square-kilometer swath of North Korean territory in the Yalu river that defines the border with China. A bilateral joint development venture there, kicked off by a ground-breaking ceremony in June 2011, was halted temporarily after North Korea insisted on having its troops stationed on the island.

But both sides agreed to rejuvenate the project and set up a joint steering committee when Jang visited China in August 2012. Beijing committed to investing 80 million yuan (1.4 billion yen, or $13 million) and has since been laying the groundwork on the island.

The North Korean official in charge of the venture, however, was recalled immediately following Jang’s purge, and construction work was also halted around the same time, sources in the steering committee said. A Chinese member of the steering committee reported to the central government in Beijing that quick changes in North Korea made it difficult to achieve the initial goal for attracting firms to Hwanggumphyong island.

The steering committee has touted the advantages of being able to rely on cheap North Korean labor in a bid to attract 30 firms from China, Taiwan and elsewhere before the year is out, but only a handful of companies have come forward with decisions to set up shop on the island amid widespread concern about investments associated with North Korea.

The purge of Jang, who was the main contact for joint China-North Korea ventures, has probably alienated most decent investors, said an embittered Chinese official in the steering committee.

North Korea has also been calling for Chinese investment in the Rason Economic and Trade Zone in the country’s northeast. But Pyongyang sent investors into panic when it accused Jang of an “act of treachery” in “selling off the land of the Rason Economic and Trade Zone to a foreign country” during his trial. He was also accused of attempting “subversion of the state.”

North Korea has sought to rehabilitate its moribund economy by attracting foreign capital to specially designated economic zones. It released an ordinance in late November, for example, to designate “economic development zones” in its various provinces.

It is believed there will be no change to that policy line, which has received Kim Jong Un’s endorsement.

Many observers believe Premier Pak Pong Ju, who has been engaged in practical aspects of economic management under Jang’s supervision, will take charge of overall economic affairs.

“Pyongyang will probably expand the role of Pak, who is believed to be an economic reformist, so as to reassure investors,” said one diplomatic source.

But investor confidence is expected to remain weak in the short term, because Jang’s execution was undoubtedly perceived as an “investment risk” in the eyes of Chinese and other foreign investors.

“It is by no means easy to regain the confidence of private-sector capitalists who were shaken up by the purge,” said one Chinese investment adviser who visits Rason frequently. “It will take time before concerns are quelled.”

The JoongAng Daily reports on the Rason SEZ (2013-12-6):

The Rason Special Economic Zone, which was headed by Jang Song-thaek, the once-powerful uncle of North Korean leader Kim Jong-un, has been left as a ghost town after Jang’s purge, and several North Korean officials who worked in the zone are under questioning, a source in China said.

“On Nov. 3 to 4, I visited the Rason economic district,” the source exclusively told the JoongAng Ilbo, “but I couldn’t meet with the two main officials in charge of the zone’s development because they were both sent to Pyongyang.

“The two officials were in the inner circle of Jang Song-thaek and they were in charge of developing economic zones of North Korea,” the source said.

The Rason Special Economic Zone is one of the most ambitious attempts by North Korea at limited economic reforms. The district has been developed since Jang visited China in August 2012.

In August 2012, North Korea and China’s [Jilin] provincial government launched a DPRK-China Rajin-Sonbong management committee for full-fledged development of the zone, according to the source. The [Jilin] government dispatched about 50 Chinese officials, while Pyongyang sent about 30 to the committee.

With the purge of Jang, most of the Chinese officials have left the zone, and the North Korean officials are scheduled to return to Pyongyang soon. All activities at three piers in Rason’s port have stopped with the downfall of Jang. The first pier, run by a Dalian-based Chinese company, suspended its transportation of coal, and the construction of a second pier has been halted. The construction of a third pier by a Russian builder was also suspended.

“Last year, the development of the Rason district seemed very dynamic,” said another source knowledgeable about North Korea.

“But most Chinese businessmen did not trust North Korea’s polices, and the Chinese government did not offer guarantees on investment in the district so, in fact, there wasn’t much progress.

“Despite the fact that development was slow, Jang’s aides invited some girls to the district and held a big soiree at a floating restaurant, which could be one of the reasons for Jang’s purge,” the source said.

Read the full story here:
Jang’s execution halts China-N. Korea joint venture, alienates investors
Asahi Shimbun
Koichiro Ishida
2013-12-19

With purge, Rason zone is ghost town
JoongAng Daily
Hoi Hyung-Kyu, Kim Hee-jin
2013-12-6

Institute for Far Eastern Studies (IFES)
2013-12-06

North Korea is pushing ambitious development of local economic development zones, purportedly with the aim of promoting balanced development of the local economy and improving the lives of ordinary people.

On November 29, 2013, the Choson Sinbo, a pro-North Korean newspaper based in Japan, reported details of North Korea’s proposed 13 economic development zones (EDZs) by province, including the characteristics of the plans, goals, and outlook. It specified that the main objectives of this project are to promote a “balanced local economy development and improve the lives of residents.”

To enhance the effectiveness of the EDZs, each region’s characteristics were incorporated into the development strategy.

The existing Rason and the Hwanggumpyong Special Economic Zones are comprehensive and large in scale, covering production and processing, transport, commerce, and tourism sectors. The local-level EDZs, on the other hand, reflect each area’s local economy and culture and more narrowly focus on local industries.

For example, the EDZ slated for Pukchong in South Hamgyong Province is an agricultural zone; Onsong in North Hamgyong Province is for island tourism; and Waudo in Nampo City is an export processing zone. He one reflects its region’s characteristics.

The (North) Korean Association of Economic Development Director Yun Yong Sok, who is in charge of attracting investment from foreign companies, said, “By integrating the unique features of each region, it can benefit the local economy through acquiring necessary technology for the development and also earn foreign currency contributable to improving the lives of the people.”

He also said that “The goods produced in the EDZs will be exported to other countries but at the same time will be able to meet domestic demand,” and “the development of EDZs will center on the border areas adjacent to China and Russia.”

In addition, each province was encouraged to develop plans according to the region’s environment and apply to the People’s Committee in each province. Plans were then sent to the State Economic Development Commission for in-depth deliberations.

North Korea has upgraded the State Economic Development Commission (from its previous designation as the State Economic Development Board) in October 2013 to become a direct mechanism under the Cabinet that oversees the establishment and management of EDZs.

This commission is responsible for developing national strategies relevant to special economic zones such as selection process of provincial EDZ establishment, preparation to state evaluation, modification and supplementation of laws and regulations, and the entire process for implementation.

As predicted by Ri Sun Chol, International Economic Relations Research Director at the Economic Institute in the Academy of Social Sciences, “Once the economic development zones are established in each province, it will greatly expand the breadth of the foreign economic cooperation and will provide a fundamental opportunity to invigorate investment activities.”

The Choson Sinbo reported that while some might take a pessimistic outlook on the new EDZs, the new project is attracting interests from various countries such as Hong Kong and Singapore, and the local and central governments are working closely to promote this project.

According to Yonhap:

Inter-Korean trade has gradually been returning to normal levels following the reopening of a joint industrial park in North Korea’s border city of Kaesong in September, government data showed Sunday.

According to data from the Ministry of Unification and the Korea Customs Service, two-way trade between South and North Korea amounted to US$152.15 million last month. The amount is equivalent to 80.9 percent of total bilateral trade in the same month last year.

“Exports have grown with the entry of large amounts of raw materials, production facilities and food supplies as (the Kaesong complex) prepares to resume operations in earnest,” a ministry official said, speaking on condition of anonymity.

The complex, which ground to a halt in April amid high security tensions on the Korean Peninsula, reopened in September. Inter-Korean trade is limited to the joint factory park because all other economic exchanges have been banned since May 2010 due to North Korea’s sinking of a South Korean warship in March of that year.

“The Kaesong Industrial Complex is gradually recovering to previous levels,” the official said.

The complex, a key outcome of the first-ever inter-Korean summit in 2000, combines South Korean capital and technology with cheap North Korean labor to produce clothes, utensils, watches and other labor-intensive goods.

The project serves as a key source of cash for the impoverished country.

My compendium of stories related to the closure and reopening of the Kaesong Zone can be found here.

Read the full story here:
Inter-Korean trade recovers following reopening of Kaesong complex
Yonhap
2013-11-24

UPDATE 1 (2013-11-29): New economic zones are under development at provincial level – development of Sinuiju special zone officially announced (IFES):

North Korea has enacted the Economic Zone Development Act on May 29 this year and explained, “The economic development zones are special economic zones where preferential treatments are guaranteed in accordance with appropriate laws as provided by the state.” It also elucidated that the provincial level SEZs were to be managed differently from the central-level SEZs.

On October 16, the institution in charge of the central-level economic development zones, the General State Economic Development Department, was upgraded to become the State Economic Development Commission, with Kim Ki Sok appointed as the commission’s chairman. Kim served as the vice-chairman of the Joint Investment Committee of Korea. In addition, the Korean Economic Development Association was established as a private organization, with Yun Yong Sok being named as president.

Provincial-level economic development zones will be open to joint venture company or independent investment by a foreign company and 50 years are guaranteed as the cooperation period. Each of the 13 SEZs in each province will be developed incorporating the special characteristics of each region. The total amount of investment permitted in this area will range from 70 million USD to 240 million USD. The provincial-level SEZs will be managed by the Economic Zone Development Bureau.

With the announcement of the names of the 13 SEZs, it is likely the development plans is likely to proceed rather rapidly.

On the other hand, Sinuiju SEZ is reported to be developed as a central-level zone. In 2002, Sinuiju already had received the title as a special administrative region but after the arrest of the Administrative Minister Yang Bin, the development of this area came to a halt.

The plan for Sinuiju SEZ is likely to be developed as state-of-the-art, comprehensive special zone modeled after China’s Shenzhen SEZ.  A Joint Venture Investment Committee and an international group from Hong Kong will hold 50:50 shares and establish a new joint venture company.

Sinuiju is especially located in a geographically advantageous area, adjacent from Dandong City divided by the Amnok (Yalu) River and it is well connected through railway and bridge that connects the two cities. The currently under construction New Yalu River Bridge is also in progress and expected for completion early next year.

ORIGINAL POST (2013-11-21): Until this year, there were four Special Economic Zones (SEZs) in the DPRK: Hwanggumphyong and Wihwado Economic Zones, Kaesong Industrial Zone, Mt. Kumgang Tourist Special Zone, Rason Economic and Trade Zone.

There is also a new “Kaesong Latest Science, Technology Development Zone” under construction.

On November 21, 2013, KCNA reported additional information on the continuing evolution of the DPRK’s Special Economic Zones (특수경제지대) and Economic Development Zones (경제개발구).

KCNA reported again that Sinuiju will be the site of a Special Economic Zone:

DPRK to Set Up Special Economic Zone in Sinuiju

Pyongyang, November 21 (KCNA) — The DPRK decided to set up a special economic zone in some part of Sinuiju, North Phyongan Province.

The sovereignty of the DPRK will be exercised in the zone.

A relevant decree of the Presidium of the Supreme People’s Assembly of the DPRK was released on Thursday.

Here is the same article in Korean:

신의주시의 일부 지역에 특수경제지대 내오기로 결정

(평양 11월 21일발 조선중앙통신)조선에서 평안북도 신의주시의 일부 지역에 특수경제지대를 내오기로 하였다.

특수경제지대에는 조선민주주의인민공화국 주권이 행사된다.

이와 관련한 조선민주주의인민공화국 최고인민회의 상임위원회 정령이 21일에 발표되였다.(끝)

Sinuiju has been proposed as a Special Administrative Region (SAR) before. You can read all Sinuiju SAR posts here. Here is the announcement in KCNA from 2002-9-20 announcing the SAR. Ultimately the endeavor was not successful, thought it ultimately led to the creation of the nearby Hwanggumphyong and Wihwado Economic Zones. 

On the same day that KCNA made this announcement, they also offered more information on the new provincial level “Economic Development Zones (경제개발구). I am unsure of the relationship between “Special Economic Zone” and “Economic Development Zone”.

According to the KCNA article:

The DPRK is to set up economic development zones in provinces.

A decree of the Presidium of the Supreme People’s Assembly of the DPRK was released Thursday.

According to the decree, some part of Ojok-ri, Uiju County, North Phyongan Province will come under the jurisdiction of Ryongun-ri. Ryongun-ri will belong to Sinuiju and be called North Phyongan Provincial Amnokgang economic development zone [압록강경제개발구].

Jagang Provincial Manpho economic development zone [자강도 만포경제개발구] will be established in some areas of Mitha-ri (including Poldung Islet) and Phosang-ri, Manpho City, Jagang Province and Jagang Provincial Wiwon industrial development zone [자강도 위원공업개발구] will be set up in areas covering part of Tokam-ri and part of Kosong-ri, Wiwon County.

North Hwanghae Provincial Sinphyong tourist development zone [황해북도 신평관광개발구] will appear in some areas of Phyonghwa-ri, Sinphyong County, North Hwanghae Province and North Hwanghae Provincial Songrim export processing zone [황해북도 송림수출가공구] will be set up in some areas of Sosong-ri, Songrim City.

Kangwon Provincial Hyondong industrial development zone [강원도 현동공업개발구] will be set up in some areas of Hyondong-ri, Wonsan City, Kangwon Province.

South Hamgyong Provincial Hungnam industrial development zone [함경남도 흥남공업개발구] will take its shape in some areas in Haean District, Hamhung City, South Hamgyong Province and South Hamgyong Provincial Pukchong agricultural development zone [함경남도 북청농업개발구] will be created in areas covering part of Mundong-ri, Pudong-ri and Jongsan-ri of Pukchong County.

North Hamgyong Provincial Chongjin economic development zone [함경북도 청진경제개발구] will be set up in areas covering part of Wolpho-ri, Susong-dong and Namsok-ri, Songphyong District, Chongjin City, North Hamgyong Province. North Hamgyong Provincial Orang agricultural development zone [함경북도 어랑농업개발구] will appear in some areas of Ryongjon-ri, Orang County. North Hamgyong Provincial Onsong island tourist development zone [함경북도 온성섬관광개발구] will be formed in some areas of Onsong township, Onsong County.

Ryanggang Provincial Hyesan economic development zone [량강도 혜산경제개발구] will appear in some areas of Sinjang-ri, Hyesan City, Ryanggang Province.

Some areas of Ryongnam-ri, Waudo District, Nampho City will turn into Nampho City Waudo export processing zone [남포시 와우도수출가공구].

The sovereignty of the DPRK will be exercised in the provincial economic development zones.

The Korean version of this article can be found here. The DPRK announced there would be 14 SEZ/Economic Development Zones. With the inclusion of the Sinuiju Special Economic Zone with the KCNA list of 13 economic development zones, you will get 14. However, there are other economic development zones that have been announced that are not included on this list. By my count there are  at least 18. If one is to be in each province, then zones in South Phyongan and South Hwanghae have yet to be announced.

As mentioned before, these economic development zones are supposed to be governed by the Law on Economic Development Zones and the Economic Development Commission/Association.

Institute for Far Eastern Studies (IFES)
2013-11-21

Under the new leadership of Kim Jong Un, the importance of advancing the country’s science and technology is being increasingly highlighted. Recently, a conference for scientists and technicians was held on November 13, 2013. Although Kim Jong Un did not attend, his article on “Let’s Promote Transition for the Development of Science and Technology to Build a Powerful Nation” was delivered and letters of appeal to the participants were also announced at the conference.

The first three pages of the November 14, 2013 edition of Rodong Sinmun featured news on the conference. The letters of appeal to the scientists and technicians were included in the article, which read, “The future of building a powerful nation depends on science and technology.” The letters encouraged scientists from each field to put in more effort. It was also stated that “Our party considers science and technology as the most important state affair and the basis for our nation’s development and is bringing scientification in all sectors.” Resolving the food situation and energy shortage problem was stated as the most urgent task for the scientists and technicians. The article also boasted the achievements made in the development of computer numerical control (CNC) and high-tech industries such as nanotechnology and defense-related science and technology.

Premier Pak Pong Ju also commented that North Korea will “push strongly and boldly for the creation of high-tech development zones” and stressed that investment in this sector will be prioritized, seemingly referring to the plan of building more areas that incorporate science and technology with the economy, as the ground-breaking ceremony for the “Kaesong High-Tech Industrial Park” is reported to have took place on Monday, November 11.

From early on the Kim Jong Un regime expressed interest in science and technology. After North Korea’s successful launch of a long-range rocket in December 2012, engineers and scientists were invited to Pyongyang and were officially proclaimed “heroes of the Republic.” Recently, in an effort to raise the living standard of elite scientists, construction of special residential complexes — Unha Scientists Street and residential complex for Kim Il Sung University faculty — were completed.

Since last August, new slogans such as “Science and Technology for Everyone” are being promoted for the purpose of cultivating young talent in the field of science and technology. This is reminiscent of the slogans associated with the former Kim Il Sung regime’s refined military doctrine of the 1960s, i.e., the ‘four-point military line’, which stressed the need for arming the entire nation to safeguard the homeland. The recent conference magnifies the prevalent atmosphere — that is, preferential treatment for scientists and increased emphasis on science and technology.

This recent trend reflects North Korea’s recognition that economic development must be backed by strong advancement in science and technology. Science and technology has been put forth as the instrument in which to achieve the nation’s goal of becoming an economic powerhouse of knowledge. Scientists are expected to play a critical, central role in North Korea’s economic development.

A new article in Forbes updates us on some of the changes in Rason:

Tomas Novotny has been in North Korea two days, and he looks frazzled. It was a long journey from Prague, and standing on the street in downtown Rajin, his government minder by his side, he can already see that doing business in the DPRK’s remote northeast will present an unusual set of challenges.

…

Novotny is here because of that railway line. A brewing technologist with the Czech firm Zvu Potez, he has come to set up a brewery. All the equipment and materials were transported by train–from Prague to Moscow, through Siberia and onto the branch line of the Trans-Korean main line.

“We’re still building the brewery. Come and see it,” says Novotny. The two containers that brought the Zvu Potez equipment from Prague lie 50 meters from the brewery. It’s a great location by the sea in Rajin’s main park. The business is a joint venture between the Czech firm and the Rason regional government, says Novotny, and will target tourists and foreigners. There are about 300 Western tourists–including Russians–a year and about 20,000 Chinese visitors to the country’s northeast.

“When they’ve finished building,” he says, shouting over the drilling, “I’m going to teach three or four locals how to brew. I hope they can speak English. If they can’t it will be interesting.”

He expects to be in Rason for six months establishing the business, but already he misses home and his young son. “I won’t get to speak to them until I go home at Christmas,” he says.

North Korea’s telecommunications challenges are a headache for business, too. Foreigners are able to get 3G on their phones, but it is expensive. International calls are possible but equally pricey.

“When telecommunications become a little more open that will indicate the seriousness of purpose,” says Andray Abrahamian, who directs Choson Exchange, a Singaporean nonprofit that focuses on business and legal training for young North Koreans in the DPRK.

Abrahamian has been watching North Korea for a decade and visited Rason several times. He says things are finally moving, a result of legal changes made in 2010 that helped make Rason more autonomous. Further legal changes two years ago were intended to harmonize Rason’s economic laws with those of China, he says.

…

“The degree to which [Pyongyang] will allow autonomy to the regional decision makers or local planners has yet to be seen. That’s a key issue for Rason–how autonomous are these places really?” asks Abrahamian, 36.

…

“Chinese small and medium-size enterprises, from Jilin Province but also Heilongjiang Province, are continuing to come in–Rason is experiencing growth,” says Abrahamian.

Not all the factories are new. The Rajin Garment Factory was built in 1958, long before talk of special economic zones. In the early days it produced school uniforms for North Korean students. After 1991 it took orders from China and today employs 180 staff.

The factory manager stands on the front steps. It’s early evening, and he’s watching a staff volleyball game in the car park. Has business improved since Rason was made a special economic zone?

He shrugs and says: “It’s hard to say. It’s different. For every school uniform we used to get paid 800 won and a 1,200-won government subsidy. Now there is no government subsidy.”

The workers, nearly all women, are given housing and paid 600? to 700 won a month, plus overtime, he says. Inside the factory, on the first floor, close to 100 women are clocking overtime. Wearing blue uniforms and matching head scarves, they are sewing puffer jackets, hurrying to complete a big order. The final step of the process is to sew in the label: “Made in China.”

The tag is written in English, and the woman packing the jackets doesn’t understand the visitors’ raised eyebrows. Apparently this is a common practice.

It’s noisy on the factory floor. The popular all-girl band Moranbong blasts out of speakers, drowning out the whir of sewing machines. It’s impossible to hear the drone of the generator, switched on after yet another power failure, a regular feature of life in the DPRK.

There is a deal in place to bring power from Jilin Province, but the Chinese have been holding it up using the pretext of an environmental impact study.

More Chinese power can’t hurt, says researcher Melvin, “but there are many more substantive problems the North Korean must overcome before serious large-scale investment can move into the country. The DPRK cannot currently credibly commit to any policy–no policy stability, rule of law–and has a poor record of honoring its agreements and impartially enforcing contracts. No independent company will risk serious capital in this environment.”

Another matter is fuel. Joseph Naemi is director of HBOil, an oil trading and refining company based in Ulaanbaatar, Mongolia. HBOil grabbed a few headlines in June when it was reported the firm had acquired a 20% stake in Sungri oil refinery in Rason. That was premature, says Naemi: HBOil has 20% of a state-dominated joint venture called Korean Oil Exploration Corp. International, and a formal commitment with Sungri has yet to be made. Another option is to invest in a refinery on the west coast of the DPRK.

“The easy option is Sungri oil refinery because it’s based on Russian technology and because of its location in terms of the dynamic state of affairs in Rason Special Economic Zone. We are conducting engineering assessment of the refinery to determine the various phases of upgrading and expanding–it’s a work in progress,” says Naemi.

Describing Rason officials as well educated and smart, he says they understand issues of foreign investment protection, taxation and the need to not only be fiscally transparent but also to offer attractive terms to investors.

“I know a number of Mongolian companies, all privately owned, that are at various stages of either investing in North Korea or finalizing their joint ventures so that they can invest. There is a robust relationship between Mongolia and North Korea,” says Naemi.

…

For anyone doing business, there will be surprises. Standing on the terrace of the new brewery, Novotny looks out at the recently planted lawn. The seeds have been planted in rows, five centimeters apart, all the way down to the sea. Come summer and the warmer weather, the grass should have taken. It stands to be a great spot for a bar.

“Yeah, if we’re still open,” says Novotny and laughs. He drops his voice and out of earshot of his minder adds: “Look at the grass, see how it grows in such straight lines. Things are different here.”

Read the full story here:
Things are Brewing in North Korea’s Rason Zone
Forbes
Kate Whitehead
2013-11-20

UPDATE 91 (2014-1-14): ROK spends 1/3 of DPRK budget for FY 2913. According to Yonhap:

South Korea spent less than one-third of its fund intended to boost exchange and cooperation with North Korea last year, the unification ministry said Tuesday.

South Korea spent 296.4 billion won (US$280 million) last year, or 27 percent of the 1.09 trillion won earmarked, for the inter-Korean cooperation fund, according to the ministry, which handles inter-Korean affairs.

The figure represents the highest level in six years as the government paid insurance money to small South Korean companies that operate plants in the North’s border city of Kaesong.

The South Korean companies received insurance money worth 177.7 billion won due to the months-long shutdown of the inter-Korean joint factory park in Kaesong last year.

In 2008, the ministry spent 18.1 percent of the inter-Korean cooperation fund. The ratio dropped to 8.6 percent and 6.5 percent in 2009 and 2012, respectively, as inter-Korean relations soured.

The factory park resumed operations in September, more than five months after the North unilaterally closed it in anger over joint annual military exercises between South Korea and the United States. In August, Pyongyang pledged not to shut the park down again “under any circumstances.”

More than 44,600 North Koreans work at 120 South Korean firms operating in the park to produce clothes, shoes, watches and other labor-intensive goods. The project serves as a major legitimate revenue source for the impoverished communist country.

UPDATE 90 (2013-12-30): The ink has barely dried before the DPRK has seemed to breech it.  This time the DPRK has demanded that the firms in the KIC pay back taxes. According to Yonhap:

North Korea has demanded that South Korean firms operating in a jointly run factory park in the communist nation pay taxes to North Korea, an official said Monday, in an apparent breach of a September deal.

The North said in a notice last week that the firms in the factory park in the North’s western border city of Kaesong should pay taxes incurred between Jan. 1 and April 8, according to the official handling the issue at the unification ministry.

The ministry, which handles inter-Korean affairs, said the North’s demand did not make any sense, and it was in talks with North Korea over the issue.

The move comes three months after North Korea agreed not to collect taxes from the South Korean firms for 2013 to make up for their losses following its unilateral closure of the factory park on April 9.

In September, the sides resumed the operation of the factory park, a month after the North pledged not to shut it down again “under any circumstances.”

Although the North Korean government took a loss on “tax revenue” it still made plenty of money from the confiscated wages of its workers. According to the article:

The North earned US$80 million in wages for its workers last year.

UPDATE 89 (2013-11-24): Inter-Korean trade has started to recover.

UPDATE 88 (2013-11-13): The Korea Times reports that the Kaesong firms are getting loan payments deferred and a new round of talks is underway.  According to the article:

The government said Wednesday it will allow companies with factories at the inter-Korean Gaeseong Industrial Complex (GIC) to delay payment of loans due within the next six months.

“The due date for loans taken out from the state-run inter-Korean cooperation fund will automatically be pushed back six months,” said Park Soo-jin, vice-spokeswoman of the Ministry of Unification that handles inter-Korean affairs, Wednesday, during a regular briefing. “The amount equals to 46 percent of all loans provided by the fund.”

According to the ministry, 28 out of the total 123 companies, which have taken out loans totaling 9.7 billion won ($ 9 million), will benefit from this measure.

Up to date, companies that have factories in North Korea’s border city of Gaeseong altogether borrowed about 21.3 billion won ($ 19.9 million) from the cooperation fund.

The move by the government is aimed at easing the pressure on GIC companies strapped for cash in the face of declined production as a consequence of the five-month hiatus of operations because of heightened tension on the Korean Peninsula earlier this year.

In the same article, the Korea times reports on the latest round of talks between the DPRK and ROK over the management of the KIC:

Meanwhile, on the same day, working-level officials from the South and North met to discuss ways of better protecting investment at the GIC and promote its internationalization.

The meeting of two sub-panels of the Gaeseong joint management committee were held in the North’s border city, the ministry said.

“The two sub-panel meetings, the first since Sept. 26, are designed to bolster the overall global competitiveness of the GIC,” a ministry official said.

There are altogether two sub-panels under the larger GIC joint management committee that has taken charge of running the complex since operations resumed in September.

During the investment protection panel meeting, the two sides reportedly discussed the establishment of an official dispute settlement regime coupled with how to attract more foreign investors into the GIC.

Previously, the two Koreas agreed to hold an IR session on Oct. 31 but it was canceled when little headway was made in a separate sub-panel meeting to change rules dealing with travel, communication and customs at the joint complex in North Korea.

The ministry also said another meeting to discuss the rights and safety of South Koreans working in Gaeseong will be held today.

But the date for the travel and communication meeting has yet to be fixed because of its sensitivity.

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According to Yonhap:

North Korea is focusing more on diversified development of its economy and pushing regional industries to play a greater role in earning foreign capital, Pyongyang watchers said Sunday.

Observers in Seoul said that the Oct. 31 issue of “economic research” published in the North highlighted the need for regional governments to generate more revenue, bolster industrial output and earn more foreign capital.

According to papers in the research journal that offer a glimpse into how Pyongyang wants to run the country, factories in the provinces must strive to modernize and form close knit alliances with industries located in the capital city and with laboratories.

This call is similar to a speech given by Vice Premier Ro Du-chol on Wednesday at a ceremony marking the 40th anniversary of regional governments being given authority to generate profits and manage their respective budgets.

The senior official stressed that all cities and counties need to do their utmost to improve their economies and come up with necessary policy plans.

Such a move calls for redoubled efforts to attract overseas investments in mineral mines and other manufacturing facilities.

Ro’s remarks have been interpreted as Pyongyang paying more attention to regional economies and getting local authorities to take charge of providing for its citizens, instead of relying on the central government.

Related to such calls, the North recently announced that it will set up a total of 14 special economic zones across the country to pursue economic growth and bring in more investments. At present the communist country only has four such special zones, including those set up in Kaesong and the Mount Kumgang resort.

“There has been a trend coming into this year of the North paying closer attention to building up its regional economy,” said Cho Bong-hyun, an analyst at the IBK Economic Research Institute. The North Korean expert said that this may be a move by the North to bring about results on the economic front under the Kim Jong-un leadership.

Kim, who took over running the country following the sudden death of his father in late 2011, has called for the simultaneous development of the country’s nuclear capability and its economy.

This move is seen as a departure from the “songun,” or military-first politics, pursued by his late father, Kim Jong-il.

Read the full story here:
N. Korea focusing more on regional development: research journal
Yonhap
2013-11-10