North Korean Economy Watch

Andrei Lankov provides some anecdotal evidence and a taxonomy of the DPRK’s growing entrepreneurial class (perhaps one of the most interesting and least reported aspects of the DPRK).  He also gives us a glimpse of how the North Korean version of the “infant industry” mindset can impede economic reform.

Here is a great blurb from the article in the Asia Times:

Who are they – the North Korean new rich? The upper crust of this social group consists of high-level officials. Some of them have gained their wealth through illegal means, but many have seen their business activities permitted and even actively encouraged by the government. Most of the money is made in foreign trade, with China being by the far the most significant partner.

Many North Korean companies, despite being technically owned by the state, are effectively private and are run by top officials and their relatives.

That said, these people are not that frequently seen on the streets of Pyongyang. They live in their own enclosed world, of which not much is known.

But if we go one or two steps down, we will encounter a very different type of North Korean entrepreneur – somebody who has made his or her (yes, surprising many of them are women) money more or less independent of the state.

Complete independence is not possible because every North Korean businessman has to pay officials just to make sure that they will not ask too many questions and turn a blind eye to activities that are still technically illegal. In many cases, North Korean entrepreneurs prefer to disguise their private operations under the cover of some state agency.

Take for example Pak. In his early 40s, he runs a truck company together with a few friends. The company has seven trucks and largely specializes in moving salt from salt ponds on the seacoast to major wholesale markets. The company employs a couple of dozen people, but officially it does not exist. On paper, all trucks are owned by state agencies and Pak’s employees are also officially registered as workers of state enterprises.

Pak bought used trucks in China, paying the Chinese owners with cash. He then took them to North Korea where he had the vehicles registered with various government agencies (army units are the best choice since military number plates give important advantages). Pak paid officials for their agreement to “adopt” the trucks. This is so common in the North that there is even an established rate of how much fake registration of a particular type of vehicle costs at which government agency.

Kim was a private owner of a gold mine. The gold mine was officially registered as a state enterprise. Technically, it was owned by a foreign trade company that in turn was managed by the financial department of the Party Central Committee. However, this was a legal fiction, pure and simple: Kim, once a mid-level police official, made some initial capital through bribes and smuggling, while his brother had made a minor fortune through selling counterfeit Western tobacco.

Then they used their money to grease the palms of bureaucrats, and they took over an old gold mine that had ceased operation in the 1980s. They restarted the small mine and hired workers, bought equipment and restarted operations. The gold dust was sold independently (and, strictly speaking, illegally) to Chinese traders.

The brothers agreed with the bureaucrats from the foreign trade company on how much money they should pay them roughly between 30-40% and the rest was used to run the business and enjoy life.

One step below we can see even humbler people like Ms Young, once an engineer at a state factory. In the mid-1990s, she began trading in second-hand Chinese dresses. By 2005 she was running a number of workshops that employed a few dozen women.

They made copies of Chinese garments using Chinese cloth, zippers and buttons. Some of the materials was smuggled across the border, while another part was purchased legally, mostly from a large market in the city of Raseon (a special economic zone which can be visited by Chinese merchants almost freely).

Interestingly, Ms Young technically remained an employee of a non-functioning state factory from which she was absent for months on end. She had to pay for the privilege of missing work and indoctrination sessions, deducting some $40 as her monthly “donation”. This is an impressive sum if compared with her official salary of merely US$2.

The North Korean new rich might occasionally feel insecure. They might be afraid of the state, because pretty much everything they do is in breach of some article of the North Korean criminal code. A serious breach indeed – technically any of the above described persons could be sent to face an execution squad at the moment the authorities change their mind.

And before we all get our hopes up that this emergent entrepreneurial class will eventually push the leadership to adopt economic reforms, Lankov reminds us how they could just as well serve to prolong the regime’s life:

Paradoxically, the long-term interests of the emerging North Korean business class might coincide with that of the Kim regime. Unlike normal people in the North, both groups – officials and entrepreneurs – have an interest in maintaining a separate North Korean state. Unification with the South is bound to spell disaster for both groups.

A person who is now running a couple of small shops might eventually, if North Korean capitalism continues uninterrupted growth, become an owner of a supermarket chain. If unification comes, he or she would be lucky to survive the competition with the South Korean retail giants and keep the few corner shops they had.

The full story is well worth reading here:
The secret world of North Korea’s new rich
Asia Times
Andrei Lankov
2011-8-10

Last week the Nautilus Institute posted a paper on the DPRK mining industry written by Choi Kyung-soo.  You can see the full report here.  A couple of the mine locations were incorrectly reported, so I thought I would correct the record (as I understand it), as well as offer coordinates and satellite imagery of all the facilities mentioned in the paper:

Sangnong Mine (상농광산)
40°36’0.38″N, 128°43’35.40″E
Sangnong Worker’s District, Hochon County, South Hamgyong Province. According to the paper, the mine is located in the “Dancheon district of Hamgyeongnam-do”.

Holdong Mine (홀동광산)
38°52’18.15″N, 126°26’21.98″E
Holdong Worker’s District, Yonsan County, North Hwanghae

Hyesan Youth Mine (해산청년광산)
41°21’52.36″N, 128° 9’28.35″E
Hyesan City, Ryanggang Province

Komdok (Geumdeok) Mine (검덕광산)
40°55’9.41″N, 128°49’13.76″E
Kumgol-dong, Tanchon, South Hamgyong Province

Taehung (Daeheung) Mine (대흥청년영웅광산)
41° 4’24.63″N, 128°51’4.68″E
Taehung-dong, Tancheon City, South Hamgyong

Musan Mine Complex (무산광산련합기업소)
42°14’16.22″N, 129°15’59.70″E
Musan, North Hamgyong

Oryong Mine (어룡광산?)
42°18’13.59″N, 129°22’51.70″E (estimated)
According to the paper, the Oryong Mine is near Ryungchon-ri (42°20’18.19″N, 129°24’39.48″E) in Hoeryong and opened in 2007. The satellite imagery of the area is from 2006 and shows an area under construction near the village. Another source claims this mine is located in Obong-dong, closer to the city of Hoeryong and is a uranium mine.

Jongchon Graphite Mine (정촌광산)
37°55’7.23″N, 126° 6’49.34″E
Jongchon-ri, Yonan County, South Hwanghae.  The paper claims the mine is located in “Jeongchon-gun”, which does not exist.

2.8 Jiktong Youth Coal Mine (2.8직동 청년 탄광)
39°29’42.68″N, 126° 2’3.50″E
Jiktong, Sunchon, South Pyongan

Kogonwon (Gogeonwon) Mine (고건원탄광)
42°40’25.03″N, 130°12’47.28″E
Kogonwon Worker’s District, Saepyol County, North Hamgyong Province

Apdong Mine (압동광산)
38°25’6.96″N, 127°21’8.17″E
Apdong-ri, Phyonggang County, Kangwon Province

Pictured above (Google Earth): Kumsong Tractor Plant (금성뜨락또르공장).  See in Google Maps here.

According to Reuters:

North Korea wants to import Cambodian rice to try to ease food shortages and has offered in return to provide machinery and expertise to develop Cambodia’s fledgling mining and energy sectors, a Cambodian official said on Wednesday.

A North Korean delegation led by Deputy Trade Minister Ri Myong-san visited Cambodia this week and the country is keen to import rice as soon as possible, said Ouch Borith, Cambodia’s secretary of state for foreign affairs.

It would help Cambodia develop its mining sector and invest in hydropower dams.

The amount of rice North Korea wanted to import was not disclosed, he said. Further specific details, such as how North Korea would fund its purchases and investments, were not available.

Cambodia is the world’s 15th biggest producer of rice and has set a target of exporting 1 million tonnes of the grain within the next four years.

According to the Economic Institute of Cambodia (EIC), an independent think tank, the country is expected to ship about 100,000 tonnes of milled rice this year, up from 50,000 tonnes in 2010. More goes to Vietnam to be milled and shipped from there.

North Korea is one of the world’s poorest countries and it rarely produces enough food to feed its 24 million people, often as a result of bad weather affecting harvests.

International sanctions over its nuclear weapons programme combined with neighbouring South Korea’s refusal to provide help have led to a substantial decline in food aid from its traditional donors.

Although Cambodia and North Korea have no trade ties, they have a diplomatic relationship. Cambodia’s former King Norodom Sihanouk has a house in North Korea and was once a special guest of the country’s late ruler, Kim Il-sung.

Ouch Borith said North Korea had offered to sell agricultural machinery to Cambodia, such as tractors, at cheaper prices than Western countries and wanted to provide expertise in developing mines.

“We have only small and medium-sized enterprises, not big industries, but Cambodia’s natural resources are huge, such as minerals, gold, iron and aluminum,” he told reporters.

“Our friends the Koreans said they would do studies and use their experience to help Cambodia make an industry from these natural resources.”

Agriculture forms the biggest part of Cambodia’s $10 billion economy, followed by tourism and garment manufacturing, but it is also trying to develop its energy and mining sectors.

Read the full story here:
N. Korea wants to buy Cambodian rice, invest in mining
Reuters
2011-7-27

According to Yonhap:

South and North Korea can drastically reduce the costs of their potential unification by taking advantage of natural and human resources in the North, a [South Korean] state-run institute said Tuesday.

North Korea has about 300 kinds of mineral resources, including magnesite, iron ore and rare earths, the Korea Institute for National Unification said in a report.

The potential value of North Korean mineral resources is as much as 6,984 trillion won (US$6.6 trillion), which could far outweigh the costs of unification, it said.

Experts estimate it could cost South Korea about US$1 trillion to $5 trillion to unify with the impoverished North, whose per capita income is about 5 percent the size of Asia’s fourth-largest economy.

Still, the institute said the benefits of unification could far outweigh its costs as the unified Korea could enjoy unimaginable economic synergy effects of their economic integration.

The think tank forecast the unification cost can be reduced to one-tenth of the estimates, as long as the North embraces the Chinese-style reform and opening policies.

The potential unification would marry South Korean capital and technology with cheap North Korean labor and rich natural resources, a prospect that could make the unified Korea an economic powerhouse, the institute said.

The institute also held out the prospect of building social infrastructure in North Korea and linking Russia’s gas pipeline to the peninsula as well as rebuilding houses in the North.

The report comes amid no clear signs that the two Koreas, divided for nearly six decades, could be reunited anytime soon.

…

Seoul has been working on the details of a special tax that would help finance the costs of potential unification. The move came as President Lee Myung-bak last year floated the idea of using taxpayers’ money to cushion the cost of unification.

North Korea, which has long suspected that Seoul could seek to absorb the North, has lashed out at the proposed unification tax.

Read the full story here:
Think tank says unification cost can be reduced to one-tenth of estimates
Yonhap
2011-7-26

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

Imports from North Korea: Existing Rules,Implications of the KORUS FTA, and the Kaesong Industrial Complex
Mark E. Manyin, Coordinator, Jeanne J. Grimmett, Vivian C. Jones, Dick K. Nanto, Michaela D. Platzer, Dianne E. Rennack
Congressional Research Service (CRS)
June 2, 2011

Download the PDF here.  This publication has been added to the list of previous CRS reports on the DPRK here.

________

Trade with China 1995-2009
Nathaniel Aden
Nautilus Institute
June 7, 2011

View the paper here.  A link to this paper has been added to the DPRK Economic Statistics Page. The Nautilus Insitute has also posted links to some very interesting presentations from the 2010 DPRK Energy and Minerals Working Group.

________

[Book] The Contemporary North Korean Politics: History, Ideology, and Power System (현대 북한의 정치: 역사, 이념, 권력체계)
Jong Song-Jang (정성장)
More information TBA, but see here and here (Korean).

________

[Book] Architekturführer Pjöngjang (German: Pyongyang Architecture Guide)
Philipp Meuser
Order here at Amazon. More here and here.

Pictured Above: (Left) Map of the reclamation project shown on North Korean television and (right) the project mapped out on Google Earth.  View in Google Maps here.

On June 7, 2011, North Korean Central Television announced the resumption of the Sohae-ri – Nunggum Island land reclamation project (서해리-능금도 간석) in Unryul County (은률군). I have posted the relevant television footage to YouTube.  You can watch it here.

According to my calculations on Google Earth, the project will reclaim just over 11 km² from the West Sea.  As with other projects, the new real estate will probably be used for food production: agriculture, salt farms, and sea food farms.

The DPRK has launched many projects like this to boost domestic food production (see here, here, and here).  Since the country is overwhelmingly mountainous, and insists on maintaining a closed system, it has limited capacities to obtain the required amount of food needed to sustain the population.

Available options include exports, aid, “decentralized coping techniques”, and land reclamation.  The DPRK has shown no interest in boosting exports to finance food imports, even during the Arduous March. Food aid is only a temporary solution, not a long-term strategy for achieving food self sufficiency.  Additionally, food aid comes with all those pesky monitors and their foreign influences. Decentralized coping mechanisms empower local officials, private growers, and markets at the expense of the national government’s Public Distribution System (PDS) and national forests (cleared for illegal plots).

“Land reclamation” (or through the transformation of inland acreage through irrigation projects) does not seem to scare the North Korean government as much.  Some sea-side villages may become inland villages, but increases in official food production can be channeled through the PDS to strengthen the DPRK government’s grip over its people vis-a-vis the distribution of food (once again).

According to KCNA, this particular section of the Unryul land reclamation project began in August 2010:

The Unryul Mine located in the western area of Korea has benefited from its large-sized and long-distance belt conveyor.

The open-pit mine supplying the Hwanghae Iron and Steel Complex with iron ore was once harassed by myriads of earth-scraping piled up on iron ore seams.

Acquainting himself with the problem, leader Kim Jong Il unfolded a bold and large-scale plan to remove earth-scraping with a belt conveyor.

Under his wise guidance the belt conveyor stretched about 4,600 meters from Lagoon Kumsan to Nunggum Islet in Juche 64 (1975) as the first stage of the project.

Over the past 35 years it has carried 40 million tons of earth to the sea, linking the mainland with islets.

It has also saved much manpower, materials and equipment which had been needed for earth removal.

The earth transported by the belt conveyor was used to build a ten-odd-km-long dike from Lagoon Kumsan to Wolsa-ri, Kwail County via Nunggum, Ung and Chongryang Islets and reclaim more than 3 500 hectares of tideland for agricultural production.

Now the belt conveyor has changed its direction toward Jui Islet from Nunggum Islet.

The dike has more than 1.3 million trees of several dozen species growing in over 150 hectares. A ring road was also built on it.

Many animals and birds such as pheasant, roe deer, hare, raccoon dog and cuckoo live there.

According to City Wire:

Private equity investment trust HgCapital Trust was challenged over links to pariah state North Korea at an investor conference this week.

Ian Armitage, chairman of HgCapital, was asked to explain the trust’s links to talc mines in North Korea via its ownership of the Finnish firm Mondo Minerals.

Talc is a mineral used to make talcum powder but also for paper making, plastic, paint and many other industries. Mondo is the world’s second largest producer and, according to Armitage, the company sells 390,000 tonnes per year. Of this 1,500 tonnes comes from North Korea.

Mark Partington, an investment trust investor attending the conference held by Numis in London, said he was concerned that the mine may have used political prisoners in its labour force.

Armitage told Citywire that Mondo ‘didn’t own a mine in North Korea and had no hand at all in operating a mine but does get supplies from that mine through a joint venture that is part owned by the mine and part owned by Mondo.’ He said that Mondo was just a customer of the mine.

Armitage said that Mondo’s relationship with North Korea was in place when HgCapital bought Mondo and that US investors in the fund had been asked if they objected – at the time there was a ban on investing in ‘axis of evil’ states – and had allowed the deal to go ahead.

But he said: ‘In terms of what happens around the world it is not our job to make moral decisions about difficult countries.’ He added: ‘We are not the world’s policeman and we do not take responsibility for what suppliers (of Mondo) do.’

Mondo makes up about 5% of HgCapital Trust’s portfolio of companies and it is believed that HgCapital is looking to sell the firm – rumours which have not been denied by HgCapital Trust. The trust has a market value of £360 million and it is about 10% of HgCapital’s larger unlisted private equity fund.

The trust is in Citywire Selection, our shortlist of investment ideas, and its shares have returned 42% over the last three years while its net asset value (NAV) has risen by 22%. The shares are now trading around a 4% premium to NAV which means that the shares are worth more than the underlying companies owned by HgCapital.

Read the full story here:
HgCapital challenged over North Korea links
City Wire
Rob Mackinlay
2011-6-9

According to the JoongAng Daily:

South Koreans doing business with North Korea, or across its border with China, are seeing opportunities dry up as Pyongyang gives all the good breaks to Chinese companies.

Yesterday, workers were seen getting ready for a ground-breaking ceremony at Hwanggumpyong, a joint industrial complex run by North Korea and China on an island in the Yalu River.

North Korea’s official news agency said the complex would further deepen economic ties between the two countries. The exact reverse is happening to South Korean businesspeople.

“South Korean firms and investors have pretty much let their businesses at the China-North Korea border go since last May,” said Choi, the owner of a restaurant in Dandong. Choi, 54, has been running his restaurant for a decade and, to him, the good times are over.

“When business was active between South and North Korea, there were about 1,000 South Korean businessmen working in Dandong, all doing work related to North Korea,” said Choi. “But now most of them have left.”

“Most of the manufacturing jobs done inside North Korea have been taken by Chinese investors and the South Koreans left here in Dandong are mostly contractors for Chinese firms,” Choi said.

After the attack on the warship Cheonan in March 2010, business ties between South and North Korea have run dry due to sanctions ordered by Seoul the following May.

“I invested millions of dollars into developing the underground natural resources in North Korea before last May,” said Park, 56, who was working from Hunchun in northeast China. “Now that the South Korean government has banned all North Korean goods from entering the South, I’m about to lose all my money.”

Chinese investors – including ethnic Koreans living in China – are grabbing the business opportunities forfeited by the Southerners.

“I run short of stock even if I charge 10 renminbi [$1.54] for an abalone I used to sell at 5 renminbi,” said Han, 70, an ethnic Korean in China who sells abalones caught in North Korea. The trade was formerly done by South Koreans.

“Doing business with Chinese customers is much better because I can earn more and in cash, too,” he said.

The South’s sanctions on North Korea have resulted in some other problems as well. Pollack caught in Russian waters have been denied being imported into South Korea because they were mistaken for North Korean pollack. In fact, the fish cannot be found in North Korea anymore due to global warming.

“It was a loss for me when the fish didn’t make it through customs after being mistaken for North Korean pollack,” said Lee, 51. “I export Russian pollack to South Korea after they are caught and processed in China.” Lee is involved in aquatic product processing in Hunchun.

Jo Dong-ho, a professor of North Korean studies at Ewha Womans University in Seoul, said, “North Korea is looking for an alternative by doing business with China after trade with the South halted. There is a need for some breathing space when it comes to inter-Korean trade.”

Read the full story here:
China capturing North’s business
JoongAng Daily
Chang Se-jeong
2011-6-8

According to Yonhap:

North Korea’s exports of mineral resources jumped 17-fold in a decade with its outbound shipment of coals and iron ores leading the growth, a U.S. report showed on Saturday.
According to Radio Free Asia (RFA), the communist state’s exports of mineral resources reached US$860 million last year, compared with some $50 million in 2002.

Citing data compiled by the Korea Trade-Investment Promotion Agency [KOTRA], the RFA said exports of such minerals as coal and iron ore accounted for 63 percent of its total exports to its strongest ally China.

In the first quarter of the year, the North earned around $154 million by exporting coal to the neighboring country, compared with $9.68 million seen a year earlier.

North Korea’s mineral reserves are believed to be among the largest in the world, worth some 7,000 trillion won, based on 2008 prices, according to an earlier report by the Unification Ministry.

I am unable to locate either the RFA story or the KOTRA report so I don’t have much to say on this.  If you have a link please send it to me.

Read the full story here:
N. Korea’s exports of mineral resources top US$860 mln last year
Yonhap
2011-5-7