North Korean Economy Watch

According to Choson Exchange:

As we mentioned recently, Ri Chol, the broker of the Orascom deal, has moved on from JVIC. Where he has gone is not yet certain, but the choice for his replacement is interesting.

Ri Gwang Gun is the new head of JVIC and was introduced as such to the CEO of Orascom last week. Ri Gwang Gun has held various positions related to trade, including executive positions at state owned enterprises and as Minister of Foreign Trade. He apparently reports to Kim Yang Gon.

He was (is?) a Daepung Investment Group man. We’ve speculated that the existence of both Daepung and JVIC reflected a kind of “competition at the top” for influence in attracting and managing investments. They were both formed around the same time in 2009/2010 and have similar charges. Therefore, Ri Gwang Gun’s promotion could indicate a potential harmonizing of this competition.

Of course, the contours of this are difficult to see. Daepung, with stronger ties to the NDC, could be construed as taking over the JVIC from the top; perhaps the military has been able to exert itself to make sure that in the new leadership era, it does not get shut out of the investment game. (JVIC has become the more active and influential of the two groups.)

It could also be seen as a victory for JVIC, with Daepung being left to crumble and the top talent from that group being brought across. It remains to be seen if there will be some kind of exodus from either group.

Perhaps, also, it is some kind of compromise and a merger of sorts, with competing groups of elites ‘buying in’ to a unified system of investment management under the JVIC brand. They may see this as a way to increase effectiveness, avoid the negative outcomes of unfettered intra-elite competition and therefore encourage stability overall.

Kim Jong-il Flies: Recently KCTV has broadcast many videos on the life and work of Kim Jong-il. One of these videos was on Kim Jong-il’s contributions to the theatrical and cinematic arts.  In this video, Kim Jong-il can be seen riding in a plane while he scouts out locations for movie sets:

I have watched more North Korean television footage than a healthy person should, but this was the first video footage I had seen of Kim Jong-il on a plane.

Alejandro Cao de Benos once told me that Kim Jong-il could fly fighter jets, though I have not seen any footage of that.

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Koryo Tours has a great Facebook Page.  Here are some of the gems that have popped up over the last few weeks:

Pasty, fast food (yum):

DPRK Tourist Card:

In the next few days Koryo Tours will be offering a brand new tourist route in the DPRK, from Rason down the East Coast to Chongjin and Mt. Chilbo, previously only accessible by charter flight from Pyongyang.

Take On Me by a-ha, North Korean Style (YouTube):

A-ha’s “Take on me” performed by young accordion players from the Kum Song School, filmed in Pyongyang, North Korea December 2011. Part of multi-genre project The Promised Land by director and artist Morten Traavik. Here is more information on the video.

Ceausescu’s visit to Pyongyang, North Korea in 1971:

I believe this clip comes from a feature film: The Autobiography of Nicolae Ceausescu (2010) (trailer here).

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DPRK Gatorade: North Korea is making its own-style sports drink. Here is a link to the report on KCNA (posted to YouTube):

This drink is manufactured in the Kumkop Combined Foodstuff Factory (금컵체육인종합식료공장) in Mangyongdae District. Satellite image and coordinates here.

According to the Choson Ilbo, China-N.Korea trade has reached a historically high level (as it does nearly every quarter).

China’s trade with North Korea has tripled since 2005. According to the Korea Trade-Investment Promotion Agency (KOTRA), Chinese customs statistics show that China has been bumping up its trade with the North by US$1 billion every three years since the middle of the last decade.

After first breaking past the $1-billion trade barrier in 2005, China posted $2 billion in 2008 and over $3 billion last year. Minerals, machinery and cars topped the list of exports, and two-way trade last year reached its all-time peak of $5 billion.

Additional Information:
Read the full story here:
China-N.Korea Trade Reaches All-time High
Choson Ilbo
2012-2-9

Pictured above: the DPRK’s two CNC plants mentioned in the post below. (L) Ryonha Factory in Pyongyang, (R) Ryonha Factory in Huichon

From the Choson Exchange web page:

The company that is tasked with producing and selling CNC is Ryonha, through its subsidiary, Unsan. The company had a booth at the recent International Trade Fair in Rason, held in North Korea’s Special Economic Zone in the far Northeast, bordering Russia and China. Their booth was staffed by a Vice President and – as one might expect – attracted lots of attention from the locals in attendance.

The president claimed annual exports of 30,000,000 euros to Europe, South America and South East Asia. He didn’t have exact details on profits, but mentioned that Unsan imported 10,000,000 euro worth of parts, mostly from Europe, such as control units and electronic relays Siemens and Arno. Their main CNC factory is 40,000 sq. meters and the “biggest in the world” according to the manager. They have two facilities, one in Pyongyang and one in Jagang with 12,000 employees in total. They want to open a factory in Rason, ideally without investors. Prices were said to be: 150,000 EUR for a European made CNC machine but only 52,000 EUR for an equivalent machine made in the DPRK, with the “same quality”.

Unfortunately for Ryonha, it seems to be a subsidiary of the Korea Ryonbong General Corporation, which is under UN sanctions as a WMD proliferator. This no doubt impacts Ryonha’s ability to market itself to customers abroad. Ryonha also doesn’t seem to have a website, which can’t help, either.

Should Ryonha’s parent corporation be taken off the UN’s list of designated proliferators, it will find easier access to a global CNC market that was $6.1 billion in 2007, before the financial crisis hit. The market has contracted since then, as the crisis left a global glut in inventory in 2009, which has taken well into 2011 to clear. The sharply reduced demand, particularly from automakers, has made the CNC market particularly competitive, though a sustained economic recovery would eventually drag the industry back up to pre-crisis levels.

It’s difficult to know what kind of impact Ryonha might have on the global CNC industry, as customers and vendors alike are probably reluctant to trumpet where their machines are made. One of the effects of sanctions has been that companies try to hide their tracks when conducting business with the DPRK, even when the industry is unrelated to sanctioned items. This is sometimes done through an extra layer (or two) of outsourced contracts, or with textiles, sometimes just label-switching. This is tough to do with bigger machines, of course, leaving North Korean CNC machines facing perhaps understandable prejudices.

Its impact on the domestic market will be more significant, of course, reducing the need to spend hard currency on imported CNC machines from China and elsewhere. Perhaps then, this import substitution will allow the DPRK to use that unspent capital on projects that actually benefit the daily lives of its citizens.

Read the full post here.

Institute for Far Eastern Studies (IFES)
2012-2-1

Since Kim Jong-un’s first election as the vice-chairman of the Korean Workers’ Party Central Military Commission (CMC) on September 28, 2010, Kim Jong-un was reported to have made 33 accompanied onsite inspections with Kim Jong-il and a total of 61 visits at industrial sites.

Out of the 61 total visits, Kim Jong-un inspected the following industries: power/electricity (5 times); metal (3 times), machinery (12 times); agricultural (4 times); light (5 times); food (14 times); and industrial (4 times). Construction sites of Huichon Power Stations were visited four times while the Huichon Ryonha General Machinery Plant and the Kanggye General Tractor Plant were also visited multiple times.

Kim Jong-un’s “economic learning” began while accompanying his late father Kim Jong-il on onsite inspections. Even when Kim Jong-il was alive, Kim Jong-un was most likely to have made preliminary visits to these industrial sites for a closer assessment as a part of his duty as the vice-chairman of the CMC.

The significance of the recent visits mainly lie with inspections to the Huichon Power Stations (located in Jagang Province) equipped with 300,000 kW of power generation capacity. Huichon Power Station was an important national strategic project which was often emphasized by Kim Jong-il, “The construction of the power plant must be completed before the centennial birthday of the Great Leader (Kim Il-sung) with great efforts from the entire party, military and the people.”

The electricity produced at the Huichon Power Station is likely to be distributed primarily in the Pyongyang area around the two national holidays, the Day of the Shining Star (Kim Jong-il’s birthday) and the Day of the Sun (Kim Il-sung’s birthday). Currently, power line constructions are still underway in Pyongyang.

At Huichon, constructions of additional terraced power plants are under planning using the currents from the Yangtze and Cheongcheo Rivers. The electricity produced from these plants is likely to be distributed to the industrial areas in Jagang Province, which is central to the machinery and national defense industries.

Important policy implications can be found from Kim Jong-un’s past accompaniment to the Huichon Ryonha General Machinery Plant with Kim Jong-il. This plant is currently emphasized as Kim Jong-un’s accomplishment and revered as, “the industrial revolution of the new era,” and a “site of CNC (Computer Numerical Control) breakthrough.” In addition, Kim Jong-un’s economic leadership is acclaimed for placing prominence on the state-of-the-art technology and “knowledge-based economy.”

Kim Jong-il visited the Huichon Ryonha General Machinery Plant on October 28, 2011 with Kim Jong-un and inspected the CNC assembly line, CNC processing plant, and CNC machineries. He stressed, “Modernization must be promoted in all sectors and levels founded on the state-of-the-art technology. The achievements in the CNC technology should serve as the stepping stone to move forward toward a higher level of science and technology.”

Similarly on October 27, 2011, Kim Jong-il visited the Yangtze River Machinery Plant* with the younger Kim and stressed, “Powerful economic nation that we are seeking is knowledge-based economy which is only possible when CNC technology and automation is realized that can create material wealth through little resources, efforts, and energy.”

The “knowledge-based economy” will likely become the trademark of Kim Jong-un and esteemed as following the “teachings of Kim Jong-il.” Kim Jong-un’s recent industrial site visits were concentrated on the cutting edge production facilities equipped with modernized and automated production processes.

* NKeconWatch: I believe this name is an error and the correct location is the Jangjagang Machine Plant.

According to Yonhap:

A U.S.-led international consortium plans to renew its call this month for North Korea to compensate for losses incurred from scrapping a project to build two light-water reactors for the communist state, a senior Seoul official said Tuesday.

The move, which is likely to irritate North Korea after the death of Kim Jong-il, had been originally decided upon just weeks before Kim died of a heart attack in December last year. The Korean Peninsula Energy Development Organization (KEDO) decided not to drop the demand for compensation from the North.

“The KEDO will send an official letter this month to North Korea, demanding it compensate US$1.89 billion for the termination of the light-water reactor project,” the official at Seoul’s foreign ministry said.

The KEDO, which also includes South Korea, Japan and the European Union, officially shut down the multi-billion-dollar project in 2006 after North Korea was caught by the U.S. pushing a second nuclear weapons program based on enriched uranium in addition to its widely known plutonium-based program.

The consortium has since been asking North Korea to return the money it poured into the project. Prospects for the call have remained dim, however, given the North’s economic hardship and belligerency.

The $4.5 billion project, which was about 35 percent complete, dated back to a 1994 deal linked to North Korea’s promise to denuclearize. In return, the KEDO agreed to build two 1,000-megawatt light-water reactors.
In September last year, amid renewed diplomatic efforts to resume the six-party talks on ending the North’s nuclear drive, Pyongyang abruptly demanded $5.7 billion in compensation, claiming that failure by the KEDO to build the reactors caused it heavy financial and other losses.

“The KEDO’s renewed call for compensation would be an official reply to counter the North’s demand last September and has nothing to do with the passing of Kim Jong-il,” the official said on the condition of anonymity, brushing off concerns about possible irritation at the North.

The official believed that North Korea demanded compensation last September as part of its “negotiating ploy” to raise the issue of the halted project if the six-nation talks resume.

The death of Kim left many policymakers and analysts wondering if his youngest son and chosen heir, Kim Jong-un, will be able to successfully consolidate power in Pyongyang.
Shortly before Kim died, the United States and North Korea were apparently poised to announce a breakthrough toward the resumption of multilateral talks, which has been dormant since late 2008. Other members of the talks include South Korea, China, Russia and Japan.

South Korea, the U.S. and Japan have insisted that the North must accept a monitored shutdown of its uranium enrichment program before the aid-for-disarmament talks can resume.

Read the full story here:
Consortium to renew call for Pyongyang to reimburse reactor project losses
Yonhap
2012-2-7

James Pearson written an excellent article in The Diplomat on the DPRK’s position in the Failed State Index (FSI):

In recent years, North Korea has collected an impressive array of very unflattering superlatives. Whether it be the most “failed”, “corrupt” or “undemocratic” state in the world, it manages to frequently top (or bottom) such rankings and indexes.

It’s a pattern that emerges frequently, and often places North Korea just a few places below Somalia which, in the case of last year’s Failed States Index (FSI) seemed to confusingly suggest that the two states were almost as “failed” as each other. (A strange comparison to make when the absolute power Pyongyang manages to project across North Korea is the total antithesis of the complete anarchy that exists in Mogadishu).

The FSI uses 12 political, social and economic “indicators” to reach its conclusions. Politically, North Korea achieves an impressive 9.9/10 for “de-legitimization of the state” thanks to its “resistance of ruling elites to transparency, accountability and political representation.” Somalia is again a close second, which gains a rival 9.8/10 in the same group, presumably because it isn’t even clear who, or indeed where, the so-called “ruling elites” of Somalia actually are.

It’s therefore puzzling that we award the two states the same title. Somalia is widely recognized to have collapsed, yet while we’ve been talking about a North Korean collapse for over a decade, the regime has remained stable and resilient in the face of famine and economic decline.

Rearranging the FSI in descending order according to social indicators produces dramatically different results. By reorganizing the list by “human flight” (the term used to describe, among other things, the “growth of exile communities”), North Korea drops more than 90 places, landing only two places ahead of South Korea. It should go without saying why “human flight” is a fundamentally flawed method of measuring to what degree North Korea has “failed.”

Indeed, how the FSI managed to obtain any clear and reliable information from North Korea is a mystery. In the weeks following the death of Kim Jong-il and the succession of Kim Jong-un, analysts were quick to draw enormous conclusions derived largely from the memoirs of Kim Jong-il’s former sushi chef, Kenji Fujimoto – a surreal twist in an already bizarre tale.

Read the full article here:
How Failed is North Korea?
The Diplomat
James Pearson
2012-1-31

Institute for Far Eastern Studies (IFES)
2012-1-25

A month into Kim Jong-un’s ascension to power, it is reported that food distribution is likely to resume nationwide in North Korea.

Many experts evaluate this as a symbolic measure to propagate the construction of a powerful economy and improve the lives of the people. For the North Koreans, the most apparent and obvious economic accomplishment is the improvement of the food situation. Thus, North Korea is most likely to take action to normalize food rations as its top priority.

According to a statement made by a South Korean government official on January 20, “Kim Jong-un and his leadership will begin the food distribution as a way to prove to its people about changes forthcoming in the new regime.”He also added, “After years of propagation for the building of a strong and prosperous nation, they must demonstrate it to the people with noticeable results.”

The amount of rations to be provided is still unclear. However, the source emphasized that it was very likely for rice rations to resume, especially with the approaching national holidays, such as the Lunar New Year and Kim Jong-il’s birthday (February 16).

He also commented that “the food distribution will be a nationwide movement and the food ration system will go into effect based on the distribution network of available food supply.”

According to the Food and Agricultural Organization (FAO) and the World Food Programme (WFP), North Korea’s food production in 2011 compared to the previous year rose by 8.5 percent, sitting at about 5.48 million tons (of rough grains or 4.66 million tons of milled grains).

The minimum amount of food consumption in North Korea is 5.4 million tons, but a shortage of about 400,000 tons is expected, including the international food aid and industrial food imports. Among the recent years, this marks the largest deficiency in food supply.

However, such shortages can be overcome with additional food imports and distributing mainly rice reserves.

The last national food distribution in North Korea was in 2005, seven years ago.

North Korea is also likely to exert more effort in food processing production to improve the distribution of daily necessities. With relatively little dependence on raw material imports, North Korea is planning to improve the food situation through expanding the food processing production in agricultural, fishery, and livestock industries, with less competition with Chinese products.

Institute for Far Eastern Studies (IFES)
2012-1-18

North Korea is continuing to put forward new laws for the special economic zones (SEZs) such as Rajin-Sonbong and Hwangumpyong Island. Recently, North Korea announced special guidelines for the tax investigations of foreign businesses in the zones.

North Korea’s Academy of Social Science Newsletter Volume 4 (published on November 2011) released an article titled, “Suggestions to Improve Tax Investigations in the Special Economic Zone,” which included detailed instructions for the policy improvement for tax investigation for SEZs. Here, particular emphasis was placed on the enhancement of the tax investigation system — to be accurate and rational — for the foreign investment companies.

The article explained, “Based on the principles of equality and reciprocity for the construction of powerful economic state, the tax investigation system in the SEZ must be improved especially at the present time when SEZs are being constructed and expanded to increase economic trade with other nations.”

It also stressed tax officials must be equipped with, “comprehensive knowledge and experience who accurately understand the entire process of business management. They must be capable of creating new tax investigation methods and be able to discern the various forms of tax evasions.”

For the qualifications of the tax officials, the article recommended that the officials be selected based on their knowledge and experience; ability to develop techniques for tax investigation; awareness of rules and regulations of tax laws and bylaws, and regulations of rights and responsibilities of taxpayers; and capability of conducting research on foreign tax investigation policies.

The Academy of Social Science is a government agency of the DPRK, and the recent article on the tax investigation reflects that the government has already begun the process of implementing the tax investigation guidelines and laws in the SEZs.

The article emphasized establishing a tax investigation system acceptable to foreign companies. One can construe this as North Korea’s effort to attract more businesses to the SEZ, which is currently suffering from poor performance.

In addition, North Korea is believed to be placing weight on the tax investigation based on its past experiences with the South Korean companies in the Kaesong Industrial Complex (KIC). In the past, the officials of the Central SpecialDirect General Bureau toured the industrial districts in China and showed keen interests in the tax management.

On December 8, 2011, the KCNA reported that the Standing Committee of the Supreme People’s Assembly (SPA) has adopted the Economic Zone Act for Hwanggumpyong and Wihwa Islands. The law was revised and supplemented to include the Free Economic and Trade Act of Rajin-Sonbong. However, the details of these laws were not disclosed and some experts are predicting that these laws are likely identical to the Chinese laws in China’s flourishing SEZs.

However, on January 11, 2012, Yonhap News Agency of South Korea reported that China rejected the new Special Economic Zone Act of the DPRK because it is “not business-friendly.” The news reported, “China said the law was not business-friendly, telling North Korea that the law had some problemsregarding taxes, accounting, remittance of profits and stability of investment.” It is reported that North Korea is working on the revision of these laws and likely for a new special zone act to be passed by the Standing Committee of the DPRK’s Supreme People’s Assembly (SPA).

Pictured above (Yonhap): Food aid to be delivered to the DPRK (2012-1-27)

According to Yonhap:

Representatives of a South Korean charity group plan to visit North Korea next week to deliver 180 tons of flour aid to North Korea to help ease its chronic food shortages, officials said Friday.

The planned shipment by the Seoul-based Korea Peace Foundation marks the first flour assistance to the communist country following the death last month of North Korean leader Kim Jong-il.

The UNDP also made public that it will place a priority on the DPRK this year:

Radio Free Asia says the United Nations Development Programme will place a priority on improving food security in North Korea by reducing crop losses after harvests.

The U.S. based broadcaster said the UNDP plans to save more crops and improve seed production by revamping North Korea’s crop storage facilities and farm equipment such as threshers and grinders.

Around 15 percent of crops harvested in Pyeongyang are said to be damaged every year, while only 13 percent of the 150-thousand tons of seed produced meet international standards.

Food security is achieved by securing a certain amount of food, taking into account potential population increases, natural disasters and war.

Additional Notes:
1. I believe the “Korea Peace Foundation” is also the “Korean Conference of Religion and Peace (KCRP)”

2. Read about South Korea’s aid to the DPRK in 2011 here.

3. CNN also covered the story about South Korean food aid.

Read the full Yonhap article here:
S. Korean group to send first flour aid to N. Korea after Kim’s death
Yonhap
2012-1-20