North Korean Economy Watch

Well, I dont know how, but my personal email address has been on the distribution list of the Rainbow Trading Company…a Tokyo based shop that specializes in North Korean art and books.  The owner, Jun Miyagawa, does not seem to be Korean, and I have never spent more time in Tokyo than to pass through several times on my way to the countryside.

Still, I just thought I would let you know that he is selling a complete set of North Korean Currency (1,5,10,50,100,200,500,1,000,5000W) for $66.50.

If you add up all of the denominations, you get 6866Won.  Using the market exchange rate of 3,000W=$1USD, the sum value of these notes is $2.28.  This is a markup of 2816% (not including postage).

Remember this when you purchase North Korean currency from ebay.  Also, When I was visiting, I was told that they have trouble with counterfiters in China.  It is likely the money you are buying has never been to the DPRK, unless it is from an actual visitor that you can verify.

You know you have arrived when you are covered by the Washingon Post:

Two Koreas Learn to Work as One: New Industrial Park Matches South’s Capital and Know-How With North’s Low-Cost Labor
By Anthony Faiola, Washington Post Foreign Service
Tuesday, February 28, 2006; Page A10

Here are the highlights:

Layout

• Kaesong Industrial Park is two-thirds the size of Manhattan.  Only a fraction of its real estate currently developed.  15 factories already operating. One is called Shinwon Textile Factory. (Source)
• A South Korean telephone company has installed the first 340 of 10,000 planned phone lines.  Because of the communist state’s chronic shortages of electricity, the South Koreans have had to run power lines across the border to serve their factories.  The goal (starting next month) is 154000 kilowats (source).
• Some company representatives concede that the North Koreans are not always ideal business partners.
• A tall green wire fence marks the zone’s 8.6-kilometer-long boundary (Source)
• South Korea is assuming all the financial risk, having invested more than $2 billion  (source). Kim Dong-keun, president of the South Korean Committee, which co-manages the zone, says the 489 South Koreans who work in Kaesong receive special training on interacting with North Koreans.   For South Korean managers, Kaesong is considered a hardship posting.  As a result, many of them receive as much as $2,500 extra pay per month (Source). No South Korean money is accepted here, even at a Family Mart convenience store set up for the exclusive use of South Korean employees (Source).
• 50 year leases were auctioned off last summer. On Average, there were 4 South Korean companies vieing for each spot. 

Labor Relations and Statistics

• After the first busloads of North Korean workers arrived at the gates 16 months ago, weeks passed before people from the two societies could even understand each other’s dialect.  They had to explain virtually every aspect of modern life to his fresh-faced communist charges — down to how to use the factory’s Western-style toilets.
• The workers put in long hours at often grueling tasks, but life here nonetheless seems a cut above the poverty that is common in most of North Korea. 
• Although the zone currently employs about 6,000 North Koreans here, officials in Seoul project that an additional 15,000 North Koreans will start work as more than 20 South Korean companies move in. By 2012, plans call for as many as 700,000 employees — 4.5 percent of North Korea’s entire workforce.
• Thousands of workers live in on-site dorms, while others arrive by bus from Kaesong. South Koreans are not permitted beyond a bright green perimeter fence that is guarded by armed soldiers and separates the complex from nearby towns.
• North Korean workers are paid a fixed salary of $57.50 a month. That is about 20 times less than the pay of a South Korean worker of the same skill level, but it is a welcome sum in North Korea.  It is unclear how much of that money actually goes to the North Korean workers. The dollar-denominated checks issued by the South Korean companies are paid to a North Korean government agency. Na Un Suk, director general of North Korea’s Central Special Economic Zone Control Agency, said the government makes deductions for room and board provided to the employees before paying them varying amounts in North Korean currency.  The Los Angeles Times reports that workers get $8/month.  About double the average salary (Source).
• Although South Korean managers have some say in promoting workers, they have little role in choosing who arrives on their doorstep. Many employees are from Kaesong city — the ancient capital of the Goryeo kingdom that first united much of the Korean Peninsula. But all are picked by officials from the North Korean government.
• North Korean workers are forbidden from any contact with South Koreans except when necessary on the job.  They enter and leave the zone through a single checkpoint manned by North Korean soldiers. (Source)
• Managers from South Korea live in single-story temporary quarters that resemble military barracks. Typically, they go home twice a month.  “It’s very difficult,” says Kim Ki Hong, general manager of a branch of the only South Korean bank in the zone. “We cannot go outside,” says Mr. Kim. “We are almost prisoners.”(Source). Southerners also have their own cafeteria and their own medical clinic, all off limits to the North Koreans (Source). 
• In response to queries about their wages, a young North Korean woman murmurs, “I cannot say anything,” and another says only, “We get enough.”
• Everyone here has at least a high school education. Many of them are college grads. But the most convenient is the fact that they all speak Korean. It’s easier to train them,” said Ryu Nam-Ryul, a section manager at Taesung Industry
• North Korean patriotic music in praise of Kim blares over the loudspeakers.

Taxes

• Gaesong has also exempted foreign companies from corporate income taxes in the first five years, and gives a 50 percent reduction for three more years. (source)
• Independent labor unions are banned.

Production

• Taesun Hata is exporting compact casings for Clinique and eye shadow holders for Bobbi Brown from its multimillion-dollar plant.
• Southern companies make shoes, textiles, auto parts and kitchen implements
• A branch of a major South Korean bank is open for business, as is a Family Mart convenience store staffed by two North Korean women.
• Inter-korean trade surged 50% since last year, over $1 billion.

Political goals

• The Zone is also key to South Korea’s strategy for lessening what is bound to be a massive economic jolt if it reunites with the North. North Korea’s per-capita income is roughly $1,800 a year, 10 times less than the South’s.
• Officials say Kaesong is also meant to keep on course a program of market-oriented restructuring that the North is undertaking in its domestic economy.
• South Korean companies have received low-interest loans and security guarantees from the South Korean government to locate in Kaesong.
• South Korea no longer has to go to south east Asia for manufacturing.  they can undertake low-cost production in North Korea and undercut Chinese prices.(Source).  It takes only three hours to deliver the products from Gaesong to the South Korean warehouse, whereas it would take more than one week from China.(source)
• “Our workers here are not motivated by material satisfaction. We are motivated by the fact that this is a national business project. We are one nation, and this is an important part of our unification process,” Na Un-Suk, director general of the Central Special Economic Zone Control Agency.

Future plans

• South Korea’s state-run Korea Land Corp. and Hyundai Asan, the North Korea business arm of Hyundai Group, said Tuesday they plan to build a hotel at an industrial complex in the North by June next year. The two companies will invite a private enterprise to construct the hotel to resolve a shortage of accommodation at the complex in the North Korean border city of Kaesong.  To that end, the state land developer and Hyundai Asan will set up a joint venture to take charge of the hotel, they said. (Yonhap)
• To grow as planned, the park will have to win access to world markets. South Korea hopes that products made here will be eligible to enter the United States under any free-trade pact that may be negotiated with the United States (Source).

The Daily NK speculates about how much money the family of the victim of the accidental death in the Mt. Koumgang resort will receive.  What is interesting about this article is the exploration of dispute resolution without courts or insurance companies…something that most westerners could not imagine.

Here are some bullet points from the article:

• Allegedly from a North Korean defector: “In North Korea there is no such national compensation for car accident causalities. So it is pitiful to think that the North Korean government did take away this compensation without giving it to the car accident-related families.”
• “Because of the system of no car insurance in North Korea, offenders must compensate the injured parties for the car accident themselves. If the offenders do not have the ability for compensation, then they must go to prison. And if they have the ability, they pay money for it. The compensation is usually a TV or about one hundred thousand won ($35). “
• If one dies in North Korea, the death is not dealt with seriously.
• The aleged defector again describes an accident in which his friend was killed by a Mercedes: “[After the accident, I put my fired in the back seat of the car].  As soon as I informed those instructors of the hospital who were in charge of Jeong Hyeok’s car accident, they ran to the Red Cross Hospital. In the meantime, Jeong Hyeok had died, and was moved to the mortuary. The vice-president and the teacher in charge of the college construction required the driver to be responsible for drinking and driving and to compensate his parents for the car accident. The chief demanded to finish up this accident, saying that he will give a TV and a refrigerator to Jeong Hyeok’s parents. The teacher repelled the suggestion, ‘This is not enough. If you do it this way, then I will accuse you to the Central Committee.  The next day, a secretary of the Primary Party Committee called the college. He said, “Just follow the suggestion that the Security Safety Agency gives the funeral expenses and a color TV.” It was evident that the Security Safety Agency gave a certain kind of hint to the secretary of the Primary Party Committee. The situation was saying that the chief will evasively save the driver. However, who can refute the instruction of the Party? Despite the undeserved death, the North Korean government just issued one ‘patriot certificate’. Seeing the TV exchanged for her son, she continued sobbing.

I have some personal experience with this topic.  When I visited the DPRK in August 2005, I asked one of my guides how traffic disputes were resolved.  He said that those involved simply had to work out the details.  there were no insurance companies.  This would put the average citizen at a severe bargaining disadvantage in the event of an acident.

According to the BBC:

A Macau bank accused by the US of laundering money for North Korea has agreed to dissolve all links with the communist state.

The US Treasury said Banco Delta Asia had acted as a “willing pawn” for North Korea to channel money through Macau.

Macau’s authorities took control of the bank last year after the fraud claims led to a run on its deposits.  Customers withdrew 10% of total deposits after the allegations surfaced.

Officials said the bank would end ties with North Korean clients and tighten its anti-money laundering procedures.

Daily DK did a survey of prices in the DPRK this January, 2006.

Official Wages for a North Korean workers labor are 2,000 won to 3,000 won per month (about $1).

– When examined, bribery is not necessary
– When getting a medical certificate or medicines, bribery is necessary
– Bribery: one box of tobacco/ as for medicines for 1,000 won, 7000 won

– Every month, the following costs should be paid to schools: kindergartens – 1,000 won/ elementary schools- 2,5000 won/ middle and high schools- 4,000 won
– Every month, the following stuffs should be provided to schools: scrap irons, glass 15kg and 40 bundles of timbers
– In an irregular basis, the following stuffs should be provided to school: vinyl, wastepaper, paints and gasoline

Asia Times
Lora Saalman
2/8/2006

On January 10, North Korean leader Kim Jong-il traveled in a luxury train to China’s Guangdong province to sample socialist-flavored capitalism. Just a few months earlier, the North Korean Workers Party introduced reform measures granting foreign investors tax cuts and allowing them to sell goods produced in North Korea without tariffs.

For an economy that ostensibly issued halting economic reforms in 1984, these new measures constitute a revolution, albeit one with Chinese characteristics. In accordance with its giant neighbor’s model, North Korean economic reform is predicated as an alternative to the instability of political liberalization. Unforeseen social and political shifts are to be cushioned by financial solvency to keep the regime intact. With China’s assistance and unofficial aid, sustainable growth may one day be achieved in North Korea. Yet a darker side to North Korea’s economic awakening remains.

Kim Jong-il’s visit comes on the heels of accounts of North Korean money-laundering in Macau and the US decision last June and again in October to freeze the assets of various North Korean companies and financial institutions. While many of these firms are beyond the reach of US sanctions, implied misconduct has already led to runs on the North Korean-affiliated financial institution Banco Delta Asia in Macau.

As allegations swirl of money-laundering through counterfeit cigarettes and currency, a less-known story has emerged on British American Tobacco’s previously undisclosed four-year-old joint venture in North Korea. It presents the dilemma of doing business in a country in desperate need of revenue but with a poor track record of allocating resources to its people. This cautionary tale begs the question as to where exactly Pyongyang’s joint-venture profits are going.

For North Korea, which lacks many of the basic laws for financial transparency and good governance, capital investments are more than economically precarious. Shared contact information and dubious management practices among North Korean companies are ubiquitous.

Daesong-BAT is one of a handful of Western joint ventures in North Korea. The far-reaching tentacles of its North Korean partner illustrate the complexity of verifying the background and connections of any North Korean entity. Like many of its compatriots, North Korea’s Sogyong General Trading Corp (Sogyong) boasts circuitous and often indirect ties to entities engaged in proliferation, international trade, shipping, and money-laundering. These indicators point to larger concerns as to whether joint ventures, particularly Western ones, can be manipulated by North Korea for illicit financing of the regime or even to sustain its alleged WMD (weapons of mass destruction) programs.

Joint ventures and front companies
In establishing Daesong-BAT, British American Tobacco teamed up with Sogyong General Trading Corp, a Pyongyang-based state trader best known for its carpet exports. Sogyong, however, also exports such products as handicrafts, furniture and agricultural produce, while importing machinery, electronics, fishing tackle, chemicals and fertilizer. It is not uncommon for North Korean state-run enterprises to deal in everything from machinery to fishing tackle. Yet eclectic product lists make trade in illicit drugs and weapons all the more difficult to track. Cigarettes are just one more product in the Sogyong export-import pantheon.

North Korean company product lists also rarely convey their full range of trade. Seemingly innocuous industries are often manipulated as front companies. Last year, for example, Japan’s Ministry of Economy, Trade and Industry (METI) listed what appeared to be an innocuous North Korean food manufacturer, Sosong Food Factory, for its participation in nuclear, missile, chemical and biological-weapons proliferation. Cigarettes, like food, have been used at times to mask the real objects being transferred. In one case, Japan in 2002 seized a Chinese vessel and found that the declared store of cigarettes on board actually contained drugs thought to have come from North Korea.

While not as licentious as drug or human trafficking, even the black-market trade of cigarettes could have a tangible impact on North Korea’s financing, as seen in Eastern European illegal cigarette rings. These factors highlight the danger of taking a North Korean food or even carpet manufacturer at face value.

North Korea’s network
Among the elements of obfuscation, the company name Daesong-BAT merits attention. Rather than combining or modifying the titles of the two partner companies to form Sogyong-BAT, Daesong-BAT combines British American Tobacco’s acronym with a name that could either point to North Korea’s Daesong district or Daesong General Trading Corp (Daesong). If it turns out to be the latter, Japan and other governments have prominently featured Daesong for its ties to missile and nuclear proliferation.

Incidentally, Daesong maintains one of the most extensive and convoluted North Korean networks, with more than 10 subsidiaries. It also is suspected of falling under Bureau 39, which earns foreign currency for North Korea. A direct connection between Daesong-BAT and the sinewy Daesong franchise has yet to be established but, as illustrated below, nothing is clear cut in North Korean business relations.

Because of the lack of transparency and convoluted nature of North Korean companies, contact information often serves as the first stencil for tracing overlap between industries. In the case of Daesong, the US Central Intelligence Agency’s Open Source Center follows the use of the same fax number to establish potential business and branch linkages. If the same logic is applied to Sogyong, another pattern emerges. Sogyong shares common fax numbers with at least two companies, Korea Foodstuffs Trading Corp (Foodstuffs) and Korea Kwail Trading Corp (Kwail). These companies in turn share fax numbers with nearly 100 companies in North Korea.

Among North Korean firms sharing contact information with Sogyong-linked entities, Japan’s METI and official European export monitors have listed at least six as end-users associated with North Korean WMD programs. In October, the US government targeted one in particular, Korea Ryonha Machinery Joint Venture Corp (Ryonha), freezing its assets under US jurisdiction and placing it on the US Specially Designated Nationals and Blocked Persons list. Ryonha is a prime example of the complex web of North Korean subsidiaries. Last June, the US Treasury Department also targeted the assets of its parent company Korea Ryonbong General Corp, formerly known as Lyongaksan, which heads five other US-designated entities.

Ryonha is not an aberration among companies converging with Sogyong. Among other Foodstuffs and Kwail-connected entities, Korean company databases list Korea Pyongyang Trading Corp as a distributor of methane gas derived from animal excrement. Apparently, effluent is not its only fetid source of income. The Japanese government has listed the very same company, along with subsidiaries of two other firms tracing back to Sogyong, namely Korea Ryonhap Trading Corp and Korea Jangsu Trading Corp, for nuclear, missile, chemical and biological weapons proliferation.

Proliferation networks may not be the only mechanisms at Sogyong’s fingertips. Contact information also links the two Sogyong-connected associates with at least four North Korean financial institutions. Among these, Koryo Bank and Korea Joint Bank have alleged ties to the now-infamous Banco Delta Asia in Macau. Banco Delta Asia’s own purported involvement in counterfeit-currency distribution and counterfeit-cigarette smuggling does not bode well for Daesong-BAT, no matter how convoluted their connections. Banco Delta Asia may have three degrees of separation between it and Sogyong, but in North Korea’s fishbowl of finance this does not preclude cooperation.

Banco Delta Asia is also reported to maintain a close business relationship with Macau-based Zokwang Trading, which its own vice general managing director claims is a part of North Korea’s Daesong General Trading Corp. Daesong, as mentioned earlier, has a pervasive proliferation record. It also has reported links to Changgwang Sinyong Corp (Changgwang), which has been repeatedly sanctioned by the United States for its missile-proliferation activities and sales to Iran and Pakistan. Zokwang in turn deals in missiles and nuclear-power-plant components, all the while maintaining a partnership with the notorious Changgwang. Combined with Sogyong’s branch in the joint \-venture hub Shenyang, China, even indirect ties to Macau suggest that Sogyong has the ability to tap into proliferation, industrial and financial networks in China and beyond.

Proliferation, industry and finance mean little without the means to transport goods and technology. Sogyong-associated entities Foodstuffs and Kwail share fax numbers with North Korea’s national airline Air Koryo, which has also been cited by official European monitors for proliferation. A 2003 Far Eastern Economic Review article even named Air Koryo as the transportation mechanism for Daesong’s suspected military assistance to Myanmar. Sogyong’s own shipping vessels Sogyong 1 and 2, which were detained in Japan on safety violations in December 2004 and January 2005, complete the final leg of the contact-linked proliferation, financing and shipment triangle. This network belies a much more intricate set of alliances than the domestic-consumption-based joint venture touted by British American Tobacco and Sogyong General Trading Corp.

Standards of business conduct
British American Tobacco’s website advocates transparency in international business and laudably eschews bribery, corruption, illicit trade, and money-laundering. In October, BAT executives further contended in The Guardian that the company’s North Korean cigarette joint venture fuels only domestic consumption, not exports to China or elsewhere. In spite of these reassurances, BAT is no stranger to the dangers of black-market cigarette production and transshipment. A February 2000 article in The Guardian even accuses BAT of complicity, by knowingly allowing illicit smuggling of its cigarettes to occur.

In the case of Daesong-BAT, British American Tobacco officials have admitted to knowing little of the company’s North Korean joint-venture operations. Ominously, BAT has stated that an unnamed Singapore division controls its North Korean joint venture. Lack of oversight combined with a dubious North Korean offshore mechanism for managing an ostensibly domestic industry raises significant warning signs. The incestuous relationship between state-run North Korean entities that share fax numbers of companies and banks listed for WMD procurement and money-laundering through counterfeit tobacco should also elicit concern. These are not simply dilemmas for British American Tobacco, but pose challenges to any companies forming joint ventures in North Korea.

Economic integration, as in China’s case, may bring North Korea more into step with international norms and standards. Ironically, engagement that is likely to lead to greater future transparency may also be manipulated for North Korea’s short-term illicit gains.

In 2003, the British government pressured BAT to close down its cigarette factory operations in the military dictatorship of Myanmar because of concerns over that country’s lack of human rights. Given the legion of obstacles impeding transparency in North Korea, BAT and other Western firms could be contributing to the worsening of more than human rights. They could be aiding and abetting illicit North Korean financing that is alleged to fuel Kim Jong-il’s slush fund and WMD programs.

North Korea, the ‘Sopranos’ state
Asia Times
By Todd Crowell

When US Ambassador to South Korea Alexander Vershbow recently called North Korea a “criminal regime”, he was not speaking metaphorically. He was not talking about the North’s abysmal human-rights record, illegal missile sales or efforts to acquire nuclear weapons.

No, he was talking about crime – as in counterfeiting US banknotes and cigarette packages, money-laundering and drug-trafficking. These issues have suddenly risen to the forefront of Washington’s agenda and become a major stumbling block in the renewal of the six-party nuclear-disarmament talks.

In September, Washington named Macau’s second-largest bank, Banco Delta Asia, as being “a willing pawn for the North Korean government to engage in corrupt financial activities through Macau”. It said senior bank officials were working with Pyongyang “to accept large deposits of cash, including counterfeit US currency, and agreeing to place that currency into circulation”.

In mid-December, the US Treasury Department issued a formal advisory concerning North Korea’s illegal activities and cautioned US financial institutions to take “reasonable steps to guard against the abuses of their financial services by North Korea, which may be seeking to establish new or to exploit existing account relationships”.

It was reported this month that a delegation of agents from the US Secret Service, which is responsible for counter-counterfeiting as well as protecting the life of the president, will travel to Seoul to meet with South Korean authorities over counterfeiting. Visits of this nature are not usually broadcast in such a public fashion.

Meanwhile, Pyongyang says it won’t return to the six-party talks unless the US lifts restrictions against its financial institutions, including those directed at eight state-owned trading companies that Washington cited in October as being involved in weapons trafficking, especially banned missile technology.

Rumors of North Korean counterfeiting and drug-trafficking have been circulating in Asia for years. Anyone who lived in Hong Kong for many years has heard them from time to time. North Korean companies have a long history of operating in the former Portuguese enclave of Macau, which for decades served the regime as a key window to the outside world.

The Zokwang Trading Co was considered Pyongyang’s de facto consulate in Macau, and the relationship between Zokwang and Banco Delta Asia is no secret. As far back as 1994 the bank found thousands of bogus US$100 bills allegedly deposited by a North Korean employee. The director of the Zokwang Trading Co was held and questioned, but no charges were pressed.

There have been several more recent instances of alleged North Korean counterfeiting.

Last April, the Japanese media reported that a hundred or so fake $100 bills were found among a stack of used currency aboard a North Korean freighter that called at a Japanese port in Tottori prefecture. The captain was reported telling police, “We were asked to bring the money to Japan so that the money could be paid for cars and other items.”

Also in April, a large stash of bogus notes was uncovered in South Korea. The Chosun Ilbo, which reported the story, did not say where or under what circumstances the money was found, though it went into great detail over the quality of the notes and quoted experts as saying it was “highly likely” they came from North Korea.

In August, the Federal Bureau of Investigation reported two “sting” operations in the US, colorfully described as Operation Royal Charm and Operation Smoking Dragon. The US government indicted 59 people on charges related to smuggling counterfeit US currency, drugs and cigarettes into the country. The announcement did not specify their origin, but other accounts have speculated that they came from North Korea.

David Asher, head of the US administration’s North Korea Working Group, published a lengthy essay in mid-November in which he described what he called “an extensive criminal network involving North Korean diplomats and officials, Chinese gangsters and other organized crime syndicates, prominent Asian banks, Irish guerrillas and a KGB agent”.

“North Korea is the only government in the world today that can be identified as being actively involved in directing crime as a central part of its national economic strategy and foreign policy … in essence North Korea has become the Sopranos state – a government guided by [Korean] Workers Party leaders, whose actions attitudes and affiliations increasingly resemble those of an organized-crime family more than a normal nation.” The Sopranos is a popular US television series about an organized-crime family.

But why is Washington suddenly pushing decades-old suspicions at this particular time? In September, Christopher Hill, the senior US negotiator at the six-party talks, announced a breakthrough in the negotiations. North Korea had agreed in principle to disarm in exchange for recognition and aid. That same month the Treasury Department issued a warning against dealings with the Macau bank.

In October came the sanctions against the eight North Korean trading companies. Also in October, Vershbow arrived in South Korea, and the new US ambassador quickly developed a reputation for making provocative statements. In November, the six-party talks quickly foundered on Pyongyang’s demands to lift sanctions.

No doubt American officials would solemnly swear they are motivated by a desire to protect the integrity of the US currency and nothing else. But even if the allegations are substantially true, which probably is the case, isn’t this really penny-ante stuff set against the much larger issue of North Korea’s nuclear-weapons program?

None of the other participants in the six-party talks has expressed any public concern about Pyongyang’s crimes. That includes Japan, which not only is supposedly the target of counterfeit money but also is on the receiving end of drugs manufactured in North Korea. (Japanese estimate that nearly half of the country’s illegal drug imports originate from there.) Yet it has said nothing.

Last week, the Chinese Foreign Ministry was forced to deny a report printed in the South Korean media that its government had found evidence of North Korean money-laundering in Macau. “China has never indicated that the government had confirmed North Koreans using Macau for money-laundering,” the ministry statement said.

Vershbow has likened North Korea to Nazi Germany as being only the second state-sponsored counterfeiter. He was referring to an operation whereby concentration-camp inmates forged millions of US dollars and British pounds to disperse in England in an effort to ignite inflation there and harm their enemies’ economies.

Yet the highest figure I have seen for the North Korean counterfeiting is the $45 million (over a decade) reported in the Washington Times, which is nothing set against the vast sums of dollars sloshing around Asia. Indeed, I’ve never heard even a whisper that North Korean counterfeits were affecting world currency markets or the value of the dollar in the slightest way.

It’s hard not to believe that the US administration is again listening to more hardline elements after a brief ascendancy of the “realists” in the State Department. Their purpose is to neutralize the talks (how does a nation negotiate with a criminal gang, after all?) and shift the issue away from nuclear disarmament back to the nature of the regime – with the ultimate objective of toppling that regime.

Todd Crowell comments on Asian affairs.

Daily NK
Shin Ju Hyun
1/10/2006

Korea Exchange Bank double Assurance

For the verification of the North Korean-made counterfeit dollars, the so-called “Super Note,” The DailyNK bought these counterfeit dollars and requested examination of them at the Korea Exchange Bank (KEB).

The above photos are of the “Super Note,” which the The DailyNK bought in Dandong, China. They were taken to the KEB on January 5th at 3 pm for examination and identified it as a “Super Note made in 2003.”

The following is the process of how The DailyNK obtained the counterfeit bills made in North Korea and requested examination of it at the KEB.

The DailyNK correspondent in Dandong, China, on January 2nd, was introduced to a businessman who does trade business between North Korea and China through an acquaintance. The DailyNK asked the businessman, Mr. Lee, working for K Trade Company to buy him some counterfeit dollar bills recently made in North Korea.

Mr. Lee smiled and said, “That is not a problem.” He said half a day would be enough for him to buy some counterfeit bills. The correspondent set an appointment with Mr. Lee for the next day.

The next day, the DailyNk was able to obtain the “goods.” From a wad of bills, he pulled out a $100 bill. It cost him $80. He said, “If you buy directly from a North Korean tradesman, it first costs $80 then drops down to $70 on the second call.”

“This is a dollar bill I got directly from a North Korean tradesman, and it is in good condition,” said Mr. Lee. “I was asked to do a favor to sell the dollar bills at $70 each.” According to Mr. Lee, if you meet the same North Korean tradesmen more than twice, they all ask you to do them the favor of selling counterfeit dollars.

Mr. Lee said in the areas where North Korean trade companies are located, such as Dandong, Changbai, and Tumen, daily counterfeit dollar exchanges are made. In Dandong, there is the Sinheung Trade Company run by North Korea’s National Security Agency and the ‘** base of 3000 Bureau (General Federation of Rear Services) run by the Ministry of the People’s Armed Forces.

Mr. Shim, who accompanied the meeting added, “Besides counterfeit dollar exchanges, it is a well known fact that fake (Chinese) Yuan bills are circulated as well.”

North Korean Tradesmen, First Deals for Counterfeit Dollars, Second for Drugs

“The Chinese government seems to know about this. If the counterfeit money becomes a problem between North Korea and the US, then China will also decide to take a hard-line policy against the North Korean counterfeit Yuan,” said Shim. “After deals for the counterfeit money are made, then comes deals for drugs. Drug deals are made much more carefully.”

The correspondent mailed the “Super Note” to The DailyNK headquarters in Seoul on January 4th. The DailyNK reporters in Seoul visited Korea Exchange Bank on January 5th for examination.

On the afternoon of January 5th, Suh Taek Seok at the financial office sales department at the KEB headquarters said, “It is certain that the bill is a sophisticated Super Note.”

“Some Super Notes made in 2001 are often circulated, but 2003 bills are very rarely found in South Korea,” he added.

After the close examination, “Although at the basic level, the quality of paper and print technique is very complicated, this Super Note bill could be considered one of the most sophisticated ones to be found,” explained Suh.

“The Super Note made in 2003 were circulated only from October 2005, thus some of the banks out there with detection machines still could fail to verify them.”

“Counterfeit Money from the Early 80s”

Suh said, “Without knowing where the Super Note bills came from, it is difficult to predict in which country the bills were produced. However, if it is true that if the bills were produced in North Korea, the problem could become quite a sensitive matter.”

“Apart from the quality of the paper, for the $100 bill, where it says ‘UNITED STATES’ on the left side of the Franklin portrait, there are white lines on the letter “N” and the picture of the grapes under the eagles is not so clearly printed. There are many more differences between real and fake bills.”

It seems the way the counterfeit bills are circulated also varies. Kim Chan Goo, researcher at the Institute for Far Eastern Studies of Kyungnam University who was devoted to relations with North Korea for a decade since 1989 testified, “Eleven years ago when I visited Pyongyang, the guide asked me if I would like to $100 bill for 30 dollars. I bought it as a souvenir, and asked for examination at the KEB when I came back to South Korea. It was verified that it was a counterfeit.”

Kim still kept the bill as a souvenir. “There were many cases of South Korean trade/businessmen who were asked to buy and sell as a broker between the consumers and the North Korean tradesmen in Dandung. Looking back, it can be deduced that North Korea started counterfeiting dollars in the early 80s.”

Bloomberg
Bradley K. Martin
12/28/2005

A sign of North Korea’s fledgling moves toward a market economy can be found at the Pyongyang monument commemorating the 1945 founding of the Workers’ Party. Beneath a 50-meter-tall rendition of the party’s logo — a hammer, sickle and writing brush — sits a street photographer.

A handmade sign displays her price list and sample photos, mostly of groups of North Korean visitors, with the monument as background.

The photographer is one of countless sidewalk entrepreneurs – – most of them selling food and drink — who have set up shop in North Korea since 2002. Before that, they would have been hauled off to re-education camps for profiteering. In the late 1990s, North Korea’s Civil Law Dictionary described merchants as a class to be eradicated because they “buy goods from producers at a low price and sell them to consumers at a high price by way of fraud, deceit and spoils.”

Since then, the party newspaper, Rodong Shinmun, has quoted Kim Jong Il, who’s held supreme power since the 1994 death of his father, Kim Il Sung, as favoring profits under socialist economic management.

North Korea, one of the world’s last Stalinist regimes, has gradually begun permitting commerce. On a four-day visit to Pyongyang, the capital, in October — arranged and scripted by the government — a group of 17 Western journalists got a glimpse of the changes. Clean, new restaurants were packed with paying customers while the streets — almost empty in 1979 and only lightly traveled in ’89 and ’92 — bustled with bicycles, motorbikes and Japanese sedans.

Casino Pyongyang

In the state-owned Yanggakdo Hotel on an island in the Taedong River, a mostly Chinese clientele played slot machines, cards or roulette at the Casino Pyongyang. Since 1998, Macau billionaire Stanley Ho, through his Sociedade de Turismo e Diversoes de Macau SARL, has invested $30 million in the casino, whose staff is also Chinese.

Now some investors from farther afield are joining pioneering Chinese and South Koreans in plunging into a country once so isolated it was known as the Hermit Kingdom. In September, Anglo- Sino Capital Partners, a London-based fund manager, said it had formed the Chosun Development & Investment Fund, which plans to raise $50 million for investments in North Korea.

“It’s the last virgin economy,” says Colin McAskill, 65, a director of Anglo-Sino and chairman of Koryo Asia Ltd., which is investment adviser to the new fund.

Natural Resources

Besides recent changes in the economic system, a 99 percent literacy rate and a minimum wage for workers in foreign-invested ventures of only $35 a month, McAskill says, he was drawn by North Korea’s rich natural resources — including iron ore, copper, lead, zinc, molybdenum, gold, nickel, manganese, tungsten, anthracite and lignite.

The fund will concentrate on North Korean companies that have been active internationally in the past, with track records as foreign currency earners, says McAskill.

He negotiated on behalf of North Korea with foreign bank creditors in 1987, when the country was unable to repay some $900 million in balance-of-payment loans that had enabled the regime in the 1970s to purchase Western industrial technology — Swiss watch-making machinery, for example — as well as such non-capital goods as 1,000 Volvo sedans from Sweden.

Oil Potential

The country’s petroleum potential lured Dublin-based Aminex Plc and its Korea-focused subsidiary, Korex Ltd., which in August announced the signing of a nine-year production-sharing agreement to explore and develop 66,000 square kilometers (25,000 square miles) of North Korean territory. The agreement covers areas in the Yellow Sea’s West Korea Bay and in the Sea of Japan as well as onshore.

While North Korea lacks proven petroleum reserves, according to the U.S. Energy Information Agency, the West Korea Bay in particular may contain hydrocarbon reserves, as it’s considered to be a geological extension of China’s oil-rich Bohai Bay.

More foreign investment may come, says Tony Michell, a Seoul- based consultant on North Korea. Michell, a 58-year-old Briton, says he has recently shepherded 20 senior managers of international companies, representing seven nationalities, to Pyongyang.

“They’re big players,” says Michell, declining to identify his clients by name or company. “They’re looking at everything, from services to manufacturing. They want to get the measure of the North Koreans and be ready if the six-party talks succeed.”

Six-Party Talks

The so-called six-party talks — between North Korea and China, Japan, Russia, South Korea and the U.S. — are aimed at ending the country’s pursuit of nuclear weapons. In September, the six countries agreed on a statement of principles to govern further talks. It called for a nuclear-free Korean peninsula, a peace treaty and economic cooperation in energy, trade and investment.

Seoul-based Hyundai Research Institute, an affiliate of the Hyundai Group, projected in September that a successful outcome to the talks would be worth as much as $55 billion to the economy in the North — and more than twice that in the South.

Optimism about the economy has boosted the prices of defaulted North Korean debt originally owed to hundreds of creditors, mostly European banks, which in the 1970s began meeting as a London-based ad hoc group to discuss restructuring options. In the 1990s, that so-called London Club turned a portion of the debt into Euroclearable certificates, securities that were denominated in Swiss francs and German marks.

The certificates are trading at about 20-21 percent of face value, up from 12 percent in 2003, according to London-based Exotix Ltd., a unit of Icap Plc, one of a few financial firms that make an over-the-counter market in them.

Excessive Optimism

The debt’s price has risen in the past on excessive optimism about the country’s future. In early 1998, the debt was trading at nearly 60 percent of face value amid rumors that North Korea would collapse imminently and be absorbed by wealthy South Korea, which would then make good on the entire outstanding debt.

That had not happened by the time of the crash later that year in global emerging-market securities, when the North Korean debt price sank to about 25 percent of face value.

Exotix estimates that North Korea owes the equivalent of some $1.6 billion in principal and interest to banks out of a total $14 billion in principal and interest owed globally to mainly communist and formerly communist countries.

Although a cease-fire was declared in 1953 in the war between North Korea and China on one side and the United Nations — under whose flag the Americans, South Koreans and others had fought — on the other side, no peace treaty has ever been signed.

The U.S. maintains sanctions under the Trading with the Enemy Act that restrict trade and financial transactions with North Korea — and apply to Americans and permanent residents of the U.S. and to branches, subsidiaries and controlled affiliates of U.S. organizations throughout the world.

China, Russia

North Korea’s flirtations with capitalism are belated compared with those of China and the former Soviet Union, which began opening their economies in the 1970s.

North Korea did pass a law legalizing foreign investment in 1984. The law, which permitted equity joint ventures between state enterprises and foreigners, attracted only $150 million in investment during the following decade, largely because investors were put off by the country’s poor roads, railroads, power systems and phone networks and by official interference in joint ventures’ recruitment, dismissal and compensation of workers, according to a 2000 thesis by Pilho Park, a postgraduate student at the University of Wisconsin Law School in Madison.

Vietnam Example

In contrast, Vietnam lured $7.5 billion in investment in the first five years after it opened its economy to foreign capital in 1988, Park wrote.

Following the collapse of European communism in the early 1990s, North Korea opened the Rajin-Sonbong Free Economic and Trade Zone on the northeastern border with China and Russia. A brief flurry of investor interest ensued and then fizzled out when a crisis over the country’s nuclear weapons program took North Korea to the brink of war with the U.S. and South Korea in 1994.

In the mid ’90s, catastrophic floods, combined with the collapse of the global communist system of aid and preferential trade, caused a severe energy shortage that crippled the economy. As much as 70 percent of manufacturing capacity went idle, according to the South Korean central bank.

Also in the mid ’90s, famine killed as many as 2.5 million North Koreans, by the estimate of the U.S. Agency for International Development.

Food Insecurity

Since then, food aid from abroad, an absence of large-scale natural catastrophes and a 2005 harvest that was the biggest in 10 years have kept North Korea from the massive starvation that’s taken place elsewhere, including Niger, says Richard Ragan, North Korea director for the United Nations World Food Program.

Still, “the country faces chronic food insecurity,” Ragan says. “One of the things that happened with the food shortages is that marginal lands became less controlled. You see people trying to farm on some of the most inhospitable plots of land you could imagine.”

In October, steep, unterraced hillsides were plowed outside Pyongyang. The crops can then wash down, rocks and all, during rainstorms, harming water supplies and damaging farmland – fertility.

A second nuclear weapons crisis boiled up in 2002 when the U.S. accused the North of conducting a secret uranium enrichment program — to replace a plutonium program that it had frozen as part of a settlement of the earlier crisis.

Economic Rules

That same year, the regime proceeded with what then Prime Minister Hong Song Nam described as dramatic new economic measures, which helped bring arbitrarily set prices and foreign exchange rates closer to those prevailing on the black market.

The North Korean won consequently dropped to 150 won to the dollar in December 2002 from 2.15 to the dollar a year earlier. The official rate is currently about 170 won, while on the black market, one dollar can bring about 2,000 won.

The government also introduced pay incentives aimed at boosting worker productivity. The system is in operation at enterprises such as the Pyongyang Embroidery Institute, where some 400 women stitch elaborate pictures for framing and sale.

Employees who don’t perform up to expectations aren’t fired; they’re denied raises, says spokeswoman Woo Kum Suk. Unable to live on their minuscule basic salary, equivalent at black market rates to something over a dollar a month, non-performers eventually quit and go elsewhere, Woo says. Good workers can see their salaries raised as much as fivefold.

Consumers

“In my opinion, it’s good to have this system,” she says. “Although the government supplies things to us, sometimes there’s something more we want to buy.”

North Korea has some way to go before many investors rush in. According to a UN report, net investment inflow for 2003 — the most recent year for which statistics are available — was a negative figure: minus $5 million.

Currently the country is constructing a new special economic zone at Kaesong, just north of the South Korean border, where several small companies from the South already employ North Koreans to make clothing, footwear and household goods. Authorities declined to let Western reporters visit it, permitting only a glimpse from a highway bridge a mile away.

Those who are investing are taking a long-term view. Singaporean entrepreneur Richard Savage was looking at least five years into the future in 2001, when he formed a joint venture tree plantation with the Ministry of Foreign Trade. The company, Evergreen Kormax Paulownia Ltd., is 30 percent-owned by the government, which has assigned Savage 20,000 hectares (49,000 acres) on a 50-year lease with an option to extend for 20 more.

Timber Business

Savage, 58, says he, family members, friends and a few other investors have put $3 million into the project so far. Savage says he hopes that by the time the paulownia trees mature — they grow as fast as 7 centimeters (2.85 inches) a day on his farm, and some may be ready for harvesting five years after planting — he’ll be able to sell the wood in a unified Korean market.

When the Northern economy takes off, the first beneficiary will be the building industry, he says. “That’s why I’m in timber,” he says, adding that his fallback plan is to sell the wood to China, Japan and South Korea.

It’s not the first venture in North Korea for Savage, who wears a cowboy hat and whose e-mail moniker is WildRichSavage. In 1994, he introduced North Korean officials to Loxley Pcl, a Thai telecommunications company. In 1995, an affiliate formed for the purpose, Loxley Pacific Co., signed a joint venture agreement with North Korea’s post and telecommunications ministry to create modern telecommunications in the Rajin-Sonbong special economic zone. The venture earns about $1 million a year, Loxley Pacific Chief Financial Officer C.C. Kuei, 56, says.

Mining for Gold

North Korea’s 1992 Foreign Investment Law guaranteed that foreign investors’ shares of profits could be repatriated, a promise that’s now being tested by Kumsan Joint Venture Co., a gold mining concern that’s half owned by a Singapore-led group of Asian investors and half owned by Hungsong Economic Group, a large trading, mining and manufacturing group in Pyongyang that’s controlled by North Korea’s military.

Roger Barrett, a Beijing-based British consultant, has helped arrange financing and technology for Kumsan. Barrett, 50, introduced Kumsan to the foreign investors, whom he declined to identify.

The company used its investment to buy secondhand mining equipment from Australia in 2004 for the venture’s mine 2,000 meters (6,562 feet) above sea level near the city of Hamhung. In the first year the new equipment was used, Barrett says, the mine produced about 100 kilograms (220 pounds) of gold, half of which the foreign investors took out of the country. He says doing business with North Koreans has proved to be absolutely normal. “It’s working very well,” he says.

Foreign-Run Bank

The business environment in North Korea is surprisingly welcoming, says Nigel Cowie, 43, a former HSBC Holdings Plc banker who was hired a decade ago by Peregrine Investment Holdings Ltd. to start North Korea’s only foreign-run bank.

When Peregrine collapsed in 1998, Cowie and the North Korean joint venture partner kept the local unit operating. He and three other investors bought Peregrine’s 70 percent stake in it from the firm’s liquidators in 2000. Cowie, who’s general manager of what’s now called Daedong Credit Bank, says the bank has about $10 million in assets and has only foreigners as customers, mostly Chinese, Japanese and Western individuals and institutions. Only North Korean-owned banks can do business with state enterprises and North Korean individuals.

Better Living Conditions

Living conditions for expatriates have improved significantly in the past three or four years, Cowie says over a meal of Korean barbecue in the capital’s Koryo Hotel. “For me, personally, it’s things like creature comforts, more shops, Internet, e-mail,” he says. While the Internet is available to foreigners, it is forbidden to most North Koreans.

Cowie says his biggest challenge at the bank comes from outside North Korea. In September, the U.S. Treasury Department barred U.S. financial institutions from dealing with a Macau bank, Banco Delta Asia, that it said had been “a willing pawn” in corrupt North Korean activities and represented a risk for money laundering and other financial crimes.

The bank and North Korea both denied the charges, but the Macau government took over the bank and announced it would provide no services to North Korea in the future. Cowie says the action tied up a big chunk of Daedong Credit Bank’s customers’ assets because Banco Delta Asia had been a main correspondent bank for North Korean banks.

The Treasury Department in October broadened its dragnet by ordering a freeze of the assets, wherever in the world the U.S. could assert its jurisdiction, of eight North Korean companies it suspected of involvement in proliferating weapons of mass destruction.

`WMD Trafficking’

The department explained its action in an Oct. 21 statement on its Web site: “The designations announced today are part of the ongoing interagency effort by the United States Government to combat WMD trafficking by blocking the property of entities and individuals that engage in proliferation activities and their support networks.”

North Korea sought to connect the Treasury actions to Washington’s position in the six-party talks. The country’s Korean Central News Agency, using the acronym for the Democratic People’s Republic of Korea, said on Dec. 2 that “lifting the financial sanctions against the DPRK is essential for creating an atmosphere for implementing the joint statement and a prerequisite to the progress of the six-party talks.”

Assistant Secretary of State Christopher Hill, the chief U.S. envoy to the talks, had said in a Nov. 11 press conference that the asset freeze wasn’t directly related to the talks.

Money Laundering Banned

Cowie says he doubts the U.S. action was intended to harm Daedong, which had already issued a manual prohibiting money laundering. He says he fears such U.S. actions could damp investor enthusiasm for North Korea. “It can cause the people doing legitimate business to just give up,” he says.

Cowie isn’t packing up to leave, though. Neither is Felix Abt, a Swiss native who heads a new European Business Association in Pyongyang. “I am very busy with visiting foreign business delegations,” Abt, 50, says. “Take it as a sign that the economy is developing and that more foreign business activities are under way.”

Outsiders’ investment on capitalism’s farthest frontier is gradually bringing benefits to North Koreans, too, says Savage, the tree farmer. “I can’t convert the whole country, but for the people who work for me, I’m giving them a better standard of living,” he says. “Slowly, people will prefer not to work for the government.”

If Savage and his fellow pioneers have their way, it’s only a matter of time before capitalism takes root in North Korea.

Asia Times
Ruediger Frank
12/9/2005

The focus of international efforts in North Korea used to be on food aid until a government policy change this fall. Now that the North Korean regime has sent home humanitarian non-governmental organizations and reinforced the public food distribution system, outside attention has shifted to developmental assistance.

However, the basic question remains the same: will international support improve the situation in North Korea or just prop up the regime? It will probably do both, partly because North Korea and the regime are are not easily separable. But are there any visible developments that would justify taking the pain of further outside engagement?

Thinking that the past years went by without any significant economic change in North Korea would mean ignoring reality.

Walking through an extraordinary, festive Pyongyang in October – freely, without any guide – I found a handwritten poster (in Korean) at a watch store reading, “To celebrate the important holiday [60th anniversary of the foundation of the Korean Workers’ Party], we are selling many goods at a 10% discount from October 10 until October 31.”

In other words, there was a sale – in North Korea. Better than any official announcements, this tells a whole story. In an ordinary socialist shop, from the perspective of the employees, selling means the investment of time without any revenue. Neither their income nor job security are usually connected to sales figures. Those familiar with other socialist countries will recall the lack of staff enthusiasm and customer orientation in shops and restaurants. Selling more than the plan dictates could even invite trouble because of empty inventory.

Prices are usually fixed by the state and not negotiable; a socialist store in fact does not sell, it distributes. In such an environment, attracting buyers by giving a discount makes no sense at all. Having a sale implies an interest in selling, as well as price flexibility. It implies an interest in the customers, and hence the readiness to respond to their needs. The motivation surely is money; at least the manager of the store has a vested interest in raising the sales figures. A sale in North Korea? Can this be a harbinger of the start of a paradigm shift? Despite all skepticism vis-a-vis the reforms, monetization and marketization seem to be no empty words.

A few steps later, I saw an advertisement offering coffee, tea, “fresh beer” and a cozy place to play Korean chess (again, in Korean – ie, targeting domestic customers). So far, so good, but this was a clothing store. Obviously not allowed to turn into a restaurant, its staff were at least trying to extend its reach. Near my hotel I found an advertisement for “the first debit card in our country”, issued by the North East Asia Bank.

Currently, it can only be used in roughly a dozen shops and restaurants. Still, this is a beginning. Some traders were ready to bargain, which implies private economic activity or at least growing flexibility. In one small but nicely arranged shop, not in the vicinity of a hotel, I found Chanel handbags at a very reasonable price, tags written in Korean but with prices also in US dollars. The same currency, not the euro, is required to purchase a ticket at the Air Koryo (the North’s state airline) office in Beijing. A North Korean official asked me to send him English-language economics textbooks for his daughter who studies at Kim Il-sung University, and would not mind if I sent him the books via ordinary mail. This list of examples can be continued.

Beyond this anecdotal but significant evidence, there are other developments. For the second year in a row, North Korean agriculture was able to increase its output significantly (Yonhap News, “USDA Estimates North Korea’s Grain Output as Largest in 10 Years”, November 28). Analysts were quick to discard the idea that the famine of 1995-1997 was mainly caused by natural disasters; so it would be unfair to associate the positive development this time only to good weather. The attempts to utilize market incentives to increase production have been effective, although not without unexpected side effects.

In China and Vietnam, too, initially nobody wanted to change the whole economic system. Even in the 1990s, Chinese economists were talking about a secondary and supplementary role of the non-state sector. But successful experiments prompted new ones, leading to the stop-and-go piecemeal approach that we now, in hindsight, recognize to have been the beginnings of gradual transformation. The external situation was more favorable there also. So there is room for optimism concerning North Korea.

A huge and important difference between the North Korean case and that of China and Vietnam is the weight of agriculture in the national economy and in society. About 80% of the population in Vietnam and 70% of the population in China worked in agriculture at the start of the reform process, as opposed to only about 30% in North Korea. Liberalizing food trade in a non-saturated and isolated market implies rising food prices. This is good for food producers, but may signal rising prices for consumers. In China and Vietnam in 1979, a majority benefited, while only a minority was forced to bear heavier costs in exchange for diversified supplies, and hence could be supported by state subsidies.

Because of its different socio-economic structure, in North Korea it has been the other way round. The majority of the population had to use their few and mostly static resources to struggle for food in the market and this drove up prices as well as industrial wages. Accordingly, inflation in North Korea skyrocketed, while it was much more moderate in the early reform phase in the other two countries.

“Skyrocketing inflation” is not just an empty phrase. Due to the lack of data, there is so far no reliable way to calculate a North Korean inflation rate based on the standard method of creating a basket of basic goods and services. But the development of wages should provide us with important clues, assuming that wages must at least cover subsistence. Otherwise, nobody would go to work. I asked a worker at a cable factory in Pyongyang in October about his monthly wage, and he answered it was 30,000 won (US$29). Would he tell a foreigner the truth?

The number he provided appears to be very high, if compared to the official wages that have been raised from about 100 won to roughly 3,000 won in 2002, and allegedly have only reluctantly been paid. However, in addition to a few private shops, I also entered several state-run department stores in Pyongyang, in which goods are displayed at official state prices. Some examples: a pair of very basic sports shoes cost 10,000 won, a bar of soap was 600 won, a wall clock cost 8,500 won. This suggests the possibility that the worker was telling the truth. Based on this evidence, if the wages increased tenfold in three years, we can estimate the annual rate of inflation in North Korea to have been roughly about 215% since 2002.

If this is roughly accurate, the situation is politically not sustainable. So in October, the government put on the brakes, hoping to curb inflation by taking its major source – food – out of the market cycle. Will it work? That remains to be seen. Are the reforms over? Is avoiding reform the surest survival strategy for the elite in Pyongyang? I would disagree with such a view. If the whole world around North Korea moves – and it certainly does – the riskiest course may be to remain static. So, even if the preservation of the status quo is the objective of the elite, in the long run it must work actively to achieve that goal. Strange as it may sound, reform is the only way to avoid regime change. Kim Jong-il calls that “adjusting to the new environment”.

This brings us back to the international community. Assuming that domestic agricultural production is still, despite the increases in the last years, insufficient – does North Korea now “rely” on food deliveries from China and South Korea? That would be something revolutionary in its own right. If true, it must mean that the North Koreans see no alternative to reliance on Chinese and South Korean food aid in the short run. But if history is a guide, they will hardly bet their future on it.

Rather, the intention seems to be to repeat what in principle has already been done after another major crisis. During the Korean War until about 1953-54, Kim Il-sung asked his “socialist brothers” mainly for conventional aid, such as food, clothing, etc. Then, the items on his wish list changed to support for reconstruction and the delivery of machinery, technology and even turnkey factories. Today, we would call that developmental assistance. Of course, the current situation is in many ways different from the 1950s. Yet a similar pattern may be unfolding.

So, what is the plan? In perfect congruence with the spirit of juche, (self-reliance) the North Koreans now do what economist David Ricardo would and what European experts including myself at economic seminars in Pyongyang have told them for years: ensure self-sustainability in food by increasing industrial output, exporting it and using the revenues to import food to supplement domestic production.

Before 1990, the North Koreans had the opportunity to engage in “politically correct” trade with socialist partners, who, for strategic reasons, often could not avoid buying low-quality goods. Now, if they want to export, the North Koreans have few alternatives to dealing with capitalists. Even the highly cooperative partners in South Korea are private companies that will go bankrupt if they purchase worthless or over-priced goods. North Korea’s industry has no choice but to become competitive.

The logical consequence is the urgent need for modernization, the introduction of advanced technology, securing a stable energy supply, the import of capital and the development of an institutional and human resource capability to interact on the international scene. This is behind Pyongyang’s focus on intensified economic training measures for its officials, and the background of the recent news about eased regulations for direct investment in North Korea (Hankook Ilbo newspaper, November 30). This is even more so since normalization with Japan and the expected financial support related to that deal are not out of reach, though still too far away.

The reforms are not necessarily over; the leaders in Pyongyang might just have adjusted their strategy. Rome was not built in a day, and the risks are high from the perspective of the North Korean leadership. International support will continue to be an important and effective policy, as it obviously was in the past, although its nature might change and the impact will not always be directly measurable. However, it works. The few millions spent on projects in North Korea are a low price for regional security and improved living conditions.

Ruediger Frank is a Korea specialist at the University of Vienna and Distinguished Visiting Professor at Korea University.