North Korean Economy Watch

Sangim Han
Bloomberg
3/10/2010

North Korea’s cash-strapped government is offering to swap sand, resources licenses and rental income in return for concrete, steel and fuel, according to Munhwa Ilbo newspaper.

The government sent letters to companies in China and South Korea asking them to invest $320 million in a construction project in the capital, Pyongyang, the Korean-language paper reported. In addition to the investment, the government is seeking 30,000 tons of diesel and gasoline, 50,000 tons of steel bars and 300,000 tons of cement, the paper said, citing one of the letters.

In return, the letters offer investors long-term rental income, the rights to resource development and sand. North Korea’s finances are being squeezed by United Nations sanctions imposed because of the country’s nuclear weapons program.

The letters were sent to the companies via an investment group, the paper said. The government wants to build 100,000 homes in Pyongyang, it said.

Daily NK
Yoo Gwan Hee
3/5/2010

North Korea’s “Land Reform Law” was signed into law on March 5th 1946, and for a while it offered North Korea a way to produce enough food to feed its people.

The following are the basic contents of the law as implemented by the North Korean Provisional People’s Committee, which was led by Kim Il Sung.

Those Japanese and Korean landlords who possessed more than 50,000 square meters of land were to have it expropriated and distributed to existing tenant farmers for free, whilst the existing tenant farming system was to be abolished. The basic principles of the law were land expropriation without compensation and land distribution for free to former peasant tenants. However, those owning more than 50,000 square meters of land but without tenant peasants were excluded.

In accordance with the provisions of Article 5 of the law, the Committee granted farmers ownership, stating, “All expropriated land is to be distributed to farmers for free.” However, post-distribution use of the land was restricted; Article 10 of the law prohibited using land as collateral in lending, the selling of land or subletting to tenants. As the law itself puts it, “The distributed land cannot be given over to tenant farming and/or used as collateral.”

At the time of the law’s enacting, Korea had been liberated from Japanese colonial rule, but around 58 percent of arable land was still owned by a minority of pro-Japanese landlords constituting just four percent of the population. Meanwhile, most North Koreans in 1946 were farmers, 80 percent of all farmers were extremely poor, and they represented a majority of the total North Korean population. Naturally, the new law was very popular. It was, after all, an opportunity for the Communist Party to appeal to the masses. The political situation was especially complex; a country divided between Soviet-occupied North and American-occupied South, political factions coalescing around different parties, and factions emerging within the Party itself.

In North Korea, the North Korean Provisional People’s Committee and the Communist Party led land reform by organizing 90,697 members into 11,500 farming committees in 1946. They also organized 210,000 farmers aged 18-35 into a semi-military organization, the so-called “self-defense forces,” who supported the projects of the farming committees. During three weeks of land reform, 98 percent of confiscated land was distributed to farmers; poor farmers suddenly became the landlord of up to 13,200 square meters of land. Thereafter, they tended to farm hard and gave their allegiance to the Party.

The farming committee members were instrumental in carrying out the land reform, mostly by aiding in distribution and record keeping. Committee members subsequently became Communist party members and supported the regime at the regional and local level. Consequently, the number of party members rose from 4,530 in December 1945, to 26,000 in April 1946 and 356,000 by June 1946. The success of the land reform consolidated the authority of the North Korean Provisional People’s Committee, and resulted in successful elections for the North Korean Provisional People’s Committee in February 1947 at the local level.

However, following the birth of the North Korean state, individual ownership of land was ended by another national project. The collective farming system, implemented over the course of 1954-1958, resulted in farmers becoming employees on collective farms. The pretext for the collective farming system was communal ownership under the socialist system, but in reality it was a way to realize state control. Article 5 of the Land Reform Law was abolished and the farmers’ dreams of personal and equitable land ownership were swept away in the name of socialist modernization.

Ultimately, the inefficiency and unjust nature of the collective farming system combined with other factors resulted in the March of Tribulation in the late 1990s and the continuing hardships of the average North Korean family today.

Nowadays, farmers tend to solve their food security problems not by working hard on the collective farms, but by farming their own fields around their houses or on steep mountainsides. Their private production is, of course, relatively greater than that of the collective farms.

The way to solve the food crisis is, of course, quite simple; return the land back to the farmers. The North Korean authorities know that private ownership of land is the best way in practice to solve the food problem, but they fear what this might mean for the regime’s viability.

Ruediger Frank, “Money in Socialist Economies: The Case of North Korea,” The Asia Pacific Journal, 8-2-10, February 22, 2010.

Introduction
Dated January 29, 2010, the Foreign Trade Bank of the DPRK (North Korea) issued document No. DC033 10-004 to diplomatic missions and international organizations present in North Korea. They were informed that the use of foreign currency was to be stopped, payments were to be made in the form of non-cash cheques, and that the official exchange rate of the Euro to the North Korean Won was changed from 188.2 KPW to 140 KPW, effective January 2, 2010.

Foreign institutions and organizations now have to obtain non-cash cheques from the Foreign Trade Bank, denominated in KPW, in order to pay for accommodations, meals and service fees in hotels, fares for transport services like railways and airlines, communication charges, inspection fees, registration fees and commissions paid to institutions and enterprises in the DPRK, fuel, office materials, spare parts for vehicles, electricity, water, heating charges and rent. Bank transfers are now mandatory for any transfers between international organizations and all money paid to institutions and organizations of the DPRK (including the salary of DPRK citizens working in embassies or international organizations).

A recent visitor to Pyongyang confirmed in a talk with the author that individuals are subject to a cumbersome process if they wish to purchase anything. Rather than using a standard hard currency or exchanging it into the new Won, they now have to obtain a receipt stating the price of the good they want to buy, then present this at a desk where they exchange their money into exactly the needed amount of North Korean money, and finally return to the shop assistant, hand over the exact amount, and receive the product.

In the preceding weeks, North Korea had made international headlines related to what seems to be a concerted economic policy initiative. The domestic currency was reformed in a way that obviously aimed at reducing the amount of money in circulation (link). A few weeks later news emerged that the use of foreign currencies was banned (link).

This is no doubt a dramatic move with far-reaching consequences. Money matters for personal lives and for society, so when a country initiates a currency reform, it has significant repercussions.

But what are these consequences for the specific case of North Korea in early 2010? Are people in various sectors of society better off now, or worse? Will the economy benefit or suffer? Do the reforms promote or impede foreign trade and investment? Will the domestic political situation become more stable, or will it deteriorate? Are the economic reforms of 2002 reversed, or were they intended to be a temporary measure from the outset? Should we even interpret the currency reforms as part of the process of power succession?

(more…)

Daily NK
Yoo Gwan Hee
2/25/2010

Bribery, corruption and overweening power are ubiquitous in many areas of North Korean society, and today’s universities are no different. Instead of cultivating the ability of outstanding individuals, simple materialism rules supreme, teaching that money is the solution to every problem.

Like almost everyone in North Korea outside the elite, the lives of university students changed considerably in the days of the “March of Tribulation.”

Until the early 1990s, the idea of a capable applicant being unable to pursue post-secondary education due to financial difficulties was unheard of. In those days, the regime offered scholarships of 15 won (specialized departments 25 won) to university students. Since the currency swap in 1992, the size of scholarships increased to 50 won, and after the July 1st Economic Management Reform Measure in 2002, they increased again to 900 won.

But the range of recipients decreased markedly. After the ‘March of Tribulation’ in the mid-1990s, scholarships were only offered to those students in central universities like Kim Il Sung University. Students in regional universities had no chance of receiving fiscal assistance.

Before the “March of Tribulation,” students took North Korea’s university entrance exam and successful applicants were selected based on their grades, as they are in most developed, equitable countries. However, as the economic situation worsened in the mid-1990s, those with the money or “background” began to be selected at the expense of better, but poorer, applicants.

Then, after the year 2000, the amount of bribery required began to depend upon a student’s academic record. For example, those students with a much lower score compared to the pass mark who wish to attend average universities have to pay a bribe of $500~600. For leading universities like Kim Il Sung University or Pyongyang School of Commerce, students have to pay between $2000~3000.

Needless to say, students from poor families could not and cannot afford the degree of support required by universities, and so most have to stop their education.

Therefore, since the “March of Tribulation,” students from poor families have lost the chance to attend university. In comparison, students from rich and powerful families attend just so as to secure a cushy job later on, and their school lives are naturally very comfortable. Universities are solely oriented around those with money.

Of course, costs do not stop with admission bribes. In North Korean universities, a quarter of the calendar year is spent on mobilization for public works, marketed as obtaining real-life experience. In such cases, students are mobilized against their wishes. However, those from a wealthy family can avoid such activities by submitting goods or funding to their university.

Regarding spring work in the fields, for example, Mr. Kim (22), who attended Hamheung University of Mathematics until 2007, recently explained to The Daily NK, “Wealthy families submit the necessary funds or goods to the university every year to be exempted from mobilization. In the case of the 2007 farm village support battle, those students who submitted a carton of good quality cigarettes just rested at home.”

Some university students enroll in the military during their studies; however, those with money who wish to join the Party can just buy their way in, and also reduce the period of their military service, with a one million won bribe.

Also, during their university lives, students are duty-bound to take part in 6-months of Local Reserve Force activities. However, if a student offers up $300, he or she can simply rest without interference for the whole time.

That this materialism is even prevalent in public education causes the offspring of wealthy families to believe in the power of money and only money. Skill isn’t cultivated, it is bought, and needless to say the performance of North Korean universities is in a downward spiral as a result.

According to the Telegraph:

Rodong Sinmun, the official newspaper of the ruling Communist Party, said Kim’s immediate ambition is to end his people’s dependence on corn for subsistence and to feed them rice and wheat products instead.

“I’m the most heartbroken by the fact that our people are still living on corn,” he was quoted as saying. “What I must do now is to feed them white rice, bread and noodles generously.”

The paper did not disclose when or where Kim’s remarks were made or how he intended to improve the diet of North Koreans, who have for years suffered food shortages and even starvation.

Kim also urged North Koreans to keep a vow made to his father, the late president Kim Il-Sung, to build a nation whose people do not even eat corn.

Last month Kim described “white rice and meat soups” as a long-cherished dream for North Koreans while admitting to failing to deliver an acceptable standard of living for the communist nation’s people.

North Korea has suffered severe food shortages since a famine in the 1990s killed hundreds of thousands people. At the time it was reported that parts of the population had resorted to eating grass.

A shock currency revaluation on Nov 30 reportedly played havoc on distribution networks, aggravating food shortages and sparking inflation.

Read the full article below:
Kim Jong-il admits being ‘heartbroken’ over diet of North Koreans
Telegraph
2/1/2010

Nicholas Eberstadt has some interesting statistics in a Wall Street Journal op-ed this week:

For a variety of reasons—possibly including unintended reverberations from the past decade’s nuclear drama—the remonetization [of 2002] did not work well. Too much new money was chasing too few goods, sparking significant inflation. By November 2009, the North Korean won’s black-market value in dollars was barely 5% of the level when the 2002 measures were implemented, a depreciation averaging over 3% per month.

…

The speed and depth of the won’s resulting plunge has been dizzying. The nominal market price of rice is reportedly higher today than it was in November 2009, before currency reform. This would imply 100-fold inflation and then some in just over one month. The won-yuan exchange rate along the North Korea-China border has reportedly dropped by almost 50% over the past month, even after discounting for the 100-to-1 currency conversion. The government apparently has no confidence in its own currency move, and is now betting against it. News reports indicate that Pyongyang this month is issuing soldiers in its public security forces twice their nominal monthly pre-reform wages (a 20,000% raise in light of the currency conversion). If the government finances more wage hikes like this by running the printing presses, it will turn the currency into a toxic asset no one wants to hold.

…

The botched currency reform also has revealed how little North Korean decision-makers understand their own economy, much less the outside world. On a related note, the regime’s supposed heir apparent, Kim Jong Eun, was the mastermind behind the North Korean currency reform, according to South Korean intelligence. This may just be bad intelligence or disinformation. But if accurate, it raises disturbing questions about the judgment of the rising generation of North Korean leadership.

Read the full story here:
North Korean Money Troubles
Wall Street Journal
Nicholas Ebererstadt
1/11/10

Daily NK
Jung Kwon Ho
12/24/2009

The North Korean authorities apparently started paying farmers as of the 16th, starting with Migok Collective Farm in Sariwon, North Hwanghae Province.

In North Korea, the amount of work each farmer does is calculated and expressed in a numerical value, which is called “labor grade (노력공수).” After the harvest has been gathered, the state’s requirement is handed over, and then farmers are distributed food according to their labor grade, while surplus cash is also supposed to be distributed dependent upon a farmer’s labor grade and the profits of the farm as a whole.

Around the time of the July 1st Economic Management Reform Measure in 2002, cash was distributed in this way, but between 2005 and 2008 there was nothing.

For office and factory workers, payment began on the 17th at approximately the level of the July 1st Economic Management Reform Measure.

A source from South Pyongan Province reported to The Daily NK on the 23rd, “From the 16th, they started delivering cash to those farms which fulfilled the state’s grain production plan. For other farms, which could not accomplish the state’s plan, the authorities gave a subsidy.”

Since some collective farms have received an unusual amount of cash, it has become the talk of the town. In the case of the Migok Collective Farm in Sariwon, an average of 150,000 won per farmer was paid in cash.

Kim Jong Il conducted an onsite inspection of Migok Collective Farm in October, and it is considered a model case because it exceeded its state production target. Hence the unusually generous payments.

Farmers working for the Ryongyeon Collective Farm, which also achieved the state’s plan, got around 100,000 won each.

Despite this apparent state generosity, the source pointed out, “This cash distribution covered only those farms which accomplished state production targets. Since this year’s farming went sour, there are less than ten farms that achieved their targets across the whole country.”

Collective farms which failed to achieve the state’s goals got just 5,000 won per worker.

“This cash distribution seems to be just a one-off measure to straighten out the confusion after the redenomination and to soothe farmers,” the source also asserted.

Regardless, the cash will slow the entry of food into the markets, the source pointed out, saying, “This cash distribution and subsidies will make food circulation difficult in the short term.”

“When farmers do not hold any cash in their hands, their grain flows into the markets. For the time being farmers will not sell rice and food in the market because they have enough pocket money. It causes rising food prices.”

Additionally, the North Korean authorities still have not announced state prices since the redenomination, and they continue to heavily regulate the market. Therefore, food traders are watching the market situation without selling any food.

The logical market principle, that when harvested grain circulates in the market food prices go down, may therefore not hold true this year, and vulnerable classes’ will become more food insecure as a result.

However, the authorities are trying to assure farmers that there will be continuous measures to give them further benefits.

According to the source, “more benefits for farmers” implies a revised grain procurement policy.

He explained, “Until now, the authorities purchased rice for 20 won per kilogram from the farm and sold it for 45 won to the people. However, from now on, the procurement price will be 44 won and supply price to workers and the people will be 18-20 won.“

Institute for Far Eastern Studies (IFES)
NK Brief No.09-12-22-1
12/22/2009

The latest on-site visit by Kim Jong Il, in mid December, marked the 156th inspection of the year. This is an increase of approximately 170 percent over last year. Among those accompanying the ‘Great Leader’, Secretary of the Central Committee of the Korean Workers’ Party Kim Ki-nam was seen most frequently, traveling with Kim Jong Il on 107 different occasions. Others seen frequently with Kim include Jang Sung-taek, brother-in-law and right-hand man, as well as Party Central Committee Vice-chairman Pak Nam-ki.

According to North Korean media officials, Kim Jong Il’s on-site inspections this year include 64 visits to economically important locations, 43 to military installations, 13 to sites related to foreign affairs, and 36 to other sites, for a total of 156 visits. Kim made only 90 visits during 2008.

Last year, 55 percent (50 visits) of Kim Jong Il’s on-site inspections were to military sites, while 26 percent (24 visits) of trips were to sites related to the economy. This year, 41 percent of site visits were to economically-relevant sites, while only 27 percent were to military sites.

These visits are linked to the recent ‘100-day Battle’ and ‘150-day Battle’ to boost domestic production in order to meet North Korea’s goal of being a ‘strong and prosperous nation’ by 2012.

North Korean authorities are undertaking massive construction projects across the country, such as the building the Huicheon Thermoelectric Plant, tens of thousands of new housing units, and other large-scale construction projects.

Broken down monthly, Kim Jong Il has ventured out to on-site visits 10-19 times per month, with the exception of July (8 visits). He has made 8 visits in December up until the 17th.

It is also important to note those who have travelled with Kim. As mentioned previously, Kim Ki-nam was seen 107 times and Jang Sung-taek travelled with Kim 82 times. In addition, Hyon Chol-hae, a former bodyguard of Kim Il Sung and confidant of Kim Jong Il, made 56 visits, General Ri Myong-su was seen with Kim 48 times, and Vice Marshal of the Korean People’s Army Kim Yong Chun was seen on 30 different occasions.

Of particular interest among all of Kim Jong Il’s public appearances this year is that in November he made a visit to the headquarters of the Ministry of People’s Security. Kim also visited the naval complex in Nampo in mid November, and made his first visit to the North’s very first free-trade zone, in Rason, North Hamgyong Province, inspecting the Rasong Dae-heung Trade Fishery Complex. Both of these followed the inter-Korean naval clash in the Yellow Sea on November 10th.

Institute for Far Eastern Studies (IFES)
NK Brief No.09-12-21-1
12/21/2009

The Korean Central Broadcasting Station (KCBS) announced on December 16 that the North Korean Supreme People’s Assembly Standing Committee has revised the North’s Real Estate Management Law, the Commodities Consumption Level Law, the General Equipment Import Law, and other laws related to economic management. This on the heels of the November 30th announcement, when authorities announced across-the-board currency reform measures, apparently in an attempt to regain control of the country’s market economy.

The KCBS reported that the Real Estate Management Law “regulates fundamental issues of real estate registration and inspection, use, and payment of user fees,” but offered no further details.

Since 2006, North Korean authorities established new offices in each city, county, and region throughout the country. These offices were responsible for surveying property, occupied and vacant, claimed by organizations and businesses, as well as recording the size of each structure on these lands.

In the mid-1990s, with the onset of serious food shortages, food rations to workers were halted and North Korean authorities from every branch and level (including the military, railway, business enterprises) were encouraged to distribute foodstuffs in ways more beneficial to themselves. These authorities planned to resolve food distribution issues through agricultural moves.

The new Real Estate Management Law appears to be aimed at labeling land used for private purposes as strategic nationalized land and strengthening the state’s ability to collect real estate taxes. However, the broadcaster failed to explain in detail how this restructuring would occur.

By enacting the Commodities Consumption Level Law, North Korean authorities can control the basis at which goods are injected into each production sector. This appears to be in preparation for taking cost-reduction measures for enterprises related to production in each region. The broadcaster explained that there were legal demands for the enactment and enforcement of regulations on the level of consumption.

The General Equipment Import Law newly regulates import plans, contracts, and the use of goods by factories, schools, hospitals, ships and broadcasters in an effort to control quality. In each sector, the measure prevents double-investment and controls consumption competition.

As these economic control measures are focused on factories and other bases of production along with importers, it appears that, in conjunction with the recent currency reform, North Korean authorities are attempting to control production quality on all levels. For example, as the North is suffering ongoing supply difficulties due to a lack of materials, the law on consumption levels is an attempt to restrict goods by forcefully managing demand. The law on imports appears to be in an effort to regulate general-use goods in light of the increased reliance on foreign equipment.

Choson Ilbo
12/10/2009

Even as North Korea struggles under UN sanctions and is in the midst of a controversial currency reform aimed at breaking the back of a nascent free market, the reclusive country is apparently in the process of changing laws in order to attract more foreign investment, an expert said Wednesday. It is even offering foreign companies wages cheaper than those paid to North Korean workers at the joint-Korean Kaesong Industrial Complex, according to Jack Pritchard, president of the Korea Economic Institute in Washington D.C.

Pritchard, who visited Pyongyang last month along with Scott Snyder, director of the Center for U.S.-Korea Policy at the Asia Foundation, told reporters in Washington. The North Korean trade department official they met there told them there are no strikes among North Korea’s skilled workers and were very aggressive in luring foreign investment. He added North Korean officials offered wages of 30 euros a month (around US$44), which was lower than the average $57 paid to workers at the Kaesong Industrial Complex. The officials said they were also willing to offer various incentives to foreign companies interested in taking part in the construction of 100,000 homes in Pyongyang. North Korea appeared to be changing its attitude toward foreign countries as part of its goal to become a strong and powerful nation by 2012, he said.

In an article for Global Security [Posted below], the Internet-based provider of military and intelligence information, Snyder wrote, “North Korean colleagues at the Ministry of Trade appeared genuinely surprised and dismayed when we mentioned that UN Security Council Resolution 1874… contains provisions prohibiting companies from making new investments in North Korea.”

Snyder said North Korea’s interest in foreign investment as part of its goal to become a “strong and powerful nation” by 2012 is a new development and one that could play a role in resolving the nuclear stalemate.

But efforts to attract foreign investment and capital over the past 25 years have been a disaster. North Korea announced new regulations in September of 1984 to allow businesses from capitalist countries to operate there. It set up special economic zones in Rajin-Songbong in 1991 and in Sinuiju in 2002. But the Sinuiju project never got beyond the ground-breaking stage due to conflict with China, while empty factories litter Rajin-Sonbong.

North Korea aimed to attract $7 billion worth of foreign investment into Rajin-Sonbong, but actual investment amounted to only $140 million. According to the South Korean government and other sources, there are an estimated 400 foreign businesses operating in North Korea. Most of them are small businesses run by Chinese or North Korean residents in Japan. The shining exception is the Egyptian telecom company Orascom, which offers mobile phone services in the North. “It’s more accurate to say that there are no major foreign businesses operating in North Korea,” said Cho Dong-ho, a professor at Ewha Woman’s University.

North Korea forged its first pact guaranteeing foreign investment with Denmark in September 1996 and signed similar pacts with around 20 countries, including China, Russia, Singapore and Switzerland, as of 2008. There have been consistent reports that businesses in Europe and Southeast Asia were interested in doing business in the North, but hardly any made the move.

Cho Myung-chul, a professor at the Korea Institute for International Economic Policy, who taught economics at Kim Il Sung University in North Korea, said, “The reason why no listed foreign companies are operating in North Korea is because they may end up on the list of businesses subject to U.S. sanctions.” This is one of the reasons why North Korea has tried so desperately to be removed from the U.S. list of terrorism-sponsoring countries.

And even if foreign businesses are interested in investing in North Korea, its lack of infrastructure, including steady power supply and adequate roads and ports, make it impossible to operate factories there. Cho Young-ki, a professor at Korea University, said, “You have to build a power plant if you want to build a factory in North Korea. Cheap labor does not mean businesses will profit there.” The electricity used by the Kaesong Industrial Complex is provided by South Korea, while Hyundai Asan operates its own generator at the North Korean resort in Mt. Kumgang.

Dispatch from Pyongyang: An Offer You Can’t Refuse!
Global Security
Scott Snyder
12/07/2009

Every North Korean seems to have been mobilized for an all-out push to mark their country’s arrival as a “strong and powerful nation” in 2012, which marks the 100th anniversary of Kim Il Sung’s birth, Kim Jong Il’s seventieth birthday, and the thirtieth birthday of Kim Jong Il’s third son and reported successor, Kim Jong-Eun. Pyongyang citizens have cleaned up the city during a 150-day labor campaign, followed by a second 100-day campaign now underway. The Ryugyong Hotel in the middle of Pyongyang, unfinished for over two decades, has been given a facelift courtesy of the Egyptian telecommunications firm Orascom, which expects to have 100,000 mobile phone customers in Pyongyang by the end of the year. But it is still difficult to shake the feeling in Pyongyang that one has walked onto a movie set in between takes. Or that the used car looks good on the outside, but you really don’t know what you might find if you were able to look under the hood or give it a test-drive.

North Korean foreign ministry officials saw United Nations condemnation of their April missile launch as an affront to their sovereignty. This is the ostensible reason the North Koreans have walked away from six party talks. Having conducted a second nuclear test, North Korean officials want to be considered as a nuclear power, choosing instead to “magnanimously” set aside nuclear differences in order to focus on the need to eliminate U.S. “hostile policy” by replacing the armistice with a permanent peace settlement. Essentially, Pyongyang’s new offer–as a “nuclear weapons state”–has shifted from the denuclearization for normalization deal at the core of the 2005 Six Party Joint Statement to “peace first; denuclearization, maybe later.” There was no mention of “action for action” by our North Korean interlocutors.

But the North Koreans are likely to find when Ambassador Stephen Bosworth arrives in Pyongyang next week that the United States will not accept North Korea as a nuclear weapons state. There is virtually no area of agreement between the two governments on the nuclear issue based on public statements made by the two sides thus far, suggesting the likelihood that both sides will face a difficult conversation.

A new component of North Korea’s strategy for achieving its economic and infrastructure goals in the run-up to 2012 is its effort to attract investment from overseas. The Director of North Korea’s newly established Foreign Investment Board unveiled a new plan for attracting equity, contractual, and 100% foreign owned joint venture investments. On paper, the rules incorporate provisions for repatriation of profit, generous tax incentives, and a labor rate of thirty Euros per month. This rate undercuts the compensation of $57.50 per month currently offered at the South Korean-invested Kaesong Industrial Zone. Even more generous was the offer of special concessions in North Korea’s natural resources sector for companies willing to build 100,000 units of new housing in Pyongyang that have already been promised in the run-up to 2012.

North Korean colleagues at the Ministry of Trade appeared genuinely surprised and dismayed when we mentioned that UN Security Council Resolution 1874, which condemned North Korea’s May 25, 2009, nuclear test, contains provisions prohibiting companies from making new investments in the DPRK. This is all the more unfortunate because on paper, North Korean efforts to open its economy through foreign investment are exactly the course that should be encouraged, and North Korea’s goals for 2012 could be advanced significantly with inward investment from companies that might be willing to take the risk, but the nuclear issue stands in the way. This is not to mention that North Korea’s own economic retrenchment and anti-market policies, including the “currency reforms” announced earlier this week, stretch the credibility of the North Korean government to back up these laws. Recent surveys of Chinese investors suggest few demonstration projects for successful investment in North Korea and a high probability of getting scammed or fleeced on the ground.

But the North Korean plea for foreign investment does suggest a potential point of leverage that deserves careful consideration, and that is the possibility of an investment in a strategic commodity that is of special interest to the United States: North Korea’s plutonium stock. During the Clinton administration, former Defense Secretary William Perry led efforts to make similar purchases of nuclear materials from the Ukraine and Kazakhstan, which had inherited stocks of nuclear materials from the breakup of the Soviet Union. These transactions advanced the cause of nuclear non-proliferation by ensuring that these countries would not become nuclear states. A 2004 report of a Task Force on U.S.-Korea Policy co-sponsored by the Center for International Policy and the University of Chicago, also suggested a plutonium “buy-out” proposal for North Korea, despite the obvious moral hazard of appearing to reward North Korea’s bad behavior. Any transaction with North Korea involves moral hazard, and North Korea has already proven that it will sell or sub-contract nuclear materials to the highest bidder. One positive of this approach is that any transaction involving removal of nuclear materials or capabilities from the North would be irreversible, in contrast to past practice of offering irreversible food-aid benefits to North Korea in exchange for participation in multilateral dialogue, but not for irreversible steps toward denuclearization.

In a post-9/11, post-North Korean nuclear test world, the Obama administration must find a formula that facilitates North Korea’s irreversible actions on the path toward denuclearization rather than agreeing to half-measures: North Korea’s immediate focus is on gaining the resources necessary to mark 2012 as a year of accomplishment, yet the North has been highly critical of Lee Myung-bak’s “grand bargain” Proposal. Denuclearization needs to be placed on the North Korean agenda as an accomplishment that North Korea will be able to justify as part of its broader 2012 objective of becoming a “strong and prosperous state.” Unless a new formula can be found by which to bring these two objectives into line with each other, it is likely that the United States and North Korea will continue to talk past each other.