North Korean Economy Watch

According to Yonhap:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

According to Yonhap:

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

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

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

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

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

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

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

Facts:

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

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

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

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

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

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

North Korea Uncovered: Version 12
Download it here

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

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

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

Version 12 available: Download it here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On this page, I will keep a list of DPRK statutes and summaries:

1. Foreign Investment Law
2. Free Economic and Trade Zone Law
3. Equity Joint Venture Law
4. Contractual Joint Venture Law
5. Foreign Enterprises Law
6. Taxation of Foreign Invested Enterprises
7. Relevant Labor Laws
8. Leasing Land 
9. Dispute Resolution
10. Domestic Sales Tax Regulations
11. Manufacturing & Export Operations
12. External Economic Arbitration Law
13. Commercial Joint Venture Law
14. Constitutions (x2)
15. Customs Law
16. Law on Economic Plans
17. Fisheries Law
18. Foreigners in FEZs
19. Intellectual Property

Click “read the rest of this entry” below to see summaries and statute text.

(more…)

According to the Choson ilbo:

Following a request from the North in July 2005, the Unification Ministry and the Korea Tourism Organization bought 8,000 tons of asphalt pitch and subsidiary materials with about W4.9 billion from the Inter-Korean Cooperation Fund to repair Mt. Baekdu runway.

But inspection by the KTO in December 2005 showed construction to be shoddy because an insufficient amount of asphalt had been used. The Unification Ministry and the KTO bought another 8,000 tons of asphalt pitch and other materials with W4.4 billion from the fund in January 2006 and delivered them to the North.

But an inspection in 2007 by the Korea Expressway Corporation found that the paving was no different from that in December 2005, and that 3,497 tons of asphalt pitch had not been used to repair the runway, the BAI said.

The BAI presumes that W2 billion worth of aid materials were diverted illegally for other purposes.

And how did the South Korean’s respond?

The [Board of Audit and Inspection] said agencies including the Unification Ministry “made no preparations to deal with shoddy construction or illegal diversion of the fund.” They took “no action even when a senior North Korean cabinet counselor publicly said in 2006 the North would use a shipment to Nampo Port out of the aid materials to pave the runway of Sunan International Airport in Pyongyang” rather than Mt. Baekdu Airport.

As discussed before (here and here), South Korean development efforts (as conducted via the Ministry of Unification) have been poorly administered.   There is little transparency and less accountability for poor decision making and results.  Given this institutional environment, we can predict that resources will continue to be frequently diverted. 

An alternative, and I believe more effective, economic development strategy which South Korea could adopt towards the DPRK is simply to end MoU structural development programs and allow South Korean businessmen to directly negotiate business opportunities with North Korean counterparts (as the Chinese, European, and others currently undertake).  In this way, business persons risk their own capital and they are fully incentivized to make sure their efforts are properly administred.  Even if some graft is necessary to get things done, at least it does not come from the South Korean Treasury.

Comments welcome.

Read the full article here:
N.Korea Diverted W2 Billion in Aid: BAI
Choson ilbo
8/26/2008

Andrei Lankov writes in the Korea Times that South Korea’s threats to reduce tourism levels to Kaesong, as well as support for the Kaesong Industrial Zone, are misguided.  His reasoning is as follows:

North Korea is a very peculiar society, where the elite are almost entirely free from the pressures experienced by those below them. When sanctions are applied to such a regime, they seldom have a direct bearing on the elite and their lifestyle.

Sanctions usually work in an indirect way, by punishing the population which then might either rebel against the government or vote it out of power. Neither rebellion nor elections are possible in North Korea (well, elections are happening there, as everybody knows, with the approval rate of the government candidates standing at a world record high of 100 percent). As a result of sanctions the populace will die without protesting, while the elite will survive and stay in control, even if for a while they will have ride their beloved Mercedes limousines less frequently.

The only way to bring changes to North Korea is to create forces which will be able to challenge the government. This might lead to a revolution, but one cannot completely rule out that the regime will start giving in if sufficiently pressed from within.

In addition to Lankov’s point above, sanctions can perversely benefit those in power who control and profit from black market activity (at higher prices).   Additionally, politically sophisticated leaders exploit the consequences of foreign-imposed sanctions to restrict domestic freedoms and political opposition. 

Bossuyt (Adverse Consequences of Economic Sanctions) shows even the most optimistic accounts of sanctions point to only a third having partial success.  Others find a mere 2% success rate among authoritarian regimes.  So sanctions have a poor track record of inducing positive policy changes, particularly in North Korea. 

So why are the Kaesong and Kumgang projects worthwhile?  Though not all that economical, Lankov argues that these aid projects create alternate channels for information to permeate the hearts and minds of the isolated North Korean people, and that shattering the North’s monopoly on information is key to promoting change within the DPRK:

…in order to facilitate North Korea’s transformation, more truth about the outside world needs to be imported. The survival of the North Korean regime now critically depends on a few important myths, and each myth is patently false and hence very vulnerable.

When the North Korean propaganda-mongers are talking to the North Korean public, they have to hide how poor their country actually is, and they also have to lie about the great respect Kim and his regime enjoys worldwide, especially in South Korea. An increase in contact with the outside world is the best way to undermine these falsities.

…

The inconvenient truth regarding South Korea’s huge economic advantage will start to surface soon. It will probably take more time before it will dawn on the North Koreans that their Seoul guests are not exactly full of love and respect for the Pyongyang dynasty, either.

There is plenty of journalistic evidence that many North Koreans already know the South is “rich”—although they might not have any idea what that actually means. Still, of all the Hyundai projects in the DPRK, I believe the Kaesong Industrial Zone is probably the most helpful for the South in the long term.  None of Hyundai’s other projects do all that much to improve the human capital of the DPRK people, and when things eventually change, it is important for the RoK to have a population of constituents in the DPRK who have some job and management skills and familiarity with the South’s culture to ease the transition.

Comments welcome.

Read the full article here:
Sanctions Harden Lives of Ordinary North Koreans
Korea Times
Andrei Lankov
8/20/2008