North Korean Economy Watch

Update:
It seems opposition efforts to spare the South Korean Ministry of Unification were not entirely successful. Yonhap is reporting that even though the ministry will retain its name, much of the rest of it is on the chopping block.

Sources said that if the ministry is retained, its five divisions and one office may be reduced to a single office and three bureaus, with part of its work transferred to the other ministries.

The ministry’s five division headquarters — including unification policy, economic cooperation and cultural exchange — are likely to be reorganized into smaller bureaus, with public relations and information analysis to come under the direct control of the minister.

The office in charge of the Kaesong industrial complex may be turned over to the newly created Ministry of Knowledge-based Economy.

However, the ministry may retain control of inter-Korean dialogue headquarters, the inter-Korean transit office, and a settlement support team for people who have fled North Korea.  (Yonhap)

Although I personally favor an engagement policy with the DPRK, sending the signal that MoU standard practices will no longer be tolerated might actually encourage the DPRK to use donated funds and supplies in an acceptible way.  Remember: carrots AND sticks.  See the game theory here.  However, since the DPRK’s new game seems to play the US, China, Russia, and South Korea off of each other, some are concerned that pushing the DPRK too hard on accoutability and transparency in managing their donations might simply shift North Korea more firmly into China’s corner–which according to Lankov, they already have a strong incentive to do… 

Original Post: 2/8/2008
In the political shake up following the recent South Korean elections, incoming President Lee Myung-bak floated the idea of merging the Ministry of Unification (responsible for the North Korea protfolio) with the South Korean Foreign Ministry.  The story is here.

Today, Reuters is reporting that the Unification Ministry is here to stay.  Afterall, the first rule of bureaucracy is, “Why have one ministry when you can have two at twice the cost!” 

South Korean lawmakers have agreed to spare the ministry responsible for relations with North Korea and reject a call for its closure made by the president-elect, local media reported on Saturday.

The compromise allows the Unification Ministry to stay while lawmakers try to strike a deal to shut other ministries in a plan backed by Lee to streamline government, local media reported lawmakers as saying.

Critics say Lee’s proposal to close the ministry primarily responsible for relations with North Korea could send the wrong signal to Pyongyang, which has long accused Lee’s conservative party of plotting to keep the peninsula divided.

The Unification Ministry has been at the centre of criticism that the outgoing government had been too soft on the impoverished North, pouring aid across the border despite internationally condemned missile and nuclear tests. (Reuters)

The full article can be found here:
South Korea to keep ministry on North: media
Reuters
Rhee So-eui
2/8/2008

New gov’t to downsize Unification Ministry
Yonhap
2/17/2008

Kang: North Korean Trade Potential
Council on Foreign Relations
12/17/2007

Last December, David C. Kang, a professor of government at Dartmouth College and an adjunct professor at Tuck Business School, discussed the North Korean economy for the Council on Foreign Relations. I have excerpted some of his comments below.

His view on the new North-South cargo train service:

It doesn’t have huge economic significance in the overall GDP of North Korea. But it does have major economic significance in the fact that what North Korea had to do in order to let a train go through was an awful lot of adjustment[…]in terms of linking up the railroad, all the ministries had to prepare.  The old [Korean Energy Development Organization] had this problem as well. [W]hen they wanted Americans and South Koreans working in North Korea to build this light-water reactor, [they] had to set up protocols [Post offices, phone calls, where they were going to stay, etc]. It is pretty significant in terms of how much they had to adjust.

He quoted the following figures on North – South trade:

From $200 million in 1998, to now exceeding $1.7 billion in 2007.   South Korea’s total trade volume is $250 billion.

His opinion on the direction of the North Korean economy:

At this point what we’re seeing is very initial steps on the part of North Korea as they try to open up reform and yet maintain control. At the same time, they are being forced into a number of institutional changes and mind-set changes that are the first step forward in this process.

His view of North Korea’s comparative advantage:

Most of the companies that have gone in—the South Korean companies that have gone in—are assembly and light manufactures, such as or textiles and light consumer goods. This is the sort of obvious point of departure. It’s not hugely capital intensive in terms of building factories, and can take advantage of North Korean cheap labor and South Korean technological advantages.

There are a lot of potential mineral resources in North Korea, which would require a whole infrastructure of legal reforms to happen before anyone would take care of them. But at this point the safest bets are the ones that are on the order of assembly and light manufactures in the North and then exporting them out.

His view of South Korea’s long term goals:

If there’s unification, or even better relations, and South Korean companies can use cheap North Korean labor, instead of having to send those factories to China or Vietnam—not only do they speak Korean, they’re culturally similar, and the labor would be cheaper.

[I]f you could reconnect the railroads, from Japan, through Pusan [South Korea], up through North Korea, then out to China and Russia, you would be linking up all these economies in a much more efficient way than they are now. So everybody wants that. But obviously there’s the political problem. And even on the infrastructure side, the North Korean rail system is so old and so decrepit, that basically it would have to be rebuilt from zero. But the potential upsides are massive, in the long run.

His view of China’s engagement:

China has been essentially as deeply involved in economic engagement with North Korea as has South Korea—and by some measures, actually more so. Whereas South Koreans just do this assembling, some Chinese companies are moving in and building full factories in the North. There’s a lot of interest in Chinese-North Korean economic relations on both sides.

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-2-12-1
2/12/2008

South Korean businesses currently involved in inter-Korean economic cooperation are facing many difficulties, both due to and in spite of the system in place, so that at the moment, investment in North Korea does not look much more appealing than in Vietnam or China.

The Korea Chamber of Commerce carried out a survey, titled “Business Perspective on the Direction of South-North Economic Cooperation Policy”, targeting 300 successful businesses (170 companies responded) and 200 companies currently involved in inter-Korean economic cooperation (132 companies responded). According to the results of the survey, 79.4 percent of companies involved in inter-Korean cooperation responded that they are “currently facing systemic and procedural difficulties.”

More specifically, 44.7 percent pointed to the “3-C” (commute, communication, and customs) issues, 22.4 percent pointed to “claim resolution procedures,” 14.3 percent highlighted “difficulties with financial transactions,” 11.8 percent chose the “ban on the import of strategic materials,” and 5 percent indicated that “limited markets” were the main issue.

In addition, 58 percent of responding companies noted issues not related to the system set up for inter-Korean cooperation. 36.6 percent pointed to difficulties resulting from the “lack of understanding of market economics,” 28.7 percent noted a “lack of supervision by managers,” 24.8 percent chose “uncooperative, highly tense attitudes,” and 8.9 percent pointed out “demands for quick production.”

When asked about the relative attractiveness of investment in North Korea if the current situation were maintained, as compared to Vietnam and China, only 27 percent responded, “more attractive”, while 53.7 percent, or twice as many companies, responded that investment was “impossible.”

However, 58 percent responded that, in the event the North’s nuclear issues were resolved, investment in North Korea would be “more attractive than China and Vietnam”, while only 21.7 percent responded that investment in the North would still be “impossible.”

The overall impression of these companies regarding inter-Korean cooperation is that “improvement of inter-Korean relations offers opportunities for new enterprises and is a positive influence on the South Korean economy” (65.3 percent), and 19 percent felt that cooperation would “in the future, serve as a springboard for the relaunch of the South Korean economy.” 15.7 percent of responding companies felt, however, that “there would be no substantial positive influence on the economy.”

Currently, a resolution to the North Korean nuclear issues is the most important factor, but it is imperative that pledges of the incoming ROK administration such as strengthening investment security, preparing claim resolution measures and other issues to placate business interests, and nurturing North Korean exporters, are institutionalized.

Last Friday, Yonhap reported that Kim Jong Il has ordered an anti-corruption investigation of two key agencies, both of which manage South Korean investments in the DPRK: the United Front Department (which Lankov claims is involved in clandestine operations) and the National Economic Cooperation Council.

North Korea is in the midst of a massive anti-corruption drive which has already resulted in the arrest of one of its top officials handling business with South Korea, informed sources in Seoul said Saturday.

The campaign, ordered by leader Kim Jong-il, was prompted by widespread allegations that some top party and administration officials took bribes as they pushed business projects with South Korean industrialists, said the sources well versed in North Korean affairs.

“The probe was launched as National Defense Commission Chairman Kim Jong-il said there was a lack of supervision over the United Front Department [a key party organization that supervises inter-Korean affairs], although lots of suspicions were raised over the department’s corruption,” one source told Yonhap News Agency.

According to the sources in Seoul, the North Korean leader was enraged after getting a report that some party and government officials allegedly pocketed bribes and diverted food and other aid from South Korea to black markets.

Also under investigation is the National Economic Cooperation Council, a government body that handles business with South Korean entrepreneurs, the sources said.

The Council’s chief, Jeong Woon-eop, remains under arrest pending investigation into allegations that he took “huge amounts” of bribes, said the sources, who wanted to remain anonymous. (Yonhap excerpted)

Frequently “anti-corruption campaigns” in developing countries have nothing to do with making the bureaucracy more accountable or responsive to public demands, but rather are political maneuvers to prevent “rents” or funds from being channeled to uses that lie outside the leadership’s control (or some faction of the leadership).  In other words, they are regime enhancing.  The announcement of this campaign demonstrates two important principles that deserve explicit mention:

1. Not all profits earned by North Korean joint ventures are channeled to the leadership, and in fact many of them are siphoned off by middlemen who actually control the financial machinery.  Once skimmed off the top, it is likely that these funds are used in illicit private commercial operations since they cannot be legally declared by the owner (unless there are domestic channels for laundering money in North Korea).

2.  If funds are being siphoned off of high-profile official joint venture operations, then the leadership is not in control of its internal fiscal affairs.  Indeed it is likely that, as in the Soviet Union, the people who keep the private economy running are the trusted mid- to senior-level officials who can skirt the rules and know how to actually get things done within the system.

Update 2/24/2008:

North Korean authorities have been investigating the chief of a North Korean committee in charge of inter-Korean economic cooperation for months after seizing $20 million from his house, a report said Friday.

The full article can be found here:
NK Official Suspected of Embezzling Funds From Seoul
Korea Times
Jung Sung-ki

Update 2/12/2008:

The chief of Daesung General Bureau, a division of the 39th Department which manages foreign transactions, was fired on suspicion of embezzling US$1.4 million last fall.” (Daily NK)

The full article can be found here:
North Korea launching massive anti-corruption drive
Yonhap
2/9/2008

Yesterday the Jong Ang Daily reported that Hyundai Asan hopes to draw more tourists to the DPRK this fall, but their forecasting record is not exactly stellar:

The number of tourists to Mount Kumgang tallied 350,000 last year. The North Korean tour unit of Hyundai Asan hopes to pull the number of visitors up to 430,000 this year, 10,000 of whom would head to Kaesong, which began tours in December, and 15,000 of whom would visit Mount Paektu, with tours slated to start in May.

Hyundai Asan had marked annual losses from 1999 until it made profits in 2005. Its 2007 profits totaled 10 billion won.

Today, Andrei Lankov, writing in the Asia Times, chimes in on his experiences with the new Kaesong Tour and gives a rationale for western participation in such activities:

The Kaesong tour is the first project which gives the average South Korean, Mr Kim or Ms Pak, an opportunity to see a semblance of North Korean life. Hitherto, only a handful of South Koreans, most of them government officials, have been able to visit North Korean cities. Now, for the first time in 60-odd years, a very limited opportunity is open for an anybody who is willing to pay a fee.

Of course, North Korean authorities went to extraordinary lengths to prevent any interaction between locals and visitors. The list of prohibited items is quite impressive. Tourists cannot take any kind of printed material, computers and computer equipment, mobile phones, radios and video cameras, universal serial bus and other memory devices. The old film cameras are banned as well. Only digital cameras are allowed into the North, since at the border check point North Korean police officials check every single picture taken by every single tourist.

Despit the limitations, Lankov still feels that these types of exchanges are ultimately worthwhile…

The extraordinary security measures undertaken by the North Korean authorities ensure that only a very limited number of northerners are allowed to approach the visitors. Nonetheless, the tours are a major event.

Every single day, a small city is invaded by an impressive motorcade: 10 large imposing buses, half a dozen jeeps and other vehicles – incidentally, produced in South Korea. The preparations are thorough and, one might suspect, seriously disrupt the city’s routine. The North Koreans can see, albeit from the distance, the visitors – their dress, their height, their behavior. The South Koreans can immediately see how poor the North is. It seems that North Koreans, being necessarily street-smart, also instantly feel the South Korean prosperity.

The waitresses, girls in small stalls and even a handful of genuine guides (not the plaincloth intelligence operatives) who can see the visitors will also notice a lot. Even the willingness of the guests to spend a dollar on a cup of instant coffee or a few cookies is an important sign to them – after all, the average monthly salary in Kaesong is about $4. Those South Korean guests definitely do not look like impoverished victims of evil US imperialism. For a while it will be possible to explain away their extravagant behavior by insisting that those people come from the exploitive elite. But the longer the tours continue, the more difficult the task will become.

So why did the North decide to open Kaesong in the first place? It seems that the major reason is the easy currency income the project brings to Pyongyang. Every visitor pays 180,000 won ($190) – a hefty sum for a one-day bus trip. Out of this amount, 100,000 won goes to the North Korean authorities. All investment into necessary infrastructure is done by Hyundai Asan, so for the North this is easy money. Since 17,000 visitors joined the tours during the first two months of its operations, annual earnings could be in excess of $10 million.

At the same time, they might believe that the Kaesong area has become ideologically contaminated anyway. The Kaesong industrial park is located just a few kilometers from the city. In this facility, some 15,000 North Korean workers are employed in factories owned and run by South Korean capital, largely small businesses which are in desperate need of “cheap labor”.

These workers interact with South Koreans regularly, and they also see life inside the industrial park, which presents a remarkable contrast with their native towns or villages: well-paved roads, trees planted everywhere, modern buildings and round-the-clock supply of water and electricity. Even traffic lights, famously absent from North Korea, are present in this de-facto South Korean enclave.

So why did the North decide to open Kaesong in the first place? It seems that the major reason is the easy currency income the project brings to Pyongyang. Every visitor pays 180,000 won ($190) – a hefty sum for a one-day bus trip. Out of this amount, 100,000 won goes to the North Korean authorities. All investment into necessary infrastructure is done by Hyundai Asan, so for the North this is easy money. Since 17,000 visitors joined the tours during the first two months of its operations, annual earnings could be in excess of $10 million.

The only way to promote change, evolutionary or revolutionary, is to bring North Koreans into contact with the outside world. The North Korean dictator and his elite might see partial exchanges as an easy way to earn money, which is necessary for them to maintain their caviar and cognac lifestyle. In the short term they are probably right. But in the long term, the exchanges will make breaches in the once monolith wall of information blockade. Sooner or later, those breaches will become decisive.

The full articles can be found here:
Tourism boost to North in works
Joong ang Daily
Moon So-young
2/6/2008

A breach in North Korea’s iron curtain
Asia Times
Andrei Lankov
2/7/2008

This should not be a surprise to anyone who is familiar with how socialist and highly regulated economies actually function.  If there is a profit opportunity to be had by breaking a regulation, there will generally be a bureaucrat there willing to pocket some of the earnings to look the other way.

The fact that ordinary North Koreans are willing to pay to get access to Kaesong jobs should send a powerful signal to those who call for the zone’s abolition. Wages and working conditions at the complex, though not popular with Western activists, are relatively better than those on the local collective farm.  When the average Kaesong resident figures out that working there will lead to a better life, baksheesh is inevitable. 

Claudia Rosette covered a similar phenomenon with North Korean loggers in Russia.

The Daily NK covers the Kaesong phenomenon specifically:

Known as a “dream place of employment” among North Koreans, citizens of the North are paying hundreds of thousands of won in the form of bribes to gain employment in the facility.

“They say that one can find a job in the Kaesong Industrial Complex by giving 700,000 North Korean won in bribes for males and 200,000 won for females. If I had used the 200 USD (approximately 700,000 won) spent in obtaining a passport as a bribe, I could have entered the Complex.”

As for the why the Kaesong Complex is so popular, Kim explained, “Commodity provision tickets, equivalent to a worker’s salary, are given to laborers in Kaesong and if one uses these tickets well, he or she can make a huge profit.”

Currently, the official salary for laborers at the Kaesong Industrial Complex is around 60 USD, a small amount of which is distributed as cash and the rest in the form of “commodity provision tickets.”

In the Kaesong Industrial Complex, there are several shops that can only be frequented by Kaesong laborers and the prices at these stores are at inexpensive compared to prices in the jangmadang.

Laborers at the Kaesong Industrial Complex use their “commodity tickets” to purchase products at a cheap price and can make a huge profit by selling the goods, giving the difference to middlemen (currency traders who mediate deals).

Recently, there have even been cases where the middlemen had specific orders for certain items from the Kaesong laborers, asking them to procure a certain amount of rice, oil, and so on. The middlemen can easily make an exorbitant amount of money by selling these goods at the jangmadang.

ADDENDUM REVISITED (The Daily NK is transalted into English and as a result is even less clear than my writing somethimes, so I have revised this post several times to clarify the text):

Opinions of the complex seemingly hinge on one’s policy goals.  If the primary goal is to raise living standards in the North and open the people up to outside influences, then Kaesong seems like progress (although maybe not the most cost effective).  If the primary goal is to minimize the income of the DPRK government, then the Kaesong zone probably is not a good idea…. 

Taking the latter point of view, Joshua at OneFree Korea emphasises the point that  the North Korean government keeps most of the cash wages paid to the workers, and that zone employees survive on the supplemental “commodity tickets”–either consuming the goods they purchase in the company store or selling them to local markets for cash.

Theoretically, though, if the thousands of workers employed in Kaesong were re-selling subsidized goods to the Kaesong public markets, this would have the (short run) effect of lowering or stabilizing food prices for the general public (since Zone employees do not need to purchase food at local markets and their clandestine re-selling of commodities to the markets increases the supply of cheaper goods).  This also means that  in general re-selling to the market is not terribly profitable to any zone employee, except when there is a temporary mismatch beteen supply and demand (which might be common depending on the reliability of the DPRK’s market supply chains).  How the price decrease would affect domestic food producers (and the long term price) is probably a bit more complicated since we are not sure how much North Korean farmers respond to price changes. 

Additionally, even though the North Korean government keeps most of the cash wages, the commodity coupons still give the worker approximately $60 in purchasing power –a decent income in North Korea. 

However, given that the South Koreans pay all cash wages go to the North Korean government and the workers themselves receive an additional $60 in script to use at the company stores, means that the average economic cost of a North Korean worker in  Kaesong is closer to $120/month! 

The whole article can be found here:
Bribery Required to Work at the Kaesong Complex
Daily NK
Jung Kwon Ho
2/4/2008

Yonhap
Shim Sun-ah
1/29/2008

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

The two Koreas began the regular train service in December as a symbol of peace and rapprochement following the October summit between their leaders.

A 12-car train runs once a day on a 20-kilometer railway connecting South Korea with a North Korean train station near a joint industrial complex in Kaesong.

(more…)

Daily NK
Yang Jung A
1/25/2008
 
A job in a factory at the Kaesong Industrial Complex is fast becoming the ideal job for North Korean citizens, and positive feelings toward the South are continuing to grow.

Good Friends reported on the 23rd that most North Koreans are aware that economic cooperation at Kaesong is thriving as South Korean enterprises supply advanced materials and management, and North Korea supplies labor.

“South Korean advisory managers supervise workers. If workers do not come to work on time in the morning or they do not work diligently, the managers simply say, ‘You don’t need to come here tomorrow’” reported one North Korean citizen through Good Friends.

The citizen added, “Workers try to complete their appointed tasks under all conditions, while monitoring the South Korean supervisors’ attitudes.”

As the Kaesong Complex grows, the internal customs procedures into Kaesong become more complicated.

Good Friends reported, “Kaesong was originally a strictly controlled zone because of its location just north of the 38th parallel. If a North Korean wanted to visit Kaesong, they had to register, undergo an investigation and get a pass. Now, If they try to go to Kaesong, the process is much more complicated.”

A cadre working at the Kaesong Complex said that this is because people have growing positive feelings toward South Korea. The authorities worry about the great gap between the North and the South and worry about growing public disillusionment.”

He added, “The only place people can talk about South Korea is at Kaesong. They have a yearning for South Korea, especially after they’ve encountered South Korean products.” 

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-1-10-1
1/10/2008

The net worth of inter-Korean exchanges totaled 1,797,890,000 USD in 2007, up 33% from the 1.35 billion USD in the previous year. Exchanges between the two Koreas began in 1989, and topped one billion dollars for the first time in 2005. The almost 1.8 billion dollars in trade recorded in 2007 is the highest to date, and is equal to 65 percent of North Korea’s non-Korean trade volume of 2.996 billion USD in 2006.

Inter-Korean commercial trade was worth 1,431,170,000 USD, 54 percent higher than the 928 million USD in 2006, while non-commercial trade fell 13 percent, from 421,660,000 dollars in 2006 to only 366,720,000 dollars last year. Overall, commercial trade made up over 80 percent of cross-border exchanges, proving that inter-Korean exchanges continue to grow based on commercial transactions. Commercial trade growth was centered around the mining and fishery sectors (52 percent) and increased production in the Kaesong Industrial Complex (48 percent). Textiles and other goods processed on commission also grew by 30 percent.

Additional manufacturing by companies entering the KIC, as well as the installment of equipment used to increase output by those manufacturers already established in the first phase of the complex, saw a great jump last year. Additionally, South Korea loaned the North 80 million USD for equipment, cloth, soap, polyester fibers, synthetic leather, and other materials to be used in light industry, while the North repayed 2.4 million USD (3 percent) of the loan by delivering 1,000 tons of zinc. This was the first example of the North repaying funds to the South, and shows opportunities for the two Koreas to fulfill each other’s needs and carry out friendly economic cooperation in the future.

With increases in domestic use and export of Bukhan Mountain’s minerals and timber, improvements in communications, customs, and transport issues at the KIC and a growing number of companies moving into the complex leading to an increase in production and manufacturing activity, inter-Korean exchanges are expected to continue to grow in the future.

Korea Times
Ryu Jin
12/28/3007

Hyundai Asan, the South Korean operator of various cross-border economic projects with North Korea such as Mt. Geumgang tourism program, said Friday that its operating profit this year is estimated to exceed 10 billion won (roughly $10.6 million).

“We saw a great upturn for our profits this year thanks to an increase in the number of tourists to Mt. Geumgang,’’ a ranking company official said. “According to our tentative calculation, the operating profit is expected to surpass 10 billion won.’’

Hyundai Asan, which began another tour program to North Korea’s border city of Gaeseong this year, expects that the company’s annual sales will reach 300 billion won this year, a notable increase from 220 billion won last year.

According to the firm, some 350,000 people crossed the border to the North to visit the mountain resort on the eastern part of the peninsula, up from last year’s 240,000, largely thanks to the launch of a new route up the inner part of the mountain in June.

Company officials anticipate that the tours will further prosper next year, as it plans to start a fresh tour program to Mt. Baekdu on the border between China and North Korea next May.

Founded in February 1992, Hyundai Asan has suffered losses for a long time. But its large-scale investment in the poverty-stricken Stalinist state is paying off at last. In 2005, the company went into the black with 5.7 billion won in operating profit for the first time.