North Korean Economy Watch

According ot the Daily NK:

An official in the Ministry of Unification has revealed that the government is planning to allow an increase in the number of South Korean nationals permitted to overnight within the Kaesong Industrial Complex.

The new standard will allow a 50% increase in South Koreans staying in the Complex, from the current 600 to a maximum of 900, with the new limits set to take effect after the “Chuseok” harvest festival later this month.

Explaining the plan, the official said, “While the restrictions on residing personnel have been in place, fatigue has accumulated and problems have constantly occurred with companies having a great many production and quality errors,” adding, “So we can expect the government to select this course of expanding the number of residing personnel to between 800 and 900 this week.”

“Especially, maintaining production quality during the period of high demand starting in September with the current staffing levels would be difficult,” the official went on, “so companies have requested an increase in staffing levels, and the government has been considering the companies difficulties and requests.”

However, the official stressed that the move doesn’t mean the government is softening its stance in terms of post-Cheonan sanctions measures, saying, “The May 24th Measures will stay in place, and restrictions on new business investment and new investment in existing businesses will continue.”

At the time of the May 24th Measure, the number of personnel permitted to overnight in the Complex was fixed at 550 from its original limit of 1,000, though the real average was only around 500. However, the limit was increased to around 590 in July based, the Ministry of Unification announced at the time, on the “stances of the corporations and (the government’s) experience of running the complex.”

Read the full story here:
Government Plans Kaesong Personnel Change
Daily NK
Chris GReen
9/14/2010

Institute for Far Eastern Studies (IFES)
NK Brief No. 10-09-07-1
9/7/2010

Construction on a day-care center for the children of North Korean workers in the Kaesong Industrial Complex (KIC) has been completed, and the center was opened on September 1. The ROK Ministry of Unification released a statement announcing that “a child-care center has been built with the aim of providing care for the children of North Korean female laborers in the KIC and to improve productivity of the industries in the complex.” With the opening of the new center, more than 300 additional children can be cared for, along with the more than 200 children that are currently attending day-care in the complex.

Ground broke on the new facility, with over 3,100 square meters of floorspace, on September 24, 2009, and it took over a year to complete. The real estate was provided by the North, with the South-North Cooperation Fund providing 900 million won for the build. The Kaesong Industrial District Management Committee has turned over the management of the center to the North, and factories in the complex pay approximately fifteen dollars per child per month to send employees’ children to day-care.

In addition, the Kaesong Industrial District Management Committee and the North Korean Central Special Zone Development Guidance General Bureau agreed on August 5 to raise the minimum wage of North Korean workers in the complex by five percent, from 57.881 USD/month to 60.775 USD/month. The raise took effect on August 1 and will need to be reevaluated before July 31, 2011.

Along with the five percent raise in the minimum wage, South Korean companies will gain more control over the hiring process. North and South Korean authorities agreed to strengthen adherence to existing regulations, both on hiring and assigning workers to various positions. Previously, North Korean labor representatives could control work assignments for North Korean workers, but that will be falling under the authority of managers of each business.

According to the guidelines regulating the KIC, North Korean workers will receive a raise of no more than five percent per year, and they have received a five percent raise each year since 2007. North and South have now agreed to continue raises at a rate palatable to businesses in the complex, and to allow South Korean businesses more control over employees.

According to Yonhap:

Inter-Korean trade soared to a record high in the first half of this year despite escalating tensions caused by the sinking of a South Korean naval ship in late March, a government report said Thursday.

Two-way trade jumped 52.4 percent on-year to US$983.2 million in the January-June period, according to report by the Korea Customs Service (KCS). It also represents a six-fold increase from the $161.6 million tallied in the same period in 1999.

Outbound shipments spiked 66 percent on-year to $430.5 million, with imports from the North surging 44 percent to $552.7 million for a deficit of slightly more than $122.2 million.

The report, however, said that with most cross-border exchanges being cut off by Seoul in retaliation for the sinking of the South Korean warship Cheonan, inter-Korean trade is expected to drop about 30 percent on-year in the second half.

A Seoul-led multinational investigation team found the North responsible for the sinking of the 1,200-ton warship that resulted in the deaths of 46 sailors. The North countered that it was in no way in involved.

Only the Kaesong Complex, located just north of the DMZ that separates the two countries, has not been affected by the fallout from the ship sinking. The complex accounts for roughly 70 percent of all inter-Korean trade and is home to 120 South Korean companies that make products with the help of North Korean laborers.

The customs office, meanwhile, said trade between the two Koreas rose from $328.6 million in 1999 to $1.08 billion in 2005 and peaked at $1.82 billion in 2008. Last year, the trade volume fell to $1.66 billion after Pyongyang detonated its second nuclear device.

According to the Choson Ilbo:

In spite of strained inter-Korean relations following the March sinking of the South Korean Navy corvette Cheonan, trade volume between the two Koreas hit a record high in the first half of this year.

According to data from the Korea Customs Service, the total value of exchanged goods reached over US$983 million in the January to June period, up more than 52 percent from $645 million a year ago.

The latest figure tops the previous record of $885 million in 2008, and is six times higher than the $162 million recorded in 1999.

The South’s cross-border exports jumped 66 percent to $435 million, and inbound shipments 44 percent to $553 million.

Amid the ever-changing atmosphere on the Korean Peninsula, inter-governmental efforts to spur North-South trade and the expansion of the joint Kaesong Industrial Complex have fueled a gradual yet continuous growth in trade activity.

The annual trade volume, which amounted to nearly $329 million in 1999, peaked at over $1.8 billion in 2008 before dropping slightly to $1.67 billion in the wake of North Korea’s second nuclear test in 2009.

Experts, however, forecast the trade volume to drop by as much as 30 percent on-year in the second half of this year, reflecting Seoul’s suspension of all trade with Pyongyang, except for operations at the Kaesong Industrial Complex, in response to the sinking of the Cheonan.

Much attention is focused on the future of business at the industrial park, which produces 70 percent of the goods traded between the two sides.

Read the full stories here:
Inter-Korean trade hits record high in H1: report
Yonhap
8/12/2010

Inter-Korean Trade Reaches Record High
Choson Ilbo
8/13/2010

According to Yonhap:

Inter-Korean trade has fallen more than 30 percent since the South cut almost all business relations with the North after Pyongyang was blamed for torpedoing one of its naval ships in late March, the customs office here said Friday.

According to data provided by the Korea Customs Service, the trade between the two Koreas came to US$123.06 million in June, down 32 percent from April, when they still kept their ordinary business relations despite a probe into the naval disaster.

…

South Korea’s exports to the North amounted to $56.88 million in June, down 27 percent from April, while imports decreased 36.5 percent to $66.18 million over the same period, the data showed.

Inter-Korean trade also dropped 21 percent from May, with its exports to and imports from the North falling 4 percent and 32 percent, respectively.

Despite such a sharp shrinkage, the customs office said the decline was not as steep as expected thanks to the Kaesong complex, which takes up most inter-Korean trade.

“The reason why the decline was not as sharp as expected is because we still keep a trade channel open in the Kaesong complex, which accounts for around 70 percent of total trade with the North,” a customs official said.

South Korea is the North’s second-largest trade partner after China. A suspension of inter-Korean business would cause a significant impact on the efforts of the reclusive communist nation to secure cash, according to experts.

Earlier, a state-run think tank here said inter-Korean trade suspension could cost North Korea about $280 million annually, adding to pressure on the North’s cash-strapped regime in governing its country.

Read the full story here:
Inter-Korean trade falls more than 30 pct amid heightened tensions
Yonhap
8/6/2010

According to Yonhap:

South Korea has agreed to raise the minimum monthly wage for North Korean workers by 5 percent at the two countries’ joint factory park in the communist state, an official said Friday.

The latest increase, which was agreed to Thursday and will be effective over the next year, is in line with the 5 percent annual hike in the preceding three years, Unification Ministry spokesman Chun Hae-sung said in a briefing, adding the minimum wage for North Korean workers now stands at US$60.775.

North Korea has demanded wage hikes for its workers in the border town of Kaesong since early this year. About 120 South Korean firms operate there, employing 44,000 North Korean workers to mainly produce labor-intensive goods. The estate has been considered the last remaining symbol of reconciliation between the sides that remain technically at war.

“Our companies agreed to allow the increase, and we have also agreed it would be appropriate to increase the minimum wage by 5 percent, after hearing opinions from the firms,” Chun said.

Under an agreement with North Korea, South Korea may increase the minimum wage by up to 5 percent each year. The new raise will be effective for one year starting Aug. 1, Chun said.

The increase comes as tension simmers between the two countries, which fought the 1950-53 Korean War that ended in a truce that has never been replaced by a peace treaty.

…South Korea has halved the number of its nationals staying in Kaesong due to safety concerns since May, when it warned it would not tolerate any North Korean threat or harm to them.

The Kaesong complex began operating in 2004 after being agreed upon by the leaders of the Koreas in a summit four years earlier. The companies there have expressed concerns that the erosion in inter-Korean relations was affecting their businesses, calling for eased regulations on their operations.

Yonhap does not mention that nearly all of the wages paid to Kaesong workers are deposited with the North Korean government.

UPDATE via the Daily NK:

In addition to the wage rise, the spokesman also announced measures to combat a concern of the companies in the Complex; that of autonomy over staffing decisions.

“Every company contains North Korean workers’ representatives, and these representatives have tended to mastermind changes to work team arrangements as they saw fit,” the spokesman explained.

However, he went on, “We have added measures so that, in future, workers’ representatives will not be involved in this area, and workers will be organized according to the independent judgment of the companies.”

So it appears that the DPRK did not simply win a unilateral pay increase.  South Korean firms apparently gained some managerial control as well.

Read the full story here:
S. Korea agrees to pay raise for N. Korean workers at joint complex
Yonhap
Sam Kim
8/6/2010

According to the Choson Ilbo:

Despite increasing tensions between the two Koreas since the North sank the South Korean Navy corvette Cheonan in March, Pyongyang looks unlikely to close the joint Kaesong Industrial Complex, chiefly because it is a source of much-needed hard currency.

The salaries of some 40,000 North Korean workers there are not paid to them but to the regime, which keeps most of the money, making the industrial park a lifeline amid crippling international sanctions.

There have been fears that the North could take the South Koreans who work in Kaesong hostage, as it has already done once. “North Korea built the Kaesong Industrial Complex because it can earn cash and take a large number of people hostage if it wants,” said a former intelligence officer who defected to the South.

Kaesong has no other industry and is unsuited for farming because of military facilities, so if the industrial park is shut down, the 40,000 workers face starvation.

The monthly income of some US$4 million is no small sum. When the State Security Department picked the industrial park’s core manpower, it simply relocated Kaesong residents and brought in workers screened under strict standards from Pyongyang and other cities. Now they have got used to their positions, closure of the industrial estate could make them a headache for the North’s security forces.

A senior North Korean defector said the State Security Department “is now in trouble because the workers are now kindly disposed to the South Korean firms operating there.” Most of them are aware that they get only $2 or $3 out of every $60 their employers pay for each of them. Despite that, many North Korean workers are eager to go to the Kaesong complex, since most North Korean firms have stopped paying wages amid the economic malaise, but at Kaesong workers are at least still paid and they get perks that are worth even more.

Any North Korean workers who contact South Korean businesspeople or meet with them privately, however briefly, can be subject to security investigations or labeled political dissents. Hundreds are said to have already suffered this fate. “If the North shuts the industrial park first, the workers will get very restive,” said a defector from Pyongyang. Nor would it help the regime to take South Korean staff hostage as that would only expose its immorality and thus provoke even severer criticism, he added.

However, the North is building a huge industrial estate in the Rajin-Sonbong economic zone that could replace the Kaesong industrial park. A Korean Chinese businessman who recently visited Rajin said, “Hotels and industrial lots are under construction and roads are being widened, and the locals have either been driven out of the city or housed in temporary quarters.” But it is rare to meet foreigners there, he added. The North Korean authorities are wooing foreign investments through their overseas missions, but even Chinese businesspeople say it would be crazy to invest in North Korea now.

Attempts to attract Chinese tourists to make up for revenue lost from suspended South Korean group tourism to the Mt. Kumgang resort are also failing. The North is now inviting the Chinese veterans of the Korean War. But one Chinese tourist said visitors “are treated like criminals and not even allowed to take pictures.” A Chinese businessman commented, “North Korea is proposing to do something with China that it can’t even accomplish with South Koreans, but no one here believes it.”

Read the full story here:
Why N.Korea Won’t Shut the Kaesong Industrial Complex
Choson Ilbo
7/31/2010

According to Yonhap, the South Korean government is subsidizing firms as they transition away from trade with North Korean firms:

South Korea will provide low-interest loans worth a total of about 60 billion won (US$50 million) to companies troubled by a government ban on trade with North Korea, an official said Monday.

The loans are aimed at alleviating the financial trouble of the companies, which started when South Korea implemented a ban in May in retaliation for the March 26 sinking of its warship near the Yellow Sea border with North Korea, Unification Ministry spokesman Chun Hae-sung said in a briefing.

“Each company will be eligible to receive a loan of up to 700 million won with a 2 percent interest rate, based on the volume and type of trade the companies have been doing for the past year,” he said, adding the measure will take effect next week.

Hundreds of companies had to stop trading with North Korea after South Korea announced that a multinational investigation found the communist state responsible for the Cheonan sinking, which claimed the lives of 46 sailors.

Yonhap also reports  South Korean companies operating in the DPRK will once again be banned from shipping goods and materials for consignment trade with the DPRK from early next month:

The application deadline was set for Aug. 10, when the temporary lift of the existing ban will end, the ministry said.

On May 24, South Korea prohibited all shipments to the North as part of punitive actions against the communist neighbor it blamed for a deadly torpedo attack on one of its warships. The March 26 sinking in the Yellow Sea killed 46 sailors.

More than 500 hundred South Korean companies were doing consignment trade with the North, in which they send raw material and bring back processed goods. Such trade amounted to US$254 million in 2009.

Seoul’s shipment ban seriously affected South Korean businesses operating at the North’s border city of Kaesong, where some 120 firms from the South operate manufacturing lines using the North’s relatively cheap labor costs.

The companies’ complaints forced the government to temporarily lift the ban, on condition that the business contracts were made before May 24.

Read the full stories here:
S. Korea to offer loans to companies banned from trading with N. Korea
Yonhap
7/26/2010

S. Korea to re-impose ban on materials shipments to N. Korea after temporary lift
Yonhap
7/28/2010

According to Yonhap:

The volume of goods brought into South Korea from a joint factory park in North Korea has remained unchanged despite Seoul’s trade ban slapped on Pyongyang in May in retaliation for its deadly attack on a South Korean warship, the government here said Tuesday.

The volume of products transported from the Kaesong industrial park stood at 6,953 tons in June, compared to 7,004 tons a month earlier when South Korea banned trade with North Korea and cut the number of South Korean workers staying in the North Korean border town, the Unification Ministry said in a release.

“There has been little difference in the amount of manufactured products brought in since the May 24 measures,” which the South imposed after a multinational investigation found the North responsible for the March sinking of the Cheonan, it said.

Ministry spokesman Chun Hae-sung said currency conversions for the data were not immediately available.

North Korea has denied any responsibility for the attack in the Yellow Sea that left 46 sailors dead. About 121 South Korean firms operate in Kaesong, employing 44,000 North Korean workers — the last remaining major symbol of detente between the divided countries.

According to the ministry that handles cross-border affairs, the amount of goods brought into South Korea for the first half of this year nearly doubled compared to the same period last year. The figures signaled the Kaesong factory park continued to grow even though the relations between the Koreas have soured since 2008.

But many of the Kaesong companies have complained of falling orders and are seeking rescue funds, arguing the deteriorating political relations are increasingly becoming a liability for their businesses.

Read the full story here:
Influx of goods from inter-Korean factory park stays consistent: gov’t
Yonhap
Sam Kim
7/20/2010

Institute for Far Eastern Studies (IFES)
NK Brief No.10-07-15-3
2010-07-15

A real estate auction was held in the Kaesong Industrial Complex for the first time since the joint inter-Korean project was launched. According to the Kaesong Industrial District Development Committee, factory plots (20,472.7 ㎡) in the stage-1 area of the KIC were being auctioned off on July 12. A government source stated, “Land in the KIC has been sold before, but this is the first I know of land rights being auctioned off.”

The company currently on the plot was awarded land rights and permission to build a factory after signing a contract with the North Korean Central Special Development Guidance Bureau. The land rights being auctioned off run until April 12, 2054. It is not known why the land rights are being auctioned off, but it appears that the company currently holding rights to the plot have some financial difficulties, forcing them to sell.

The rights are estimated to be worth more than 1.37 billion won, and the auction is set to close on the 23rd of July. The sale is being handled by the Kaesong Industrial District Management Committee. The committee is handling the sale in accordance with the rules set forth on May 10 by the KIC real estate management office. These rules established a seven-member committee of lawyers and other specialists to handle the auction and sale of real estate within the industrial complex.

After the sinking of the ROK warship Cheonan, Seoul authorized more flexible management of South Korean workers in the KIC in order to help companies avoid financial losses in the complex. The government also increased the amount of the inter-Korean cooperation fund from 50 trillion to 60 trillion won in order to ease financial concerns of South Korean companies operating joint ventures, and announced that loans to 183 companies involved in processing-on-commission, as well as 530 other trading companies, would be made at 2 percent.

This move by the government highlights the fact that South Korean companies in the KIC continue to tread on rocky financial footing, despite the announcement by the Ministry of Unification that emergency management stability funds would be made available.

Following the sinking of the Cheonan, the number of South Korea workers in the KIC on any given weekday was reduced from more than 1000 to around 500, and this has caused companies to produce less, have higher costs, and see lower buyer interest. While Seoul tries to keep the industrial complex open, it is also looking into the laws on the Mount Keumgang tourism project, seeking ways to aggressively assist companies involved in the joint scheme.

According to Yonhap:

Production at a South Korea-financed factory park in North Korea fell for a second straight month in May, figures showed Tuesday, as manufacturers complained of a decrease in orders amid tension between the divided states.

Production at the joint complex in the North Korean border city of Kaesong stood at US$27.79 million in May, a 1.2 percent decrease from a month earlier, according to the Unification Ministry in Seoul.

The number, however, marked a 56 percent increase from a year earlier, the ministry said, a sign that the complex is expanding on a yearly basis.

Despite the deadly March sinking of a South Korean warship, which was blamed on North Korea and ignited the ensuing tension along the border, the number of North Korean workers in the complex topped 44,000 recently. More than 120 South Korean companies employ the workers to produce labor-intensive goods such as utensils and garments.

The companies have recently called on the Seoul government to ease its restrictions on their operations, including a cap on the number of South Korean workers allowed to travel to Kaesong daily.

South Korea has also banned the companies from new investments in their businesses within the complex, which opened in 2004 and represents the last remaining major symbol of reconciliation between the Koreas.

According to Yonhap:
Output at inter-Korean factory park declines for second month
Yonhap
7/13/2010