North Korean Economy Watch

Daily NK
Yang Jung A
1/22/2007

Oh Kwang Chul, President of the North Korea Trade Bank and North Korea’s chief delegate in the Banco Delta Asia financial sanction talks will visit Beijing on the 23rd, Asahi Newspaper reported on the 22nd.

The newspaper, informed by a source in North Korea-China, reported that President Oh is scheduled to travel from Beijing to Pyongyang on a direct route on the 23rd to speak with the Chinese.

Indifferent to the fact that the next financial talks were to reconvene in New York says the U.S., North Korea is requesting that the talks be resumed in Beijing similar to the former meeting. It appears that President Oh’s trip to China will be to explain North Korea’s position to the Chinese and gain understanding and cooperation from the Chinese, claimed the newspaper.

The source revealed that developments made in Berlin, where the chief delegates of the six party talks met to discuss the North Korea financial issues and related issues is linked to Oh Kwang Chul visiting China.

The source also predicted that the North will shortly announce the reconvening of the six party talks.

Contrastingly, China’s Foreign Minister Wu Dei and U.S. Assistant-Secretary Hill met in Beijing on the 21st inciting to the press, the possibility of the next financial talks being held after the 29th.

Heritage 2007 Index of Economic Freedom

North Korea’s economy is 3% free, according to our 2007 assessment, which makes it the world’s least free economy, or 157th out of 157 countries. North Korea is ranked 30th out of 30 countries in the Asia–Pacific region, and its overall score is the lowest in the world.

North Korea does not score well in a single area of economic freedom, although it does score 10 percent in investment freedom and property rights. The opening of the Kaesong industrial venture in cooperation with South Korea has been a start in foreign investment.

Business freedom, investment freedom, trade freedom, financial freedom, freedom from corruption, and labor freedom are nonexistent. All aspects of business operations are totally controlled and dominated by the government. Normal foreign trade is almost zero. No courts are independent of political interference, and private property (particularly land) is strictly regulated by the state. Corruption is virtually immeasurable and, in the case of North Korea, hard to distinguish from necessity. Much of North Korea’s economy cannot be measured, and world bodies like the International Monetary Fund and World Bank are not permitted to gather information. Our policy is to give countries low marks for specific freedoms when it is country policy to restrict measurement of those freedoms.

Background:
The Democratic People’s Republic of Korea has maintained its Communist system since its founding in 1948. A serious economic decline began in the early 1990s with the end of economic support from the Soviet Union and other Communist-bloc countries, including China. Floods and droughts all but destroyed the agricultural infrastructure and led to severe famine and dislocation of the population during the 1990s. South Korean and Chinese investments in the economy have alleviated dire conditions. The government continues to rely on counterfeiting foreign currency and sales of missiles for money. That and the nuclear ambitions and isolationism of Kim Jong Il reinforce North Korea’s status as the hermit kingdom.

Business Freedom – 0.0%
The state regulates the economy heavily through central planning. The economic reforms implemented in 2002 allegedly brought some changes at the enterprise and industrial level, but government regulations make the creation of any entrepreneurial activities virtually impossible. The overall freedom to start, operate, and close a business is extremely restricted by the national regulatory environment.

Trade Freedom – 0.0%
The government controls all imports and exports, and formal trade is minimal. Data on North Korean trade are limited and compiled from trading partners’ statistics. Most North Korean trade is de facto aid, mainly from North Korea’s two main trading partners, China and South Korea. Non-tariff barriers are significant. Inter-Korean trade remains constrained in scope by North Korea’s difficulties with implementing needed reform. Given the lack of necessary tariff data, a score of zero is assigned.

Fiscal Freedom – 0.0%
No data on income or corporate tax rates are available. Given the absence of published official macroeconomic data, such figures as are available with respect to North Korea’s government expenditures are highly suspect and outdated.

Freedom from Government – 0.0%
The government owns all property and sets production levels for most products, and state-owned industries account for nearly all GDP. The state directs all significant economic activity. The government implemented limited economic reforms, such as changes in foreign investment codes and restructuring in industry and management, in 2002.

Monetary Freedom – 0.0%
In July 2002, North Korea introduced price and wage reforms that consisted of reducing government subsidies and telling producers to charge prices that more closely reflect costs. However, without matching supply-side measures to boost output, the result of these measures has been rampant inflation for many staple goods. With the ongoing crisis in agriculture, the government has banned sales of grain at markets and returned to a rationing system. Given the lack of necessary inflation data, a score of zero is assigned.

Investment Freedom – 10.0%
North Korea does not welcome foreign investment. One attempt to open the economy to foreigners was its first special economic zone, located at Rajin-Sonbong in the northeast. However, Rajin-Sonbong is remote and still lacks basic infrastructure. Wage rates in the special zone are unrealistically high, as the state controls the labor supply and insists on taking its share. More recent special zones at Mt. Kumgang and Kaesong are more enticing. Aside from these few economic zones where investment is approved on a case-by-case basis, foreign investment is prohibited.

Financial Freedom – 0.0%
North Korea is a Communist command economy and lacks a private financial sector. The central bank also serves as a commercial bank with a network of local branches. The government provides most funding for industries and takes a percentage from enterprises. There is an increasing preference for foreign currency. Foreign aid agencies have set up microcredit schemes to lend to farmers and small businesses. A rumored overhaul of the financial system to permit firms to borrow from banks has not materialized. Because of debts dating back to the 1970s, most foreign banks will not consider entering North Korea. A South Korean bank has opened a branch in the Kaesong zone. The state holds a monopoly on insurance, and there are no equity markets.

Property Rights – 10.0%
Property rights are not guaranteed in North Korea. Almost all property belongs to the state, and the judiciary is not independent.

Freedom from Corruption – 10.0%
North Korea’s informal market is immense, especially in agricultural goods, as a result of famines and oppressive government policies. There is also an active informal market in currency and in trade with China.

Labor Freedom – 0.0%
The government controls and determines all wages. Since the 2002 economic reforms, factory managers have had more autonomy to set wages and offer incentives, but the labor market still operates under highly restrictive employment regulations that seriously hinder employment and productivity growth.

Yonhap
1/16/2007

An international energy consortium has asked impoverished North Korea for nearly US$1.9 billion in compensation for its defunct project to build two nuclear power plants in the North under the 1994 nuclear agreement on the North’s freezing of its nuclear activities, diplomatic sources here said Tuesday.

North Korea, however, has yet to respond to the claim, the sources said, speaking on condition of anonymity. Analysts also said the North is unlikely to respond favorably, given its past record and current claims.

The North claims the 1994 agreement, known as the Agreed Framework, was breached by the United States long before it withdrew from the nuclear Non-Proliferation Treaty in early 2003, and is demanding compensation for the unfinished reactors.

“Now that the construction of the light-water reactors came to a final stop, the DPRK is compelled to blame the U.S. for having overturned the Agreed Framework and demand it compensate (the North) for the political and economic losses it has caused to the former,” an unidentified spokesman for the North’s Foreign Ministry said in a statement carried by the country’s Korean Central News Agency Nov. 28, 2005. DPRK is short for the Democratic People’s Republic of Korea, the North’s official name.

The diplomatic sources said the Korean Peninsula Energy Development Organization (KEDO) has asked for the amount in at least three letters sent to Pyongyang.

“(KEDO) has sent a letter (to North Korea) following every meeting of its executive board of directors since (last) May, demanding compensation for its assets at the construction site” in North Korea, one of the sources said.

“Letters were sent on five occasions, but the organization stated the specific amount in the three sent after September,” the source added.

The $4.6-billion project was officially scrapped early last year after years of suspension following the outbreak of an ongoing dispute over North Korea’s nuclear weapons program in late 2002. The communist state conducted its first nuclear weapons test on Oct. 9, 2006.

The sources said the amount includes expenses for KEDO’s executive office in New York.

A total of $1.56 billion had been spent on the nuclear reactor project before its official termination, of which, some $1.14 billion was shouldered by South Korea and $410 million by Japan. The European Union also pitched in $18 million for the joint project, which also includes the United States.

The countries blame the North for scrapping the project, which was part of a 1994 agreement between Washington and Pyongyang to settle a dispute over North Korea’s nuclear weapons program.

North Korea has attended international negotiations aimed at bringing a peaceful end to the dispute over its nuclear weapons program since its eruption in 2002, but no progress has been made since a 2005 round, during which the communist nation agreed in general to give up its nuclear ambitions in return for economic and diplomatic benefits.

Korea Herald
12/27/2006

North Korea, desperate for foreign currency under U.S.-imposed sanctions, has started to sell its gold reserves on international markets, a Japanese newspaper said Tuesday.

The United States last year blacklisted a Pyongyang-linked bank in Macau, infuriating the communist regime which walked out of disarmament talks for 13 months during which it tested an atom bomb.

Since the US crackdown on the bank, North Korea has earned 28 million dollars in foreign cash by exporting gold to Thailand, which had not imported gold from Pyongyang for the previous five years, the Yomiuri Shimbun said.

North Korea exported 500 kilograms of bullion to Thailand in April and another 800 kilograms a month later, the conservative Japanese daily said without identifying its sources.

North Korea’s central bank, Choson Central Bank was also re-listed on May 12 for trading on the London Bullion Market, said the newspaper, quoting a spokesman for the London market.

The North Korean central bank, which can issue currency, joined the London gold market in 1976 but was de-listed in June 2004 due to inactive trading, the newspaper said.

The Yomiuri, citing South Korean data, said North Korea was estimated to have between 1,000 and 2,000 tons of gold reserves.

The United States blacklisted Macau’s Banco Delta Asia in September 2005, saying it suspected that 24 million dollars in North Korean accounts were linked to counterfeiting or money-laundering.

The accounts have been frozen and other Asian banks have taken similar moves.

The financial sanctions were a main topic during six-nation talks, aimed at persuading North Korea to end its nuclear program, which ended in deadlock last week in Beijing.

Joong Ang Daily
12/21/2006
Choi Hyung-kyu, Kwon Hyuk-joo

Half of the $24 million in North Korean assets held in the frozen Banco Delta Asia accounts came from the Hyundai Group of South Korea, sources here told the JoongAng Ilbo yesterday. Other sources said North Korea will be able to access some of the frozen holdings next week, because the money had been proven “legitimate.”

The Macao-based bank froze the North Korean holdings last year after the U.S. government accused Pyongyang of financial crimes, such as money laundering and counterfeiting U.S. dollars. Since then, the North has made the unfreezing of those assets a precondition for the nuclear disarmament negotiations.

A U.S. source who requested anonymity said yesterday the $12 million was a part of Hyundai Group’s payments to North Korea for inter-Korean businesses. The money was wired in several payments, the source said. The payments were initially sent to other bank accounts that deal with North Korea, the source said, and then forwarded to the Banco Delta Asia accounts from there.

To deposit a large sum, an account holder must inform the bank in Macao about the source of the money and its purpose. The source showed North Korean account holders’ statements which claimed the deposits came from Hyundai.

Another source well informed about Banco Delta Asia affairs also said the money came from Hyundai.

“It is not easy to distinguish how much of the North Korean assets was earned from legitimate economic activities,” a senior South Korean government official said. “To sort the matter out, the United States and North Korea should meet and discuss the issue.”

In Beijing, O Kwang-chol, the president of the Foreign Trade Bank of Korea, has been meeting with U.S. Deputy Assistant Treasury Secretary Daniel Glaser since Tuesday.

Signs also pointed to a thawing of the freeze on the accounts in the near future. Other sources said Pyongyang has dispatched officials to the city of Zhuhai in China with papers necessary to withdraw the $12 million from the bank in Macao. They said access will likely be granted Tuesday or Wednesday of next week.

Hyundai Asan, Hyundai Group’s North Korea business arm, said yesterday it has not sent any money to a Banco Delta Asia account. The Mount Kumgang tour program began in 1998.

The company said it has wired $1 million a month to an overseas bank account designated by North Korea.

A senior official with Hyundai Asan said North Korea frequently changed the account. “I don’t know if our payment was later wired to BDA accounts or not, but I think that could be possible,” he said.

Hyundai Group provided $500 million to North Korea on the eve of the 2000 inter-Korean summit by wiring the money to a North Korean account with a foreign bank, but the sum currently frozen at the Banco Delta Asia accounts is not connected to that, the sources said.

Daily NK
Yang Jung A
12/20/2006

Difficult to Recover British Funds Caught in BDA North Korea Accounts

In amongst the North Korean accounts that were frozen from Macao’s Banco Delta Bank (BDA) was joint funds from a British tobacco company which has been deemed difficult to recover.

The U.K. Financial Times reported on the 18th that the $7mn of the $24mn in North Korea funds frozen in BDA accounts is from Korean trusts and banks of which half the funds is estimated to from a joint account by British American Tobacco (BAT) and a tobacco company trading by North Korea.

BAT’s spokesperson Catherine Armstrong revealed in an interview with Radio Free Asia (RFA) on the 18th “The money has been certified as legal so we’re very keen to get the money out of the frozen account.”

Regarding the amount of frozen funds, Armstrong said “As there are no substantial data, an actual figure cannot be revealed but I am aware it is nearing tens and hundreds of thousands of dollars.”

Raphael Perl, a specialist at the U.S. Congressional Research Service (CRS) said “We don’t necessarily know on its face that the North Korean tobacco company is not also involved in criminal activity” and revealed “As North Korea sells fake cigarettes on a large scale, every tobacco company in North Korea is being suspected of conspiring illegal acts.”

Perl said “Even in the case a company is internationally based, a company is not completely owned internationally but if a joint ownership, it is even more difficult to discern whether or not the transaction was legitimate.”

In another sense, as reports suggest that “The U.S. Administration told North Korea $12mn of the $24mn frozen funds appears to be unrelated to North Korea’s illegal actions,” others are cautiously anticipating progress from the six party talks as North Korea’s legitimate funds are released.

Herald Tribune
12/5/2006

Japanese police raid pro-North Korea group over alleged accounting violation

Japanese police raided offices of a pro-North Korean association and later arrested an executive over suspected accounting violations on Tuesday, the latest crackdown as Tokyo intensifies pressure on the reclusive communist regime.

Investigators searched the offices of the Hyogo chamber of commerce affiliated with the General Association of Korean Residents in Japan, which acts as Pyongyang’s de facto embassy, prefectural (state) police spokesman Naoki Awazu said.

Awazu said no other details were immediately available.

Police suspect a 36-year-old former senior official at the group’s local business office helped North Korea-affiliated companies and offices evade taxes and provided accounting services without a license, Kyodo News agency reported.

Eitetsu Kawa, a North Korean living in Japan, was later arrested on suspicion of accounting law violations.

Japan has been cracking down on the residents’ association amid concerns about North Korea’s nuclear and chemical weapons programs, but it was not immediately known if Tuesday’s raid was linked.

The reclusive regime angered Japan and other nations when it tested ballistic missiles in July and conducted a nuclear test in October.

Pro-Pyongyang Japanese residents have come under increasing scrutiny by authorities as tensions have escalated with North Korea.

Tokyo was also planning to urge local governments to review preferential property taxes for facilities owned by North Korean organizations to check on how the pro-North association uses its buildings and facilities.

On Tuesday, the North’s state-run Korean Central News Agency protested the recent raids, calling them “an infringement upon the dignity of (North Korea) and a vicious political provocation.”

Last week, police raided the association’s Tokyo headquarters and its offices in the northern Japanese city of Niigata on suspicion that a relative of a group official illegally obtained a small amount medical supplies for shipment to the impoverished country.

In August, Japanese police arrested a pro-North resident in Japan for allegedly exporting to the North machinery that can be used to make biological weapons.

In March, Japanese police raided another pro-North Korea local chamber of commerce in connection with Pyongyang’s abduction of Japanese citizens in the 1970s and 1980s.

Yonhap
11/20/2006

China has lifted its freeze on some North Korean accounts in a Macau bank which have allegedly been involved in money laundering and other financial irregularities for Pyongyang, a diplomatic source said Monday.

China ordered its banks to stop engaging in financial dealings with Banco Delta Asia (BDA) in the Chinese territory of Macau, after the U.S. gave its financial institutions similar instructions in September 2005. The sanctions led to the freeze of about US$24 million of the North’s holdings.

Yonhap
11/20/2006 
U.S. does not confirm report of unfrozen N.K. account, reaffirms talks within 6-party context

U.S. officials deferred to Chinese authorities on Monday to confirm whether Beijing has released some of the North Korean accounts frozen for alleged illicit financial activities.

At the same time, they reaffirmed that the U.S. is ready to address the issue at the six-nation nuclear talks when they resume.

Joong Ang Daily
11/17/2006

China has not cut off oil supplies to North Korea, nor will it stop oil and food assistance to its ally as a means of exerting political pressure, Chinese officials were quoted as telling a group of U.S. scholars.

The Americans in the group also said Wednesday that Chinese officials seemed to have a different understanding from the North Koreans about how U.S. financial sanctions would be dealt with at the next round of six-nation talks.

The Chinese reportedly said they were “surprised” that Pyongyang had told the group it expected those sanctions to be lifted.

Siegfried Hecker, a visiting professor at Stanford University, said he asked Chinese foreign ministry officials if Beijing had cut off heavy fuel oil to North Korea as reported.

“The answer was that China did not cut off heavy fuel oil to North Korea. That’s the direct answer that we received,” he said at a news conference.

Mr. Hecker was part of a four-member delegation that was in Pyongyang Oct. 31-Nov. 4. He is a former director of the Los Alamos National Laboratory, a U.S. nuclear weapons center, and has visited North Korea three times.

The other members of the team were Jack Pritchard, former U.S. point man on North Korea policy and now head of the Korea Economic Institute in Washington, D.C.; Robert Carlin, a former North Korea analyst now at the Korean Peninsula Energy Development Organization; and John Lewis, a Stanford University professor.

There was speculation that Beijing had ended the fuel aid to the North in September, when Pyongyang showed signs of preparing for its first nuclear test. The aid suspension was believed to be China’s way of pressing its ally to forgo the test.

Mr. Hecker said Chinese officials were clear that Beijing did not and would not stop fuel and food donations, arguing that North Korea would only “grow stronger” if pressured.

The team arrived in North Korea on the day the communist regime, after a year’s boycott, agreed to return to the six-nation nuclear talks that also involve South Korea, the United States, China, Russia and Japan.

Pyongyang left the table to protest punitive measures taken by the U.S. Treasury against Macao’s Banco Delta Asia for allegedly laundering money for the North.

North Korean officials told the American visitors that they expected discussions and a conclusion of the sanctions issue at the next six-party talks, according to Mr. Pritchard.

But Chinese officials, when told of Pyongyang’s position, “expressed some surprise,” Mr. Hecker said.

“They indicated, obviously, differences of opinion as to what was agreed on,” he said.

Joong Ang Daily
11/8/2006

Amid continued concern that money spent on the Kaesong inter-Korean industrial complex fuels Pyongyang’s military, the Unification Ministry said yesterday that most of the wages paid by South Korean companies buy daily supplies and food for North Korean workers.

Song Yong-deung, 66, a Korean-Australian who operates a Kaesong-based food and supply company jointly owned by North Korea, told the ministry that his company regularly provides goods to North Korean workers, according to a press release from Goh Gyeong-bin, an official in charge of the complex. Song’s company gets money from North Korean authorities, who in turn accept the wage payments from the South Korean companies operating the complex. The North Korean workers do not directly receive their salaries.

According to data provided by Mr. Song and the ministry, South Korean firms pay an average of $600,000 per month in wages, of which about 45 percent is deducted for fees such as insurance and taxes. In March, after the deductions, a total of $295,000 was paid to the North, of which $219,000 went to Mr. Song’s company to purchase goods, such as rice, for the workers.

Unification Ministry officials said yesterday the bulk of the information provided by Mr. Song matched Seoul’s own assessment on how the money sent to the North is being used. Asked why the ministry has not tried in the past two years since the complex opened to verify how the money sent for wages was being used, Yang Chang-seok, a ministry spokesman, said Seoul has repeatedly asked the North to provide a detailed account of the cash flow, but other than stating the workers bought supplies, little information has been provided.

“Given the nature of the North’s closed society, confirmation itself is problematic,” the spokesman said.

The efforts by Seoul to cast a light on the flow of the money being paid to the North comes at a time when Washington is pushing Seoul to curb inter-Korean projects, citing transparency issues over money sent to the North. Over the weekend, President Roh Moo-hyun vowed to continue with inter-Korean projects in a policy speech addressed to the National Assembly. Currently, there are 15 companies operating at the complex employing 9,632 North Koreans.

The announcement came as U.S. delegation visited Seoul this week to discuss how to implement the United Nations sanctions resolution against the North.