North Korean Economy Watch

According to Yonahp:

South Korean firms operating at an inter-Korean industrial complex have asked the government to grant a grace period for their debt repayments, saying the two Koreas’ strained political relations have adversely affected their business, officials at the complex said Wednesday.

The officials said an association of South Korean firms at the factory park collected signatures from some 40 firms operating there and submitted the request to the Ministry of Unification last week. The ministry is tasked with handling inter-Korean affairs.

“Although the total amount of production at the complex has increased this year, about 30 percent of our firms are experiencing significant difficulties,” said one of the officials, who wished to remain unidentified.

In the letter, the firms said their businesses are struggling due to the months-long political standoff triggered by North Korea’s deadly military attacks against the South last year. Seoul suspended nearly all ties with Pyongyang last year over the March sinking of the South Korean warship Cheonan and the artillery shelling of the front-line island Yeonpyeong, which killed a total of 50 South Koreans.

“With a growing number of firms facing the risk of bankruptcy, (we) need emergency measures from financial institutions, including an extension of grace periods and the deferral of debt repayments,” the firms said in the letter.

The association sent a similar request to Rep. Park Joo-sun of the main opposition Democratic Party last week, prompting lawmakers from a special parliamentary committee on inter-Korean relations to plan a trip to the joint industrial zone. The visit was canceled, however, after the Unification Ministry effectively denied their entry. All trips to North Korea are subject to prior approval from the ministry, as the Koreas remain in a technical state of war following a cease-fire at the end of the 1950-53 Korean War.

The industrial complex in the North Korean border city of Kaesong, an achievement of the first-ever inter-Korean summit in Pyongyang in 2000, combines South Korea’s capital and technology with the North’s cheap labor to produce clothes, utensils, watches and other goods.

Read previous stories on the Kaesong Industrial Zone here.

Read the full story here:
Kaesong firms request deferral of debt repayments
Yonahp
2011-8-31

The Choson Ilbo reports:

The World’s Knowledge biweekly published by World Knowledge Publishing House under the [Chinese] Foreign Ministry supervision dismissed the North Korean plan to build what it called “its own Hong Kong.” In its latest edition, Tang Longwen, an associate professor at the Dandong party school, said, “The North’s plan to develop the two islands by leasing them to Chinese enterprises costs too much.”

Chinese businesses “need to check if it is worth making huge investment in areas that neither have abundant resources nor are worth developing,” Tang wrote.

Tang also mentioned risks from the lack of proper governance in North Korea. Citing the joint Korean Kaesong Industrial Complex as an example, he said, “What is important is not the development of the two islands but whether the North genuinely intends to open its doors. Everybody worries that the North will just open and close the islands as it likes.”

He cited the North’s habitual disregard for international norms, apparently referring to its unilateral abrogation of its contract with Hyundai Asan in the Mt. Kumgang package tour project and repeated bans on passage to the Kaesong industrial park.

“The North is calling for simultaneous development of the Rajin-Sonbong area and Hwanggumpyong, but China is more interested in the Rajin-Sonbong area, which would give it access” to the East Sea, he said. As Chinese President Hu Jintao said during Kim’s visit to China in May, “the two countries should seek ‘win-win’ economic cooperation. It should not be sought through one-sided aid.”

On three visits to China between May last year to May this year, Kim asked China to support the development of Wihwa and Hwanggumpyong islands, but Beijing told him cooperation “should be sought based on market principles.”

Chinese officials attended a ground-breaking ceremony on Hwanggumpyong at the North’s request in June, but there has reportedly been no progress in construction since then.

A recent in the Financial Times article quotes another Chinese academic who expresses some skepticism about the success of the new ventures:

North Korea’s past experience of working with other countries has left it with a serious credibility problem and this will stop a lot of foreign investment from even considering these new zones,” says Zhang Liangui, a professor of international strategic research at China’s central Communist party school.

Mr Zhang graduated from the Kim Il-sung University in North Korea and is considered one of China’s top experts on the country. “Even though Chinese entrepreneurs are being encouraged and supported by China to invest there, they are still very cautious about considering the Hwanggumphyong Island Economic Zone, and investors from other countries will be even more circumspect,” he explains.

“It will be very difficult to build this zone up,” he adds, citing the unpredictability of the political situation in North Korea and UN sanctions which would prevent many investors from considering the venture.

In addition, analysts warn that similar moves in the past have led to nothing. The Rason zone that Chinese and North Korean officials broke ground on in June will incorporate an area that was designated as an investment zone in the early 1990s but never attracted any real interest.

Previous posts on Hwanggumphyong here.

Previous posts on Rason here.

Read the full story here:
Chinese Magazine Dismisses N.Korean Development Dreams
Choson Ilbo
2011-8-31

According to the Choson Ilbo:

According to the Unification Ministry, 123 firms were operating in the industrial park as of July, with combined production output amounting to US$34.87 million in May, up 25 percent from $27.79 million year-on-year.

The total volume of inter-Korean trade through the industrial park reached $825.88 million in the first half of this year, up 19.5 percent from last year and a whopping 135.8 percent from 2009.

South Korean staff dwindled from 1,461 in 2008, when inter-Korean trade was at its height, to 801 in May this year, but the number of North Korean workers rose from 36,650 to 47,172. And some 3,700 more North Korean workers were hired even since May last year when the South banned new investments there after the North sank the Navy corvette Cheonon in March.

At the moment, the regime is unlikely to shut down the industrial park, since nearly 50,000 North Koreans are working there. But experts stress that the government should take the seizure of the properties in the resort as a warning and be prepared for anything that the regime could do.

“There’s nothing we can be sure of in inter-Korean relations,” said Dong Yong-seung, a researcher at the Samsung Economic Research Institute. “Risk factors always exist because the government launched the Kaesong project without providing any safety net to protect its people and properties, as in the case of the Mt. Kumgang tour project.”

South Korean investments in the industrial park amount to W920 billion (US$1=W1,079) — W540 billion invested by the 123 firms, and W380 billion from the government and public corporations to lay the infrastructure, including electricity and communications facilities, and landscaping.

If the regime shuts down the industrial park, the South would suffer double the losses it incurred from the regime’s seizure of the properties in Mt. Kumgang, which are worth W484.1 billion.

Read the full story here:
Kaesong Firms Worry as N.Korea Seizes Mt. Kumgang Assets
Choson Ilbo
2011-8-24

Pictured above (Google Earth): Kaesong Industrial Zone (Sept. 2009)

According to Yonhap:

With Seoul’s plan to build a hospital within the inter-Korean industrial park in the North stalled, more than 220 South Korean workers have had to be rushed to hospitals in the South for emergency treatment over the past five years, the Unification Ministry said Monday.

As many as 227 South Korean workers who were injured or fell ill while working in the joint complex in the North’s border town of Kaesong had to be transferred across the border to general hospitals in South Korean border cities between 2007 and June this year, according to the ministry.

Though a small clinic manned by two doctors and three nurses has been in operation in the Kaesong complex since 2005, it is only capable of administering simple first aid, it added.

To cope with steady demand for emergency medical services, Seoul had planned to set up a hospital with 10 beds and a dozen medical staff by the end of last year, and earmarked 326.8 billion won (US$301.7 million) in 2010 and 330 billion won in 2011 to fund the project.

But with the souring of inter-Korean relations over Pyongyang’s two deadly attacks on South Korea last year, Seoul has yet to even take the first steps toward building such facilities, according to the ministry.

“Our plan for a better medical environment for the Kaesong workers will be pushed back in consideration of overall inter-Korean relations and how things will unfold in the industrial park,” a ministry official said.

Around 500 South Koreans, together with more than 46,000 North Koreans, currently work at some 120 South Korean companies in the Kaesong joint industrial park, which has been in operation since 2004.

Read the full story here:
Inter-Korean hostility inconveniences Kaesong complex patients
Yonhap
Oh Seok-min
2011-8-22

Institute for Far Eastern Studies (IFES)
2011-8-11

Despite the current impasse in inter-Korean relations, the trade volume in the Kaesong Industrial Complex (KIC) continues to rise, up about 20 percent against last year.

According to the ROK Ministry of Unification, the inter-Korean trade via Kaesong totaled 825.88 million USD in the first six months of 2011. In comparison to last year’s 691.09 million USD, this is a 19.5 percent increase (134.795 million USD) and a whopping 135.8 percent climb (475.64 million USD) from 2009.

The total import reached 444.98 million USD, up 36.4 percent from last year. The total export recorded 389 million USD, a slight increase of 4.3 percent.

As of June 2011, there are about 123 companies reported to be in Kaesong. A total of 560 South Korean staffs work in the KIC, 155 of which joined since June of last year. There was also a boost in the number of North Korean workers; 3,161 new workers joined the complex from the year before, making the current number of North Korean employees 47,172.

In comparison, both commercial trade including general trade (mineral and agricultural products) and noncommercial trade such as humanitarian assistance and socio-cultural exchanges dwindled 16.2 percent (161.34 million USD) from the previous year.

The figure suggests the plunge was triggered by the sanctions imposed by the South Korean government on North Korea since May 24 of last year — a response to North Korea’s deadly provocation in March 2010 — cutting off most of the humanitarian assistance and exchanges. According to the ministry of unification, before the sanctions went into effect, general trade that comprised 30 percent fell below 1 percent and humanitarian assistance became nonexistent.

According to a recent survey conducted in the complex, economic loss engendered by the May 24 sanctions are estimated to be 3.875 billion USD. Out of the 154 total economic cooperation and trade firms in Kaesong, 104 claimed to have suffered economically, totaling over 430 million USD in losses.

The survey was conducted from January 24 to March 25 with 154 firms: 79.2 percent indicated the recent sanctions have significantly impacted their businesses; 3.2 percent answered “a little” effect; none answered “no effect at all.”

Moreover, 78.6 percent responded that the sanctions led to interruption in business operations and 12.3 percent replied that the sanctions resulted in complete shutdown.

In addition, reduction of staffs was also linked to the sanctions, in which 34.4 percent reported to have downsized by 20 percent, while 26.7 percent reported 30 to 40 percent cut backs in the number of staff.

According to Yonhap:

Trade volume between South and North Korea reached US$825 million in the first six months of the year, up 19.5 percent compared to the same period last year, the Unification Ministry said Wednesday.

The cross-border trade volume jumped more than 135 percent compared to the January-June period in 2009, the ministry said.

The figure suggests that a joint industrial complex in the North’s border city of Kaesong, a key source of inter-Korean trade, has not been affected by South Korea’s sanctions imposed on the North for its two deadly attacks on the South last year.

The industrial complex, an achievement of the first-ever inter-Korean summit in Pyongyang in 2000, combines South Korea’s capital and technology with the North’s cheap labor.

More than 47,000 North Koreans work at about 120 South Korean firms operating in the industrial zone to produce clothes, utensils, watches and other goods.

South and North Korea have recently raised the minimum monthly wage for the North Korean workers by 5 percent this year to US$63.814, according to the ministry.

Previous posts on the Kaesong Industrial Zone can be found here.

Read the full story here:
Inter-Korean trade via joint industrial zone increases 19 pct in H1
Yonhap
Kim Kwang-tae
2011-8-3

According the Hankyoreh:

South Korean businesses engaged in economic cooperation with North Korea who have incurred major losses due to sanctions are showing signs of working together in response to their predicament, including suing the government for compensation. The South Korean government imposed the sanctions on North Korea in connection with the sinking of the Cheonan.

Around 10 heads of businesses investing in tourism at Mt. Kumgang, businesses planning to move in to Kaesong Industrial Complex, and businesses trading with other parts of North Korea are known to have gathered in central Seoul on July 19 and agreed to embark jointly on responsive measures, including taking legal action against the government.

“In a situation where there is no sign of an improvement in inter-Korean relations, businesses cooperating with North Korea are going beyond the limits of their tolerance,” said one official working in a field related to inter-Korean economic cooperation during a telephone interview with the Hankyoreh on July 20. “Those taking part in the meeting easily agreed to respond as a group, including by suing the Ministry of Unification for damages. They decided to meet once more some time around next week and decide upon a specific plan. Around ten businesses are currently preparing to sue.”

The affected businesses have decided to demand that the government withdraw the Cheonan sanctions while urging it to provide systematic guarantees that North-South economic cooperation can continue in a stable manner regardless of the political situation. They are also known to be considering plans such as one-man protests, returning their business licenses and issuing a statement.

Two materials processing companies, including CEO Kim Chan-ung’s NFN, have sued individually for damages, but this is the first time since the sanctions were imposed, on May 24 last year, that businesses dealing with North Korea have acted together against the government in an organized manner.

Read the full story here:
S.Korean businesses to sue for losses from sanctions
Hankyoreh
Kim Jong-cheol
2011-7-21

UPDATE 1 (2011-8-10): Wages of North Korean workers in Kaesong Industrial Complex set to rise 5% for the fifth consecutive year. According to the Institute for Far Easter Studies (IFES):

The minimum wage for North Korean workers at the Kaesong Industrial Complex (KIC) has risen annually at a rate of 5 percent since 2007. The year 2011 stands to mark the fifth consecutive year that such an increase has occurred.

Recently, the steering committee for the KIC and South Korean and North Korean authorities reached an agreement to accept a 5 percent wage hike for North Korean workers at the complex. Accordingly, as of August 1, 2011, North Korean workers at the KIC should earn USD 63.814 rather than USD 60.775 in monthly wages. South Korean authorities, as an exchange for accepting the North Korean demand for a wage increase, requested that productivity be elevated via the adoption of a more efficient method of worker placement.

At the meeting, the Kaesong Industrial District Management Committee, representatives of companies in the complex, and the head of corporations were in attendance and reached an agreement to form a task force specifically for the improvement of productivity of workers. While the overall output of the KIC has increased, the output per worker has not improved, leading to the decision to establish the task force, with the goal of enhancing the competitiveness of the complex.

The minimum monthly income of USD 60.775, which kicked in last August, remained in effect until July 31 of this year. The Labor Law of the KIC caps the wage increase at 5 percent; a 5 percent increase to the minimum wage this year would elevate the minimum monthly wage for workers to USD 63.814.

At the meeting, North Korea mentioned international wage levels and made demands for a wage hike of more than the upper limit. However, most of the companies that operate in the KIC adamantly oppose such demands.

Despite the May 24 sanctions implemented by the South Korean government after the March 2010 sinking of the ROK navy corvette Cheonan, the growth of the KIC has continued. The trade volume has increased by 24.23 percent while the production output has increased by 26.1 percent compared to the same period last year.

Although the eight-year old Kaesong Industrial Complex boasts its competitiveness against other industrial complexes in China and Vietnam, it still has many challenges that must be resolved, including employment flexibility and incentive system.

From the institutional perspective, there are many tax benefits that Kaesong offers that industrial complexes in China and Vietnam do not. For example, the enterprise profit tax in Kaesong is at 14 percent. In contrast, China and Vietnam abolished the preferential treatment for foreign companies in 2008 and 2009, respectively; they currently apply a 25 percent of enterprise profit tax to both domestic and foreign companies. Even in terms of labor and wages, the KIC would appear to offer better quality of labor. In addition, the labor productivity of the KIC is comparable to 71 percent of South Korea, which is much higher than that of China’s Qingdao Industrial Complex (60 percent) and Vietnam’s Tanttueon Industrial Complex (40 percent).

Another advantage is the KIC’s favorable geographical proximity to South Korea, which helps reduce distribution costs and time. This advantage helps to reinforce the sales competiveness of the companies in the complex. In addition, the KIC has sufficient potential for expansion into markets in China, and domestic markets in South and North Korea.

On the other hand, Kaesong has relatively low flexibility of employment due to the principle of indirect recruitment. Difficulties in applying an incentive system are also a disadvantage of the KIC.

ORIGINAL POST (2011-7-15): Kaesong wages set to increase. According to Yonhap:

The minimum wage for workers at the inter-Korean industrial park in the North Korean border town of Kaesong is likely to rise 5 percent this year, the same annual rate of increase since 2007, industry sources said Friday.

More than 46,000 North Koreans work at about 120 South Korean firms operating in the complex, despite the South’s suspension of all other economic ties with the North over the deadly sinking of a South Korean warship last year. The local workers currently earn a minimum monthly income of US$60.775 following a 5 percent increase that took effect last August.

This year’s new minimum rate goes into effect next month after negotiations between the factory park’s management officials from the two sides. Under the park’s labor regulations, the minimum wage can increase only up to 5 percent from the previous year.

“The North Koreans are demanding an increase of more than the upper limit (of 5 percent), citing wage levels in other parts of the world,” said an official from one of the South Korean firms in Kaesong. The person spoke on the condition of anonymity.

“In effect, this is equivalent to demanding a wage rise of 5 percent,” the official said, adding that the businesses operating in the joint industrial park had tentatively agreed to accept the demand. After the increase, the North Korean workers will earn $63.814 monthly.

Meanwhile, production at the industrial zone has continued to grow, according to recent data. The park’s output of clothes, utensils, watches and other goods rose 26.1 percent last year from 2009. Since its opening in 2004 under former liberal South Korean President Roh Moo-hyun, the complex has served as a source of tens of millions of dollars for the cash-strapped North annually.

Read the full story here:
Minimum wage for N. Koreans in Kaesong likely to rise 5 pct
Yonhap
2011-7-15

Pictured above (Google Earth): Two official marketplaces in Kaesong highlighted in yellow.  South Korean treats are popular in these markets.

According to the Daily NK:

Shin Ramen (a brand of instant noodles), Choco-pies and coffee mix, the snacks offered to Kaesong Industrial Complex workers, leak out and are now very popular in the jangmadang in Kaesong, according to sources.

The news was revealed by a South Korea government official and a staff member from an enterprise in the Kaesong Complex on the 15th.

North Korean workers often ask their employers for Shin Ramen uncooked and packed so that they can sell it in the jangmadang to augment their wages, according to the Ministry of Unification.

One staff member from a company stationed in the Kaesong Industrial Complex explained, “The time when the North Korean workers are given Shin Ramen, Choco-pies and coffee mix is the time they look forward to the most.”

“I am aware that North Korean workers take the several ramen given to them at snack times or when doing evening overtime back into North Korea,” he added. “They sell the ramen they take for roughly the same price as a kilo of rice. But it is not just Shin Ramen; Choco-pies are very popular with the North Korean workers, and they also use Shin Ramen soup as a seasoning at home.”

Kaesong Industrial Complex companies are known to get assistance from domestic companies, so pay less than market price for the Shin Ramen and other snacks that they offer to workers.

The company staff member said he saw the situation in a positive light, explaining,, “There have been almost no inter-Korean exchanges of late, so in this situation the Shin Ramen and Choco-pies and other things offered by enterprises provide a link between the North Korean people and South Korea. If the workers take the Korean-made products and sell them in the jangmadang then not just the workers but also the North Korean people get to know about South Korea.”

Unfortunately, meanwhile, although workers in the Kaesong Industrial Complex receive a wage of approximately $100/month, they are not free to keep it. 30% is taken by the North Korean authorities in the form of a ‘Socialist Culture Policy Tax’, and other costs are extracted as well. Therefore, the take-home pay is around $30/month, although even this is not paid in cash but in the form of an exchange coupon.

A Ministry of Unification explained one part of that system, saying, “Most of the money and other things that come from the South go to the central North Korean authorities, but a proportion goes to Kaesong city authorities. That money which goes to Kaesong City is meant to be for the purpose of buying rice for distribution to the local people.”

There are now approximately 46,000 North Korean workers in the Kaesong Complex, and complex operations are, as such, a $4.6 million monthly subsidy for the North Korean authorities.

Despite the measures put in place by the South Korean government following last year’s Cheonan and Yeonpyeong Island incidents, the number of workers earning money in Kaesong has continued to expand. According to the Ministry of Unification, at the end of February there were 46,420 workers, an 11% increase on one year previously. Earnings have also risen significantly in the same period.

Donald Kirk was the first (of whom I am aware) to write about the subversive nature of Choco Pies back in May 2009.

Read the full story here:
Shin Ramen Popular in Kaesong Jangmadang
Daily NK
Kim Yong-hun
2011-7-15

Pictured above (Google Earth) is the electrified fence around the Rason special economic zone.

Lankov writes in the East Asia Forum:

SEZs are acceptable to the North Korean government because they are relatively easy to control. North Korean SEZs have been fenced off with barbed wire and all visitors have had their IDs carefully studied at checkpoints.

The North Korean government obviously hopes that small areas of controlled capitalism will generate enough income to make a difference — or at least to keep afloat the long-decaying economy.

Similar SEZs with China to those recently declared have been attempted before. At Raseon a major problem was its isolated location and underdeveloped transport infrastructure, even by meagre North Korean standards. At Sinuiju there were numerous problems. One was North Korea’s choice of the Chinese entrepreneur Yang Bin to lead the project as he wanted to transform the city into a gambling centre, a Macau of the North. This was not welcomed by the Chinese government. Also, it did not help that the North Koreans, following their modus operandi, did not bother to liaise with the Chinese beforehand.

…

The success of KIZ might seem encouraging, but it is actually a very special case. It is viable because the South Korean government is willing to go to great lengths to support it. It has subsidised industrial development and has provided adventurous developers and companies with generous subsidies and guarantees that made the entire undertaking possible. This willingness is driven by a multitude of political considerations. Frankly, it is doubtful whether the Chinese side would be equally interested in subsidising a similar undertaking by Chinese companies in Sinuiju.

…

What will happen to these two planned new SEZs? The fate of Raseon seems pretty certain. Available evidence indicates it is largely about transportation links. Chinese Manchuria is landlocked, so Chinese companies will save a small fortune on transportation costs if they are given access to a seaport on the Eastern coast of the Korean Peninsula. If this is what happens in Raseon, it has a relatively bright future.

The future of the Hwanggumpyong SEZ is far less certain. Obviously Chinese businesses want to do there what their South Korean counterparts did in Kaesong, take advantage of low labour costs in North Korea. Even though Chinese labour is cheap, North Korean labour is much cheaper still, since US$15-20 a month would be seen by the average North Korean worker as a good wage. For the same labour, they would have to pay a Chinese worker between US$100 and US$150 a month.

But that said, the business reputation of North Korean managers leaves much to be desired. They are likely to intervene in operations − partially as a way to extort bribes, but largely because they will worry about excessive exposure of their population to dangerous Chinese influences. South Korean businesses in Kaesong accept such interference, but they are backed by the South Korean government. It remains to be seen whether the same situation will develop in a Chinese-led zone.

Previous posts on the Sinuiju (including Waudo and Hwangumphyong) can be fond here.

Previous posts on Rason (Rajin-Sonbong) can be found here.

Read the full story here:
North Korea-China special economic zones
East Asia Forum
Andrei Lankov
2011-7-14