North Korean Economy Watch

Asia Times
Andrei Lankov
12/13/2006

Last Thursday in Seoul, the influential opposition daily newspaper Chosun Ilbo published a government document that outlined the plans for South Korean aid to be shipped to North Korea in the next financial year. In spite of the nuclear test in October and a series of missile launches last summer, the amount sent to Pyongyang this year was record-breaking – nearly US$800 million. If the document is to be believed, the target for the next year is set at an even higher level of 1 trillion won (about $910 million).

This generosity might appear strange, since technically both Koreas are still at war. However, it has long been an open secret that this is not the war the South wants to win, at least any time soon. The Seoul politicians do not want to provoke Pyongyang into dangerous confrontation, and they would be unhappy to deal with the consequences of a sudden collapse of Kim Jong-il’s dictatorship. Now South Korea wants a slow transformation of the North, and is ready to shower it with aid and unilateral concessions.

Many optimists in Seoul believe this generosity will persuade Pyongyang leaders to launch Chinese-style reforms. However, so far no significant reforms have happened. On the contrary, news emanating from the North since late 2004 seems to indicate that the government is now working hard to turn the clock back, to revive the system that existed until the early 1990s and then collapsed under the manifold pressures of famine and social disruption.

Signs of this ongoing backlash are many. There were attempts to revive the travel-permission system that forbids all North Koreans to leave their native counties without police permission. Occasional crackdowns have taken place at the markets. There were some attempts to re-establish control over the porous border with China.

Finally, in October 2005 it was stated that North Korea would revive the Public Distribution System, under which all major food items were distributed by state. Private trade in grain was prohibited, so nowadays the only legitimate way to buy grain, by far the most important source of calories in North Koreans’ diet, is by presenting food coupons in a state-run shop. It is open to question to what extent this ban is enforced. So far, reports from northern provinces seem to indicate that private dealing in grain still takes place, but on a smaller scale.

From early this month people in northern provinces are allowed to trade at the markets only as long as an aspiring vendor can produce a certificate that states that he or she is not a primary breadwinner of the household but a dependant, normally eligible to some 250 grams of daily grain ration (the breadwinners are given 534 grams daily). It is again assumed that all able-bodied males should attend a “proper” job, that is, to be employees of the government sector and show up for work regularly.

In the past few years the economic situation in North Korea was improving – largely because of large infusions of foreign aid. If so, why are the North Korean leaders so bent on re-Stalinizing their country, instead of emulating the Chinese reform policy that has been so tremendously successful? After all, the Mercedes-riding Chinese bureaucrats of our days are much better off than their predecessors used to be 30 years ago, and the affluence of common Chinese in 2006 probably has no parallels in the nation’s long history.

The Chinese success story is well known to Kim Jong-il and his close entourage, but Pyongyang leaders choose not to emulate China. This is not because they are narrow-minded or paranoid. The Chinese-style transformation might indeed be too risky for them, since the Pyongyang ruling elite has to deal with a challenge unlike anything their Chinese peers ever faced – the existence of “another Korea”, the free and prosperous South.

The Chinese commoners realize that they have not much choice but to be patient and feel thankful for a steady improvement of living standards under the Communist Party dictatorship. In North Korea the situation is different. If North Koreans learn about the actual size of the gap in living standards between them and their cousins in the South, and if they become less certain that any act of defiance will be punished swiftly and brutally, what will prevent them from emulating East Germans and rebelling against the government and demanding immediate unification?

Of course, it is possible that North Korean leaders will somehow manage to stay on top, but the risks are too high, and Pyongyang’s elite do not want to gamble. If reforms undermine stability and produce a revolution, the current North Korean leaders will lose everything. Hence their best bet is to keep the situation under control and avoid all change.

Until the early 2000s the major constraint in their policy was the exceptional weakness of their own economy. For all practical purposes, North Korea’s industry collapsed in 1990-95, and its Soviet-style collective agriculture produces merely 65-80% of the food necessary to keep the population alive. Since the state had no resources to pay for surveillance and control, officials were happy to accept bribes and overlook numerous irregularities.

However, in recent years the situation changed. Pyongyang is receiving sufficient aid from South Korea and China, two countries that are most afraid of a North Korean collapse. The nuclear program also probably makes North Korean leaders more confident about their ability to resist foreign pressure and, if necessary, to squeeze more aid from foes and friends (well, strictly speaking, they do not have friends now).

With this aid and new sense of relative security, the North Korean regime can prevent mass famine and restart some essential parts of the old system, with the food-distribution system being its cornerstone. This is a step toward an ideal of Kim Jong-il and his people, to a system where all able-bodied Koreans go to a state-managed job and spend the entire day there, being constantly watched and indoctrinated by a small army of propagandists, police informers, party officials, security officers and the like.

No unauthorized contacts with the dangerous outside world would be permitted, and no unauthorized social or commercial activity would happen under such system. Neither Kim nor his close associates are fools; they know perfectly well that such a system is not efficient, but they also know that only under such system can their privileges and security be guaranteed.

This is a sad paradox: aid that is often presented as a potential incentive for market-oriented reforms is actually the major reason North Korean leaders are now able to contemplate re-Stalinization of their country.

However, it remains to be seen whether they will succeed, since the North Korean society has changed much in the 12 years since the death of Kim Il-sung. New social forces have emerged, and the general mood has changed as well.

When in the mid-1990s the food rations stopped coming, previously forbidden or strictly controlled private trade became the only survival strategy available for a majority of North Koreans. The society experienced a sudden and explosive growth of grassroots capitalist economy, which by the late 1990s nearly replaced the “regular” Stalinist economy – at least, outside Pyongyang.

Apart from trade in a strict sense, North Korea’s “new entrepreneurs” are engaged in running small workshops, inns and canteens, as well as in providing all kinds of services. Another important part of the “second economy” is food production from individual plots, hitherto nearly absent from North Korea (from the late 1950s, farmers were allowed only tiny plots, not exceeding 100 square meters, sufficient only to grow some spices).

In many cases, the new business penetrates the official bureaucracy. While officials are not normally allowed to run their own business operations, some do, and as the line between the private and state businesses is becoming murky, the supposedly state-run companies make deals with private traders, borrow money on the black market and so on.

As one would expect, a new merchant class has emerged as a result of these changes. Nowadays an exceptionally successful North Korean entrepreneur would operate with capital reaching $100,000 (a fortune in a country where the average monthly salary is merely few dollars). Such mini-tycoons are very few and far between, but incomes measured in $100 a month are earned by many more merchants, and nearly all North Korean families earn at least a part of their income through the “second economy”.

These changes have produced a major psychological shift. The old assumptions about society are dead. After many decades of existence under the patronizing control of a Stalinist state, North Koreans discovered that one can live without going to an office to get next month’s food coupons. They also learned a lot more about the outside world. Smuggled South Korean videotapes are important, if dangerous, merchandise in the North Korean markets.

Contacts with China are necessary for a successful business, and these contacts bring not only goods for sale but also rumors about overseas life. And, of course, the vendors are the first people within living memory who became successful outside the official system. One of these former merchants recently told me: “Those who once attempted to trade, came to like it. Until now, [North Koreans] knew that only cadres could live well, while others should be content with eating grass gruel, but now merchants live better than cadres, and they feel proud of themselves.”

It seems that in recent months we have seen the very first signs of the social activity displayed by this new social group. Early last month, a large group of outraged merchants gathered in front of the local office in the city of Hoiryong, demanding to talk to the representatives of the authorities.

The Hoiryong riot was strictly non-political. A few months ago the local officials collected payments from the market vendors, promising to use the money for refurbishing the old market. However, the market was suddenly closed instead of being refurbished (perhaps as part of the ongoing crackdown on private commercial activities). The outraged vendors gathered near the market and demanded a refund.

The crowd was soon dispersed, and more active participants of the protest were arrested. Had a similar incident happened elsewhere, it would probably not have warranted more than a short newspaper report, but in North Korea this was an event of tremendous significance, the first time in decades that North Koreans openly and loudly expressed their dissatisfaction with a decision of the authorities.

In March 2005, a soccer riot in Pyongyang demonstrated that North Koreans are quite capable of breaking the law, but during that event the popular wrath was provoked by a foreigner, a Syrian referee, and could be construed as an outpouring of nationalistic sentiments (the soccer fans soon began to fight police, however). This time, in Hoiryong, a large group of North Koreans clearly challenged the state bureaucracy. Perhaps nothing like it has happened since the 1950s.

However, the growing power and social independence of the merchants is not the major problem the North Korean neo-Stalinists have to face. They deal with a society that has changed much, not least because of the penetration of modern technology, which facilitates the spread of information. The key role is played by the Chinese border, which is almost uncontrolled and has become an area of widespread smuggling.

Small radio sets are widely smuggled from China, so much so that a defector recently said: “In North Korea, nowadays every official has a radio set in his house.” This is new, since until the early 1990s all North Korean radios were fixed so that they could receive only official broadcasts. Theoretically, radio sets with free tuning are still banned, but this is not enforced. These radios sets are used to listen to foreign broadcasts, especially from South Korea.

Videocassette recorders are common as well. No statistics are available, but it seems that nearly half of all households in the borderland area and a smaller but significant number of households in Pyongyang have a VCR that is used to watch foreign movies. Defectors reported that in mid-October, just after the nuclear test, all North Koreans were required to sign a written pledge about non-participation in “non-socialist activity”. It was explained during the meetings that this activity includes listening to foreign radio and watching foreign videotapes.

Thus it seems that only a few people still believe in the official myth of South Korean destitution. Perhaps most people in the North do not realize how great the difference between their lives and those of their South Korean brethren is. Perhaps, for most of them, being affluent merely means the ability to eat rice daily. Discussions with recent defectors also create an impression that most North Koreans still believe that the major source of their problems is the suffocating “US imperialist blockade”. Still, the old propaganda about the destitute and starving South is not readily swallowed anymore.

Another obstacle on the way to a Stalinist revival is a serious breakdown of morale among officialdom. The low-level officials whose job is to enforce stricter regulations do not feel much enthusiasm about the new orders. Back in the 1940s and 1950s when Stalinism was first established in North Korea under Soviet tutelage, a large part of the population sincerely believed that it was the way to the future.

Nowadays, the situation is different. The low-level bureaucrats are skeptical. They are well aware of the capitalism-driven Chinese prosperity, and they have some vague ideas about South Korea’s economic success. And they are unconvinced by government promises that, as they know, never materialize. Unlike the elite, the mid-level officials have little reason to be afraid of the regime’s collapse. And, last but not least, they have become very corrupt in recent years, hence their law-enforcement zeal diminishes once they see an opportunity to earn extra money for looking other way.

At the same time, the new measures might find support from the large segments of population who did not succeed in the new economy and long for the stability of Kim Il-sung’s era. Recently, a former trader told me: “Elderly or unlucky people still miss the times of socialism, but younger people do business very well, believe that things are better now than they used to be and worry that the situation might turn back to the old days.”

We should not overestimate the scope of this generalization. After all, it is based on the observations of a market trader who obviously spent much time with her colleagues, the winners of the new social reality. Among less fortunate North Koreans, there will be some people who perhaps would not mind sitting through a couple of hours of indoctrination daily, if in exchange they would receive their precious 534 grams of barley-rice mixture (and an additional 250 grams per every dependant).

Early this month it was also reported that low-level officials had received new orders requiring them to tighten up residence control, normally executed through so-called “people’s groups”. Each such group consists of 30-50 families living in the same block or same apartment building and is headed by an official whose task is to watch everything in the neighborhood.

The new instructions, obtained by the Good Friends, a well-informed non-governmental organization dealing with North Korea, specify the deviations that are of particular importance: “secretly watching or copying illegal videotapes, using cars for trade, renting out houses or cooking food for sale, making liquors at home”. All these are “anti-socialist activities which must be watched carefully and exterminated”. The struggle to return to Kim Il-sung’s brand of socialism continues.

Still, North Korean authorities are fighting an uphill battle. In a sense they are lucky, since many foreign forces, including their traditional enemy, South Korea, do not really want their system to collapse and thus avoid anything that might promote a revolution. However, the regime is too anachronistic and too inefficient economically, so a great danger for its survival is created by the very existence of the prosperous world just outside its increasingly porous borders.

In the long run, all attempts to maintain a Stalinist society in the 21st century must be doomed. However, the North Korean leaders are fighting to buy time, to enjoy a few additional years of luxurious life (or plain security) for themselves. How long they will succeed remains to be seen.

Dr Andrei Lankov is a lecturer in the faculty of Asian Studies, China and Korea Center, Australian National University. He graduated from Leningrad State University with a PhD in Far Eastern history and China, with emphasis on Korea, and his thesis focused on factionalism in the Yi Dynasty. He has published books and articles on Korea and North Asia. He is currently on leave, teaching at Kookmin University, Seoul.

Kyodo News is claiming that recently enacted UN restrictions on trade in luxury goods to the DPRK are having little effect on shops in Pyongyang (with the exception of Japanese cigarettes).  I suspect there are several reasons for this:

1.  Sanctions never completely cut off the supply of goods.  Where there is a willing buyer, there will almost always be a willing seller (particularly if the buyers is a well-connected party finctionary).  Quantity falls a little, price rises a lot.  A few more people get into the smuggling business.

2.  Most goods are imported from China.  China is not as tough on its “little brother” as the Japanese and US. 

3.  This will raise the value of North Koreans that have legitimate foreign connections (I dont want to name names but you know who you are! 🙂

4.  There are several places in Pyongyang worth checking out to learn more aobut the impact of sanctions in Pyongyang.  The DHL office in the Foreign ministry building, the shops on changwang street, and the Ragwan department store near the ice skating rink.  Ragwan was set up to sell to Koreans who returned from Japan and have yen to spare.

Story below:

Kyodo News (Hat tip DPRK Studies)
12/8/2006

Impact of sanctions not yet felt in Pyongyang stores

While countries have begun drawing up lists of luxury items they will deny North Korea as part of sanctions in response to the country’s nuclear test, the impact of the measure has yet to be felt in the handful of stores that sell imported goods in Pyongyang.
During a recent visit, shelves at a store inside the Koryo Hotel in central Pyongyang were stocked with French perfume, Russian vodka and Japanese “sake” rice wine, and restaurants in the North Korean capital still offered foreign beer.

Nor were changes visible in exchange rates for Japanese yen, the euro and Chinese yuan, which remained at around the level of previous months in several hotels that cater to non-Korean visitors and tourists.

“I would have thought that there would be a run on foreign goods by expatriates here, but so far there has been no major change,” a diplomat living in Pyongyang said. “The stores visited by the foreign community here still have, for example, chocolate and wine.”

After North Korea carried out its first nuclear test in October, the U.N. Security Council passed Resolution 1718, which condemns the nuclear experiment and denies the nation military hardware, nuclear technology and luxury items.

The idea behind the ban on luxury goods is to pressure North Korea’s elite, not the ordinary public, in a country that faces chronic food shortage.

While the U.N. Security Council resolution detailed the military and nuclear items the U.N. member countries will deny North Korea, it left the decision on luxury goods up to each country.

Japan’s list of 24 items, for example, includes high-quality beef, fatty tuna, caviar, fur products and jewelry. Many other countries have yet to complete their lists.

Another Pyongyang resident, meanwhile, said he has noticed one change — a dramatic rise in the price of Japanese cigarettes.

There has been a three-fold increase in the price over the past few months, said the international aid worker.

While cigarettes are among the luxury items Japan denies North Korea under the U.N. resolution, there could be another reason for the price hike — a Japanese ban on port calls by the ferry Mangyongbong-92 which has been in place since North Korea test-fired missiles in July.

The ferry, the only passenger link between the two countries, has also been used to ship Japanese goods into North Korea.

“The impact of the denial of luxury goods would not be very visible” in the streets of Pyongyang as they target the country’s elite, said Noriyuki Suzuki, a senior analyst at Radiopress, which monitors North Korean media in Tokyo.

But the impact of Japanese sanctions that include a halt in all imports from North Korea “would probably result in a gradual decrease in not just luxury items but all Japanese goods in the country,” he said.

Yonhap
12/6/2006

South Korea is set to announce its participation in a U.S.-led campaign to stop container-borne radioactive materials after refusing to help interdict North Korean ships suspected of carrying weapons of mass destruction.

A Foreign Ministry official confirmed Wednesday that Seoul decided to join the International Container Scanning Network, or ICSN.

“The government plans to formally announce the decision later this week,” the official said, asking not to be identified.

The ICSN calls for its members to install state-of-the-art radioactivity detectors at their major ports so customs officials can screen the contents of containers without opening them.

International efforts to curb the flow of nuclear materials have gained more urgency since North Korea conducted a nuclear test in October.

Seoul’s decision to join the ICSN was widely interpreted as designed to offset its limited participation in the Proliferation Security Initiative (PSI).

South Korea said last month that it would stay away from any PSI-related activity in the vicinity of the Korean Peninsula, citing its unique geopolitical situation. South Korea remains technically at war with the communist North and the two sides are vulnerable to military clashes especially in the poorly-demarcated West Sea.

South Korea described its position in the PSI as “special status,” as it kept the door open for PSI activities in remote areas.

Government officials, however, said the PSI was not considered when it made the decision to join the ICSN, a project still being tested.

According to a report from the US Commerce Department, the US registered just $3,000 worth of exports to the DPRK, and it seems that it was just a single shipment of publicaitons.   This number does not count trade through third countries, and it does not count the occasional tourist or businessman who manages to get a visa.

US/DPRK trade would have been much higher this hear if the DPRK had gone through with the Arirang Mass Games last August.  Just about every tour company that offers trips to the DPRK was sold out with Americans eager to visit one of the most isolated countries in the world.

This story should be sobering to those who are trying to promote regime change in the DPRK through economic sanctions.  I personally think that the sanctions should be lifted for three reasons.  Firstly, only through increased trade will a constituency of elite North Koreans be able to consolidate resources and leverage their political influence for greater openness to international intergration.  Of course these things take time, but there are politicians in the DPRK who want this.  Blockades only strenghen the military and those prone to isolationist tendencies. Secondly, as far as I know, sanctions have never resulted in regime change.  Recent examples include Cuba, Iraq, South Africa, Lybia, Iran, and North Korea.  Sanctions punish the people who have no political recourse and entrench the ruling elites.  Thirdly, trade will promote the flow of information into the DPRK (which combined with non-militarism) will improve the domestic climate for opening up.

Here is the trade story:
Yonhap
12/4/2006

Bilateral trade between the United States and North Korea reached a mere US$3,000 in the first nine months of this year, a sharp drop from a year earlier, a state-run trade agency said Monday.

In the January-September period, the United States registered no imports from the communist country, with the only export item being publications, the Korea Trade Investment Promotion Agency (KOTRA) said in a report, citing the U.S. Commerce Department. The U.S. exported humanitarian food aid to North Korea worth $5.8 million last year.

Asia Times
(abridged)
11/30/2006

United Nations Security Council Resolution 1718 has had no impact on the economic activity in the remote northeastern corner of North Korea where Russians and Chinese are building transportation infrastructure for future industrial-development projects. As was planned before the nuclear test, the Russians began repairing a dilapidated railway line, while the Chinese continued with their highway-construction project.

There were no delays in the normal operations of the Kumgang (also transliterated Geumgang) project, a joint tourist venture on the border between two Koreas. Every day many hundreds of South Korean tourists travel about 20 kilometers into the North to visit the picturesque mountains and spend a few days there, leaving their currency in the accounts of the North Korean government. The project has always been a major money-earner for the cash-hungry North. The Americans tried to stop Kumgang operations, but the South Koreans refused, and business continued as usual.

It was reported this month that a number of the North Korean workers employed by South Korean companies in Gaesong industrial park exceeded the 10,000 mark. Gaesong industrial park is the largest cooperative venture between two Koreas. It is the place where South Korean capital and technology use cheap North Korean labor to produce internationally competitive stuff – or at least this is what is supposed to be going on there.

In spite of optimistic talk, so far the project has been a money-losing enterprise for the Southerners, and most companies stay in Gaesong only because their government is willing to back them financially.  Still, Seoul, even when it talked tough, did not do anything to slow down the project. On the contrary, the Gaesong project is growing fast, and so, one might suspect, are revenues it provides to the Pyongyang regime.

By now it has become patently clear. No international sanction regime against North Korea worthy of its name is in place, and there is no chance that such regime will emerge in future. China, Russia and, above all, South Korea do not want to punish North Korea for going nuclear.

China is not happy about a nuclear North Korea, but probably sees it a lesser evil than a unified Korea that is likely to be under US influence and will perhaps even have US military bases. Beijing does not want this. It also does not want a collapse of another state under communist rule – this might be a bad news for domestic propagandists.

And last but not least, in recent years Chinese companies have moved into North Korea, taking over mining and infrastructure, so such gains need be protected as well. At the same time, the North Korean nukes are not seen by Chinese strategists as an immediate problem: the Chinese assume (correctly, perhaps) that these weapons will never target China and will not be transferred to China’s enemies. So for China, keeping North Korea afloat is a strategic imperative.

Russia is not a major player in the Korean game nowadays, but it has some leverage as a potential “blockade breaker”. Without sincere cooperation from Russia, no efficient sanctions regime will be possible, and such cooperation seems unlikely. Moscow does not want the North Korean regime to collapse. The country’s leader Kim Jong-il is potentially useful for numerous diplomatic combinations, and also as a deterrent against the Americans, who are increasingly seen by President Vladimir Putin’s Moscow as dangerous global bullies.

However, it is South Korea whose policy is decisive in these issues. Indeed, in recent years North Korea was kept afloat by generous Southern aid, with some 500,000 tons of grain and a large amount of other supplies being sent north every year. This aid saved countless lives in the North, but it also contributed to keeping the regime in control.

It has been clear for a decade that South Korea, in spite of all the rhetoric, does not want unification to happen too fast or too soon. The German experience demonstrated how vastly expensive unification might become, and Koreans have good reasons to believe that their situation is much worse than that of Germany. After all, the per capita gross national product in East Germany was roughly half of the West German level, while in the case of North Korea, per capita GNP is less than one-tenth of the South Korean level.

Judging by the experience of the 1990s when the North Korean regime was more isolated than now, economic pressures alone will not necessarily lead to its collapse. During the great famine of the late 1990s, between a half-million and a million people starved to death without causing any inconvenience to the regime. There are no reasons to believe that sanctions would achieve much either, apart from producing another famine and many more deaths.

In contrast, the ongoing exchanges bring to North Korea information about the outside world, and this information is subversive by definition, making more and more people wonder whether something should be done about their country’s political and economic system, so clearly inefficient and anachronistic. Thus the current situation surrounding the so-called “sanctions” might be a rare case when the hypocrisy and duplicity of so-called “collective diplomacy” is doing more good than harm.

Early this month a market riot happened in the remote North Korean city of Hoeryong. Perhaps for the first time since 1945, a large group of North Koreans openly and vocally protested an unpopular decision of the local administration. This was a minor incident, but in the long run it might be more significant than all the meaningless invectives delivered by the well-dressed people in the UN Assembly Hall.

USA Today
11/29/2006
Ted Bridis

The Bush administration wants North Korea’s attention, so like a scolding parent it’s trying to make it tougher for that country’s eccentric leader to buy iPods, plasma televisions and Segway electric scooters.

The U.S. government’s first-ever effort to use trade sanctions to personally aggravate a foreign president expressly targets items believed to be favored by Kim Jong Il or presented by him as gifts to the roughly 600 loyalist families who run the communist government.

Kim, who engineered a secret nuclear weapons program, has other options for obtaining the high-end consumer electronics and other items he wants.

But the list of proposed luxury sanctions, obtained by The Associated Press, aims to make Kim’s swanky life harder: No more cognac, Rolex watches, cigarettes, artwork, expensive cars, Harley Davidson motorcycles or even personal watercraft, such as Jet Skis.

The new ban would extend even to music and sports equipment. The 5-foot-3 Kim is an enthusiastic basketball fan; then-Secretary of State Madeleine Albright presented him with a ball signed by Michael Jordan during a rare diplomatic trip in 2000.

Experts said the effort — being coordinated under the United Nations — would be the first ever to curtail a specific category of goods not associated with military buildups or weapons designs, especially one so tailored to annoy a foreign leader. U.S. officials acknowledge that enforcing the ban on black-market trading would be difficult.

The population in North Korea, one of the world’s most isolated economies, is impoverished and routinely suffers widescale food shortages. The new trade ban would forbid U.S. shipments there of Rolexes, French cognac, plasma TVs, yachts and more — all items favored by Kim but unattainable by most of the country.

“It’s a new concept; it’s kind of creative,” said William Reinsch, a former senior Commerce Department official who oversaw trade restrictions with North Korea during Bill Clinton’s presidency. Reinsch predicted governments will comply with the new sanctions, but agreed that efforts to block all underground shipments will be frustrated.

“The problem is there has always been and will always be this group of people who work at getting these goods illegally,” Reinsch said. Small electronics, such as iPods or laptops, are “untraceable and available all over the place,” he said. U.S. exports to North Korea are paltry, amounting to only $5.8 million last year.

The Distilled Spirits Council of the United States, the trade group for the liquor industry, said it supports the administration’s policies toward North Korea. The Washington-based Personal Watercraft Industry Association said it also supports the U.S. sanctions — although it bristled at the notion a Jet Ski was a luxury.

“The thousands of Americans and Canadians who build, ship and sell personal watercraft are patriots first,” said Maureen Healey, head of the trade group. She said it endorsed the ban “because of the narrow nature of this ban and the genuine dangers that responsible world governments are trying to stave off.”

Defectors to South Korea have described Kim giving expensive gifts of cars, liquor and Japanese-made appliances to his most faithful bureaucrats.

“If you take away one of the tools of his control, perhaps you weaken the cohesion of his leadership,” said Robert J. Einhorn, a former senior State Department official who visited North Korea with Albright and dined extravagantly there. “It can’t hurt, but whether it works, we don’t know.”

Responding to North Korea’s nuclear test Oct. 9, the U.N. Security Council voted to ban military supplies and weapons shipments — sanctions already imposed by the United States. It also banned sales of luxury goods but so far has left each country to define such items. Japan included beef, caviar and fatty tuna, along with expensive cars, motorcycles, cameras and more. Many European nations are still working on their lists.

U.S. intelligence officials who helped produce the Bush administration’s list said Kim prefers Mercedes, BMW and Cadillac cars; Japanese and Harley Davidson motorcycles; Hennessy XO cognac from France and Johnny Walker Scotch whisky; Sony cameras and Japanese air conditioners.

Kim is reportedly under his physician’s orders to avoid hard liquor and prefers French wines. He also is said to own an extensive movie library of more than 10,000 titles and prefers films about James Bond and Godzilla, along with Clint Eastwood’s 1993 drama, In the Line of Fire, and Whitney Houston’s 1992 love story, The Bodyguard.

Much of the U.S. information about Kim’s preferences comes from defectors, including Kenji Fujimoto, the Japanese chef who fled in 2001 and wrote a book about his time with the North Korean leader.

Yonhap
11/20/2006

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

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

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

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

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

World Peace Herald
Lee Jong-Heon
11/17/2006

North Korean leader Kim Jong Il has recently recognized the academic works of dozens of local scholars by presenting them with wrist watches as part of his “gift politics.” But this policy may not last much longer when the international community implements the U.N. sanctions resolution slapped on North Korea following its nuclear test last month.

According to the (North) Korean Central News Agency, a total of 26 professors and officials at the country’s prestigious Kim Il Sung University were awarded the watches inscribed with the captions, “Gift of Great Leader Kim Il Sung,” in reference to the country’s founding leader and father of the current leader Kim Jong Il.

The award was part of Kim’s unique ruling technique of using gifts to keep a key group of supporters in his hands.

Under the “gift politics,” Kim has provided wrist watches and other luxury goods to his aides and ruling elite members to reward their unconditional loyalty toward him. Most of the luxury items were made outside of North Korea, in places such as Japan or Switzerland, according to North Korean defectors and intelligence sources.

Gifts for loyalists also include cars, pianos, camcorders and leather love seats, among others.

But the North Korean leader may no longer use the “gift politics” because U.N. members have moved to impose bans on shipments of luxury goods — including cars and wrist watches — in a bid to obstruct the personal consumptions of Kim Jong Il and his ruling elite.

The U.N. Security Council unanimously adopted Resolution 1718 after the North’s nuclear test last month, calling for all U.N. members to impose wide-ranging sanctions on the communist country, including a ban on exports of luxury goods as well as large conventional weapons and weapons of mass destruction.

In line with the U.N. resolution, Japan’s Cabinet this week approved bans on exports of 24 kinds of luxury goods to North Korea, including cars, wrist watches, alcohol, cigarettes, jewelry, perfume and caviar.

The list also includes beef, tuna fillet, cosmetics, leather bags, fur products, crystal glass, motorcycles, yachts, cameras, musical instruments, fountain pens and works of art antiquities. The total export value of the 24 items was about $9.2 million in 2005.

Korea Times:
11/13/2006
Andrei Lankov

For the last few decades a visitor to Eastern Siberia would sometimes come across unusual logging camps: fenced off with barbed wire, they sported the telltale portraits of Kim Ilsung and Kim Jong-il. These are North Korean camps: from the late 1960s, North Korean loggers have been working in Russia’s Far East.

In the 1960s the timber shortage was felt both in North Korea and the USSR, but the reasons for the shortages were different.

The Russians had plenty of forest, but lacked labor. When the gulags were emptied after Stalin’s death, few people were willing to up and fell trees in remote corners of Siberia.

The North Koreans had an abundance of cheap labor, but almost no good timber. Thus, the two Communist states had a potential match made in heaven.

In March 1967, when the relations between the two countries began to recover after a serious chill, the logging agreement was signed.

According to the agreement North Korean loggers were allowed to work in designated areas of the Russian Far East.

They were housed in special labor camps, run by the North Korean administration. The timber was to be divided between the two sides: the Russians 60 percent and the North Koreans 40 percent.

At their peak in the mid-1980s the Far East joint logging projects employed over 20,000 North Korean workers. This means that some 0.5 percent of all North Korean able-bodied men labored there. Nowadays, the operations are smaller in scale, with some 8,000 workers employed. An additional 3,000 North Korean workers are employed in other joint projects in Russia (construction industry, vegetable gardening etc.). Since the workers were rotated every three years, it is likely that up to a quarter of a million North Koreans have taken part in this project over the decades.

Politically, this was not as dangerous as it might seem. Even in the 1960s, the Soviet Union had far higher standards of living and was much more liberal and permissive society than the North.

However, the North Korean workers were in the middle of nowhere, and kept under the watchful eyes of their supervisors in the nearly isolated camps. People who broke the rules were arrested and sent back to the North. If it was deemed too difficult or impractical, they could be killed on the spot _ the Siberian forests provided more than enough space for unknown burials.

The Soviets usually turned a blind eye to everything the North Korean administrators did. In the early 1990s the situation changed. During the heyday of perestroika, investigative journalists began to report on the conditions of the North Korean workers.

An expose of the prison maintained by the North Korean security police in one of the logging camps led to a particular public outcry. In those days the Russians felt a nearly universal enthusiasm for democracy and believed that Kim Il-sung’s regime would soon collapse.

There were also publications about the secret opium plantations and illegal harvesting of protected species of plants and animals _ both, frankly, long established pillars of North Korea’s foreign currency earning programs.

On top of that, some loggers used the change in the international situation to defect to the South. In those days, defectors were still rare and thus welcomed in Seoul.

In 1992-1994 it appeared that the entire timber project would be discontinued owing to political considerations. However, the situation changed. The events of 1992-2005 made Russians quite skeptical about democracy, and very suspicious of idealistic crusades of any kind.

Thus, the North Korean camps were left alone to the great relief of the local Russian administrators and businessmen who make good money out of these projects.

For them, the North Koreans were but a source of cheap labor, and they did not care how these “Orientals” were treated by their supervisors.

When the initial Russian enthusiasm for a free press died out, the local politicians learned how to keep journalists away.

By the late 1990s, it also became clear that South Korea was not going to encourage the defection of the loggers. On the contrary, anecdotal evidence indicates that loggers who approach the local South Korean consulate are unceremoniously turned away.

Seoul does not need these impoverished and potentially troublesome brethren in our sunshiny days! Of course, some loggers run away, but largely in order to find better job opportunities in Russia’s black economy.

There are about a thousand such runaways hiding in Russia now, but the authorities tend to ignore their presence.

But what was the incentive for the North Koreans workers? The short answer is: money.

Really good money _ at least, by North Korean standards.

Asian Survey
November/December 2006, Vol. 46, No. 6, Pages 898-916
Jae Cheol Kim
Professor of International Studies at the Catholic University of Korea, Seoul.

PDF here: chinainDPRK.pdf

Conclusion:
China’s investment efforts suggest that it has begun to engage North Korea economically. By investing, the Chinese leadership has attempted to push the North to embrace economic reforms, which in turn could improve the North Korean economy and reduce the country’s potential for political instability. In order to lead the North to embark on reform policies, Beijing has tried to provide it with seed money and technology by encouraging Chinese companies to invest. This suggests that despite expectations and allegations from the West that China might abandon its long-time ally, China is committed to supporting North Korea.

The Chinese investment, however, has increasingly been influenced by commercial considerations. Officials in Beijing have stressed that economic exchanges with the North must be mutually beneficial. Chinese companies, which have become responsible for the majority of the investment, have paid increasing attention to market share and natural resources. That China has increasingly tried to gain economic advantage in the North suggests that Sino-North Korean relations are being transformed from being ideology-motivated to interestmotivated.

Despite a stiff increase over the past couple of years, it is hard to say that Chinese investment is either full-fledged or irreversible. Because the instability of North Korea prevents Chinese entrepreneurs from fully embracing the country, Chinese investment must be seen as a pilot project, with Chinese companies and entrepreneurs testing the water. Looking to the future, Chinese investment in North Korea is likely to increase. Despite problems, the Chinese leadership will probably continue to encourage further investment in an effort to exploit developmental opportunities while simultaneously curtailing the flow of direct aid to the North. In addition, China’s dynamic economic growth will propel its overseas investment. As China’s capital account is gradually liberalized, cash-rich Chinese companies will look for markets and resources abroad to fuel their development. The potential appreciation of the yuan will further force firms to relocate factories producing low-end products to countries where the labor cost is lower. Seen from this perspective, North Korea is a good candidate for future Chinese investment—if there is no major turbulence in bilateral relations.

Highlights:
North Korea has been reluctant to follow China’s path of reform and opening because it worried that the policy may create political problems. In an apparent response to China’s recommendation in the late 1990s for reform, for instance, Kim asked Beijing to respect “Korean-style socialism.” But China’s support for reform is not unconditional. Although Chinese leaders have repeatedly urged the DPRK to embrace market-driven reforms (even taking Kim Jong Il is on tours to see the results of China’s economic reforms), when North Korea decided to set up a special economic zone in Sinuiju, apparently without prior consultation with Beijing, China aborted the project by arresting Yang Bin, whom North Korea had designated head of the zone, in October 2002.

China, however, does not want to see turbulence on the Korean Peninsula, which could not only lead to the economic and political collapse of a socialist regime on China’s border but could also threaten regional stability. China thus has tried to sustain the Pyongyang regime by providing economic assistance–believing that reform and opening would not only revive the North Korean economy but also reduce the need for regular aid to prop up the regime, Chinese Premier Wen Jiabao said that the Chinese government would encourage more of its companies to invest and establish their businesses in North Korea.

For Chinese firms, the prime minister’s statement amounted to a government directive, with some entrepreneurs understanding that Wen’s statement was a signal for Chinese companies to invest.  Organizations were formed to smooth such investment, including the Shenyang Municipal Association of Entrepreneurs (Shenyangshi Qiyejia Xiehui), Dandong Municipal Economic Consultation Center for the Korean Peninsula (Dandongshi Chaoxianbandao Jingji Zixun Zhongxin), and Beijing Sino-Korea Economic & Cultural Exchange Company (Beijing Chaohua Youlian). They organized explanatory meetings on investment, drawing numerous applicants.

Beijing attempted to boost investors’ confidence by signing an “Investment Encouragement and Protection Agreement” with Pyongyang in March 2005 when Premier Park Bongju visited Beijing. The framework for economic and technological cooperation was made clearer through the signing of an “Agreement on Economic and Technological Cooperation” that October. Chinese officials have given financial incentives and guarantees to firms that invest in North Korea. China’s state-run banks have not only provided companies with investment capital but also have underwritten Chinese investment for joint ventures. Beijing granted preferential treatment to products processed in the North, allowing them better access to the Chinese market. Products that were processed in the Rajin area with Chinese materials and then imported to China, for instance, were labeled domestic trade and were thus exempted from customs inspection.

The deputy CEO of Beijing Sino-Korea Economic & Cultural Exchange Company, a Beijing company that helps Chinese companies invest in the North, has been quoted as saying that whether a company is able to invest in North Korea depended not on the company’s will but on whether the North would accept it or not. Foreign investors, he added, needed to meet the criterion of “political reliability.” In practice, concerns about political contamination limit North Korea’s economic cooperation with South Korea, whose government has eagerly pushed economic integration with the North. North Korea’s opening therefore means an opening toward China, and this in turn gives Chinese companies very rare advantages.

Labor costs in the DPRK are low [compared to China], running only 70–80 yuan (about US$10) per month.  Building a factory is very cheap, up to one million yuan (about $120,000).  Chinese entrepreneurs see that what North Korea needs is largely light industrial products. Because brand consciousness there is weak, these investors believe that many Chinese companies, even small- and medium-sized ones, can compete in the North Korean market.  The scope for making profits is bigger in North Korea than in China because manufacturers can charge more for similar products in the North. For example, the price of a cigarette lighter is three to five yuan ($0.36 to $0.60) in Pyongyang but only 0.5 yuan ($0.06) in Wenzhou, China.

Although big state-owned companies account for the majority of Chinese outward investments, they rarely invest in North Korea, leaving this to small- to medium-sized companies. In the past, most Chinese investors were Korean-Chinese merchants from two areas in China: Liaoning Province and the Yanbian Korean Autonomous Prefecture. They do not expect that they can make profits in the North Korean market right away; rather, they plan to be ready for when the North opens to the world, by moving into the market early.

Chinese investment projects in North Korea are not only small in number but also weak in scale. There are no detailed data available on their average size, but they likely are no exception to the fact that China’s outward investment is generally characterized by its small scale and low level of technology.

Although North Korea wants capital in such sectors as home appliances, construction materials, electronic communications products, and machine building, Chinese investment is heavily concentrated in the sectors where China’s needs lie, such as resource extraction, or where its companies can make a profit, such as service sectors. The official Chinese guideline for outbound investment, noted above, recommended investment only in such manufacturing sectors as textiles, clothing, and food products, leaving aside other sectors for which North Korea wants investment.

The North lacks basic frameworks needed for drawing in foreign investment. Policies, laws, and regulations about tax, for instance, are not in place. There is no well established market mechanism for running the economy. The government is still heavily involved in economic management; therefore, potential investors need to have personal networks to open doors, a point that worries potential Chinese investors.  North Korea lacks a sound political environment for enticing foreign investment. The country’s economic policies, especially those related to reform, shift continuously, raising questions about the official commitment to reform.

Pyongyang Department Store No. 1
Zeng Changbiao, chief executive officer (CEO) of the Zhongxu Group, in a much publicized deal in 2004, signed a contract to run Pyongyang’s Department Store No.1 for 10 years. He said his main motive for investing was to take over the North Korean market. He wants to be dominant in the North Korean retail business by securing and expanding market share. But it is not clear whether the contract was put into practice.  An article in a journal published by the National Development and Reform Commission, a ministry-level organization of the Chinese government, suggested that little had changed at the department store by the middle of 2005. South Korean officials also say that the store is still run by North Korea. Zhongxu Group’s Zeng received the lowest tax rate—5% income and 5% import—in the North Korean tax system.

This is one of three big department stores that were being run either by the Chinese alone or jointly.  Shenyang Municipal Association for Trade Promotion opened Daesong Market in Pyongyang, the first wholly foreign-owned company in a non-science sector.

Musan
China has shown an interest in joint resources development projects. The best known case is the project to develop the Musan iron mines. It is not easy to draw an exact picture of Chinese investment in the mines because many press reports suggest different stories. According to a Korean report, a Chinese company from Jilin Province planned to invest about $500 million in the mines. Ta Kung Pao, a Hong Kong newspaper, reported that three companies from Jilin—Tonghua Iron & Steel Group (Tonggang), Yanbian Tianchi Company, and Sinosteel Corporation (Zhonggang)—contracted rights to exploit the Musan iron mines for 50 years. According to the report, the Chinese companies were going to invest 7 billion yuan (about $865 million) and planned to produce 10 million tons of iron ore each year.  In the case of the Musan mines, 2 billion yuan (about $240 million) out of the 7 billion China committed to invest was allocated to building roads and railways from Musan to Tonghua in China. Sizable investment levels might help Jilin secure access to seaports in North Korea.

Similarly, the Chinese press has reported that the Musan iron mines development project was canceled by officials in North Korea, embarrassed by publicity over the deal because it highlighted the degree of foreign investment, a subject that Pyongyang would prefer to handle quietly.

Raijin
Rason International Logistics Joint Company-Rason International secured the exclusive rights to run the No. 3 and No. 4 piers of Rajin port for 50 years. In order to secure the rights, China committed to investing 30 million euros ($36 million) to build an industrial park, tourism facilities, and a road from the trade district of Rason city to Rajin Port. North Korea in turn committed to providing China with 5 to 10 square kilometers of land to build the industrial park.