North Korean Economy Watch

From the Institute for International Economics:

West-Bound Train Leaving the Station: Pyongyang on the Reform Track

Marcus Noland
Institute for International Economics

Paper prepared for the Council on US-Korea Security Studies
Seoul, Korea
October 14-15, 2002

Marketization

The North Korean economic reforms that began in July 2002 have four components: marketization, inflation, special economic zones, and aid-seeking. Marketization, in turn, has several features.1 The government appears to be attempting to adopt a dual-price strategy similar to what the Chinese have implemented in the industrial sphere. In essence the Chinese instructed their state-owned enterprises to continue to fulfill the plan, but once planned production obligations were fulfilled, the enterprises were free to hire factors and produce products for sale on the open market. In other words, the plan was essentially frozen in time, and marginal growth occurred according to market dictates.

The government has announced a scrapping/downsizing/attenuation of the system of distributing goods and services through rationing (including the public distribution system (PDS) for food), meaning that at the household or retail level, the allocation of goods will increasingly occur through markets and on market terms. (Two exceptions are health care and education that will continue to be supplied gratis by the state.)

One can question the extent to which this is a real policy change and how much this is simply a ratification of system—fraying that had already occurred—there is considerable evidence that most food, for example, was already being distributed through markets, not the PDS. In this respect, the North Korean move could be interpreted as an admission that the genie is out of the bottle.

On the production side, enterprises have been instructed that they are responsible for covering their own costs—that is, no more state subsidies. Modest changes in the organization of production have been introduced in agriculture and there are rumors that more dramatic changes in the agricultural sector are on their way. Yet it is unclear to what extent managers outside of agriculture have been given the power to hire, fire, and promote workers, or to what extent remuneration will be determined by the market. Moreover there has been no mention of the military’s privileged position within the economy and domestic propaganda continues to speak of a “military-first” political path.

The state has administratively raised wage levels, with certain favored groups such as military personnel, party officials, scientists, and coal miners receiving supernormal increases. (For example, while it has been reported that military personnel and miners have received wage increases on the order of 1,500 percent, the increases for office workers and less essential employees are less, and the estimated income increase for agricultural workers may be on the order of 900 percent.) This alteration of real wages across occupational groups could be interpreted as an attempt to enhance the role of material incentives in labor allocation.

The state continues to maintain an administered price structure, though by fiat, the state prices are being brought in line with prices observed in the farmers’ markets. This is problematic (as it has proven in other transitional economies): the state has told the enterprises that they must cover costs, yet it continues to administer prices, and in the absence of any formal bankruptcy or other “exit” mechanism, there is no prescribed method for enterprises that cannot cover costs to cease operations, nor, in the absence of a social safety net, how workers from closed enterprises would survive. What is likely to occur is the maintenance of operations by these enterprises supported by implicit subsidies, either through national or local government budgets or through recourse to a reconstructed banking system. Indeed, the North Koreans have sent officials to China to study the Chinese banking system, which although may well have virtues, is also the primary mechanism through which money-losing state-owned firms are kept alive.

Inflation

The likelihood is increased by the second component of the economic policy change, the creation of enormous inflation. At the same time the government announced the marketization initiatives, it also announced tremendous administered increases in wages and prices (Table 1). To get a grasp on the magnitude of these price changes, consider this: when China raised the price of grains at the start of its reforms in November 1979, the increase was on the order of 25 percent. In comparison, North Korea has raised the prices of corn and rice by nearly 4,000 percent. In the absence of huge supply responses, the result will be an enormous jump in the price level and possibly even hyperinflation.

Moreover, when China began its reforms in 1979, more than 70 percent of the population was in the agricultural sector. (The same held true for Vietnam when it began reforming the following decade.) In contrast, North Korea has perhaps half that share employed in agriculture. This has two profound implications: first, the population share, which is directly benefiting from the increase in producer prices for agricultural goods, is roughly half as big as in China and Vietnam. This means that reform in North Korea is less likely to be what economists call Pareto-improving (in other words a change in which no one is made worse off) than the cases of China or Vietnam. Instead, reform in North Korea is more likely to create losers and with them the possibility of unrest. Second, the relatively smaller size of the agricultural sector suggests that the positive supply response will not be as great in the North Korean case as compared to China or Vietnam either. Again, this increases the likelihood of reform creating losers and unrest.

In the short run, the initial jump in the price level is usually accompanied by an increase in economic activity, as households and enterprises mistake increases in the overall price level for changes in relative prices. This is likely to be particularly acute in North Korea, where many households and enterprises can be expected to be relatively naïve about market economics, and where significant alterations in the structure of relative prices will be coincident with the rapid increase in the price level. So in the short run, there may be an increase in economic activity.

In the longer run however, once households and enterprises begin to distinguish more clearly between changes in relative and absolute prices, it will become apparent that some parts of the population have experienced real increases in income and wealth, while others have experienced real deteriorations. The North Koreans have not announced any mechanism for periodically adjusting prices, so in all likelihood, disequilibria, possibly severe, will develop over time. Access to foreign currency may act as insurance against inflation, and in fact, the black market value of the North Korean won has dropped approximately 50 percent since the reforms were announced.

Those with access to foreign exchange such as senior party officials will be relatively insulated from this phenomenon. Agricultural workers may benefit from “automatic” pay increases as the price of grain rises, but salaried workers without access to foreign exchange will fall behind. In other words, the process of marketization and inflation will contribute to the exacerbation of existing social differences in North Korea. Given how stressed a society North Korea has become, the implications for “losers” could be quite severe. It would not be at all surprising to observe a significant increase in mortality rates.

Make no mistake about it: North Korea has moved from the realm of elite, to the realm of mass politics. Unlike the diplomatic initiatives of the past several years, these developments will affect the entire population, not just a few elites. And while there is a consensus that marketization is a necessary component of economic revitalization, the inflationary part of the package would appear to be both unnecessary and destructive. (If one wanted to increase the relative wages of coal miners by 40 percent, one could simply give them a 40 percent raise–one does not need to increase the overall price level by a factor of 10, and the nominal wages of coal miners a factor of 14 to effect the same real wage increase.)

So why do it? There are at least three possible explanations. The first, as alluded to above, is the most benign: by creating inflation, the government hopes to provide a short-run kick-start to the economy, the long-run implications be damned. (From the standpoint of North Korean policymakers, Keynes’ aphorism, “in the long run we are all dead” may apply with a rather short time horizon.) Given the extremely low levels of capacity utilization in the North Korean economy, this argument has a certain surface plausibility. Yet the problems of the North Korean economy run far, far deeper than underutilized resources. In large part the economy is geared to produce goods (televisions and radios without tuners, to cite one example, or Scud missiles, to give another) for which there is only limited demand. Unless there is a significant reorientation in the composition of output, it is unlikely that inflation alone will generate a sizeable supply response. Even agriculture is problematic in this regard: North Korean agriculture is highly dependent on industrial inputs (chemical fertilizers and agricultural chemicals, for example) and agriculture could be disrupted if the farmers find themselves getting squeezed on the input side.

A second possibility is that the inflation policy is intentional, and is a product of Kim Jong-il’s reputed antipathy toward private economic activity beyond state control. One effect of inflation is to reduce the value of existing won holdings. (For example, if the price level increases by a factor of 10, the real value of existing won holdings is literally decimated.) Historically, state-administered inflations and their cousins, currency reforms, have been used by socialist governments to wipe out currency “overhangs” (excess monetary stock claims on goods in circulation), more specifically to target black marketers and others engaged in economic activity outside state strictures, who hold large stocks of the domestic currency. (In a currency reform, residents are literally required to turn in their existing holdings—subject to a ceiling, of course—for newly issued notes.) In July it was announced that the blue won (Korean People’s Won) foreign exchange certificates would be replaced by the normal brown won, though it is unclear if these are convertible into foreign currency. In the case of North Korea, the episode that is now unfolding will be the fourth such one in the country’s five-decade history.

The hypothesis has the strength of linking what appears to be a gratuitous economic policy to politics-Kim Jong-il not only rewards favored constituencies by providing them with real income increases and by going the inflation/currency reform route, but he also punishes his enemies. This line of reasoning is not purely speculative: it has been reported that one of the motivations behind unifying prices in the PDS and farmers’ markets has been to reduce the need of consumers to visit farmers’ markets, and to “assist in the prevention of “illegal sales activities” which took place when the price in the farmers’ market was much higher than the state price” (CanKor, 9 August 2002). A number of unconfirmed reports indicate that the government has placed a price ceiling on staple goods in the farmers’ markets as an anti-inflationary device. The increase in the procurement price for grain has reportedly been motivated, at least in part, to counter the supply response of the farmers, who were diverting acreage away from grain to tobacco, and using grain to produce liquor for sale.

The problem with this explanation is that having gone through this experience several times in the past, North Korean traders are not gullible: they quickly get out of won in favor of dollars, yen, and yuan. Indeed, even North Koreans working on cooperative farms reportedly prefer trinkets as a store of value to the local currency. As a consequence, this blow aimed at traders, may fall more squarely on the North Korean masses, especially those in regions and occupations in which opportunities to obtain foreign currencies are limited.

As an economist I am trained to assume rationality, and it is only with reluctance that I propose arguments that presume ignorance. But my personal experience in China suggests one more possible explanation for the North Korean policy. Demand and supply are not quantities or points—they are schedules indicating quantities as a function of prices. Market-determined prices are thus a signal of scarcity value reflecting underlying demand and supply. Conversations with Chinese officials in the early to mid-1980s, during the first stage of the marketizing reforms, however, revealed that fundamental misunderstanding of the nature of markets was widespread, especially among older officials who had spent many years in a planned economy.

The North Koreans have indicated that they are trying to unify (or at least reduce the differences between) state prices and those observed in the farmers’ markets. In a press report, one unnamed official laid out the logic of the price reform: the administered price of rice would be raised to the farmers’ market price, but since no one could afford rice at the market price, everyone’s nominal wages would be increased commensurately. What this official did not seem to grasp was that the amount of won in circulation was instantly increased by a factor of 10 due to the wage increase, unless there was an immediate supply-response, then the government had effectively caused a 900 percent jump in the price level.

Again, political considerations increase the plausibility of this argument. By all reports, the economic policy changes being undertaken in North Korea are being devised by a small number of senior officials. Moreover, North Korea has a political system in which the political space of discussion and dissent is highly constricted, and the penalties for being on the wrong side of a political dispute can be quite severe. So while the logic of too many won chasing too few goods would seem elementary to those of us raised in market economies, under the circumstances that exist in North Korea, the possibility that economic decisions are being made by people who do not grasp the implications of their actions (or are afraid to voice their reservations and instead engage in preference falsification if they do) should not be dismissed too hastily.

Special Economic Zones

The third component of the North Korean economic policy change is the formation of special economic zones of various sorts. The first such zone was established in the Rajin-Sonbong region in the extreme northeast of the country in the mid-1980s. It has proved to be a failure for a variety of reasons including its geographic isolation, poor infrastructure, onerous rules, and interference in enterprise management by party officials. The one major investment has been the establishment of a combination hotel/casino/bank. Given the obvious scope for illicit activity associated with such a horizontally integrated endeavor, the result has been less Hong Kong than Macau North.

The 1998 agreement between North Korea and Hyundai that established the Mt. Kumgang tourist venture also provided for the establishment of an industrial park to be managed and operated by Hyundai. While the tourism project was obviously the centerpiece of the agreement, from the standpoint of revitalizing the North Korean economy, the establishment of the industrial park, which would permit South Korean small- and medium-sized enterprises (SMEs) to invest in the North with Hyundai’s implicit protection, was actually more important. In the long run, South Korean SMEs will be a natural source of investment and transfer of appropriate technology to the North. However, in the absence of physical or legal infrastructure, they are unlikely to invest. The Hyundai-sponsored park would in effect address both issues. (The chaebols, because of their size and political connections, would not be so reliant on formal rules—they could always go to the South Korean government if they encountered trouble in the North.) The subsequent signing of four economic cooperation agreements between the North and South on issues such as taxation and foreign exchange transactions could be regarded as providing the legal infrastructure for economic activity by the politically noninfluential SMEs.

The North Korean government and the South Korean firm then negotiated for 18 months over the location of the zone, with the North Koreans wanting it in Sinuiju, a city of some symbolic political importance in the northwest of the country on the Chinese border, and Hyundai wanting to locate the park in the Haeju district, more easily accessible to South Korea. In the end, it was agreed that the park would be located in Kaesong-a decision that was hailed at the time as reflecting an increased emphasis on economic rationality in North Korea.

The industrial park at Kaesong has not fulfilled its promise, however: Hyundai’s dissolution forced the South Korean parastatal KOLAND to take over the project, and the North Koreans inexplicably failed to open the necessary transportation links to South Korea on their side of the demilitarized zone (DMZ). Hence the September 2002 initiation of activity on the northern side of the DMZ could be an important step in the take-off of the Kaesong industrial park.

In September 2002 the North Korean government announced the establishment of a special administrative region (SAR) at Sinuiju. In certain respects the location of the new zone was not surprising: the North Koreans had been talking about doing something in the Sinuiju area since 1998. Yet in other respects the announcement was extraordinary. The North Koreans announced that the zone would exist completely outside North Korea’s usual legal structures; that it would have its own flag and issue its own passports; and that land could be leased for fifty years.

To top it off, the North Koreans announced that the SAR would be run by Yang Bin, a somewhat shady Chinese—born entrepreneur with Dutch citizenship who was under investigation for tax evasion in China, and had reportedly fled to North Korea-though he does not speak Korean—during two previous investigations. (Among his various business interests, Yang operates a Dutch-style village in Shenyang complete with a windmill and imitations of Amsterdam buildings. Kim Jong-il, who knows a thing or two about fantasylands, has visited it himself.) At the time of Yang’s appointment, trading in shares of his firm, Euro-Asia Agriculture Holdings, had been suspended on the Hong Kong stock exchange after crashing on the suspicion of fraud. When asked about Yang’s appointment, China’s Foreign Ministry spokesperson declined to endorse it. To paraphrase Senator Lloyd Bentsen’s memorable line from the 1988 US Vice Presidential debate, “Mr. Yang, you are no Tung Chee Hwa.” Indeed, Mr. Yang was subsequently arrested by Chinese authorities. Whether the zone will survive his arrest remains to be seen.

Assuming that these are mere growing pains, the question arises as to how important the Sinuiju SAR may prove to be. It should promote economic integration between North Korea and China, though one should keep in mind that China is a big place and that the most economically dynamic parts are in the southern coastal areas far from North Korea. But the North Korean economy is so far down that even integration with a comparative backwater like Dandong could be a boost.

More important is whether the SAR will generate any spillovers. In conventional terms this will depend on whether any lessons from the Sinuiju SAR experiment are generalized to the rest of the economy. (One ray of hope in recent events is the removal of the less than 50 percent foreign ownership ceiling in joint ventures.) More subtly the SAR might have a positive impact if internally it is regarded as giving Kim Jong-il’s unimpeachable imprimatur to the reform process. Bureaucrats and factory managers who have been reluctant to get ahead of the leadership may take this as a sign that change is safe. Conversely, by taking the SAR completely outside of the normal North Korean governing structures, Kim Jong-il can in effect end-run the party and the bureaucracy, and manage the zone directly out of his office.

Uncle Junichiro…

Meanwhile, as exciting as the establishment of the Sinuiju SAR might have been, its long-run significance is probably less than that of an event that had occurred the previous week—a meeting in Pyongyang between Kim Jong-il and Koizumi Junichiro, a manifestation of the fourth component of the economic plan, passing the hat.

At the first-ever meeting between the heads of government of Japan and North Korea, Kim stunned the world by baldly admitting that North Korean agents had kidnapped 12 Japanese citizens and that most of the abductees were dead. Each of the leaders then expressed regrets for their countries’ respective historical sins and agreed to pursue diplomatic normalization. It is expected that normalization will be accompanied by a large financial transfer from Japan to North Korea in the form of grants, subsidized loans, and trade credits. Japanese officials have not denied formulas reported in the press that would put the total value of a multiyear package at approximately $10 billion, despite the shaky state of Japanese public finances. Taking inflation, changes in the value of the yen, differences in population size, and other factors into account, this sum would be in the ballpark of the transfer that Japan made to South Korea in 1965 when the two countries normalized relations. Given the puny size of the North Korean economy, this is a gigantic sum. The critical issue for North Korea is whether these talks will proceed rapidly enough to generate aid inflows before the dislocations of marketization begin to bite. Given the Japanese public’s revulsion at the disclosure of the probable murders of some of the abductees, the process of normalization may be more protracted than either the North Korean or Japanese governments expected.

In connection with this process, there are rumors that the North Koreans intend to establish yet another special economic zone on the east coast, to be oriented toward Japan. Discounting the failed zone at Rajin-Sonbong, this would give the North Koreans three special economic enclaves, one oriented toward South Korea, one toward China, and one toward Japan, diversifying their portfolios so to speak. Again, given the centrality of politics to North Korean thinking, they may well envision playing the three off against each other. In the long run, however, it is integration with South Korea that will be critical to the development of the North Korean economy.

…and Uncle Sam

The Koizumi visit amounted to a kick in the pants to the Bush Administration. It brought to a head the disagreement between the hawks and the moderates in Washington. Assistant Secretary of State James Kelly was sent to Pyongyang with greater alacrity than he otherwise would have had. With its two allies in Northeast Asia moving forward with engagement, the “Axis of Evil” characterization will become increasingly difficult to sustain, and the United States will find its options more constrained.

For example, North Korea’s membership on the list of state sponsors of terrorism prevents the United States from supporting the DPRK for membership in international financial institutions such as the International Monetary Fund, World Bank, or Asian Development Bank. The North Koreans have fulfilled most of the terms set out by the Clinton Administration to secure their removal from the list. A major sticking point has been third-party claims by Japan associated with the Japanese Red Army hijackers and the abductees. If the hijackers are returned to Japan and the North Korean and Japanese governments resolve the abductee issue as now seems likely in the near future, a major obstacle to North Korea getting off the list of state sponsors of terror will have been removed. While it is quite possible that the Bush Administration will insist on keeping them on the list and barring their entry into the international financial institutions, this position will be increasingly hard to sustain in the face of South Korean and Japanese objections.

At the same time, the transfer from Japan to North Korea is the single biggest financial claim that North Korea maintains on the international system and dwarfs anything it could hope to get from the multilateral development banks. Unlike the sorts of carrots that the United States might offer, it also contains an element of irreversibility, and no matter how well conditioned the loans, money is at least partly fungible, raising the understandable worry in Washington that the Japanese settlement could be used for military modernization. The apparent lack of consultation between the United States and Japan in the run-up to the meeting has added to Washington’s concerns.

Conclusions

In the end, to understand the meaning of what has occurred in the last several months, one has to make some kind of assessment of the motivations behind North Korea’s policy changes. One argument put forward by some North Korea-watchers is that Kim Jong-il has long understood that the North Korean system is irretrievably broken, but that it has taken a long time for him to consolidate power and implement these far-reaching changes. This is hard to believe. Kim Jong-il was reputedly running the country on a day-to-day basis for ten years before his father’s death eight years ago. This means he has in effect been running the country for 18 years and was the uncontested supreme leader for the last eight. In a political system as hierarchical as North Korea’s, it is difficult to accept that it has taken him this long to consolidate his position.

Indeed, the opposite interpretation would seem more plausible, namely, that Kim Jong-il has reluctantly concluded that the old methods are inadequate to revive the economy and out of political necessity is embracing marketization, inflation, and the former colonial master in a desperate bid to revitalize a moribund system. If this interpretation is correct, then we should expect hesitancy in the implementation of reforms, and a strong reliance on the international social safety net supplied by the rest of the world. In certain respects the plans put forward thus far appear to be ill-conceived, but a combination of marginal increases in economic activity and international aid inflows may put enough goods on the shelves to keep the population pacified, at least in the short run. Ten billion dollars can buy a lot of transistor radios.

However, the initiatives undertaken in the last several months are qualitatively different from the diplomatic initiatives that the North Koreans undertook over the last several years. Marketization and inflation alter economic, political, and social relations on the ground, and raise far higher stakes internally. While the upside potential may be great, failure could mean the end of the regime. The train has left the station, but where it is headed and if it will derail are open questions—even for the conductor.

Table 1: Price Increases

Product   Reported Price Increase (percent)

Rice   4,000
Corn   3,700
Pork   700

Diesel fuel   3,700
Electricity   5,900

Apartment rent   2,400
Subway ticket   900

Sources: Press reports, private correspondence.

BBC
9/13/2002

There have been emotional scenes in North Korea as hundreds of relatives from South Korea were reunited with 100 long-lost relatives from the North.

Many of the participants, mostly aged in their 60s and 70s, were speechless as they embraced their brothers, sisters, parents and children for the first time in more than 50 years.

The group of 455 South Koreans arrived by ship for the three-day reunion, which is taking place at the picturesque Kumgang Mountain (Diamond Mountain) resort on the northern side of the border.

This is the fifth reunion to take place since the meetings were agreed upon at an historic inter-Korean summit in 2000.

Millions of Koreans were separated after the 1950-1953 Korean War. About eight million South Koreans have relatives living in the North.

Time running out

The two counties remain technically at war, and it is impossible for civilians to telephone or send a letter to relatives on the other side of their heavily-fortified border

The oldest participant in this latest wave of reunions is a 94-year-old man who is set to see his son for the first time in more than 50 years.

Many Koreans wept as they were introduced to relatives that they could barely recognise after so many years.

South Korean sisters Lee Jin-ock and Lee Jin-geum broke down when they saw their father, Lee Kyoo-yom, aged 82.

The sisters have held an annual memorial service for him for the past 30 years, having given him up for dead after he went out shopping and never returned on the outbreak of war in 1950.

Kim Kun-rye, a 67-year-old South Korean grandmother, was blind but could still recognise the voice of her 74-year-old brother after five decades.

“It’s him! I can’t see him, but he still has the same voice,” the blind sister said, hugging her brother and weeping.

Selection lottery

The reunions are an emotional issue for many Koreans as the divided family members are beginning to die of old age or illness.

Red Cross officials in Seoul said three family-reunion applicants had to abandon this trip because of health problems.

South Korea held a lottery among 120,000 candidates to select its family members. It is not known how the North selected its participants.

The reunions are strictly controlled and participants are not allowed to visit their home towns.

Last week Red Cross officials from both sides agreed to set up a permanent reunion centre at the mountain resort.

Another group of 100 South Koreans will leave for Mount Kumgang on Monday to meet relatives.

The latest flurry of reunions is part of a recent thawing of relations between the two countries as the impoverished North reaches out internationally for much needed aid.

BBC
9/12/2002

Efforts to revive a struggling tourism project between North and South Korea have broken down in the mountain resort of Kumgang just north of their shared border, local media reported.

The three days of talks were aimed at designating Mount Kumgang – also known as Diamond Mountain – a special tourist area open to the free flow of foreign capital and linked by a land route to the South.

But the despite running into extra time late on Thursday the talks ended without the two sides reaching an agreement.

Kumgang Mountain first opened to South Korean tourists in 1998, allowing them to visit the Stalinist North by cruise ship, despite the fact that the two states technically remain at war.

Financial crisis

The scheme was hailed as a success which had helped to cool relations between the two states.

But the number of tourists visiting the resort dropped away after South Korea’s privately owned Hyundai Group, which ran the cruise trips, ran into financial problems.

According to the Yonhap news agency the talks failed because Pyongyang insisted that Seoul should guarantee it would pay for the loss-making tourism business operated by Hyundai Group.

The South reportedly rejected this demand and the talks broke down.

“Failing to narrow differences, both sides ended the talks without an agreement produced,” the South’s chief delegate Cho Myung-Kyoon said.

But Mr Cho suggested that the talks might resume.

“I hope the two sides will soon meet again to continue discussions based on the contents of talks this time,” he said.

Easing tension

South Korea’s proposal that Mount Kumgang should be classed a special tourist area would pave the way for investors to build facilities such as golf courses, ski resorts and other entertainment facilities which could help boost tourism in the communist country.

The limited cruise tours to Mount Kumgang have already been a key source of income for the impoverished North.

But in the past the North has rejected the South’s plans for Kumgang, citing environmental and security reasons.

However, in recent weeks there have been signs of rapprochement between the two countries as the impoverished North reaches out internationally for much needed aid.

On Thursday North Korea signed a deal with the American-led United Nations Command, for the construction of an east coast rail link between the two Koreas.

A similar deal for a rail link on the western side of the peninsula was agreed last year, but it has yet to be implemented.

From our friends at the U.S. Embassy in Seoul:

North Korean financial institutions
U.S. Embassy; Seoul, South Korea
Flash Fax Document Number: 5711
Date: April, 1995
——————————————————————————–

1. This cable summarizes information obtained from meetings with Korean Development Institute (KDI) officials as well as from two unclassified publications:
— “Status of North Korea’s financial system and expected reform in North Korea’s financial world in case economic integration takes place,” written by Dr. Chun Hong-Taek, and published by KDI in January 1994. Chun notes that his information is from open sources as well as interviews with South Korean companies that have done business with North Korea.

— “North Korean trading companies and financial institutions,” published by the National Unification Board (NUB) in October 1994. The NUB notes that the data in its publication is based on contract forms between South and North Korean trading corporations and other open sources, such as “Foreign trade of the DPRK” (published by the DPRK International Trade Promotion Committee, editions of January 1993 to June 1994) and “Directory of DPRK Foreign Trade Organizations,” (published in March 1994 by Japan’s East Asian Trade Society).

2. A few observations about the information:

— It provides a snapshot of individual North Korean financial institutions, such as a bank’s areas of specialization (if any), its address, key personnel, and its correspondent banks overseas. It does not provide information on current financial transactions.

— There are some differences in the information provided by the KDI and NUB, especially regarding subordination/jurisdiction. For example, the KDI publication notes that all banks are subordinate to the Central Bank, which itself is subordinate to the State Administration Council (SAC). The NUB, however, indicates that some banks are directly responsible to the Central Bank, while others are responsible to the SAC.

— Neither the KDI nor NUB publication lists any North Korean financial institution as having a correspondent agreement with Ashikaga Bank in Japan — a relationship that has been discussed in the press.

— Because of the date of information, newly created banks, such as the Ing-North East Asia Bank (reftel), are not included below.

— Likewise, the KDI and NUB include the names of several banks that may not be currently operating (such as Lyongaksan Bank), may have merged, or may have been renamed. 3. According to KDI officials and the two documents mentioned above, North Korean financial institutions include:

The Central Bank
4. Its title in English is the “Central Bank of the Democratic People’s Republic of Korea.” The CB is located In the central district of Pyongyang. Its telegraphic address is central bank. The CB operates 227 branches throughout North Korea, including P’yongyang, Ch’ongjin, Haeju, Hamhung, Hyesan, Kaesong, Kanggye, Namp’o, Najin, Sariwon, Sinuiju, and Wonsan. According to NUB, CB’s President is Chong Song-t’aek.

5. Established in 1946, the CB falls under the jurisdiction of the State Administration Council. Organizationally, the CB consists of three departments (Cadre Affairs, Material Supply, and Finance) and 14 Offices (coordination/planning, floating fund, Construction fund, repair fund, technology, currency control, banknote issue, fixed assets, savings/insurance, bookkeeping, inspection, business, and mobilization).

6. As a central bank, it is responsible for issuing bank notes, regulating currency in circulation, handling matters related to payment of accounts on a national level, making the government’s budgetary payments, and purchasing/managing precious metals. The Central Bank also operates as: a “special bank” by supplying state funds; a “commercial bank” by accepting deposits and lending money; a “state auditor” by exercising financial control in matters regarding the use of state funds; a “state property manager” by registering and evaluating the fixed assets of state institutions and enterprises; and as an “insurance institution” by handling domestic insurance matters–including property insurance for cooperative farms and factories and accident insurance for working Persons between 16 and 65 years old.

7. (FYI: according to KDI, there are four kinds of savings accounts available at the CB and north Korean Post Offices: ordinary savings accounts carrying 3.0 percent interest per year; long-term savings accounts carrying 3.6 percent interest per year; time deposit accounts carrying 4.0 percent interest per year; and a lottery-type deposit whereby the subscriber-if he/she draws a winning number in a lottery held every quarter–is paid a prize instead of interest.)

8. Funds lent by the CB to North Korean enterprises come from three sources, including the state budget, savings accounts, and insurance premiums. If an enterprise suffers a temporary cash flow problem while implementing Its projected economic plan, it can go to the CB because — according to KDI — the CB is the only supplier of state budgetary funds and money needed for financing national economic plans comes out of the state budget.

9. The NUB publication lists a firm named “Eunbyol Corporation of the Central Bank of the Democratic People’s Republic of Korea.” It is located in the central district of P’yongyang, its telex number is 5965 zu kp, and its telephone numbers are 33946 and 36882. According to the NUB, Eunbyol accepts orders for the manufacture of memorial coins. (Comment: The relationship between Eunbyol and the Central Bank is not further defined.)

Trade Bank (aka Korea Trade Bank)
10. The Korea Trade Bank’s (KTB) title in English is the “Foreign Trade Bank of the Democratic People’s Republic of Korea.” The bank is located in the central district of P’yongyang. Its telegraphic address is Mooyokbank Pyongyang; its telephone numbers are 32588, 34531, and 36508; its telex is 5460, 5465, 5477 and 36032 muyok bk kp; and its fax number is 814467. KTB’s president is Kim Ung-ch’ol, and its vice presidents are Kim Chun-ch’ol, Kim Myong-po, Pak Yang-sok, and Kim Yun-sik.

11. KTB was established in November 1959. The bank comes under the Central Bank’s jurisdiction, although KDI officials believe that the bank is now operating with less Central Bank oversight. According to KDI — KTB actually functions like a central bank’s foreign exchange department because its responsibilities include settling accounts in trade and invisible transactions, exercising control in matters regarding foreign exchange acquisition and disbursement, setting and announcing foreign exchange rates, and issuing foreign exchange convertible notes that can be used only by foreigners while staying in north Korea. According to NUB, KTB was once involved in trade with South Korea, such as selling gold and silver nuggets.

12. In order to settle its trade accounts overseas, KTB has correspondent agreements with foreign banks, including 18 banks in Japan, which (as of March 1993) the NUB identified as Sanwa, Tokyo, Sakura, Mitsubishi, Fuji, Daiichi-kangyo, Tokai, Sumitomo, Asahi, Saiwa, Hokkaido Takushoku, Nihon Kogyo, Nihon Long-term Credit Bank, Itsui Trust, Sokuri, Hyogo, Hokkuriku, and Norin Chuou Kinko. According to KDI, other foreign banks include Great Britain’s Lloyds and Standard Chartered, Germany’s Deutsche and Commerze, France’s BNP and Credit lyonnaise, Switzerland’s SBC and UBS, Austria’s Creditanstalt Bankverein and Girozentrale Vienna. KTB also has correspondent agreements with unidentified banks in Hong Kong.

Daesong Bank
13. This bank’s title in English is “Korea Daesong Bank” (KDB. It is located in the central district of P’yongyang. Its telegraphic address is Daesongbank Pyongyang; its telephone number is 43002; and its telex is 36023 and 37041 kdb kp. According to the NUB, KDB’s President is Kim Myong-hui, its vice president is Chang Kon-il, and its chief managing director is Ch’oe Su-kil. (comment: according to KDI, the KDB’s top managers traditionally hold high posts within the KWP, and these persons are typically more influential than other government officials.)

14. Established in November 1978, KDP comes under the Central Bank’s jurisdiction. The bank settles accounts for trading and shipping companies, such as Korea Daesong Trading Corporation, Korea Tonghae Shipping Company, and Korea Mangyong Trading Corporation. The bank was also once involved in trade with South Korea, such as selling gold and silver nuggets

15. (Comment: the KDI and NUB publications say that KDB is under the Central Bank’s jurisdiction, but the NUB write-up on Korea Daesong General Trading Corporation (KDGTC) notes that KDGTC operates a bank, most likely referring to Korea Daesong bank. Moreover, the NUB says That kdgtc itself is under the jurisdiction of the Daesong General Bureau, Office 39, KWP Central Committee.)

16. KDB operates a branch/affiliate in Vienna, Austria, named the Golden Star Bank. It also operates a branch of the Korea Daesong Trading Corporation in Hong Kong, according to KDI. In addition, KDB has correspondent relations with banks in Japan (Tokyo, Sanwa, and Sokuri), In the United Kingdom (Midland, National Westminister, and Standard Chartered), in Germany (Deutsche Bank) and in Switzerland (Swiss Bancorp). It also has correspondent relations with unidentified banks in Bombay, Frankfurt, Hong Kong, London, Paris, Singapore, Stockholm, and Vienna.

Changgwang Credit Bank
17. Its title in English is “Korea Changgwang Credit Bank” (KCCB). The bank is located in P’yongyang. Its telegraphic address is Changgwang credit; its telephone number is 31477; its telex is 36016 kccbc kp; and its fax number is 814414. According to NUB, the chairman of Korea Changgwang Credit Bank (KCCB) is Sin Ho and its president is Maeng Pok-sik.

18. According to NUB, KCCB was established on 25 February 1983 and deals in international financing – making exchange transactions in Beijing, Copenhagen, Frankfurt, Geneva, Hong Kong, London, Milan, Rome, Singapore, Stockholm, Tokyo, and Vienna. KCCBC also has 172 branches. (Comment: the NUB publication does not specify whether these branches are located in North Korea or overseas.)

19. (Comment: Although KDI’s banking document does not contain any details on KCCB or its activities, a KDI official told Emboffs that he considers KCCB to be the richest bank operating in North Korea — primarily because it is associated with the military (NFI).)

Koryo Commercial Bank
20. The bank’s title in English is “Koryo Commercial Bank Ltd.” This bank is located in Taedonggang District, P’yongyang. Its telegraphic address is Koryo bank; its telephone number is 32060; its telex is 36019 kcb kp; and its fax number is 814441. According to NUB, the bank was established in 1988, jointly financed by the DPRK and a Group of Korean residents in the United States. Its business reportedly is to issue “National Reunification Fund” bonds.

Credit Bank
21. The Credit Bank’s title in English is “Credit Bank Of Korea.” It is located in the Taedonggang District of P’yongyang. Its telegraphic address is credit bank; its telephone number is 814285; its telex is 5939 cbk kp; and its fax number is 817806. The president of Credit Bank is Pak Ki-chu.

22. Credit Bank was first established in September 1986. It was initially called the International Credit Bank, but its name was changed to its present form on 23 August 1989. Dealing in international finance, the Credit Bank does exchange transactions in cities around the world, including Amsterdam, Brussels, Frankfurt, Hong Kong, London, Milan, Moscow, New York, Paris, Tokyo, Vienna, and Zurich. The Credit Bank also was once Involved in trade with South Korea, selling gold nuggets to it.

Kumgang Bank
23. Kumgang bank is located in the central district, P’yongyang. Its telegraphic address is Kumgang Pyongyang; Its telephone numbers are 32029 and 32797; its telex is 5355 kgbk kp. Kumgang Bank settles accounts for export-import transactions of North Korean trading corporations, including Korea Pyongyang Trading Corporation and Korea Ponghwa General Trading Corporation.

24. According to the NUB, Kumgang bank was established in September 1978. Its subordination is not clear as the NUB says it is under the state administration council’s jurisdiction, while KDI says it is under the Central Bank’s. (Comment: to further complicate the issue, the NUB document notes in its write-up of Korea Ponghwa General Corporation (SEPTEL) that Ponghwa itself operates the Kumgang Bank.)

Nagwon Financial Joint Venture Corporation
25. According to the NUB publication, Nagwon was established in October 1987, jointly financed by Korea Nagwon Trading Corporation and a Japanese firm “Palace.” Its subordination is not clear as NUB says it is under the State Administration Council jurisdiction, while KDI says it is under the Central Bank’s. The bank accepts deposits, remits money, and provides financial services to joint venture projects, trading corporations, and companies run by overseas compatriots.

26. (Comment: The KDI publication does not provide information on this firm. Instead, it notes that a bank named Korea Ragwon Kumyung Company (aka Korea Ragwon Financing Company) operates in North Korea, but information on its activities is not available. It is not clear whether the NUB and the KDI firms are one and the same.)

Yongaksan Bank (aka Lyongaksan Bank)
27. This bank was established in February 1983. It settles trade accounts of trading companies, including Yongaksan Trading Corporation.

T’ongil Palchon Bank (aka Korea Tongil Paljon Bank)
28. (Comment: T’ongil Palchon means “reunification and development.” Based on the information below, this bank is probably the same as “United Development Bank” which was formed in November 1991 between Ruby Holdings (now known as China Strategic Investments) and Osandok General Trading Corporation.)

29. According to NUB and KDI, T’ongil Palchon Bank (TPB) is a joint venture between Hong Kong’s Ruby Holdings Company and North Korea’s Osandok General Bureau. The two publications differ regarding the bank’s financing and subordination: –NUB says that TPB was jointly financed; KDI indicates that Ruby Holdings financed 51 percent of TPB’s US $30 million capital, with Osandok financing the remaining 49 percent. (Comment: According to the KDI publication, China’s International Trust and Investment Corporation (CITIC) had an option to buy into the joint venture, but it is not clear whether CITIC ever did so.)

— The NUB says TPB falls under the State Administration Council’s jurisdiction; KDI says TPB is subordinate to the Central Bank.

30. According to KDI, TPB deals in general trade, including the import of advanced technologies (NFI). It also operates an affiliate, Korea International Trust Investment Corporation (KITIC). KDI notes that North Korea appears interested in learning market financing techniques because the holding company of the joint venture partner (Ruby Holdings) is Indonesia’s Sinarmas (phonetic) Business Group which owns the Bank International Indonesia. (Comment: KDI defines “financing techniques” as ones required for inducing foreign capital.)

Habyong Bank
31. Habyong Bank’s title in English is “Korea Joint Venture Bank” (KJVB). It is located in the Central District, P’yongyang. KJVB’s telephone numbers are 33052 and 39620; its telex is 36001 kjb kp; and its fax number is 814497. The bank’s vice president is Pak Il-nak, who the NUB document says is from the Chosen Soren.

32. KJVB was established in April 1989. The NUB and the KDI publications differ on the names of the joint venture partners:

— The NUB says that the bank was formed by the Chosen Soren and its affiliate, the Federation of Korean Traders and Industrialists in Japan. The North Korean partner is the State Administration Council’s Joint Venture Industry General Bureau.

— KDI notes that KJVB was jointly financed by the Chosen Soren’s Joint Ventures Promotion Committee and North Korea’s Korea International Joint Venture Company.

33. The bank functions as an international financial institution, providing financial assistance for North Korea’s joint venture projects and settling domestic and foreign accounts for joint venture companies. According to NUB, the bank also conducts economic surveys. KJVB operates branches in North Korea, including Hamhung, Sariwon, Sinuiju, Wonsan, P’yongsong, and Ch’ongjin. It also has correspondent relationships with some 30 foreign banks, including Japan’s Sokuri Bank, Hong Kong’s Maritime Commercial Bank, and China’s Bank of China.

Kukche Insurance Company
34. This firm’s title in English is “Korea Foreign Insurance Company” (KFIC). It is located in P’yongch’on District in P’yongyang. Its telegraphic address is chosunbohom; its telephone numbers are 36147, 38805, and 45501; and its telex number is 5464 bohom kp. KFIC’s president is Paek Myong-non, and its vice presidents are Yi Sang-chu and Pak Kun-pae.

35. According to NUB, KFIC handles insurance matters involving ships and export-import cargos and reinsurance issues involving foreign insurance companies. It also does business with some non-life insurance companies in Japan regarding reinsurance matters. KFIC operates branches at major ports, including Namp’o, Hungnam, Ch’ongjin, Najin, and Haeju.

UN PAN
Bertil Lintner
Suh-Kyung Yoon

Pak Ku Po and his companion would not make it in international business circles.  They have no name cards and one of them does not even want to give his name. They claim they know nothing about the place where they are based–“we’re just newcomers here”–but promise to be more forthcoming “the next time we meet.”  Their secretiveness is perhaps understandable as they work for Zokwang Trading, a state-owned North Korean company in Macau, which in the past has been accused of being involved in the distribution of counterfeit money, arms smuggling and terrorist training. North Korea had been accused of state-sponsored terrorism long before Afghanistan decided to give shelter to Osama bin Laden and the seeds of the present conflict in Central Asia were sown.

But now things are supposed to have changed, and Zokwang and other North Korean trading companies–and there are many of them throughout East Asia–claim they are legitimate business operations. Pak, for instance, says that Zokwang is involved mainly in the export of North Korean ginseng to Asian countries, and sweaters and other knitwear to France and Canada. Over the past few years, North Korea has embarked on a vigorous commercial drive across the globe, and, for the first time, it is making serious attempts to attract foreign investment. Is Pyongyang finally turning to capitalism to save the world’s last Stalinist state?

The main question is whether this change in attitude will, in the long run, also change North Korea’s economy and society–as similar initiatives by the Chinese communists in the late 1970s have begun to transform China. Or will more hard currency in the state’s coffers only serve to delay the collapse of one of the world’s most atavistic regimes, thus prolonging the suffering of the North Korean people? And have North Korean businesses overseas really become legitimate? Or are they still peddling fake bank notes, drugs and ballistic-missile technology? This is an important issue going forward because the United States has made it clear it will track down all sources of funding for terrorists in future–and now that other sources are drying up,lesser-known alternatives may come into vogue.

There is little doubt that the sale of ballistic-missile technology in violation of the Missile Technology Control Regime and, more generally, the export of weapons to terrorist organizations and the states that harbour them, is far more lucrative than all of Pyongyang’s legitimate commercial ventures put together. But it is equally true that the international war on terrorism will only make such sales more difficult with every passing day.

Ri To Sop, North Korean consul general at the recently established diplomatic mission in Hong Kong, is firm in his assurances. “Our Dear Leader has told us that this is a new millennium, and that we should not do things in the old way. There will be changes. Just wait and see,” he says. The “Dear Leader,” North Korea’s reclusive supremo, Kim Jong Il, visited China in May this year, where his hosts took him to see the stock exchange in Shanghai. In July, he embarked on a 10-day epic train journey through Siberia to Moscow and St. Petersburg, where he visited sites commemorating the 1917 communist revolution, but also held talks with Russia’s new, born-again capitalist leadership. The trip was hailed by South Korean Foreign Minister Han Seung Soo: “[This is] a very positive development because it is an indication that North Korea is willing to open up.”

The main force behind North Korea’s commercial drive is, perhaps not surprisingly, the country’s powerful military. In June, a North Korean defector described the North Korean People’s Army as the country’s biggest “foreign-exchange earner.” From early spring this year, servicemen have been made to engage in a variety of export-oriented projects including mushroom harvesting, gold mining, medicinal-herb collection and crab fishing.

The ruling Korean Workers’ Party is also reported to be operating more than 40 restaurants in six countries as a means of raising hard currency. The first North Korean eatery opened in Austria as early as in March 1986, but in recent years more have followed in China, Russia and Indonesia. According to South Korean intelligence, North Korea will soon open restaurants also in Bulgaria and Australia.

Even more imaginatively, the Dongkong Foreign Trade Corporation in the Chinese city of Dandong, just across the border from North Korea, acquired in September the exclusive right to sell North Korean medicines in the international market–including a brand called Cheongchun No. 1, which is a home-made North Korean version of Viagra.

EFFORTS PAYING OFF
In Thailand, a North Korean-owned company, Wolmyongsan Progress Joint Venture, has for years been engaged in mining activities near the Burmese border in Kanchanaburi, west of Bangkok, while Kosun Import-Export, which is based in the Thai capital itself, is permitted to trade in rice, rubber, paper, tapioca and clothing.  Kosun is located in a discreet office on the top floor of an eight-storey building in a Bangkok suburb. The company is also involved in property, apparently owning the building and renting out flats and office space.

At first glance, it seems that North Korea’s dive into the world of capitalism is paying off. North Korea does not release any trade or economic figures, but according to data collected by South Korea’s state-run Korea Trade-Investment Promotion Agency, or Kotra, from the North’s main trading partners–China, Japan, Thailand and Hong Kong–its external trade in 2000 jumped by 33.1% to $1.96 billion from a year earlier.  It was the second straight year that North Korea saw its trade volume expand and that, too, at a much higher rate than the modest 2.6% increase in 1999.

Kotra is now actively promoting more trade with North Korea. In April this year, the agency published a fact book on how to do business in the Stalinist state, complete with useful phone numbers in Pyongyang and the complete text, in English, of all new laws relating to foreign trade and investment. South Korea’s interest in the development of the impoverished north is understandable. Since South Korean President Kim Dae Jung undertook his historic journey to Pyongyang in June last year, the question of a reunification of the Korean peninsula has become much more urgent–and the South Koreans are painfully aware of the wide income gap between the North and the South.

“Unless we help North Korea develop and strengthen its economy, both countries would collapse if they were reunited,” says a South Korean diplomat on condition of anonymity. “The South would not be able to take care of the North. The gap is just too wide today.” The cost of reunification was first discussed in South Korea shortly after East and West Germany–at a tremendous price–became one country in 1990. According to Marcus Noland, a researcher at the Institute for International Economics, Washington, South Korea would have to invest as much as $3.17 trillion in order to avoid an abrupt influx of people to the South and to upgrade living standards in the North–significantly more than West Germany had to pay to raise living standards in East Germany to an acceptable level.

A closer look at Kotra’s upbeat trade figures for North Korea also reveals a somewhat less rosy picture. In 2000, North Korea exported $556 million worth of machinery and chemical goods–while importing $1.4 billion worth of food, computers and vehicles. The North’s perennial trade deficit is expected to worsen this year as the country has to increase imports of rice, corn and other grains. According to the Bank of Korea, North Korea’s foreign debt totals $12.3 billion and Pyongyang’s credit rating is the lowest in the world.

There is no doubt that it is the dire straits that North Korea has found itself in which have forced its government to resort to commerce, not any real change of mind in the inviolability of the country’s austere socialist system. According to a study by Heather Smith and Yiping Huang of the Australian National University, the present food crisis in North Korea was caused by the disruption in trading ties with former communist allies in the late 1980s. The former Soviet Union ceased providing aid in 1987. More devastatingly, they emphasize, both the former Soviet Union in 1990 and China in 1993 demanded that North Korea pay standard international prices for goods, and that it pay in hard currency rather than through barter trade, as previously had been the case. This affected petroleum imports to the degree that they declined from 506,000 tonnes in 1989 to 30,000 tonnes in 1992.

Subsequently, North Korea embarked on its overseas capitalist ventures. According to a Western diplomat who follows developments in North Korea, the country’s embassies abroad were mobilized to raise badly needed foreign exchange. This, he says, was done partly in the name of the diplomats themselves, or through locally established trading companies, which in reality are offshoots of bigger, Pyongyang-based state trading corporations. “Not only do the embassies have to be self-sufficient, they are also expected to send money back to the government in Pyongyang,” the diplomat says. “How they raise money is immaterial. It can be by legal or illegal means. And it’s often done by abusing diplomatic privileges.”

The sad truth is that the North Koreans are desperate and prepared to do anything to make money, and Bangkok seems to be emerging as a centre for many of their activities. Western intelligence officials based in the Thai capital are aware of the import and sale of luxury cars, which are brought in duty-free by North Korean diplomats. Another way of raising money is to insure a cargo consignment at a disproportionate level, and then report the goods lost. “This is usually done through international insurance markets, and there is little the companies can do but to pay up,” the diplomat says.

And earlier this year, fake $100 notes turned up in Bangkok. The police believed that the North Korean embassy was responsible as some of its diplomats were caught trying to deposit the forgeries in local banks. The North Korean diplomats were warned not to try it again. In a more novel enterprise, the North Koreans in Bangkok were reported to be buying second-hand mobile phones–and sending them in diplomatic pouches to Bangladesh, where they were resold to customers who cannot afford new ones.

And even where businesses tend to be more legitimate, North Korea has managed to attract some rather unusual investors. As early as 1991, the North Koreans established a “free economic and trade zone” in Rajin-Sonbong along the Tumen River near the border with China and Russia. Some 746 square kilometres were set aside for “foreign capitalists”–but there have been very few takers apart from pro-Pyongyang ethnic Koreans from Japan, who have invested because of patriotic duty rather than any expectations of quick returns. In fact, there is only one major foreign investor in the entire zone: Hong Kong entrepreneur Albert Yeung Sau Shing, who controls the Emperor Group, which has interests in gold, securities, property and entertainment in Hong Kong and China as well as a banking venture in Cambodia.

In October 1999, Yeung opened the $180 million Seaview Casino Hotel in Rajin-Sonbong. Although locals are banned from entering the establishment, the Emperor Group is betting that wealthy Chinese and Russians will come there to gamble. The casino has 52 slot machines and 16 gaming tables offering everything from blackjack and baccarat to roulette. In Hong Kong, Yeung is best remembered for his acquittal at his dramatic trial for criminal intimidation in 1995 when all five witnesses called by the prosecution testified that they did not remember anything. Yeung was accused of having kept a former employee prisoner after threatening to break his leg. Even the victim himself said he could not remember what had happened.

In the same year, Macau gambling tycoon Stanley Ho also opened a casino in North Korea, but in the capital itself. Ho’s $30 million Casino Pyongyang is located in the Yanggakdo Hotel, where his partner is Macau businessman Wong Sing-wa. His company, the Talented Dragon Investment Firm, in 1990 became Pyongyang’s unofficial consulate in Macau with authority to issue North Korean visas.

Wong, who has interests in several Macau casinos, made headlines in early 1998, when a Lisbon-based weekly newspaper, the Independent, protested over his presence in a delegation from Macau that was being received by the Portuguese president. The paper cited a Macau official as saying that Wong had “no criminal record, but we have registered information that links him to organized crime” in Macau.

With such business partners, it is obvious that the North Koreans have a long way to go before they acquire a better understanding of how capitalism really works. Nor has North Korea, despite its efforts, managed to attract a large number of new investors.  In July this year, a delegation of representatives from 17 Hong Kong companies went to North Korea on a trip initiated by the new consulate in the special administrative region. But though they showed some interest, no commitments were made.

LITTLE BUSINESS INTEREST
In October, the Singapore Confederation of Industry sent a 25-member delegation to North Korea to look into business opportunities, but little investment is expected from there as well. In recent years, only one Singapore company, Maxgro Holdings, has concluded a joint-venture agreement with North Korea. Maxgro intends to plant 80 million paulownia trees on 20,000 hectares of state-owned land and the project is meant to produce wood for furniture, veneers and musical instruments. But at a value of only $23 million, it is hardly going to turn things around in North Korea.

And, as the fake dollars in circulation in Bangkok show, old habits die hard. In fact, North Korea’s main export item remains ballistic-missile technology. There are especially two North Korean companies that have attracted the attention of Western diplomats: the Changgwang Sinyong Corporation and the Lyongaksan General Trading Company.

In the 1990s, Changgwang was sanctioned by the U.S. government for exporting ballistic-missile technology to Pakistan. In July this year, Changgwang was once again sanctioned by Washington, this time for providing Iran with the same technology. According to Western diplomats, Lyongaksan, which like Changgwang is controlled by the North Korean military, sends people under commercial cover to countries such as Syria and Libya, where they in reality sell weapons systems. According to a report which the Seoul-based Korean Institute for Defence Analyses released in April, North Korea has exported at least 540 missiles to Libya, Iraq and other Middle East countries since 1985.

Libya recently bought 50 Rodong-1 missiles with a range of 1,000 kilometres. Cash-starved North Korea has not hesitated to sell weapons to whoever wants to buy them, including terrorist groups. A video of an attack last year by the Liberation Tigers of Tamil Eelam on a Sri Lankan navy vessel shows speedboats which appeared to be of North Korean origin. The rebels also appeared to be using a North Korean variant of the Russian 107 millimetre Katysha rocket launcher. And in late 1990, North Korea sold Burma 20 million rounds of 7.62 millimetre rifle ammunition, which intelligence sources say ended up in the hands of the United Wa State Army, a drug-trafficking group which is active in the Burmese sector of the golden triangle.

While the world is focusing on the terrorist threat from Afghanistan, North Korea’s potential for mischief has been almost overlooked. But in testimony on April 17 this year, Deputy CIA Director John E. McLaughlin warned: “North Korea’s challenge to regional and global security is magnified by two . . . factors . . . first the North’s pursuit of weapons of mass destruction and long-range missiles, and its readiness–and eagerness–to become missile salesman to the world. And second, the economic and humanitarian disaster that has afflicted the people of the North–a catastrophe whose effects will endure for generations, no matter how the Korean situation finally plays out.”

Unlike North Korea’s more mainstream trading companies, its sale of ballistic-missile technology and military hardware raises millions of dollars, which–minus commissions for the North Korean “businessmen” in the field–flow back into Pyongyang’s coffers. “There is no evidence to suggest that this money is used to put food upon the tables of North Korea’s starving people,” quips a Western diplomat.

North Korea, which depends on international aid to feed its people, has imported $340 million worth of military hardware over the past decade, according to South Korean security officials. This may be less in absolute terms than what South Korea spends on its military. But the much-poorer North spends 14.3% of the country’s GDP on its military compared to the 3.1% spent by the South.

So, for the time being, missiles rather than mushrooms make up the backbone of the North Korea’s exports. If some capitalist seeds have been sown during the present drive to shore up the economy, it will take some time for a new business mentality to emerge. Kim Jong Il, it seems, is not yet about to become another Deng Xiaoping.  But in a world ever more concerned with the spread of biological, chemical and nuclear weapons, states that are known, or suspected, to possess them will find themselves facing intense scrutiny–if not outright isolation. North Korea, thus, has very good reason to come in from the cold.

Dow Jones Newwire

PYONGYANG — At the foreign exchange counter at the self-proclaimed ‘deluxe’ Koryo Hotel, an electronic screen posts the daily rate of the North Korean won against various international currencies.

Quotes for a dozen or so currency pairs light up in red digital numbers, one after the other.

One rate that doesn’t shift too much is the dollar-won, which generally hovers at or around 2.16 won to the dollar. Speculation has it that the government has fixed the won’s rate against the dollar around that level to commemorate the February 16 birthday of Kim Jong-il, the country’s semi-divine leader.

Sounds strange? The fact is, in this quasi-theocratic country, if it looks like adulation, it probably is. This is, after all, the nation that holds a weeklong exhibition (in mid-February, of course) to admire the Kimjongilia, the national flower.

In any case, whether there is a peg at 2.16 or not, North Korea’s currency bears little relation to economic fundamentals.

Indeed in the Rajin-Sonbong trade zone in the north of the country, where the government has experimented with a free market rate, and along the Chinese borders where there is an active black market, the rate of the won tends to be more like 200 won to the dollar, analysts say. That’s a difference of a hundred fold – making the North Korean won one of the most distorted currencies in the world.

“The pricing of the won doesn’t have any particular relationship to any economic cost concept,” explains Bradley Babson, a senior advisor to the World Bank who specializes in North Korea.

That may have made little difference in the Soviet-style planned economy that has characterized this country’s economy to date. However, as the country tentatively opens its doors to international trade and investment and toys with the idea of using at least some elements of a market economy, currency reform will become vital, analysts say.

Ideological Aversion to Money

Unfortunately, other than the experiment in Rajin-Sonbong, there is little sign the country’s Communist leaders are prepared to take this step yet.

Monetary reform North Korean-style, the latest round of which took place in the early 1990s, has normally been focused on confiscating funds from overly rich entrepreneurs – not exactly the kind of adjustment the IMF would endorse.

At issue is the official Communist ideology which views money as a dirty instrument of capitalism. As such, its role within the economy should be kept to a minimum.

As Deok Ryong Yoon, an economist at the Korea Institute for International Economic Policy in Seoul, explains, until 1990, the North Korean won served not as money at all, but purely as an accounting unit.

North Korean residents didn’t need money because all their needs were met by the state distribution system – one of the most complete anywhere in the Communist world.

That is now changing. “Nowadays people use money and monetization is quite advanced,” says Yoon.

What doesn’t seem to be changing, however, is the government’s attitude toward money. “The regime does not admit the reality,” he says.

That means a complete absence of an “institutional framework” to manage money in the economy, leading to inflation rates of around 700%, according to Yoon’s estimates.

True, there is formally a central bank. But western economists who have met with officials from the Choson Central Bank describe them as meek bureaucrats who have little knowledge of even the most basic economic principles.

The result has been an increasing marginalization of the North Korean won – also nicknamed the ‘brown’ won for its brown and grubby appearance – in the economy. North Koreans resort to barter to meet their basic consumption needs – and increasingly just do transactions in hard currency, such as U.S. dollars, Chinese yuan or even Japanese yen.

Worthless Currency

The same is true of foreign investors. North Korea has a ‘foreign exchange certificate’ system – the same type used in China until 1994. Under this system, foreigners exchange dollars not for local currency but for special purple and blue currency notes.

If as a tourist you change money here, such special notes is what you’ll get. But it’s hard to find anywhere to spend them – as hard currency is demanded for most transactions.

“Basically it’s all done in U.S. dollars,” says Roger Barrett, chief representative of a Beijing-based business group that helps foreign businesses interested in investing in North Korea.

“Hard currency is the export focus, and you get your money back in hard currency,” he says.

The large South Korean projects in North Korea, such as Hyundai’s tourist cruises to Mt. Kumgang, have also been structured in U.S. dollars, according to Yoon.

Pending a major reform of the North Korean currency and pricing system, this tendency to use the dollar in any commercial transaction is likely to continue, analysts say.

In the meantime, even investors used to the most exotic instruments rule out the prospects of the North Korean won as a currency play.

“No we can’t really do anything with it,” says Jerome Booth, head of research at Ashmore Investment Management in London. “I’ve never heard of anyone trying to do anything.”

An economist who travels regularly to North Korea was even more scathing. “I don’t think this currency is worth anything anywhere,” he said.

If either project is built, then, it would probably come as foreign aid, probably in exchange for once again putting North Korea’s nuclear weapons program back under international inspection and control. After a six-month break in talks over the weapons program, American diplomats were touring Northeast Asia over the weekend trying to restart the negotiations.

Yevgeny Afanasiev, a senior Russian diplomat, said at the forum that his country “will do our utmost” to promote the two projects. “They do not have to be part of a package, they could be separate,” Mr. Afanasiev said. “But think of private investors, think of the high political risk – would you invest?”

Financing could come as part of a wider package that would gain North Korea entry into the World Bank and the Asian Development Bank. Or the money might be put up by South Korea, which would stand to benefit both directly and indirectly.

“The Russians basically believe that South Koreans will pay for it,” said Yonghun Jung, a Korean executive at the Asia Pacific Energy Research Center in Tokyo.

But many South Korean businesspeople see North Korea as an unreliable money pit.

Korea Gas, favors bringing Russian gas to South Korea through China and an underwater pipeline, bypassing North Korea and denying it any control over the supply.