North Korean Economy Watch

Yonhap
11/1/2007

The chief of South Korea’s Hyundai Group met with North Korean officials in charge of inter-Korean cooperation on Thursday to discuss the group’s business projects in the North, the North’s Korean Central News Agency (KCNA) reported.

The KCNA said Hyundai Group Chairwoman Hyun Jung-eun held talks with North Korean officials, including officials from the North’s National Economic Cooperation Federation.

The two sides took notes on an industrial park in the North Korean city of Kaesong and the building of a tourist resort near Mount Paekdu, according to the KCNA. Prior to the talks, Hyun’s delegation also toured Mount Paekdu, the North’s highest mountain on the border with China, the KCNA said.

The KCNA, however, stopped short of reporting the outcome of the talks.

At Thursday’s talks, Hyun is believed to have discussed the Mount Paekdu tourism project and the second-stage development of the Kaesong industrial complex with the North.

The South Korean company said earlier that Hyun and Yoon Man-joon, head of Hyundai Asan, a Hyundai subsidiary that runs Hyundai’s business in North Korea, visited Pyongyang on Tuesday via Beijing to discuss inter-Korean projects with North Korean officials. Hyun and Yoon are to return home Saturday, according to Hyundai officials.

Hyun’s visit this week marked her second trip to North Korea in a month, as she accompanied South Korean President Roh Moo-hyun on his historic inter-Korean summit with North Korean leader Kim Jong-il from Oct. 2-4.

At the summit, Roh and Kim agreed their two countries would work together on a wide range of economic projects, even though the two states are still technically at war since the 1950-53 Korean War ended in an armistice, not a peace treaty.

After the summit, Hyun said she expects tours to Mount Paekdu to start as early as next April. At the summit, the two leaders agreed to establish direct flights from Seoul to Mount Paekdu.

Hyundai maintains close business ties to North Korea. One of its major cross-border projects is tours of scenic Mount Geumgang on the North’s east coast. More than 1 million South Koreans have visited it since 1998.

Hyundai’s business with North Korea was started by its late founder, Chung Ju-yung, in the early 1990s.

Hyun took the helm of Hyundai in 2003 after her husband, Chung Mong-hun, the Hyundai founder’s fifth son, committed suicide by jumping from a window of his high-rise office in Seoul, apparently under pressure from a lobbying scandal involving a North Korean project.

Yonhap
Nam Kwang-sik
11/1/2007

Hyundai Asan Co., an affiliate of South Korean conglomerate Hyundai Group, said Thursday that the number of visitors to a mountain resort that it operates in North Korea hit a monthly high in October.

A total of 64,447 people took its tours of the Mt. Geumgang resort on the east coast of the North in October, the company said in a statement, adding that it was the highest monthly figure since Hyundai Asan started the program in November 1998.

The previous monthly record was 43,000 in August 2005. In terms of one-year periods, the tours had the highest number of participants in 2005, when 301,822 people travelled from South Korea to the mountain.

“The rise in the number of tourists was attributable to the second summit between the South and North Korean leaders and growing hopes for the resolution of the North Korean nuclear issue,” a company official said.

The two Koreas held the summit in Pyongyang in early October, with the six-party talks on the North’s denuclearization making tangible progress.

Between 1998 and 2006, about 1.4 million people, including 8,000 foreigners, visited the resort, according to data by Hyundai Asan.

Joong Ang Daily
10/23/2007

Regulatory filing requirements to invest in North Korea will be eased, and the Export-Import Bank of Korea will manage information on investment activities in the North, according to a Ministry of Finance and Economy release yesterday.

For an amount below $300,000, an investor will no longer need to hand in an annual financial report to the bank handling the company’s foreign exchange deals for investments in the North.

For an amount below $1 million, an investor will only need to report briefly.

The bank dealing with foreign exchange transactions will need to report the investor’s financial information to the Export-Import Bank of Korea instead of the Ministry of Unification and the Finance Ministry.

Yonhap
Lee Joon-seung
10/23/2007

A newly opened factory-apartment at the Kaesong Industrial Complex promises fresh possibilities for inter-Korean business cooperation, the developer of the facility said Tuesday.

The state-run Korea Industrial Complex Corp. (KICOX) said the dual-purpose manufacturing and residential facility is specifically designed for small and medium enterprises (SMEs) that are currently being phased out of South Korea due to the lack of workers and high labor costs.

At the formal opening ceremony of the factory-apartment, KICOX President Kim Chil-doo said, “The new facility provides an ideal business model for South Korea’s labor-intensive SMEs trying to stay afloat, and is an ideal means to start off business in North Korea.” About 300 people from South Korea were present at Tuesday’s opening in Kaesong, including lawmakers and Vice Industry Minister Oh Young-ho.

The 32 companies that will use the new facility are generally small clothing companies that were at the critical juncture of deciding whether to move to China and Southeast Asian countries, or close their businesses altogether. The factory-apartment provides an alternative means to continue making goods and is beneficial to all sides, the developer said.

By moving to Kaesong, the companies can stay in business by hiring workers for about US$60 a month, while 2,700 North Korean workers benefit from new jobs. In addition, the dual arrangement permits cheaper operating costs, a better working environment and allows companies to cooperate with each other for logistics support, said the developer.

The corporation, which runs 11 similar factory-apartments in South Korea, said the five-story building covers 27,880 square meters and was built in 14 months at the expense of 21.1 billion won (US$22.8 million). It is equipped with a storage area, a training center, a product display room, two dining halls, a store and fitness center. The new building is equipped with 71 dormitories for South Korean workers and various support staff.

The monthly rent in the factory-apartments is 4,500 won (US$4.9) per square meter, and there are six different floor arrangements available, ranging from 396 to 1983 square meters.

KICOX said that based on the projected success of the first factory-apartment, up to seven more will be built in Kaesong by 2010. It said 19,489 square meters of land were reserved in May 2007 for the project.

A second factory-apartment is being built the Kaesong Industrial District Management Committee (KIDMAC), and is scheduled for completion by late 2008.

Companies that have moved into the new factory-apartment, meanwhile, said they are satisfied with the proficiency of workers and cheap labor costs.

Ok Sung-seok, president of Nine Mode Co. and chairman of the corporate management committee at the KICOX factory, said Kaesong plants cost a third less to operate than similar plants in China. He added that his shirt-making company should turn a profit by next year.

“I ran a factory in Qingtao, China for four years, but the operating cost there is skyrocketing,” the businessman said. He said Nine Mode closed its Chinese factory and plans to downsize its operations in Seoul so it can concentrate on its efforts in Kaesong.

Ok said that depending on the type of business and size, four or five factories in the factory-apartments should turn a profit by the end of the year.

The Kaesong complex lies 60 kilometers northeast of Seoul, and is hailed as the crowning achievement of the historic 2000 inter-Korean summit. It has played a key role in expanding two-way economic exchange that stood at just $300 million in 1999 to $1.35 billion last year.

Construction of the industrial district began in June 2003, with 3.3 square kilometers of factory land have been built to house up to 450 firms. By 2012, 11.6 square kilometers of industrial park is to be laid down that can hold several thousand South Korean factories and hire over 200,000 North Korean workers.

There are at present about 13,000 North Korean workers employed by 57 South Korean firms in Kaesong that have churned out garments, watches, kitchen utensils, auto parts and other labor-intensive goods since 2004.

The complex just north of the demilitarized zone that separates the two Koreas has been in the spotlight after the second inter-Korean summit. South Korean President Roh Moo-hyun and North Korean leader Kim Jong-il agreed to build a region of peace and prosperity centered around Kaesong and the North Korean city of Haeju, 75 kilometers west of Kaesong.

“People at Kaesong expect progress to be made in such areas as communications and travel, which had previously been an obstacle to the development of the industrial district,” said a KIDMAC official. The prime ministers of the two sides are to meet in November to implement follow-up measures to the summit.

There is only one telephone line linking Kaesong with Seoul, while no mobile phones are allowed in the area. People and materials are also prevented from moving in and out of the complex.

Institute for Far Easter Studies
NK Brief No. 07-10-16-1

The Kaesong Industrial District Management Committee reported on October 10 that after two years and nine months of operation, the total value of goods manufactured in the Kaesong Industrial Complex (KIC) surpassed 200,000,000 USD. In 2005, production by companies in the KIC totaled 15,000,000 USD; in 2006, 74,000,000 USD; and in the first 9 months of 2007, 124,000,000 USD, for a total since 2005 until last September of 213,000,000 USD.

There are currently a total of 45 companies operating in the complex, employing 19,433 North Korean workers and 800 workers from South Korea, for a total of over twenty thousand employees. The Committee’s report further detailed that the production output of the North Korean workers averaged 1,275 USD per person during the first half of 2007, up 28 percent over last year’s per-capita output of 989 USD.

After overall production surpassed 100,000,000 USD at the end of last January, the 200,000,000 USD barrier was broken in only eight months. This expansion of production is a result of a stable business environment, the increase in the number of companies entering the complex and the number of North Korean workers employed, and overall productivity growth.

The 1,275 USD per-capita production output for the first half of the year shows a 28 percent increase over the 989 USD per-capita recorded in 2006, and 15 percent higher than the 1,108 USD per-capita average of the first two quarters of last year. Despite employment regulations calling for continually increasing numbers of workers, which tend to lower productivity statistics, overall North Korean workers’ average per-capita production numbers did not fall, and the increase shown is significant.

The increase in productivity is not unrelated to the level of education of the workers. Currently, the majority of workers in the KIC have at least a high-school education, and more than 20 percent have completed some form of technical college or higher. A technical training center scheduled for completion in October of this year will provide even more formal technical training for the workers, further increasing productivity.

Yonhap
Tony Chang
10/16/2007

More than 400 government and business officials from South and North Korea gathered Tuesday at an industrial complex in the North to celebrate the completion of the first-phase of development of the landmark reconciliation zone, organizers said.

The industrial park in Kaesong, a border town 60 kilometers northeast of Seoul, has been hailed as a major outcome of the historic 2000 inter-Korean summit and is being built in three stages with completion scheduled for 2012. Over 13,000 North Korean workers now employed in Kaesong earn some US$60.4 each a month working for South Korean firms producing garments, watches, utensils and other labor-intensive goods.

“The Kaesong complex is an achievement that shows that our people can do anything when they pull together,” Kim Jae-hyun, head of the Korea Land Corp. (KLC), said in a congratulatory speech during a ceremony held at the complex, according to the company.

KLC, South Korea’s state-run real-estate company, is responsible for selecting the companies that operate there.

Other dignitaries from Seoul included Unification Minister Lee Jae-joung and Hyun Jeong-eun, chairwoman of the Hyundai Group that is involved in various projects in the North. Some 100 North Koreans, of whom none were identified, were present at the ceremony, according to the KLC.

“The significance of the industrial park was highlighted once more during the recent inter-Korean summit, paving the way to further expand development (of the zone),” Lee said in his speech.

The first-phase construction of the park, which began in June 2003, covers 3.3 million square-meters. As of April, some 220 companies have signed up to move into the complex. Currently 57 firms operate in the zone.

Approximately 8.26 million square meters of land have been allotted for the second-stage of development. Construction of the second stage is expected to begin early next year. It is expected to be used for material-oriented and technology industries, such as synthetic fibers and electronics parts, according to the KLC.

In the second inter-Korean summit held early this month, South and North Korea agreed to make Haeju, a militarily sensitive town for North Korea roughly 75 kilometers west of Kaesong, a special economic zone, similar to the Kaesong complex.

Korea Herald
Ko Kyoung-tae
10/16/2007

South Korean experts yesterday called on the government to develop Haeju, a North Korean port which South and North Korean leaders recently agreed to develop as a special zone, into a business hub covering a wide array of industries, from fisheries to manufacturing.

Jeong Hyung-gon, an economist at the Korea Institute for International Economic Policy, recommended in a seminar yesterday that the special zone of Haeju should be transformed into a comprehensive economic zone so as to expand inter-Korean economic ties.

He cited several Chinese free economic zones as good models for the joint-development project. “It should be developed like Shenzhen or Dongguan,” Jeong said.

These two coastal cities have been locomotives of China’s red-hot economic growth since the Beijing administration opened them to the global economy in the late 1970s.

Jeong’s speech implies that North Korea should also substantially open Haeju to foreign investors, including South Korean companies.

South Korean President Roh Moo-hyun and North Korean leader Kim Jong-il recently agreed to transform this harbor city into another joint industrial complex.

A special peace zone will be set up along the coast of Haeju, with the purpose of developing joint fisheries and establishing a new economic zone.

The city is geographically advantageous to South Korean manufacturers because it is close to Incheon Port, the nation’s second-largest harbor.

“The Haeju project and Gaeseong Industrial Complex should be complementary to each other,” Jeong said.

But he cautioned that Seoul and Pyongyang should settle their dispute over the Northern Limit Line in the West Sea, in order to effectively operate the Haeju special zone.

The sea border was unilaterally drawn by the U.N. forces at the end of the 1950-53 Korean War, but there has been no legal agreement on the demarcation between the two Koreas.

This has caused frequent military and diplomatic conflicts, including two deadly naval clashes in the West Sea, and has been a major obstacle to co-developing Haeju.

Yonhap
10/10/2007

The Unification Ministry has dropped the words “reform and openness” to describe the South Korea-invested industrial park in the North’s border town of Kaesong from its Web site in an apparent bid not to provoke the North.

North Korean leader Kim Jong-il complained in the second-ever inter-Korean summit in Pyongyang last week that South Korea has been using the Kaesong industrial park as a scheme to force reform and openness in the communist North, whereas Pyongyang had gained little from the inter-Korean economic cooperation project.

President Roh Moo-hyun responded by saying in the North Korean capital that North Korea should not be described as a subject of reform and openness.

Joong Ang Daily
Limb Jae-un
10/8/2007

Days after both Koreas vowed to heighten cooperation, a lawmaker said yesterday in a report that the Kaesong Industrial Complex, the experimental site combining South Korean technology and North Korean labor, has been unprofitable so far.

In addition, the Ministry of Construction and Transportation said in a report yesterday that repairs to the airport on Mount Paektu will cost 280 billion won, or $304 million.

One of the agreements signed at the inter-Korean summit Thursday calls for allowing South Korean tourists to visit the scenic mountain on the Korea-China border.

“In terms of the runway length, Samjiyon Airport can accommodate large airplanes, such as a Boeing 747, but the condition of the airport is bad,” said an official of the construction ministry, who asked for anonymity. The airport, located on a plateau 1,000 meters, or 3,280 feet, above sea level, needs advanced navigation facilities, he said.

Despite the optimistic discussions during last week’s summit, inter-Korean economic cooperation has so far had dismal results, according to a report from Grand National Party Representative Lee Han-koo. Thirteen out of 16 companies operating at the Kaesong Industrial Complex are currently in the red, he said. Their debt is four times higher than their assets, he said. The combined assets of the 16 companies is only 4.5 billion won and their average annual sales is 790 million won.

“The biggest problem of the economic cooperation is that the relevant information has been held back from the public,” Lee said.

Meanwhile, a top European official said North Korea must go through serious reforms to become a viable investment destination for Europe.

North Korea is unattractive for Europe because “the conditions for investment are not safe enough and the regulatory environment is not predictable,” Guenter Verheugen, the EU Industry and Enterprise Commissioner, said in an interview with The Associated Press on Saturday.

Joong Ang Daily
Jo Dong-ho
10/9/2007

The summit meeting was quite successful. Some say it was because North Korea’s nuclear program was not on the agenda. Relinquishing its nuclear ambitions is the North’s card for normalizing ties with the United States and receiving rewards.

Costs cannot worry us either, because South Korea’s economy has grown so much that we can now pave a road even for a village on a remote mountain. If the size of government projects for culture cities or innovation cities were reduced, we would have trillions won, or billions more dollars, available.

As an economist, I would like to focus on roles of the government and the market discussed in the summit meeting. The ultimate question of economics can be summarized as how the market and the government will divide their roles to get maximum benefits out of limited resources.

The economics of past 200 years concludes that the best way is for the private sector to make independent decisions in economic activities and for the government to manage the rules so that those activities will be carried out fairly and smoothly. This can be likened to the relationship between players and referees in a sporting event.

The same principle applies to economic cooperation between South and North Korea.

Easing military tension, which will reduce the risk of investing in North Korea, is something that only the government can do. Repairing railways and roads is also the responsibility of the government. To improve transportation, communication and customs are the same. The private sector cannot do those jobs on its own.

However, building a shipyard or developing tourism on Mount Baekdu is for the private sector to carry out. But as these projects were agreed upon in the summit meeting, they must be carried out without feasibility studies. These projects were being discussed even before the summit meeting.

Private companies have been interested in them for years, but they have not made the decision to pursue them for many reasons, including low profits. Now the leaders of the two Koreas have made an agreement so these projects must be carried out. North Korea will probably make more unreasonable demands. The South Korean government will have to provide subsidies, and that will increase the burden on the South Korean people.

Some may find it disturbing that I criticize a few projects when there were many other good agreements reached. But these projects show the South Korean government’s basic view on economic cooperation with the North.

In fact, in all the projects agreed upon, there is a vague guideline for the division of roles between the government and the market. The same is true with the agreement to complete the first step of construction at the Kaesong Industrial Complex earlier than planned and to start the second step. The Hyundai Asan Corporation and the Korea Land Corporation are the ones doing the industrial park project, not the government.

These companies have their reasons for managing the industrial park project in its first stages. The government cannot and should not agree to implement the project at a faster speed. After North Korea tested its nuclear bomb, there was pressure to halt that project. Then the government said it could not intervene because it was led by the private sector. But the government has now agreed to complete it at an earlier date.

Some maintain that these agreements will improve inter-Korean relations so there is no use in dividing the government and the market. But it is more important that economic cooperation between South and North Korea improves properly than quickly. Let’s say the improvement of economic cooperation between South and North Korea is of the utmost value so the government can lead economic projects. But there must be good reasons for the government to intervene in the market.

The government has said until now that it supported economic co-operation with the North in an attempt to induce North Korea to open its doors and reform its economy. But that no longer sounds like enough. When providing assistance, the supporter must make sure that the party that receives assistance tries to stand on its own. But the president said we should not mention this in the summit meeting.

Six months ago, at an event for businessmen in the fisheries industry, the president said the government would provide support if need be, but what is most important is their own will and efforts.

One of President Roh’s strengths is that he is not afraid to say what he needs to say. That he could not say what he had to say to Kim Jong-il is what is most regrettable about the meeting.