North Korean Economy Watch

UPDATE 2 (2012-1-20): The DPRK has released two Japanese men recently detained in Rason. According to the Associated Press:

Two Japanese men detained in North Korea 10 months ago have returned home, a minister said Friday, adding it could be a “positive” diplomatic sign from the reclusive state.

The two arrived back in Japan this week, said Jin Matsubara, head of the National Public Safety Commission.

“I think this could be taken as a positive message from North Korea,” he told reporters.

Police declined to comment on whether the two men paid any money or why they were released.

The men, reportedly in their 30s and 40s were detained in a special economic zone near the communist state’s border with Russia. They returned via China.

…

Three Japanese men had initially been taken into detention in March last year, but one of them, who was in his 80s, was freed and returned to Japan in April, Jiji Press news agency and public broadcaster NHK said.

Reports said the three men were employees of a machine maintenance firm in Tokyo who had visited Rason city near North Korea’s border with Russia in March to check machines at a food manufacturing factory.

They were reportedly detained on charges of hiding drugs in canned goods to be exported to China and currency counterfeiting.

The release of these men was also covered in Bloomberg.

UPDATE 1 (2011-5-4): According to KCNA:

Japanese Detained in DPRK for Their Crimes

Pyongyang, May 4 (KCNA) — The Korean Central News Agency Wednesday issued the following report:

Masaki Furuya, former representative managing director of JP Dairin Co. Ltd., Hidehiko Abe, representative managing director of Realise Co. Ltd, of Japan, and Takumi Hirooka, managing director of Sugita Industrial Co. Ltd, of Japan, were put in custody by a relevant body on charges of drug trafficking and counterfeit after entering Rason City of the DPRK on March 14.

They admitted their crimes and their gravity.

Masaki Furuya had already been expelled from the DPRK and the two Japanese are called to legal accounts.

What they did is a very grave violation of the law of the DPRK and international law and they will, therefore, face proper legal actions.

The Wall Street Journal also reports that the DPRK held a Japanese man for drug smuggling from 2003-2009.

ORIGINAL POST (2011-4-20): According to Yonhap:

North Korea detained three Japanese men on apparent drug smuggling charges in its special economic zone last month, but it later released one man, a news report said Wednesday.

The three Japanese employees of a machine maintenance firm in Tokyo visited the city of Rason, near North Korea’s border with Russia, in March to check machines at a food manufacturing factory, Japan’s Asahi Shimbun newspaper said, citing unidentified sources.

They were detained on charges that they hid drugs in canned goods to be exported to China, though the North later allowed one of them to return to Japan, the newspaper said.

The North has demanded a large bail for the two detainees, it said.

South Korea’s Unification Ministry, which handles inter-Korean affairs in Seoul, and the pro-North Korean association in Tokyo said they had no information.

The North’s state media have not reported on the case.

North Korea arrested a Japanese man on drug smuggling charges in 2003 before allowing him to return home on humanitarian grounds in 2009.

The news came days after North Korea confirmed the detention of a Korean-American man on a crime against the North.

The North said it will indict Jun Young-su, who was arrested in November, claiming he admitted his crime in the course of the investigation, the North’s official Korean Central News Agency reported Thursday.

According to the Korea Times the men were detained in Rason.

Read the Yonhap story here:
N. Korea detains two Japanese men: report
Yonhap
2011-4-20

According to the Korea Herald:

South Korea’s government last year executed the smallest amount of its inter-Korean cooperation fund in a decade, officials said Sunday, in another reflection of frayed relations with the communist North Korea.

The Unification Ministry, in charge of North Korean affairs, spent 42.6 billion won ($36.6 million), or 4.2 percent of the 1.1 trillion won fund designated as “South-North Cooperation Fund,” the ministry officials said.

The fund was used to support a Korean dictionary project, a humanitarian program by the United Nations Children‘s Fund as well as operating a facility for family reunions and an association for the inter-Korean industrial complex, they said.

Last year’s spending was the lowest level since 2000 when the two sides held their landmark summit talks and agreed on a wide range of cooperation projects as part of their reconciliation efforts.

Inter-Korean relations went to the lowest ebb in a decade after the North‘s two deadly provocations in 2010 that killed 50 South Koreans.

In 2008, when President Lee Myung-bak took office with a hard-line stance on North Korea’s nuclear program, the cooperation fund‘s execution rate plunged to 18.1 percent from 82.2 percent in 2007 under the liberal predecessor Roh Moo-hyun, the report noted.

The rate had remained at the 7 percent level between 2009 and 2010, it said.

The fund was created in 1991 to support humanitarian and economic exchanges between the divided Koreas, which remain technically at war after the 1950-53 Korean War ended in a truce. (Yonhap News)

Read the full story here:
Gov’t spending on inter-Korean projects lowest since 2000: ministry
Korea Herald
2012-1-8

Andray Abrahamin and John Kim worte a comprehensive summary of the current state of Rason. The article appears in The Diplomat:

In 1991, the North Korean government dubbed Rajin-Sonbong (Rason) a free trade zone to attract foreign capital. However, less than a decade later, the zone lost its free trade status. According to local businessmen, the party secretary of Rason, a relative of the late Kim Jong-il himself, was charged with corruption and eventually executed, a harbinger for the long period of isolation ahead. Since the end of 2009, signs of renewed commitment to Rason have sprouted. While it may be too early to say whether the region will succeed in drawing investment and reform, our recent trips to Rason lead us to believe that developments on the ground may eventually warrant a shift in foreign policy by governments around the globe.

China has long eyed Rason as a potential import/export center for the landlocked provinces of Jilin and Heilongjiang. However, from Rason’s inception, the Middle Kingdom held little influence or interest in the region’s success. In 2002, North Korea establishedanother special economic zone in Shinuiju and instated businessman Yang Bin, then China’s second richest man, as the SEZ’s Chief Executive. The Chinese authorities promptly placed Yang Bin under house arrest. Perhaps as a lesson learned from this episode, the North Koreans have made the Chinese government a major stakeholder in Rason’s development.

The Chinese have moved 80,000 metric tons of coal this year through a pier they leased at the Rajin port.They are also reportedly sending regular delegations of senior officials, including the Chairman of the China Development Bank, and they have invested $30 million to repave the road from the border town of Wonjong to the Rajin Port. This road was 60 percent paved during a visit in October, and recent reports from businessmen inside the region confirm that the road is now 95 percent paved, allowing for large trucks to pass through. The Chinese have also constructed a new road on their side of the border, part of the support this area has received after the Chinese central government designated it “The Changjitu Development Region” in November of 2009.Officials from the North explained that the Chinese will have a say in everything from zoning of real estate to port customs and investment policies.

Though Russia’s involvement doesn’t run as deep, it also maintains a keen interest in Rason’s ice-free port and has pledged an investment of $200 million to refurbish a railway from the border town of Khasan and to upgrade pier three at the Rajin port, which it has leased for 49 years. Rason’s third port at Oongsang was once a major exporter of lumber from the Soviet Union, and though Oongsang looks far from reviving the Soviet involvement of its heyday, Russia clearly has an interest in Rason’s success as well.

In addition to neighboring countries’ newfound interest in the zone’s success, the North Korean leadership has also shown a renewed desire in luring investment into the region. In December 2009, Kim Jong-il made a visit to the area, sent his former trade minister to run the region as party secretary, and reinstated Rason’s status as a special city, wresting it out of provincial control. Any potential investor who visits the SEZ would experience the thirst of the local government to develop the region, as reflected by the words of an official with the Rason Economic Cooperation Bureau, Rhee Sung Hye: “The future of my career depends on how much investment I can bring.”

At the national level there are also signs that the regime is increasing its focus on economic development as a source of legitimacy. In 2009, the Joint Venture Investment Commission was formed as a one stop shop for foreign investors, while the Taepung Group and State Development Bank were created to attract foreign investment. In the first half of 2011, Kim Jong-il made more appearances related to the economy and less related to defense than in prior years, and a focus on improving lives through focus on light industry and agriculture was emphasized in joint editorials that signaled policy direction at the beginning of 2010 and 2011.

The alignment of simultaneous commitment from North Korea, China, and Russia sets the scene for a North Korean special economic zone with higher chances of success than perhaps ever before. However, interest and desire may not necessarily translate into results without knowledge of markets and how to create a stable investment environment. After a recent tour of his 200MW fuel oil powered generation facility, the President of Songbong Power, Rhee Kang Chul, expressed that the reason for his plant’s inactivity and the subsequent blackouts in the region was the rise in feedstock costs. When asked about mechanisms for electricity pricing, Rhee responded that the government had set power prices at 6.5 euro cents/kwh, but he couldn’t provide further details on how the number was arrived at and when it might change again. Though Rhee was clearly an expert on the technical aspects of power generation, he hadn’t had the chance to consider that potential investors, after getting comfortable with country risk, would have little clarity on the revenue side of their equation. When this was expressed to the Vice Mayor of Rason, he replied, “We can change the price of electricity here. Rason is not under the same restrictions as the rest of the country.”

North Korea could theoretically piggyback off the market knowledge that their Chinese partners have gained over the last 30 years, but Rason’s neighbors are only likely to share when it suits their interests. In the case of Sonbong Power, Kang told us that every Chinese official who has visited stated that the most effective solution would be to pipe in power from the Chinese grid. “We plan to have a power line installed from the border by the end of 2013.” As power is as strategic asset like food or water, dependence on Chinese power clearly leaves the North Koreans in a vulnerable position.

China is clearly North Korea’s closest ally, but their relationship has a thorny history and Pyongyang is acutely aware of its reliance on big brother Beijing. With China’s rise, many other countries in the region are increasingly dependent on trade but increasingly cautious of dependence, welcoming a stronger presence from the United States, which is in the midst of a strategic pivot towards Asia.

In December 2009, the Asia Society and the Institute on Global Conflict and Cooperation published a report arguing that economic engagement of Pyongyang by the United States would result in creation of vested interests in continued reform, a changed perception of self-interest and a less confrontational foreign policy from North Korea. Against the backdrop of a more uncertain domestic environment after the death of Kim Jong-il, and the shifting dynamics in Asia generally, a North Korea that trades more and engages with the outside world may necessitate a change in foreign policy of governments around the world, most specifically the United States, South Korea, and Japan.

The Rajin-Sonbong SEZ has a checkered past and it would be naïve to say that North Korea is embarking on late 1970’s style Chinese economic reforms. However, we believe that the unprecedented alignment of interests in the region make it a likely starting point for any lasting directional change, which is why the world should watch Rason.

Read the full story here:
Why World Should Watch Rason
The Diplomat
John Kim & Andray Abrahamian
2011-12-22

According to Yonhap :

North Korea has allowed a Chinese company to do business at its scenic mountain resort, a source said Tuesday, in an apparent attempt to revitalize the resort at the center of a dispute with South Korea.

The company plans to organize a cruise tour to Mount Kumgang on the North’s east coast for Chinese tourists from Hong Kong and other eastern Chinese ports, said the source familiar with the issue.

The company, which won permission to run the business until the end of 2026, also plans to run a casino, a duty free shop and a hotel in the resort, the source said.

The move comes just months after North Korea made a trial cruise from its northeastern port city of Rajin to the mountain resort to try to attract Chinese tourists.

North Korea has launched a series of tourism programs for the Chinese in an apparent bid to earn much-needed hard currency.

For a decade, South and North Korea jointly ran the tour program at the resort, a key symbol of reconciliation on the divided Korean Peninsula.

Still, Seoul halted the cross-border tour program following the 2008 shooting death of a tourist by a North Korean soldier near the resort.

Seoul has demanded a formal apology from Pyongyang for the incident, in addition to improved security measures for tourists, before resuming the tour program, a key cash cow for the North.

However, the North has expelled South Korean workers from the resort and disposed of all South Korean assets there after it unsuccessfully tried to pressure Seoul to resume the tour program.

South Korea has asked foreign countries not to invest or engage in tourism activities at the mountain resort as part of its moves to protect its property rights there.

Dear Yonhap: Would it have been too much trouble to give us the name of the Chinese company or tell us anything about it?

Read the full story here:
N. Korea permits foreign company to run business at its scenic resort
Yonhap
2011-12-3

Pictured Above (Google Earth): The Hwanggumphyong and Wiwha Island SEZ on the Yalu/Amnok River which separates the DPRK and PRC.

UPDATE 1 (2012-3-19): Read the laws governing the SEZs here.

ORIGINAL POST (2011-12-9): According to the Daily NK:

North Korea has enacted a law governing activities at Hwanggeumpyeong and on Wihwa Island, two new special economic zones in the vicinity of Shinuiju on the Sino-North Korean border.

Chosun Central News Agency revealed the news this morning, stating, “The Hwanggeumpyeong-Wihwa Island Economic Zone Act was adopted by the Standing Committee of the Supreme People’s Assembly of the Chosun People’s Democratic Republic.” It did not offer any further details.

The provisions of the new law are reported to have been circulated to various Chinese governmental and economic figures, and it is said to contain provisions reflecting successful elements in the development of China’s own special economic zones.

Naturally, one key part of the intent behind the new law’s enactment appears to be to reassure potential Chinese investors of the stability of the investment climate in North Korea.

At this stage, although there was a large opening ceremony for the zone in June this year attended by Workers’ Party figures including Jang Sung Taek, who plays a key role in the attraction of overseas investment to North Korea, the pace of construction remains limited.

However, there may not be long to wait. Dai Yulin, who heads the Municipal Committtee of the Chinese Communist Party across the Yalu River in Dandong told the China Daily back in September, “Concrete plans for the development of the Hwanggeumpyeong Special Economic Zone will be completed by the end of this year.”

Read the full story here:
SEZ Law Enacted by Supreme Assembly
Daily NK
Kim Tae Hong
2011-12-9

According to Yonahp:

Top executives of more than 120 South Korean companies operating in the Kaesong Industrial Complex plan to meet in the North’s border city this week, in the first such meeting to discuss pending inter-Korean business issues, an organizer said Tuesday.

The CEO conference is scheduled to bring together the heads or local representatives of 123 South Korean firms and other related officials on Wednesday, said Bae Won-joo, one of the organizers of the meeting.

A Unification Ministry official said the meeting was designed to discuss issues related to the operation of the industrial complex. He did not give further details and asked not to identified, citing office policy.

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

Read the full story here:
S. Korean businessmen to meet in N. Korea’s industrial park
Yonhap
2011-12-6

According to the Daily NK:

According to records released today by the Ministry of Unification, there were a total of 48,242 workers in the Kaesong Industrial Complex at the end of September, up from 6013 when the project was launched in 2005.

Following the recent resumption of construction at the complex, the number of workers is now expected to grow further.

Revealing the data, an official with the Ministry of Unification commented, “Labor has been provided sufficient for Kaesong Complex enterprises to overcome labor shortages. If conditions get better allowing workers from further away to get employed, it looks like numbers will increase even more.”

The more than 48,000 North Korean workers in the Kaesong Complex bring in $50 million annually for the North Korean government.

As word of the good working environment that the Kaesong Industrial Complex offers spreads, the area is reportedly attracting internal migrants.

“The good reputation of Kaesong among workers has spread to Shinuiji, so they are moving to the area. But accommodation problems have to be solved before any can be hired,” the official explained.

The educational backgrounds of the workers include 81.8% with a high school diploma, 9.5% college graduates and 8.7% from professional schools.

Their base pay plus bonuses and incentives add up to roughly $100 dollars per person, though much of this is lost in payments to the North Korean state.

Here and here are recent post on road construction in Kaesong.

Here are previous posts on the Kaesong Industrial Zone.

Read the full story here:
Kaesong Still Growing
Daily NK
Kim Yong Hun
2011-12-02

From the Choson Exchange web page (November 5):

In October 2011, John Kim, a board director of the Choson Exchange, visited the Rajin-Sonbong Special Economic Zone. The following is a summary of some of his findings based on site visits and talks with senior officials in the SEZ. An longer account of his travels and impressions will be available soon. This information helps elaborate on our report from August.

Rajin Port
The Rajin Port employs 1400 workers. The Chinese have conducted feasibility tests regarding two new piers, but currently the port houses three piers with 9-9.5 meters draft. A 30,000 metric ton coal storage warehouse was built at Pier 1 by the Chinese, who moved 80,000 metric tons through the facility in five shipments from January to September. Pier two, largely dedicated to container shipment, is currently dormant and a Swiss company is currently using Pier 3 to ship manganese and talc out of the region. The Russians also have a 49 year lease agreement signed in 2008.

Oongsang [Ungsang] Port
Oongsang Port exported Russian lumber until 1985, but remains largely quiet now except for the occasional fishing boat. The present draft of 7 meters constricts any major future activity, so the North Koreans hope to bring in over $100M to widen the draft to 9 meters. After Rajin Port activity surpasses capacity there, Oongsang Port will become the next regional hub for drybulk activity.

Sonbong Port
Originally opened in the early 70’s, the draft within the port is 7 meters, but a fully laden Very Large Crude Carrier containing 270,000 metric tons of oil can offload at an offshore facility further out at sea. Two pipes, 63 cm in diameter, run for 9km underground before reaching the storage facility at “Victory Petrochemical”, a simple refinery that was designed to refine crude and send oil products (gasoline, naphtha, jet fuel, diesel and fuel oil) back to the port for export. In addition to this two way flow, fuel oil also arrived sporadically at the port as part of aid packages from 1994 to 2008.

Sonbong Power
This power plant was originally designed to take fuel oil from Victory Petrochemical as feedstock and generate power to feed back to Victory. Since the refinery has been offline, Sonbong Power has at times provided electricity to the region, but with fuel oil prices close to $700/metric ton and current electricity prices at 6.5 eurocents/kwh, the economics of running the plant do not work leaving the 800 workers employed here largely idle.

Victory [Sungri] Oil Refinery
Literally translated as “Victory Chemical Plant”, this refinery was completed in 1973 with a 40,000bbl/day crude distillation unit that typically yields 40~50% residual fuel oil for an average crude feed. Investment into upgrading capacity in the international market has led to an eroding of margins for simple refineries like Victory. Currently the refinery is idle and would need over $500M in investment to become competitive.

Hye Song Trading Company
Mr Kim visited a Sewing Factory owned by Hye Song, which runs 8 such factories employing 2000 workers. Output is recorded for the entire year on a bulletin board at the front entrance of the company. All employees except the handyman were women.

Cell Phone use more prevalent
The number of cell phone users in the DPRK crossed 1 million earlier this year and one official commented that the overwhelming majority of urban households have at least one cell phone. This particular official had 4 phones for a household of 3. Foreigners are allowed to use cell phones on a different network, and users of the domestic and foreign network can not call each other. All usage is prepaid.

Handset Type: Local
Purchase Cost: 1570-2200 RMB
Usage Cost: 250 minutes and 20 text messages, while each additional minute is charged at 60 NKW (about .1 RMB/min)

Handset Type: Foreigner
Purchase Cost: 1800-2400 RMB
Usage Cost: Does not include any free minutes and are charged at 2RMB/min

Banking System has room for growth
There are two banks in Rason, the Central Bank, which is focused on domestic transactions, and the Golden Triangle Bank, which is focused on foreign currency transactions. Transactions for goods and services are conducted almost entirely in cash, usually in RMB or NKW. Mechanisms for savings are credit have room for development. As banks take a fee to deposit and withdraw cash, merchants prefer to hold money in cash (usually RMB). Credit is also available almost exclusively through friends or family.

Bottlenecks
A number of issues require solving if Rason is serious about attracting large scale foreign investment. Among these are reliable access to travel visas, reasonable communications costs with the outside world, a more mature banking system with savings and credit mechanisms and favorable tax treatment with a consistent legal framework. The mere fact that Rason is experimenting with market reform is encouraging, and Mr Kim is optimistic about economic development in the region and the nation as a whole.

According to Yonhap:

South Korea will next week start repairing a road used by North Korean commuters to reach an inter-Korean industrial complex in the North, an official said Thursday amid signs of a thaw in bilateral relations.

The 4.5-kilometer road linking North Korea’s border city of Kaesong to the nearby industrial park is used by more than 47,000 North Korean workers who are employed by some 120 South Korean firms operating in the zone. South Korean officials earlier said the road was damaged in summer’s torrential rains, prompting the South to conduct an on-site survey.

“After signing an agreement (with the North), we expect to start repair work next week,” said an official at the Unification Ministry, which handles inter-Korean relations in the South.

“It will likely take about three months to complete the work, unless the weather becomes too cold, and cost us around 1.8 billion won (US$1.59 million),” the official said, speaking on condition of anonymity.

The repairs will involve restoring damaged paved sections and filling in holes on unpaved sections. Repairing the road is expected to save time for North Korean commuters and reduce traffic accidents.

The Daily NK offers some additonal information:

A government official explained today that the decision was made pursuant to agreement between the Kaesong Industrial Complex Management Committee, LH Construction and the North Korean authorities.

“The agreement has not yet been signed, but we are hoping to start the construction at the beginning of next week,” the official explained.

“Our side has taken on responsibility for planning the road repairs and supervising the construction,” he went on. “The weather could change things, but the construction should require three months and is expected to cost 1.8 billion South Korean won.”

Aside from the aforementioned construction, there are also plans to reconstruct two turning points for buses serving the complex. The human resources for the construction will be provided by North Korea.

There are plans to extend bus service to cover the areas of Pongchon (봉천), Kumchon (금천), and Phyongsan (평산). However, the roads to these areas are unpaved and extension of transportation services to these areas will require negotiations with the North Korean authorities.

Read the full story here:
Seoul to start repairing road leading to Kaesong complex next week
Yonhap
2011-11-3

Pictured Above (Google Earth): The new PRC/DPRK economic zone: Hwanggumphyong-ri (“HGP” in Sindo County) and Wihwa Island (Sinuiju and Uiju Counties).  See islands in Google Maps here and here.

According to Yonhap:

North Korea has opened a bureau tasked with running a free trade zone near its border with China, a source familiar with the country said Wednesday, indicating the North’s continued efforts to revive its forlorn economy.

The move came shortly after North Korea and China agreed to create joint economic complexes on the border islands of Hwanggumpyong [HGP] and Wihwa following a summit between their leaders in May.

“North Korea has opened a bureau with some 10 staff members on Hwanggumpyong,” the source said, asking for anonymity. “It opened around August or September.”

The staff includes a ranking official who was in charge of operating the Kaesong industrial complex near the western border with South Korea in the early 2000s, the source said, a sign that the North may want to develop Hwanggumpyong in a similar way to Kaesong.

The inter-Korean industrial park in Kaesong combines South Korea’s capital and technology with cheap labor from the North. More than 47,000 North Koreans work at about 120 South Korean firms operating in the zone to produce clothes, utensils, watches and other goods.

In a related move, North Korea has added two more vice chairmen to a state-run investment committee charged with attracting foreign investment, the source said. The committee, which was launched in July last year, is known to be under the control of Jang Song-thaek, brother-in-law of North Korean leader Kim Jong-il and vice chairman of the North’s powerful National Defense Commission.

North Korea is seeking to boost economic cooperation with China, its closest political and economic ally, as Pyongyang struggles to achieve its stated goal of becoming a prosperous country by 2012.

Read previous posts on Hwanggumphyong (HGP) and Sinuiju here.

Read the full story here:
N. Korea opens bureau to run free trade zone with China: source
Yonhap
2011-11-2