North Korean Economy Watch

UPDATE 9/16/2009: Despite the downward trajectory that business in the Kaesong Zone seemed to be taking this year, things appear to have bottomed out.  According to Yonhap, the Koreas have signed a Kaesong wage increase.  According to the article:

South and North Korea agreed to a 5 percent wage hike at a joint industrial park on Wednesday, the Unification Ministry here said, in the latest sign of inter-Korean projects returning to normal.

North Korea earlier demanded a 400 percent raise in monthly wages for its workers at the South Korean-run park in Kaesong, just north of the border.

South Korea’s management office in Kaesong “signed an agreement on a 5 percent wage increase” with its North Korean counterpart, ministry spokesman Chun Hae-sung said in a brief statement.

The North voluntarily withdrew its earlier demand last week in a striking shift from its unyielding attitude in four rounds of negotiations from April to July. The demand called for monthly wages be raised to US$300 from the average $70-80, apparently in retaliation against Seoul’s hard-line policy toward Pyongyang.

The Kaesong park opened in late 2004 as an outcome of the first inter-Korean summit four years earlier. It houses 114 mostly small-sized South Korean firms producing clothing, electronic equipment, kitchenware and other labor-intensive goods with about 40,000 North Korean workers.

The venture is seen as a much-needed source of dollar income for the North, which is currently under U.N. sanctions for its May nuclear test that bans cash flows to the country.

The 5 percent rate hike will increase the minimum wage to about $58 from the current $55.

Separately, North Korea was conducting a door-to-door survey on South Korean businesses at the joint park, said ministry spokeswoman Lee Jong-joo.

North Korea asserted that the two-day survey that continues until Thursday was to examine the firms’ output and “listen to their complaints and difficulties regarding tax and accounting,” Lee said. Such on-site surveys have been done sporadically, she added.

Although tensions might have eased, it remains to be seen whether the business community can be coaxed into making serious capital investments in the DPRK.

Read previous Kaesong Industrial Zone news below:

(more…)

According to the Choson Ilbo:

The South’s Kaesong Industrial Complex Management Committee, which supervises the estate just north of the border, said Sunday visitors would no longer need to provide anything more than ID cards and travel permits.

Responding to complaints about inconvenience, the North agreed to allow the South’s office to process some paperwork on behalf of individuals.

“The extra documents were redundant because they carried exactly the same information as ID cards and travel permits,” the South’s office spokesman told AFP, adding the new rules would take effect from Monday.

Despite the easing of border controls, the fate of Kaesong remains uncertain because of the North’s demand for huge pay and rent increases, along with its holding of a Seoul worker.

Pyongyang detained the South Korean male worker on March 30 for allegedly criticising its political system and trying to incite a female North Korean worker to defect.

Kaesong, which opened in December 2004, is the last remaining large-scale reconciliation project between the communist North and the capitalist South.

Some 40,000 North Koreans work for South Korean firms in Kaesong.

Read previous Kaesong Industrial Zone posts here.

Read the full story here:
N.Korea agrees to streamline border crossing
AFP
8/2/2009

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-7-15-1
7/15/2009

Despite the fact that inter-Korean relations continue to be stalled, North Korea authorities reportedly provided approximately 1,300 new workers in June for businesses entering the Kaesong Industrial Complex (KIC). Despite the fact that there has been no progress in inter-Korean working-level talks between authorities involved in the KIC, the North is continuing to provide a labor force for South Korean businesses in the complex.

An official from the Kaesong Industrial District Management Committee verified that “approximately 1,300 new laborers were supplied last month,” and that “there are some young workers, as well, but the majority are 30 to 40-year-old women.” The official also explained, “the number of laborers was reduced slightly at the beginning of the year; while [their number] was insufficient, laborers continue to come…up until June of this year, while the number fluctuated, an average of around 700 per month [were provided].” Last year, the number of new workers each month was around 1,000.

New workers continue to be provided to the KIC, but there has also been a sharp increase in the number of workers quitting or being removed from their positions. At the end of June, there were 40,255 North Korean laborers; the overall number of workers provided by the North has only increased by 1,324 since the end of last year.

The source explained that at the beginning of 2009, more than 2000 construction workers quit. It appears, according to the numerous reports on the status of employment in the KIC, that the supply of workers is still insufficient, but that the North Korean authorities are working as hard as possible to provide what manpower they can.

North Korea’s Central Special Zone Development Guidance General Bureau recently held a general assembly for all North Korean labor representatives, and ordered them to “work to the max” in order to alleviate all complaints by South Korean businesses. However, as there has still been no resolution to the issue of constructing additional dormitories for the workers, this issue will continue to restrict growth in the number of North Korean laborers, regardless of the attitude in Pyongyang.

North Korea Uncovered version 18 is available.  This Google Earth overlay maps 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.

This project has now been downloaded over 140,000 times since launching in April 2007 and received much media attention last month following a Wall Street Journal article highlighting the work.

Note: Kimchaek City is now in high resolution for the first time.  Information on this city is pretty scarce.  Contributions welcome.

Additions to this version include: New image overlays in Nampo (infrastructure update), Haeju (infrastructure update, apricot trees), Kanggye (infrastructure update, wood processing factory), Kimchaek (infrastructure update). Also, river dredges (h/t Christopher Del Riesgo), the Handure Plain, Musudan update, Nuclear Test Site revamp (h/t Ogle Earth), The International School of Berne (Kim Jong un school), Ongjin Shallow Sea Farms, Monument to  “Horizon of the Handure Plain”, Unhung Youth Power Station, Hwangnyong Fortress Wall, Kim Ung so House, Tomb of Kim Ung so, Chungnyol Shrine, Onchon Public Library, Onchon Public bathhouse, Anbyon Youth Power Stations.

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-6-16-1
6/16/2009

The amount of inter-Korean exchange has shrunk considerably this year, as tensions between the North and South continue to mount. According to the ROK Customs Administration’s inter-Korean trade office, cross-border transactions between January and April of this year fell 24.8 percent from 2008; trade amounted to 426.35 million USD, down from 566.92 million USD during the same period last year. South Korean imports were down only 9.5 percent, at 260.19 million USD, but exports to the North amounted to a mere 59.4 percent of the amount sent last year, recording 166.17 million USD. 54.9 percent of these goods (by value) traveled across the border by passing through Dorasan Station; 32.8 percent went through Incheon Harbor; 6.4 percent through Busan Harbor, 1.6 percent through Sokcho Harbor; and 1.1 percent passing through Goseong.

In April, with the North’s launch of a long-range missile in spite of the opposition of the international community, inter-Korean trade dropped to 69.2 percent of last year’s level, falling to 105.53 million USD. In fact, inter-Korean trade fell relative to the same month in the previous year eight months straight, beginning in September of last year.

With last month’s sudden nuclear test and South Korea’s subsequent joining of PSI, inter-Korean trade is expected to continue to wither in the latter half of the year. The amount of trade seen from January to April of this year is equivalent to 23.4 percent of the total trade for last year (1.82078 billion USD), and even if the current level of trade is maintained for the rest of the year, it is expected to amount to a mere 70 percent of what was traded in 2008.

Inter-Korean trade had previously been recording significant growth; in 1999, during Kim Dae Jung’s ‘People’s Government’, inter-Korean trade was worth only 328.65 million USD, but began to climb, growing more than five-fold by 2008, topping out at 1.82078 billion USD last year. However, after the launch of the current government, the amount of goods imported by the North from the South began to fall; exports to North Korea in 2008 were worth 883.41 USD, 145.15 million less than in 2007.

North Korean companies involved in processing-on-demand, agriculture and fisheries work have been part of Pyongyang’s trade ambitions, and these companies have also been hurt by the freeze in inter-Korean relations, with dozens of businesses facing closure, and many more severely hit by the North’s shrinking trade.

According to Yonhap:

Trade between South and North Korea plunged nearly 25 percent in the first four months of this year amid growing tensions on the Korean Peninsula, a report showed Tuesday.

Inter-Korean trade amounted to US$426.35 million during the January-April period, down 24.8 percent from $566.92 million a year earlier, according to the report by the Korea Customs Service.

The decline comes as tensions mounted after North Korea fired a rocket on April 5, prompting the U.N. Security Council to unanimously condemn the move. The North responded by kicking out outside nuclear inspectors and quitting six-party denuclearization talks.

Trade between the two Koreas, which amounted to $328.65 million in 1999, surged more than five-fold to $1.79 billion in 2007 when leaders from the two sides met for the second time. Last year, trade inched up to $1.82 billion.

Experts say that trade is expected to fall further in months to come as tensions are still running high after the North conducted its second nuclear test last month in defiance of repeated warnings by the international community and recently sentenced two U.S. journalists to 12 years in a labor camp for illegally entering the country.

In addition, we pointed out earlier this month that the South Korean government had barely touched the funds it appropriated for inter-Korean projects in 2009.

Finally, although inter-Korean trade has floundered this year, the DPRK’s trade volume reached a record US$3.8 billion in 2008, due largely to its trade with China.  

Read the full Yonhap story here:
Inter-Korean trade tumbles amid growing tensions
Yonhap
Koh Byung-joon
6/9/2009

In what is certainly not good news for foreign investors, the North Korean government has announced that it is unilaterally canceling agreements with the South Koreans regarding the Kaesong Industrial Zone.

According to the Korea Times:

North Korea announced Friday the nullification of all contracts on rent, salaries and taxes at the Gaeseong Industrial Complex, asking the South to empty the industrial estate unless it honors the North’s wishes to amend related laws and rules.

The notification came about five hours after the two Koreas were unable to set a date for talks due to their wrangling over the release of a Southern worker detained by the North.

The North continued, “We are nullifying contracts and benefits on rent, salaries and taxes that we have offered in the Gaeseong complex in accordance with the June 15 Joint Declaration.”

The report added that the North will begin to adjust laws and rules to meet with the current situation.

“South Korean companies and officials must accept the notification, if not, they can evacuate from the complex,” it said.

In the article, Andrei Lonkov makes the following comment:

“North Koreans are clearly looking for some leverage over the South, and it they come to see the park as a hostage project, they will it use to put forward escalating demands,” he said.

He predicted, “If the South Korean government bows to the pressure and makes concessions, there is no doubt that in weeks or months Pyongyang manipulators will make new demands, probably more outrageous.”

“One can hope that the project will survive. Nonetheless, it will become dangerous if Seoul, in trying to save this important project, starts to succumb to Pyongyang’s blackmail. So, the project should be supported, at a cost to South Korean taxpayers, but not at the cost of unprincipled political concessions,” he added.

This has been a rough year for the Kaesong Zone.  I have kept a running timeline of events in the zone which you can see here.

UPDATES:

1. According to the Choson Ilbo: “North Korea earns some US$33.52 million a year from the Kaesong Industrial Complex, making the inter-Korean joint venture a significant cash cow for the impoverished country.”

2. According to Reuters:

News late on Friday that North Korea was cancelling all wage, rent and tax agreements with South Korea on the joint Kaesong factory park just north of their heavily armed border weighed on stocks in companies that have production units in the factory park, but had a limited impact on the broader market.

“Seoul market participants have become quite immune to North Korea-related news and tend not to react sensitively unless the development has a scale of impact that may affect South Korea’s sovereign rating,” Lee said.

3. NK pointman on South Korea, Choe Sung Chol, allegedly executed.  According to Bloomberg:

North Korea executed a former official in charge of inter-Korean relations, accusing him of allowing the population to develop a favorable image of South Korea, Yonhap News reported.

Choe Sung Chol, who was the point man on South Korea during the Roh Moo Hyun administration that ended in February 2008, was killed last year, the news agency reported last night, citing an unidentified person familiar with North Korean affairs.

While Choe was officially charged with bribery, he was executed for ignoring opponents and pressing ahead with closer ties with South Korea that threatened to make the communist state too dependant on its richer neighbor, Yonhap reported.  

4. The Choson Ilbo reports on the productivity of Kaesong’s Northern workers:

The basic monthly salary of North Korean workers at the complex is US$63.4, consisting of $55.1 in wages and $8.3 in social insurance. In addition, overtime work pay amounts to between $11 to 18.3 a month, and a welfare package subsidizing lunches, snacks and transport costs is provided at a range of between $36.6 and 47.9 per month. In total, the monthly salary of a North Korean worker ranges from $110 to 130, which, the companies argue, is comparable to that earned by workers in China and Vietnam.

A survey of some 40 firms operating at the complex was carried out after the first round of talks on April 25 to discover why these firms were having difficulty accepting North Korea’s demands. According to the survey, the productivity of an individual North Korean worker is just 33 percent that of a South Korean worker. In comparison, the productivity of Chinese and Vietnamese workers is 96 and 85 percent that of South Korean workers, respectively.

The companies also argue that it is difficult to accept North Korea’s demand to pay land use fees from next year, considering the fee they paid for building factories there. The fee for building factories in the Kaesong industrial park was $394 per one sq. m of land, compared to $122 in China and $65 in Vietnam.

5. According to the Korea Business Consultants newsletter (May/June 2009):

South Korea’s point man for North Korea said May 18 that the joint industrial enclave at Kaesong, just across the DMZ in the North, is “in turmoil” after the DPRK voided contracts governing the facility the same day, sending shares in firms that operate there tumbling. The KOSPI fell by 0.44 percent upon receipt of the news.

Read more below:
N. Korea Scraps Gaeseong Contracts
Korea Times
Kim Sue-young
5/15/2009

N. Korea declares inter-Korean contracts on Kaesong venture invalid
Yonhap
5/15/2009

N. Korea scraps contracts with South on joint venture amid tension
Yonhap
Kim Hyun
5/15/2009

Cabinet reshuffle
NKeconWatch.com

N.Korean Kaesong Workers’ Productivity Lags Far Behind S.Korean Workers
Choson Ilbo
5/19/2009

This week, The South Korean government announced that if the North unilaterally files formal charges against a detained South Korean worker it will reevaluate regulations for its citizens to enter the zone which would require each border crosser to obtain a written guarantee of his safety from Pyongyang before leaving South Korea.  Although the number of South Korean workers allowed to cross the DMZ was reduced after the North’s missile launch, this would effectively prevent South Korean managers from entering the Kaesong Zone and would likely bring an end to operations there.  According to Yonhap:

South Koreans may be barred from visiting North Korea if the communist country takes legal action against a Hyundai Asan employee who has been unlawfully detained by Pyongyang, a government source said Sunday.

The Hyundai employee, who works at the Kaesong Industrial Complex and is identified only by his family name of Yu, has been held for 28 days for allegedly criticizing Pyongyang’s political system and trying to lure a North Korean female worker to defect to the South.

The worker in his 40s has yet to be interviewed by South Korean authorities to determine the exact nature of the detention.

“Under the special arrangement governing the Kaesong complex, the two Koreas must reach an understanding on how to deal with serious offenses involving South Koreans (that carry punishments) exceeding warnings, fines and expulsions,” the source, who declined to be identified, said.

“If Pyongyang takes unilateral action to indict the worker, it will be a violation of the fundamental rules related to cross-border interactions and will compel Seoul to rethink its stance on allowing South Korean to visit the North,” the source stressed.

The bilateral agreement makes clear that Pyongyang should respect the rights of South Korean workers, dwellings and property in Kaesong and the special tourist region in Mount Kumgang on the east coast. The latter has been closed since the shooting death of a female tourist by North Korean guards last July.

He said that if protection for South Koreans nationals cannot be ensured, Seoul will be compelled to review its policies on allowing visits from scratch.

“If this is the case, even employees working at Kaesong will have to get individual, written permission from North Korea that they will not be detained,” the official said.

Such a move could effectively make it hard for South Koreans to go to North Korea, crippling normal operations at the complex just north of the demilitarized zone that separates the two countries.

As of March, 101 South Korean factories operated in the complex, employing about 39,000 North Korean workers. The Kaesong park opened in 2005 and produces labor-intensive goods such as clothing, kitchen wares and watches. (Yonhap)

Given the trajectory of North-South relations this year, it is no surprise that inter-Korean trade dropped 30% in March.  According to Yonhap:

Monthly trade between South and North Korea fell more than 30 percent on-year in March, as tensions ran high over South Korea-U.S. joint military exercise, government data showed Monday.

The two Koreas exchanged goods and services worth US$108.74 million over the last month, down 31.1 percent from $157.9 million in the same period in 2008, the data from the Unification Ministry said.

North Korea sealed the border three times in March, disrupting South Korean production in a joint industrial complex in the North’s border town of Kaesong. Pyongyang imposed the ban in retaliation against a joint military exercise South Korea staged with the United States from March 9 to 20 south of the border.

Pyongyang blasted the joint exercise as a rehearsal for a “second Korean War,” while the two allies say the annual drill is purely defensive.

More than 100 South Korean firms operate in the Kaesong industrial venture, just an hour’s drive from Seoul, joining their capital and technology with North Korea’s cheap but skilled labor.

North Korea demanded the South raise wages, pay fees for land use and revise existing contracts for the Kaesong venture during inter-Korean government talks last week, the first official dialogue in more than a year. Seoul is gathering opinion from South Korean firms and plans to respond to the North Korean demand as early as this week.

Hyundai Asan, which has seen a dramatic reversal of fortune in the last year, has launched a new tourism project to make up some of its lost revenue.  Unable to offer trips to Kaesong and Kumgangsan, they are still trying to capitalize on the mystery of the DPRK:

Hyundai Asan said its new programme includes one-day tours costing 46,000 won (34 dollars) per person to border areas at Paju and Yeoncheon, north of Seoul.

Two-day tours to the border area at Yanggu, 175 kilometres northeast of Seoul, and to Mount Sorak on the east coast, will cost 118,000 won.

“Along with trips to front-line fences, tourists will be allowed to see wildlife and other places which remained untouched for decades,” a Hyundai Asan official told AFP.

Visitors will not be allowed inside the DMZ itself.

Hyundai Asan said the new programme would help ease its financial woes, which began when a South Korean woman tourist was shot dead when she strayed into a military zone at Kumgang last July.

The Seoul government halted tours to Kumgang after the shooting, while Pyongyang barred the one-day tours to Kaesong city as relations worsened.

The company’s other major joint project, the joint industrial complex near Kaesong city, is also facing problems due to sour cross-border ties.

The communist North has expelled hundreds of South Korean staff and restricted access to the Seoul-funded complex.

On March 30 it detained a Hyundai Asan employee for allegedly criticising the North’s regime and trying to persuade a local woman worker to defect.

Read the full stories below:
Gov’t warns it can bar S. Koreans from visiting N. Korea
Yonhap
4/26/2009

Inter-Korean trade drops 30 percent in March during political tension
Yonhap
4/27/2009

South Korean firm to start tours along North Korea border
Channel News Asia
4/27/2009

According to Yonhap (excerpts):

The two Koreas met Tuesday for their first government-level talks in more than a year, during which the North demanded negotiations begin on operational changes at the joint complex in its border town of Kaesong. Pyongyang said it will reconsider all “special benefits” that have been granted to South Korean firms, such as low wages for North Korean employees and free land use.

The proposed measure, if actualized, is expected to deal a serious blow to more than 100 South Korean firms in Kaesong, mostly small manufacturers producing garments, utensils, watches and other labor-intensive products and already struggling to survive the global economic downturn.

Under a contract signed between Hyundai and the North Korean government in 2000, South Korean firms pay their North Korean employees between US$70-$80 on average a month, but the wages are wired directly to North Korean government bank accounts. The annual wages last year amounted to $26 million, according to ministry data. About 39,000 cheap but skilled North Korean workers are employed there.

North Korea also said it will begin charging land fees starting next year. North Korea initially set a 10-year grace period on rent when the complex opened, allowing the South Korean firms to use its land in Kaesong for free until 2014.

The [South Korean Unification] minister criticized North Korea’s prolonged detention of a South Korean worker as “against justice.” Pyongyang officials did not answer questions about the Hyundai Asan employee during Tuesday’s talks, he said.

The inter-Korean talks opened after a half-day delay due to procedural disputes but lasted only 22 minutes, during which the two sides exchanged documents laying out their demands and positions.

Read the full story here:
S. Korea reviewing N. Korea’s call to revise industrial contracts: minister
Yonhap
4/22/2009

According to Radio Free Asia:

Following North Korea’s April 6 rocket launch, South Korea began limiting the number of its citizens allowed to cross the border to the Kaesong Industrial Zone, which was set up just inside North Korea amid thawing relations between the two sides in 2004.

“We plan on maintaining the minimum personnel needed to run the Kaesong operations,” South Korean Unification Ministry spokeswoman Lee Jong-joo said.

“The South Korean government has requested enterprises invested in Kaesong to maintain their staff at the minimum level necessary to avoid disruption of production and business operations in the complex.”

South Koreans trying to travel to Kaesong this week were surprised to find their entry permits revoked by the South in the wake of the rocket launch, with the number of South Koreans working in the zone cut to a little above the minimum needed for basic operations.

“Eight persons initially received permission to travel to Kaesong, but eventually only three were allowed to take the trip, and actually most South Korean managerial staff had to stay behind,” a Kaesong-based South Korean entrepreneur said.

‘Skills gap’
“The big issue here is that the skill level of North Korean workers is insufficient, and that’s why South Korean management is essential.”

He warned of negative economic consequences if management personnel were unable to reach the zone from the South.

“Banning South Korean managerial staff from traveling to Kaesong will inevitably have a negative impact on production in the complex,” the entrepreneur said.

Tensions have further escalated over the March 30 detention of a South Korean employee of the Kaesong-based Hyundai Asan factory, allegedly for encouraging North Koreans to defect and criticizing the communist regime.

Hyundai’s company president visited Kaesong for a second time this week to press North Korean officials for the employee’s release, but he was refused permission to see the employee, identified only by his surname, Yoo.

Unification Minister Hyun In-taek warned that Seoul wouldn’t tolerate further detention of the employee.

Warning to North
“In the case of Mr. Yoo, the Hyundai Asan employee in the custody of the North Korean authorities, we will react vigorously to any unreasonable extension of the detention of the South Korean,” Hyun told a foreign affairs, trade, and unification committee in Seoul.

He also warned against “any punitive measures exceeding what was agreed upon between the two Koreas, such as a warning or expulsion to South Korea.”

The South has ruled out the possibility of closing the joint industrial park despite rising tensions with the North, however.

In March, in protest against a joint South Korea-U.S. military exercise, the North blocked the border crossing to the industrial complex several times, affecting production in some factories.

Experts have called for bilateral talks to hash out a clear framework for the running of Kaesong, to prevent economic fallout from political events in future.

“South and North Korea need to discuss and consult on the relevant systemic and legal issues associated with inter-Korean economic cooperation in the area,” said Hong Ik-pyo, researcher at the Korea Institute for International Economic Policy.

Read the full story here:
Korean Tensions Hit Zone
Radio Free Asia
J.W. Noh
4/10/2009