North Korean Economy Watch

UPDATE 2 (2011-7-20): The Daily NK offers some more statistics:

It has been confirmed the North Korean authorities were concentrating on importing luxury items for privileged people, while international humanitarian organizations were worrying about North Korea’s chronic food shortage and the damage to the vulnerable classes.

According to statistics from the South Korean government and Chinese customs, from January to May this year, the cost of food import is only about 4% out of the total amount of imports, which translates to about 46 million dollars out of 1.148 billion dollars.

The total amount of trade with China was doubled as compared with the corresponding period from last year: exports were increased by 217% and imports by 58%. The export amount is 812 million dollars while the import is 1.148 billion dollars.

In comparison, around 10 million dollars were used to purchase high quality liquor, cigarettes and others for privileged classes. The amount of cigarette imports, such as Marlboro, Mild Seven and others, is 7.5 million dollars. 2.4 million dollars were used to buy Cognac or whisky like Chivas Regal, Hennessy X.O. and other kinds of alcohol.

The amount of alcohol imported was increased by 94 % compared to the same period of last year.

It was reported that other items, such as international designer brands clothes, watches, and other items and electronic goods from SONY and Samsung were also imported.

It also showed that North Korean authorities sold wheat it had received from the international community to other countries. 200,000 tons of phosphate rock, which is materials for fertilizer, provided by Middle Eastern countries for free in 2010, were sold to some countries in Europe.

In addition, since South Korean markets have been blocked due to May 24 Measures, North Korea tried to download agricultural products, which are disguised as Chinese products, onto South Korean vessels in international waters by secretly working with Chinese traders. The South Korean government reported that there were four cases last year and 11 cases so far this year.

So apparently everyone has seen the data source but me.

UPDATE 1 (2011-7-22): The Los Angeles Times picked up on the report and offered a few more details:

North Korea’s importing of luxury goods from China nearly doubled in the first five months of this year, compared with the same time period for 2010, according to a report by Beijing customs officials obtained by the South Korean Unification Ministry.

…

The communist regime spent $46 million on imported corn, rice and other food staples, but it also spent $10 million on luxury items from January through May of this year. Imported through China, the items reportedly include Marlboro cigarettes, Hennessy cognac, whiskey and Japanese beer, South Korean officials said this week, quoting the Chinese customs report.

The imports included about $500,000 worth of high-grade beef, apparently for luxury meals, which North Korean leader Kim Jong Il uses to maintain the support of the power elite, Seoul officials said.

…

This year, the regime again requested food aid, citing reduced crop yields. Though the European Union plans to send $14.5 million in food aid, the United States and South Korea have been reticent to supply such aid.

Some scholars believe that North Korea has exaggerated its need for food, alleging that the aid is turned over to the military or stored for future use, such as a planned celebration next year to mark the anniversary of the regime.

“I do not believe these claims about mass starvation,” said Andrei N. Lankov, a professor at Kookmin University in Seoul and the author of several books on North Korean history and politics.

He called the move by Pyongyang “a deliberate campaign to get free food, which will then be distributed to the privileged groups as government gifts. This will allow them to increase their legitimacy and win some popular support at the expense of the Western and South Korean taxpayers.”

I still have not seen the original Chinese source.  If anyone has it, please send it my way.

ORIGINAL POST (2011-7-20): Yonhap cites an unnamed South Korean government official (anyone want to take credit for these statistics?) who claims that the DPRK is skirting UN sanctions and obtaining luxury goods.  According to the article:

Despite years of food shortages, North Korean leader Kim Jong-il has engaged in the gift politics of showering his top aides and other elites with luxury goods to win their loyalty.

Some ruling elites also enjoyed McDonald’s hamburgers delivered from China via Air Koryo, North Korea’s flagship airline, the official said, without elaborating.

The North also spent about US$7.5 million in buying cigarettes such as Marlboro and Mild Seven in the first five months, a rise of 117 percent compared to the same period last year, according to figures by South Korea and China. It also showed that the North imported $2.4 million worth of Hennessy Cognac, whiskey and Japanese beer, up 94 percent compared to the same period last year.

The trade volume between North Korea and China stood at US$1.96 billion in the first five months, twice as much as in the same period last year, according to Lee.

Since the article does not name a source or provide any way to track down the numbers, take them with a grain of salt.

Read the full story here:
N. Korea imports luxury goods for ruling elites despite food shortages
Yonhap
2011-7-20

UPDATE 1 (2011-8-10): Wages of North Korean workers in Kaesong Industrial Complex set to rise 5% for the fifth consecutive year. According to the Institute for Far Easter Studies (IFES):

The minimum wage for North Korean workers at the Kaesong Industrial Complex (KIC) has risen annually at a rate of 5 percent since 2007. The year 2011 stands to mark the fifth consecutive year that such an increase has occurred.

Recently, the steering committee for the KIC and South Korean and North Korean authorities reached an agreement to accept a 5 percent wage hike for North Korean workers at the complex. Accordingly, as of August 1, 2011, North Korean workers at the KIC should earn USD 63.814 rather than USD 60.775 in monthly wages. South Korean authorities, as an exchange for accepting the North Korean demand for a wage increase, requested that productivity be elevated via the adoption of a more efficient method of worker placement.

At the meeting, the Kaesong Industrial District Management Committee, representatives of companies in the complex, and the head of corporations were in attendance and reached an agreement to form a task force specifically for the improvement of productivity of workers. While the overall output of the KIC has increased, the output per worker has not improved, leading to the decision to establish the task force, with the goal of enhancing the competitiveness of the complex.

The minimum monthly income of USD 60.775, which kicked in last August, remained in effect until July 31 of this year. The Labor Law of the KIC caps the wage increase at 5 percent; a 5 percent increase to the minimum wage this year would elevate the minimum monthly wage for workers to USD 63.814.

At the meeting, North Korea mentioned international wage levels and made demands for a wage hike of more than the upper limit. However, most of the companies that operate in the KIC adamantly oppose such demands.

Despite the May 24 sanctions implemented by the South Korean government after the March 2010 sinking of the ROK navy corvette Cheonan, the growth of the KIC has continued. The trade volume has increased by 24.23 percent while the production output has increased by 26.1 percent compared to the same period last year.

Although the eight-year old Kaesong Industrial Complex boasts its competitiveness against other industrial complexes in China and Vietnam, it still has many challenges that must be resolved, including employment flexibility and incentive system.

From the institutional perspective, there are many tax benefits that Kaesong offers that industrial complexes in China and Vietnam do not. For example, the enterprise profit tax in Kaesong is at 14 percent. In contrast, China and Vietnam abolished the preferential treatment for foreign companies in 2008 and 2009, respectively; they currently apply a 25 percent of enterprise profit tax to both domestic and foreign companies. Even in terms of labor and wages, the KIC would appear to offer better quality of labor. In addition, the labor productivity of the KIC is comparable to 71 percent of South Korea, which is much higher than that of China’s Qingdao Industrial Complex (60 percent) and Vietnam’s Tanttueon Industrial Complex (40 percent).

Another advantage is the KIC’s favorable geographical proximity to South Korea, which helps reduce distribution costs and time. This advantage helps to reinforce the sales competiveness of the companies in the complex. In addition, the KIC has sufficient potential for expansion into markets in China, and domestic markets in South and North Korea.

On the other hand, Kaesong has relatively low flexibility of employment due to the principle of indirect recruitment. Difficulties in applying an incentive system are also a disadvantage of the KIC.

ORIGINAL POST (2011-7-15): Kaesong wages set to increase. According to Yonhap:

The minimum wage for workers at the inter-Korean industrial park in the North Korean border town of Kaesong is likely to rise 5 percent this year, the same annual rate of increase since 2007, industry sources said Friday.

More than 46,000 North Koreans work at about 120 South Korean firms operating in the complex, despite the South’s suspension of all other economic ties with the North over the deadly sinking of a South Korean warship last year. The local workers currently earn a minimum monthly income of US$60.775 following a 5 percent increase that took effect last August.

This year’s new minimum rate goes into effect next month after negotiations between the factory park’s management officials from the two sides. Under the park’s labor regulations, the minimum wage can increase only up to 5 percent from the previous year.

“The North Koreans are demanding an increase of more than the upper limit (of 5 percent), citing wage levels in other parts of the world,” said an official from one of the South Korean firms in Kaesong. The person spoke on the condition of anonymity.

“In effect, this is equivalent to demanding a wage rise of 5 percent,” the official said, adding that the businesses operating in the joint industrial park had tentatively agreed to accept the demand. After the increase, the North Korean workers will earn $63.814 monthly.

Meanwhile, production at the industrial zone has continued to grow, according to recent data. The park’s output of clothes, utensils, watches and other goods rose 26.1 percent last year from 2009. Since its opening in 2004 under former liberal South Korean President Roh Moo-hyun, the complex has served as a source of tens of millions of dollars for the cash-strapped North annually.

Read the full story here:
Minimum wage for N. Koreans in Kaesong likely to rise 5 pct
Yonhap
2011-7-15

Picture above from the Daily NK.

According to the Donga Ilbo:

China has begun cracking down on North Korea`s narcotics trade in China along with South Korean intelligence, having seized 60 million U.S. dollars worth of drugs from the North last year, according to a South Korean government source Monday.

“It’s only a fraction. The volume of drug trafficking in China will be much greater than that,” the source said.

This is the first time for China to unveil the volume of narcotics made in North Korea.

Beijing had been reluctant to raise the matter in public though it found Pyongyang`s increased drug trafficking as a threat. China diplomatically protects the North in nuclear issues but started a crackdown with South Korea apparently because it can no longer tolerate the North`s narcotics, which threatened China`s three northeastern provinces bordering the North.

The drugs seized by Beijing are said to have the best quality, going beyond the level individuals can produce. So Pyongyang is considered to be manufacturing narcotics on the national level at factories.

“China is pretty much pissed off,” a diplomatic source said, adding, “China believes that North Korea’s drug trafficking has grown more serious since last year.”

Though Beijing did not specifically mention the North when it stressed a crackdown on drugs, it implied North Korean-made narcotics.

In a previous post, we linked to a Newsweek story on the Chinese crackdown:

Twenty years ago, Yanji had only 44 registered drug addicts. Last year, the city registered almost 2,100 drug addicts, according to a 2010 Brookings Institution report, with more than 90 percent of them addicted to meth or similar synthetic drugs. Local officials acknowledge that this is very likely a gross undercount and that the actual number may be five or six times higher. “Jilin Province is not only the most important transshipment point for drugs from North Korea into China, but has itself become one of the largest markets in China for amphetamine-type stimulants,” the Brookings report said.

Chinese authorities recently conducted a provincewide crackdown, code-named Strong Wind. But for law enforcement, the drug presents a particular problem. Unlike other drugs, it’s nearly impossible to trace the origin of meth. Still, officials, residents, and experts believe that much of the methamphetamine consumed in this Chinese region is manufactured across the border in North Korea, a longtime exporter of drugs. “Clearly,” the Brookings report said, amphetamine-type stimulants “from North Korea have become a threat to China in recent years.”

In an article published last year, Cui Junyong, a professor at Yanbian University’s School of Law, posited that a large amount of the illegal drugs ingested in Yanji came from North Korea. Supporting his point, the border patrol last year arrested six North Koreans in a high-profile bust, including a dealer named “Sister Kim.” Although sources estimate that a gram of meth in North Korea costs roughly 10 times the price of a kilo of rice—about $15—it’s still much cheaper than in China.

“Selling ice is the easiest way to make money,” says Shin Dong Hyuk, who was born in a North Korean concentration camp in 1982 and escaped to South Korea in 2005. Every defector, he added, “knows about ice.”

Perhaps because of its alliance with its benighted neighbor, the Chinese government has been extremely careful about pointing its finger at North Korea; reports on drug busts in Jilin province euphemistically refer to the drugs as coming from a “border country.”

“We don’t publicize” the drugs coming from North Korea because it would touch on “the good relationship between China and North Korea,” an official, requesting anonymity, from Jilin’s anti-drug unit says. But he adds, “Of all the drugs we’ve seized this year, it’s mostly been ice, because that’s our main drug here.”

…

According to Yun and others, North Korea’s methamphetamine production is centered in Hamheung, the site of a chemical-industrial complex built by the Japanese during World War II, which has a high concentration of chemists and was reportedly one of the worst-hit cities during the famine.
…

Earlier this year, a US Department of State report to the Congress alleged that the DPRK’s state-sponsored drug production was on the wane–though “private” production and trade along the Chinese border remained a problem.  According to one report:

In an annual report submitted to Congress, the US State Department said “no confirmed instances of large-scale drug trafficking” involving the North Korean state or its nationals were reported in 2010.

It said there was not enough information to confirm that the communist state was no longer involved in drug manufacture and trafficking “but if such activity persists, it is certainly on a smaller scale”.

This is the eighth consecutive year that there were no known instances of large-scale methamphetamine or heroin trafficking to either Japan or Taiwan with direct North Korean state involvement, it said in the 2011 International Narcotics Control Strategy Report.

“The continued lack of public reports of drug trafficking with a direct DPRK (North Korea) connection suggests that such high-profile drug trafficking has either ceased or been sharply reduced,” the report said.

The report said, however, that trafficking of methamphetamines along the North Korea-China border continues and press reports about such activities have increased in comparison to last year.

“These reports… point to transactions between DPRK traffickers and large-scale, organised Chinese criminal groups” in locations along the border.

“Press reports of continuing seizures of methamphetamine trafficked to organised Chinese criminals from DPRK territory suggest continuing manufacture and sale of DPRK methamphetamine,” the report said.

This and continued trafficking in counterfeit cigarettes and currency suggests that “enforcement against organized criminality in the DPRK is lax”, it added.

Additional Information:
1.  Back in March, Andrei Lankov wrote about this situtaion.

2. Earlier this year, the DPRK arrested some Japanese men in Rason for “trafficking and counterfeit”.

3. In June, China intercepted a meth shipment from the DPRK.

4. Marcus Noland also has posted on this topic.

UPDATE 1 (2011-7-13): Marcus Noland wrote some comments on the DPRK’s trade with China:

In an earlier post we argued that North Korea’s trade dependency on China, while large and rising, is frequently exaggerated in public discussions. According to press reports, the Korean Development Institute has apparently gone some way in rectifying this situation, determining that China accounts for 57 percent of North Korea’s trade—a far cry from the 80 percent derived from the KOTRA figures that ignore North-South trade, yet still well above the 30-40 percent we obtain on the basis of IMF figures. Like KOTRA, the KDI figures appear to be missing trade—their overall estimate for total North Korean trade, approximately $6 billion, is well below the $8-11 billion reported in recent years by the Fund. Those figures are not unimpeachable—just take a look on our recent posting regarding their FDI data, but it is striking that the numbers diverge by such large margins.

ORIGINAL POST(2011-7-7):

Trade with China: According to the APF (2011-7-6):

North Korea’s reliance on China for trade deepened last year after South Korea severed most ties with Pyongyang, accusing it of torpedoing of one of its warships, a think-tank said Wednesday.

The state Korea Development Institute said in a report the North’s trade with China was worth $3.47 billion last year, up 29.3 percent from a year earlier.

Such trade accounted for 56.9 percent of its total trade of $6.09 billion last year, up from 52.6 percent in 2009.

The trend intensified this year, with the value of North Korea-China trade nearly doubling to $1.43 billion during the first four months from the same period a year earlier.

This was mainly due to a sharp rise in the North’s coal exports, the institute said.

In contrast, the North’s exports to South Korea plunged from an average $40 million per month in January-May last year to a mere $1 million per month in the first four months of this year.

“The North drastically expanded exports of such strategic materials as coal to China” after its trade with the South was almost cut off, the report said.

This sudden surge in exports contributed to energy shortages in the North during the past winter.

Here is the report home page (Korean). Here is the report (Korean-PDF)

Trade with South Korea: According to Yonhap:

Trade between South and North Korea shrank more than 14 percent in a year following economic sanctions imposed on the North in retaliation for its sinking of a South Korean warship, the Unification Ministry said Sunday.

Total inter-Korean trade dropped to US$1.73 billion in the year spanning from June last year to May this year, declining 14.41 percent from $2.02 billion in the same June-May period a year earlier, according to the ministry.

The decline came after the sitting Lee Myung-bak administration declared on May 24 last year its resolution to bring the North’s March 26 sinking of the South Korean warship Cheonan to the United Nations Security Council.

The South also imposed economic sanctions on the North in reaction to the ship attack that killed 46 crew members. The North has denied responsibility for the attack.

General trade and processing trade, in which North Korea imports resources and manufactures them to re-export to the South or another country, plunged 76.45 percent to $165.9 million during the cited period, the ministry said. Both of the trade types have been banned since the May resolution.

Inter-Korean trade has shown an even steeper downtrend since the beginning of this year as pre-paid manufacturing orders, which were exempt from the trade ban, nearly came to an end, according to the ministry.

During the January-May period, cross-border trade stood at $685.2 million, down 21.5 percent from the same five-month period last year, it said.

However, the volume of trade via the Kaesong industrial complex, an inter-Korean joint economic project, rose 24.2 percent to $1.55 billion over the past year, the ministry added.

Nicholas Eberstadt offers some stark economic data on the DPRK.  According to his article:

While it is true that the DPRK suffered a severe economic shock from the collapse of the Soviet Bloc, this unexpected economic dislocation did not automatically presage log-term economic failure, much less famine. The counterexample of Vietnam–another socialist Asian economy heavily dependent on Soviet subsidies in the late 1980s–proves as much. According to the World Bank, Vietnam’s per capita income rose by over 150% between 1990 and 2007, and its per nominal per capita exports (in US dollars) rose by a factor of over 7 times during those same years, whereas North Korea’s nominal per capita exports slumped by over 25% between 1990 and 2007.

Further, it is of course true that the US–and in more recent years, Japan and South Korea–have imposed a plethora of economic sanctions on North Korea (America alone has over 30 such legal and administrative strictures in force today). But these penalties cannot explain North Korea’s miserable economic performance with the rest of the OECD countries, most of which are in principle open to commerce with the DPRK.

Let’s exclude Japan, South Korea, and America from OECD trade for the moment. Between 1980 and 2007, the import market for these other OECD countries expanded in nominal US dollars from just over $1 trillion to nearly $7 trillion–but according to the UN COMTRADE database, North Korea’s exports to those same countries collapsed: plummeting from $330 million to $177 million. When one takes inflation and population growth into account, this means the DPRK’s per capita exports to the rest of the OECD fell by almost 80% over those 27 years–and since these same export markets were growing all the while, North Korea’s share was twelve times smaller in 2007 than it had been in 1980.

What then is the problem? Closer inspection strongly suggests that North Korea’s long-term economic failure is directly related to the policies and practices embraced and championed by the Pyongyang government. North Korea’s current “own style of socialism” [or Urisik Sahoejuui] is a grotesquely deformed mutation of the initial DPRK command planning system, from which it fatefully and increasingly devolved over time.

North Korea is still in principle a planned Soviet-type economy: but for almost two decades it has in reality been engaged in “planning without facts”, and even in “planning without plans” (in the memorable phrase of Japanese economist Kimura Mitsuhiko). In and of itself, this would be enough to consign the North Korean economy to trouble. But to make matters worse, North Korean leadership has insisted on saddling the economy with a monstrous military burden under its campaign of “military-first politics” [Songun Chongchi]. Further, in contradistinction to virtually all other contemporary economies, North Korean trade policy for almost two generations has systematically throttled the import of productive and relatively inexpensive foreign machinery and equipment, thereby guaranteeing that the national economy would be saddled with a low-productivity, high-cost industrial infrastructure of its own making.

Add to this North Korea’s unrelenting war against its own consumers (no other modern economy has ever seen such a low ratio of consumer spending to national income, even at the height of Maoism or Stalinism) and Pyongyang’s stubborn, longstanding policy of “reverse comparative advantage” via a juche food policy that attempts to devote no more funds to overseas cereal purchases than foreigners pay for North Korean agricultural products in a country where cropland is scarce and growing seasons are short, and one begins to see how North Korean leadership engineered the country’s remarkable Great Leap Backward–and eventually, even a famine.

There is, to be sure, a grim logic to the DPRK’s destructive policies: for the same strategy that has ruined the country’s economy has also served to sustain its peculiar political system and ruling elite. In fact, given Pyongyang’s narrowly racialist ideology, its now-improbable but continuing quest for absolute mastery of the entire Korean peninsula and its undisguised fear that “ideological and cultural infiltration” will subvert the DPRK’s political order, the policies that the North Korean government pursues today may be regarded as careful, deliberate and faithful representations of the state’s overarching priorities.

Unfortunately, Pyongyang’s official policies and practices just happen to make the North Korean economy incapable of anything like genuine self-reliance, juche slogans notwithstanding, So DPRK state survival depends upon successfully generating a steady stream of subventions and concessional transfers from abroad.

Even so: the North Korean economy is so dysfunctional that it a positive net flow of foreign subsidies is not always enough to prevent calamity. After all: the Great North Korean Famine of the 1990s took place when the country (to judge by the import and export figures of its international trading partners) was receiving hundreds of millions of US dollars a year more in merchandise for abroad than it was shipping out. Quite obviously, that surplus was too small to overcome the grave built-in defects of the modern North Korean economy, or to forestall mass hunger.

So to continue its very existence, the North Korean system must commit itself to a permanent, predatory hunt for life-giving foreign funds: monies that it extracts from abroad by stratagems of military extortion, humanitarian hostage-negotiations (for the external feeding of its own population), and what might be called “guerilla commerce” (i.e., duping credulous foreigners who think there is money to be made from the DPRK by any but the country’s own elite).

North Korea, incidentally, seems to make it a point of honor not to repay its foreign creditors–and although “imperialist” banks and businesses from the West have learned this fact to their sorrow in abortive attempts to do commerce with Pyongyang, this is a bad habit that goes back to the early years of the Cold War, when the DPRK’s routinely reneged on loans from its “socialist comrades” in Beijing and Moscow.

North Korea has honed impressive skills in separating foreign governments from their own money. According to the US Congressional Research Service (CRS), for example, the USA transferred for than $1 billion in humanitarian, economic and security assistance to North Korea between 1995 and 2009: this despite a supposed “hostile US policy”. By the CRS’ reckoning, North Korea obtained over $4 billion from South Korea over those same years–and those were only the officially acknowledged payments by Seoul.

But China’s aid to North Korea puts all these Western subsidies in the shade. Beijing is almost completely opaque about its economic relations with Pyongyang–yet Chinese trade statistics suggest that North Korea has enjoyed a net resource transfer from China of over $9 billion since 1995, and the annual transfers look to have jumped markedly after 2004 (although China has never offered any sort of public explanation for why it would have increased its economic assistance to Pyongyang so significantly in recent years).

Earlier this year, North Korea announced a new “Ten Year State Strategy Plan for Economic Development” designed to lift the DPRK into the ranks of “the advanced countries by 2020”. Although the details of the plan have not yet been revealed, we can be sure it has enormous investment requirements–running into the tens or even hundreds of billions of dollars. It is also a safe bet that Kim Jong Il’s visit to China in May 2011 was a sort of fundraising tour aimed at securing some of the many billions of dollars envisioned by this ambitious plan.

After Kim Jong Il’s return from China, Pyongyang unveiled a new “joint economic zone” with China on two border islands in the Yalu rive–a projectr meant to underscore a new direction for the North Korean economy, and to jumpstart the new development campaign. But haven’t we seen this movie before? Ever since Kim Jong Il’s highly publicized visit to China in the early 1980s, there has been recurrent foreign speculation that would “inevitably” have to embrace economic reform. Yet all North Korean efforts at “opening” and “reform” to date have been confused and half-hearted, and every one of these initiatives has ultimately ended in failure.

Will this latest plan mark a decisive break from decades of ever more wayward North Korean economic policy? Some in China clearly believe that the DPRK can be gradually coaxed onto a path of pragmatic economic policymaking. To judge by Beijing’s swelling economic subsidies for North Korea, Chinese leadership may be banking on as much. The results of any such wagers, however, remain to be seen.

In China and other socialist countries, big changes in economic policy have typically followed, and depended upon, big changes in national leadership–but Pyongyang appears absolutely intent upon carrying the Kim family’s dynastic rule into its third generation. North Korean policymakers may genuinely want the DPRK to be what they call a “prosperous and powerful state” [Kangsong Taeguk]–but at the same time they have been totally unwilling to risk the sorts of steps that could actually generate such prosperity. Until this contradiction is resolved, North Korea is most likely to remain the black hole in the Northeast Asian economy.

Read the full story here:
What Is Wrong with the North Korean Economy
American Enterprise Institute
2011-7-1

Institute for Far Eastern Studies (IFES)
2011-6-25

Since the June 8 and 9 groundbreaking ceremonies for joint development projects between North Korea and China were held, attention has been directed toward North Korea’s international economic activities. The Japan-based newspaper, Chosun Shinbo, featured an interview article regarding these collective projects, including the areas of Hwanggumpyong and Wiwha Islands and the Rason Economic and Trade Zone.

According to North Korea’s Committee of Investment and Joint Venture, Rason Economic and Trade Zone is, “an important national undertaking following the teachings of Kim Il Sung. . . . Rason will soon become the entrepot port like Singapore, enhancing the lives of North Korean people.”

In addition, it was mentioned that the development of economic zones in Hwanggumpyong and Wiwha Islands will solidify the already strong DPRK-China friendship and expand the boundaries of international economic relations.

According to North Korea’s Committee of Investment and Joint Venture, politically, “Stable political atmosphere allow investors to engage freely in investment activities and necessary legal measures were taken creating favorable legal conditions for foreign investments. This includes the establishment of Joint Venture Law (of 1984) and other related laws.” Economically, “All the necessary substructures supporting the business operation are set. Workers will all be provided free 11-year education and tax rates are the lowest in the region and for those investors investing in sectors that the DPRK is promoting, will be provided with preferential treatment.”

North Korea is encouraging foreign investments especially in the industrial, agricultural, transportation, construction, financial, and tourism sectors. In particular, adopting state-of-the-art production technology is considered most important. This is to increase the area’s competitiveness in the international market through the production of items that have high export value. However, investment restrictions are placed preventing exports on natural resources like ore and coal.

The Committee also stressed the accomplishments of economic cooperation with China and Egypt and revealed plans of passing a double tax avoidance agreement with China, who is the largest foreign investment for North Korea.

The Egyptian company Orascom Telecom has invested in telecommunications, construction, and financial sectors in North Korea. The president of Orascom is said to have met with Kim Jong Il early this year, announcing his plans of expanding investment in the country.

In addition, the Committee reiterated building an independent national economy does not exclude international economic relations. It explained, “We are trying to resolve our shortcomings through international economic activities while maximizing our domestic technology and resources. This is the principle of socialist economic construction.

The Committee of Investment and Joint Venture was established last July, which is a central state organization under the Cabinet overseeing joint ventures and investments. It is in charge of guiding, supervising and administering the inducement of investments from abroad. It is a government body on the level of the Ministry of Trade, which it has close affiliations with. The Ministry is a central organization controlling general trade activities while the Committee is mostly responsible for attracting foreign investment, joint investment, and ventures.

Part 1: The Illogicality of Anti-Socialist Policy
Lee Seok Young
2011-6-22

In North Korea today, those actions which are subject to the harshest oversight and most excessive punishment are those deemed anti-socialist, an expression of the extent to which such actions are seen as a threat to the regime.

Yet these very actions have already taken deep root in people’s lifestyles, spreading rapidly as a result of chronic economic difficulties, food insecurity, endemic corruption and the inflow of information from abroad.

First of all, every North Korean and defector the Daily NK meets says much the same thing; that if people had not followed an ‘anti-socialist’ path during the mid-90s famine, they could not have survived. The power which maintains North Korean society through the hardest times is that derived from anti-socialist actions, and it is those actions which the authorities would like to put an end to.

The blocking of these so-called ‘anti-socialist trends’ nominally began with Kim Jong Il’s 1992 work, ‘Socialism Is a Science’, issued following the fall of the Eastern Bloc. A time of great fear for the regime, ‘Socialism Is a Science’ expressed a determination to block out anti-socialist phenomena.

However, a famine exploded nationwide shortly after the publication of the thesis, placing these very anti-socialist modes of behavior at the core of the lives of almost everybody in the nation.

Having completely replaced Kim Jong Il and the Chosun Workers’ Party as the alpha provider of sustenance, money is now uppermost in the minds of the people. If they can, they are moving away from the collective farms, factories and enterprises to become more active in the market.

“At a time when the state didn’t provide rations and workers were not even receiving their monthly wages, the ones who started trading early on were all best able to avoid this predicament,” said one defector, “Others followed after their example and, rather than trying to find work, went straight into the market.”

Money, then, is the fundamental toxin that now threatens to shake the very basis of the Kim regime, completely undermining the ‘let’s work the same, have the same and live well’ lifestyle that the regime has long been demanding from the people.The authorities, as part of a losing battle to halt this slide, ‘educates’ the people with the mantra, “Don’t become a slave to money,” but it makes no difference.

People are growing more and more money-oriented. What simply began as a desperate rearguard action to survive extreme poverty has become a preoccupation with accumulating wealth. The many who don’t have the capital to start a business are keen to work with those who do.

One interviewee, a woman hailing from North Hamkyung Province, told The Daily NK, “They have to keep trying, but they can’t eliminate it. How could they, when the state itself is actually encouraging its spread? Everywhere you go, they demand bribes, and people with money never get punished even when clearly guilty, because everyone is desperate to earn money.”

Given that the central authorities demand Party funds from regional bodies, and regional Party and military cadres in turn work with smugglers, and the cadres charged with inspection turn a blind eye to criminal acts in exchange for bribes, the whole system is, as the interviewee said, rotten from the top down.

One defector who left his position as a cadre in a Yangkang Province enterprise agreed, recalling, “The Party periodically collected money from our factory, but since all the machinery had long since stopped running, they made us work in the market and give 30% of the profits to the authorities. It was the state that promoted anti-socialism in consequence.”

Another defector originally from North Hamkyung Province said in a similar vein, “The National Security and People’s Safety agents stationed on provincial borders stop people without the right permit to travel, but let them pass in exchange for a few packs of cigarettes. Some even ask for your wrist watch. It’s not just the people; the whole nation is busy being anti-socialist.”

Increasing exposure to foreign materials is also influencing the situation somewhat. Such things are especially popular with students and women working in the markets, two groups which are more up-to-date than most.

South Korean and Western culture is being transmitted quickly via DVD, and materials that are brought into the state from China by traders and smugglers are also pushing forward new trends such as the ‘Korean Wave.’

To the North Korean people, who once lived in near complete isolation from the rest of the world, the introduction of foreign materials has intensified their yearnings for a new life style. The stricter the regulations become, the thirstier for something else the people become.

Part 2: Crackdowns Enhancing Anti-Socialist Cycle
Mok Yong Jae
2011-06-23

‘Anti-socialism’ in North Korea is a destabilizing force disturbing the foundations of the system. For that reason, the authorities place a great emphasis on rooting it out. Inspections are frequent and their targets varied. But the fact is that this has done little to stop the growth of such activities; in fact, quite the opposite; some believe that targeted inspections actually increase instances of smuggling, for example.

These focused inspections are handed down in the name of the ‘Party Center’ in other words Kim Jong Il. The latest inspections over anti-socialist trends in border areas have been being carried out by Kim Jong Eun’s direct instruction. First people are educated about and warned against ‘anti-socialist behavior’, then provincial Party and military cadres launch an inspection.

If a concerted inspection is to be unleashed on a given area, an inspection unit is set up, and it does the work. In the case of recent inspections targeting drugs and defection, the inspection units have even been sent from the Central Committee of the Party. The makeup of the unit can differ slightly depending on the target of the inspection, but usually includes agents from the National Security Agency (NSA), People’s Safety Ministry and Prosecutors Office. Precise search sites are usually selected at random and the searches conducted without warning, while ‘criminals’ are flushed out in part by getting citizens to report on one another.

However, the effectiveness of this system has a limit. This is primarily due to an overwhelming degree of official corruption at nearly all levels.

The Spread of Bureaucracy and the Limits of Inspections

The primary agents conducting the inspections, agents from the NSA and PSM, collude with smugglers for their own benefit. Anti-socialist activities are not a new means of survival, and the more commonplace the inspections become, the more focused the agents doing it become on their own self-interest; i.e. rent seeking rather than uncovering instances of wrongdoing.

For example, agents seek out big smugglers only in order to offer them an opportunity for their actions to be ignored, something they will do for a price. A source from Yangkang Province explained to The Daily NK, “Hoping not to lose their goods, also so as to avoid prison, in many cases smugglers try to win over agents. They talk to the official for a while, and if they think ‘this guy can be won over’ then some even gently encourage them to find a way to forego any punishment.”

Then, when the inspecting agents begin dropping heavy hints about expensive merchandise, electronics or a piano, for example, the smugglers say, “I’d be delighted to buy that for you,” and for that receive their freedom.

Thus, it is rare for money to change hands directly; goods are bought in China and handed over when the inspection period has come to a close. The smuggler also obtains a permit to import a certain amount of other goods without penalty in the future. By winning over agents in this way, assistance in future times of trouble can also be secured.

In addition, as Lee Jae Won, the former chairman of the Korean Bar Association Committee on Human Rights in North Korea and someone who has interviewed a great number of defectors as author of the 2010 White Paper on Human Rights in North Korea, concludes, “Anti-socialist activities are extremely common for North Korean cadres in public positions such as prosecutors and judges.” The bribing of prosecutors and judges in exchange for leniency or to escape conviction is a daily occurrence, as much as bribing the security forces and cadres.

What Anti-socialist Counteroffensive? Officials are the source of Antisocialism

Now much more so than in the past, cadres and agents are directly involved in the antisocialist activities.

A Chinese-Korean trader who often goes between Dandong and Shinuiju told The Daily NK, “There are so many drugs in North Korea that even the officers supposed to be policing it are taking drugs themselves. Some of them even asked me to take opium to China and sell it. I go back to North Korea every year to visit relatives, and I’ve seen officers there doing bingdu (methamphetamines) with my own eyes.

It is also said that the families of cadres are the main source of South Korean movies and dramas on DVD. Party cadres are, in effect, the very source of the Korean Wave that their bosses in Pyongyang ban on the premise of defending the state from the ‘ideological and cultural invasion of the South Chosun reactionaries’.

A source from Pyongan Province confirmed the story, telling The Daily NK, “These DVDs and VCDs come from the houses of cadres who travel overseas a lot. The children of cadres love watching them. The families of traders have a lot of them, too, but it’s the cadres they’re spreading from.”

Thus, while the central Party single-mindedly attacks anti-socialist behaviour, the cadres and agents who are meant to be carrying out the orders are deeply involved in the ‘anti-socialism’ themselves. The more crackdowns that occur, the more contact there is between the elite and security forces on the one hand and smugglers and traders on the other, offering more opportunities for symbiosis. It is for this reason that some claim the inspections are actually catalyzing the anti-socialism.

Meanwhile, An Chan Il of the World North Korea Study Center pointed out to The Daily NK that the whole thing is completely inevitable, saying, “These inspection teams are not receiving proper rations from the state, so of course they take bribes instead when sent out into the field. Administrative irregularities and corruption are at the very heart of these anti-socialist inspections. The only way for the families of inspecting agents to survive is for the father to be a part of this anti-socialist behavior.”

Choi Yong Hwan from the Gyeonggi Research Institute agreed, adding, “These inspections are intensifying social inequality. The fundamental cause of this is the collapse of the state rationing system due to economic difficulties. It’s a situation where even the agents are hungry, so there is a permanent pattern of them attempting to guarantee their own survival via corruption. There is a vicious cycle repeating here, whereby those who are able to ingratiate themselves with the inspecting agents and cadres survive, and those who do not or cannot get punished.”

UPDATE 2 (2011-7-23): The Choson Sinbo, a pro-Pyongyang news service based in Tokyo, has published an article on rare-earths development in the DPRK.  You can see a PDF of the original Korean article here.

According to coverage of the article in Bernama:

According to resource development senior officials, the amount of rare earth buried in the North amounts to approximately 20 million tonnes.

Estimates on the amount could rise fo the current digging work finds new burial grounds or more elements deeper in existing sites, said the Tokyo-based paper, which serves as a channel for Pyongyang to deliver messages.

So far, no exact amount of rare earth deposits in the reclusive communist nation has been confirmed. The largest burial deposit was located in North Pyeongan Province the paper said, while the rest of the elements were distributed in the southern and northern parts of the nation.

The North is working on using the rare earth minerals in manufacturing industries and is considering joint projects with other nations, Kim Heung-joo, vice chief of the state-run resource development agency, was quoted as saying by the paper.

The government will put limits on its output aqnd exports of rare earth materials, Kim added.

According to coverage in the AFP:

China has 90 million tonnes of rare earth deposits, Russia has 21 million tonnes while the United States has 14 million tonnes, the report said.

…

The largest deposit was discovered in North Pyongan Province, the paper said, while the rest of the elements were distributed in southern and northern parts of the country.

A senior North Korean official of the state natural resource development agency told the newspaper that North Korea was encouraging joint ventures with other countries to develop rare earth metals.

“It is important that these elements be processed in the country before being exported,” the official, Kim Hung-Ju, was quoted as saying by the Chosun Shinbo.

…

Currently, China produces more than 95 percent of the world’s rare earths — 17 elements critical to manufacturing everything from iPods to low-emission cars and missiles.

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UPDATE 1 (2011-6-23): Here is the story in KCNA:

DPRK Makes Full Use of Rare-earth Minerals

Pyongyang, June 20 (KCNA) — An effective utilization of rare-earth minerals is of weighty significance in economic growth, said an official of the Ministry of State Resource Development.

Kim Hung Ju, vice department director of the ministry, told KCNA the DPRK government has paid much effort to the exploitation and utilization of rare-earth minerals.

The country has large deposits of high-grade rare-earth minerals in west and east areas.

Prospecting work and mining have been launched in the areas and detailed exploration of new deposits is going on in a far-sighted way in areas with favorable mining conditions.

Meanwhile, scientific institutes have intensified researches in various rare-earth elements.

KCNA has previously boasted about rare-earths development.  See 2002-11-18, 2004-7-29, and 2010-4-9.

ORIGINAL POST (2011-6-23): According to Yonhap:

North Korea is showing a growing interest in developing rare earth minerals, in an apparent bid to earn much-needed cash from selling the materials abroad.

Rare earth minerals are compounds of rare earth metals, including cerium and neodymium, which are used as a crucial element in semiconductors, cars, computers and other advanced technology areas. Some types of rare earth materials can be used to build missiles.

In a report carried by North Korea’s official Korean Central News Agency (KCNA) earlier this week, the communist state said it is working on developing rare earth minerals for economic growth.

“An effective utilization of rare earth minerals is of weighty significance in economic growth,” the report said, quoting Kim Hung-ju, vice department director of the North’s Ministry of State Resource Development.

“The DPRK government has paid much effort to the exploitation and utilization of rare earth minerals,” it said, referring to North Korea by the acronym of its official name, the Democratic People’s Republic of Korea.

The report added that there are large deposits of high-grade rare earth minerals in the western and eastern parts of the country, where prospecting work and mining have already begun. It also said the rare earth elements are being studied in scientific institutes, while some of the research findings have already been introduced in economic sectors.

The article follows another KCNA report in July 2009 that described North Korean leader Kim Jong-il’s inspection of a semiconductor materials plant, saying he stressed the importance of producing more rare earth metals.

Until now, North Korea’s official media have mostly reported on the use of rare earth minerals in medicine and fertilizers. But its new focus on developing and using the materials appears to stem from the country’s interest in selling the metals for a high price on the international market, according to experts.

Rare earth elements are becoming increasingly expensive, as China, the world’s largest rare earth supplier, puts limits on its output and exports.

“It appears that North Korea only recently started taking an interest in rare earth materials,” said Choi Gyeong-su, head of the North Korea Resources Institute in Seoul. “The country does not have the technology to even determine the exact amount of its reserves, so it doesn’t seem likely anytime soon that the rare earth materials will be used to produce goods for the high-tech industry.”

Read the full story here:
N. Korea seen exploiting rare earth minerals for exports
Yonhap
2011-6-23

Here is the statement from the US Treasury Department:

​On June 20, 2011, the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) amended the North Korea Sanctions Regulations, 31 C.F.R. part 510 (the “NKSR”), to implement Executive Order 13570 of April 18, 2011.  OFAC also removed from 31 C.F.R. chapter V the Foreign Assets Control Regulations, 31 C.F.R. part 500 (the “FACR”), and the Regulations Prohibiting Transactions Involving the Shipment of Certain Merchandise between Foreign Countries (Transaction Control Regulations), 31 C.F.R. part 505 (the “TCR”).  The final rule containing the NKSR amendments was published at 76 FR 35740 (June 20, 2011); the final rule removing the FACR and TCR was published at 76 FR 35739 (June 20, 2011).

Here and here are the links to the final rules (PDF).

Here is a link to the Treasury Department’s DPRK information resource page.

Lankov writes in the Korea Times about the DPRK’s various Special Economic Zones:

In early June, the governments of China and North Korea declared that they would work to develop two new special economic zones (SEZs). One zone is to be situated in the small port city of Raseon, on the eastern coast of South Korea, just 20 kilometers from the nearest crossing to China. Another zone will be developed on the unremarkable sandy island of Hwanggumpyong, in the vicinity of Sinuiju, the largest city on the border (some three quarters of trade between the two countries pass through this city).

One cannot be surprised by this initiative as talk of new SEZs “soon to be established” has been around for over a decade. There is little doubt that the North Korean government is very interested in the idea of SEZs. Unfortunately, this interest does not necessary mean that the North Korean authorities are willing to make the concessions that would allow the SEZs to operate efficiently.

The history of North Korean SEZs is essentially the history of frequent failures and occasional partial successes. The first attempt to create a SEZ took place in 1991, when the North Korean government established a SEZ in the remote northwestern corner of the country. The Raseon SEZ, as it has now become known, is located where the borders of China, Russia and North Korea meet.

Read the remainder of the story below:
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