North Korean Economy Watch

It depends on who you ask.

As many DPRK-watchers are aware, Kim Jong Il’s “On the Spot Guidance” trips (OSGs) are importnat for several reasons.  Aside from giving Kim the ability to bypass the normal bureaucratic informaiton chanels and get a better (although not accurate) impression of on-the-ground conditions, they serve as powerful signals to military and party functionaries who see them on TV or read about them in the media.  Not only do these OSGs signal where Kim is directing his energies, they signal who he is devoting them to.  Usually the names of functionaries who are joining him are reported in the North Korean press.

On 12/11/2006, the Daily NK reported that Kim has shifted his focus from military sites to economic development sites.  If so, this would be a positive developent (article available at bottom).

Today (12/27/2006), Yonhap reports another dake on the data:

North Korean leader Kim Jong-il appeared at 66 public functions related to his country’s armed services this year although he significantly cut back his appearances amid international unrest over the communist nation’s missile and nuclear tests.

As of Tuesday, Kim had made 99 public appearances, down from 121 during the same period last year.

Daily NK
12/11/2006
Kim Yong Hun

Kim Jong Il has been gathering much interest following the nuclear experiment. In the past, he was known for making visits to military grounds, but recently has been inspecting grounds of economic development such as the farms.

More specifically, since the reconvening of the six party talks last month, Kim Jong Il has been making vigorous public outings 3 times a week. This month already he has made 5 inspections alone. On the other hand, after the missile launch last July, Kim Jong Il concealed himself for 40 days and made only 3 public outings following the nuclear experiment in October.

Last month, Kim Jong Il made 13 onsite inspections, of which 4 were made to military grounds and 9 inspections focused on economic development areas such as industrial sites, power plants and farms.

He visited sites such as Ryongsung Machine Complex in Hamheung, Heungnam Fertilizer Complex, Hamheung Chemical Industry University, Geumjin River Heungbong Youth Power Station in Hamjoo-gun, the construction site of Gumjin River Guchang Power Station in Jeongpyong-gun, and Kwangpo Duck Farm. Further within this month of December, he is known to have made visits to sites such as the construction site of Yesung River Power Station in North Hwanghae-province, Rice Collective Farm in North Hwanghae-province.

North Korean Central News Agency proclaimed Kim Jong Il’s onsite visits, “Hamkyung is the heart of our industries such as chemical, machinery and mining. As a result, it is responsible for a greater part of our nation’s economic development.”

For now, it has been analyzed that Kim Jong Il’s active visits symbolize a sigh of relief having thrown the “reconvening six party talks” card on the table, following the threat of national decline from the U.N. Security Council’s North Korea resolution and the continuous U.S’ financial sanctions.

Also, it seems that he carries a hope that changes will inevitably be made to the Bush Administration’s North Korea policy with the victory of the Democrats at the recent election. In addition, it was suggested that these regional tactics would be employed until the end of the 2008 presidential election, while proclaiming reconvening of six party talks, “reduction of nuclear armaments” and removal of financial sanctions to subside the intensified threat from the missile launch and nuclear experiment.

Moreover, it has been analyzed that with the unexpected suspension of food assistance and increased economic sanctions by the international community resulting from the missile launch and nuclear experiment, this attempt to look after the military in association to military politics and showing interest in the economy is to further urge “self-revitalization” and intercept in the disturbances by citizens.

According to a North Korean inside document “Lecture materials for officials and military” that was publicized on Donga Ilbo last 6th contained the following information “Just as we succeeded in developing nuclear armaments and evaded U.S. threat, now we are able to focus on economic development and the improvement of our people’s lifestyle.”

Regarding this, Professor Nam Sung Wook of Korea University said in a telephone conversation with the DailyNK “Kim Jong Il’s active movement’s construes that the threat on the nation has pacified and suggests that in future he will go about with normal activities” and “In particular, he will probably focus on revitalizing the economy.” However, he predicted “There are always orders but it will be difficult to expect much” and “From now on, North Korea will probably move towards its old ways.”

In fact, according to sources inside North Korea, last month North Korean authorities held meetings around the nation targeting soldiers and citizens proclaiming that “With the success of the nuclear experiment, in future we will focus on reviving our republican economy.”

On the other hand, Kim Jin Chol (pseudonym) who defected in 2005 said “Kim Jong Il will only be making onsite visits to protect his image and show that he is looking out for the people who are experiencing difficult times due to the nuclear experiment and such” and alleged “On the whole, North Korean citizens know that these acts by Kim Jong Il are only for “show” and so did not anticipate very much.”

Kim said “Kim Jong Il’s onsite visits are basically to gather support and merely to make orders” and criticized “Until now, North Korea has not adopted any fundamental measures but has only advocated ‘Self-revitalization.’”

Daily NK
12/20/2006
Kim Min Se

Pride and confidence spread among armed forces, government officials and the rich in North Korea since nuclear test.

A 41-year old North Korean businessman, K, had a telephone interview with the Daily NK from Dandong, China, on Tuesday. During the interview, K described confidence in the regime. He said “Whether Americans do it (sanctions) or not, we Koreans don’t care. We now have nuclear weapons and we are pretty sure that we will win. Soldiers think so.”

When asked if ordinary people believe North Korea possessing nuclear weapons, K boasted “Everybody in (North) Korea knows that except for infants. We are not afraid of Yankees.”

K is a typical member of the North Korean wealthy class. North Korea’s upper class’s confidence after the nuclear test contradicts worldwide expectation of escalation of domestic disorder due to international sanctions.

K said that armed forces and ordinary people are convinced to defeat the U.S. Such attitude is opposite from the actual popular reaction of ignorance to the nuclear test.

While most of the population struggles to live, a small portion of North Koreans have earned fortune from trade with China or Japan. This newly created wealthy class is now a key supporter of Kim Jong Il and his regime.

Also, another interpretation might be that since the Chinese government does not restrict trade with North Korea despite the UN Security Council’s resolution, participants of the Sino-N. Korean trade are not damaged yet.

On people’s lives after the nuke test, K optimistically said “Everything is going well.” “Cost of rice is stable and there are plenty of goods at the market.”

And “Whether the international society punishes Korea, we would not worry if we keep normal trade relationship with China,” K assured.

K’s confident remarks prove that Kim Jong Il’s nuclear strategy works well, at least among the army, government and upper class in North Korea.

Donga
12/18/2006

North Korean Military: New Regime?  

If that happens, the report forecasts that the military is highly likely to control the government and independent units, such as the escort command, and the security command and the operation command will attempt to take control of the government by joining forces or individually.

Yesterday, Dong-A Ilbo obtained a report titled “North Korea’s Crisis Management System and Our Countermeasures” released by the information committee of the National Assembly. The report predicts that “we cannot rule out an abrupt collapse of the Kim Jong Il regime. But, given the neighboring countries do not have firm grounds for intervention, the fall of North Korea will happen gradually.” It was submitted to the committee on December 13 by three researchers of Peace Foundation, Cho Seong-ryeol, Kim Hak-rin and Kang dong-ho.

Kim Jong Il in Trouble in North Korean Emergency-

The report argues that a national crisis is likely to be caused when Kim Jong Il, the chief of the North’s Workers’ Party, the government and the military, is in trouble.

If that happens, the report forecasts that the military is highly likely to control the government and independent units, such as the escort command, and the security command and the operation command, will attempt to take control of the government by joining forces or individually.

In particular, it also expects Oh Geuk Ryeol, the 75-year-old operational director of the Workers’ Party who is considered to be the most powerful among Kim Jong Il’s cross associates, to act before others by utilizing his independent commanding authority and his elite unit equipped with advanced weapons.

The report says the first thing the North Korean military should do, after taking control, is to declare a national emergency in the name of the central military committee of the Workers’ Party, which is entitled to command and control all military power in the country according to Article 27 of the party rules. But the report also predicts that the national defense committee will be at the center of administration of power and that the new regime will maintain a group leader system temporarily.

Who Will Be the Acting Commander in Chief?-

According to the report, if the North engages in war with the outside world, the country is likely to shift an emergency control system with the commander in chief in its center, as it did during the Korean War.

Cho Myeong Rok, the 78-year-old director of the General Political Department of the Korean People’s Army, is highly likely to be appointed as a commander in chief by hierarchy. But, considering age and health, Kim Yeong Chun, the 70-year-old Chief of the General Staff of the Army responsible for military operation of the one million-strong forces, is the shoo-in, according to the report.

Establishment of the Succession System-

It has been analyzed that the establishment of a succession system is more urgent for Kim Jong Il than the overcoming of the economic crisis through reform and market opening or the formation of diplomatic ties with the U.S., since Kim is well aware that an emergency in the absence of the succession system will lead to a civil war.

For this reason, it says, chances are that Pyongyang will formalize the succession system internally in the first half of 2007, when internal cohesion following its nuclear test and the supportive atmosphere for the third-time succession of military authority to protect the vested interest of the “Military First politics” still remain.

The report also connects the gradual stabilization of the succession system and the resolution of the North’s nuclear problem. It estimates that Kim will demand approval of the succession system and massive economic assistance in return for denouncement of nuclear weapons, and that the Pyongyang-Washington ties will be normalized if Washington accepts the demand.

Korea Herald
12/18/2006

N.K. general to lead if Kim loses power

A top military commander is expected to take the reins in North Korea in the event its leader Kim Jong-il loses power during an emergency, a South Korean parliamentary report said yesterday.

The report on a possible North Korean crisis pinpointed General Oh Geuk-ryul, chief of central combat operations of the Workers’ Party, as the strongest candidate to take contingency leadership of the communist country.

The report was written by the Peace Foundation, a private think tank on security affairs commissioned by the National Assembly Intelligence Committee.

The report said if Kim loses control, it will trigger fierce power struggles among leaders of different military groups such as Kim’s security guard, the Army headquarters, the intelligence command and the combat operations department.

None of them are in position to take control of the entire military. Kim is known to have controlled all military forces through a system of checks and balances among the several independent military groups. Each separate group is directed by Kim, with no influence on one another.

Among the powerful candidates, Oh, 74, is expected to take the lead in mobilizing his well-trained soldiers equipped with the North’s most modern weapons systems, the report said.

In the event the North Korean crisis triggers intervention from outside forces, the new leadership could fall under Kim Young-chun, deputy marshal of the Korean Peoples’ Army, the report expected.

Kim, 69, is likely to lead the North’s military in fighting against any foreign interventionist forces although Cho Myoung-rok, another deputy marshal of the KPA, is higher in rank, it said. Cho, 77, was cited as weaker than Kim due to his age and suspect health.

The report also said Pyongyang’s crisis may lead to the development of a crisis management system instead of the collapse of the North Korean regime.

The new authority is expected to exercise a military-led collective leadership after invoking martial law throughout the country, it said.

With regard to the possibility of North Korean military aggression, a full-scale invasion of South Korea is unlikely to occur at the time of such a crisis although the North could trigger local conflicts in frontline areas, the report said.

The report advised that South Korea needs to prepare to deal with the North’s new leadership and to enhance military preparedness for any possible clashes.

Joong Ang Daily
12/19/2006

Despite United Nations sanctions aimed at preventing the North Korean government from buying luxury goods for its ruling class, government sources here said a North Korean trading company is still busy providing Kim Jong-il loyalists with their perquisites.

Tian Ming Trading Company, in the center of this former Portuguese enclave now with the same China-affiliated status as Hong Kong, says its main business line is carpets, and little more. Three office workers said there were no North Koreans at the company and that it has never traded with North Korea. The company’s president was out of town on business, they said.

But a source with close ties to the trading economy here said that Park Su-dok, a 53-year-old North Korean, is in Macao and obtained a visa as an employee of the company.

Another source said, “Tian Ming is a joint venture by North Korean and Hong Kong investors, and its main business is buying luxury goods from Hong Kong for shipment to North Korea.” He added that Tian Ming’s president, a Hong Kong resident, is buying luxury watches, gold products and expensive liquor at North Korea’s request, using a Hong Kong branch office for the purpose.

Other Macao government officials said 18 North Korean firms were registered in Macao as of late November, and 115 North Koreans carry Macao visas as employees. Twenty have become Macao citizens, they added.

Since Washington threatened to impose sanctions on Banco Delta Asia here, allegedly for helping North Korea launder cash from its alleged dubious business lines, some of those companies have shut down. Ten are still in limited operation, however, these government sources said.

Separately, a South Korean banker in Hong Kong told the Joong-Ang Ilbo that a North Korean businessman had visited him in an attempt to sell gold bars through one of the South Korean bank branches in Hong Kong.

The banker reportedly spurned the overture, although the transaction would not have violated any South Korean laws or regulations on North-South dealings. He said he simply did not want to get involved in such a deal given the international attention being paid to commercial dealings with North Korea. The banker suggested that the offer may have been a sign of the foreign currency problems North Korea is facing because of the UN sanctions and U.S. pressure on financial dealings with North Korea.

Banco Delta Asia has said that between 2003 and 2005, it had sold 9.2 tons of gold bars that it had purchased from the North, where gold production is estimated to be about 25 tons per year, mostly for export.

Wall Street Journal
12/18/2006
Gordon Fairlcough, p.A1

Close-Out Sale: North Korea’s Elite Shop While They Can

A North Korean businesswoman with heavy makeup and a bouffant hairdo studied herself in a mirror as she modeled fur-lined leather coats at a small store in [Dandong, China] this frigid northeast border city.

During a three-day excursion late last month, the woman also tried on shoes and looked at large-screen television sets before buying furniture and fresh fruit and heading home to Pyongyang, North Korea’s capital city.

The United Nations has called for a crackdown on luxury-goods shipments to North Korea as a way of pressuring the country to drop its atomic-weapons programs, which came under new fire after an October nuclear test.

If anything, the uncertainty about the flow of fancy goods appears to have whetted the appetites of some privileged North Koreans — whose impoverished country cultivates a Spartan socialist image.

In Dandong, North Koreans, many wearing lapel pins with a picture of North Korea’s founding dictator, Kim Il Sung, stroll through hotels and department stores. Signs are often written in Korean, with storekeepers advertising computers, karaoke machines and the erectile-dysfunction drugs Viagra and Cialis.

A few North Koreans have bought new cars at a Toyota dealership near the Dandong customs checkpoint, according to a salesman. One man paid about $50,000 in cash for a luxury sedan.

Gold is also gaining a following. Wang Xiaoju, a saleswoman at the jewelry counter at Xin Yi Bai Department Store, says North Korean women come in nearly every day, mostly to buy gold chains and other gold jewelry.

Women from the North also are frequent visitors to a riverfront spa, favoring milk baths and massages, according to staff there. A saleswoman at the Xin Yi Bai L’Oreal counter says North Koreans are regular customers. Among the big sellers: body sculpting cream for women who want to look thinner.

In the first 10 months of this year, Chinese exports of fur coats and fake furs to North Korea soared more than sevenfold from the year-earlier period, according to Chinese Customs figures. Exports of televisions and other consumer electronics were up 77%, while perfumes and cosmetics were up 10%.

Some North Koreans are even buying real estate in Dandong. One high-rise building, where three bedroom apartments go for nearly $100,000 each, has sweeping views of a decrepit North Korean village with crumbling cinder-block houses across the border. A North Korean buyer recently purchased one of the units with cash, according to the building’s sales agent.

“Life is quite comfortable” for senior party members, military officers and traders, who have prospered despite widespread shortages of food, fuel and medicine in North Korea, says Pak Yong Ho, a former high-ranking North Korean official who defected to South Korea two years ago.

North Korea’s Communist Party has long had overseas agents in Macau, Switzerland and elsewhere dedicated to maintaining supplies of luxuries for top military and government personnel, according to former North Korean officials. Their jobs, in the wake of the U.N. sanctions, could get much harder.

The U.N. so far has let individual countries decide which high-end products to block. Washington has barred U.S. companies from selling everything from iPods to Harley-Davidson motorcycles. But that move was largely symbolic, as there is very little direct trade between the U.S. and North Korea.

Japan, which has for decades been a source of luxuries for the North Korean ruling class, has banned exports of 24 fancy products from caviar and gems to watches and art.

But the key to whether the sanctions will work is in the hands of China, North Korea’s largest trading partner.

A steel-girder bridge here spans the Yalu River, connecting Dandong to the city of Sinuiju in North Korea. That has helped Dandong, whose name means “Red East,” become a popular shopping destination for North Koreans with money. It is unclear how much that will change because of the sanctions.

So far, China hasn’t disclosed what specific kinds of high-end exports — TVs or luxury automobiles, for instance — it will block. A Chinese foreign-ministry spokeswoman, Jiang Yu, has said the list “should not be allowed to impact normal trade transactions” between the socialist neighbors.

North Korean leader Kim Jong Il, whose own taste for expensive French cognac and other imported luxuries is well known, uses money and goods liberally in an effort to buy the loyalty of the elite, according to U.S. and South Korean officials. Some of these officials say that depriving the ruling class of its creature comforts could alienate them from Mr. Kim, long known as “Dear Leader.”

But many North Korea watchers and North Korean defectors doubt that the elite would revolt against Mr. Kim’s government, because their fates are so closely tied to his now. “Under this regime, the privileged have had a very good life,” says Kim Dok Hong, the second-highest North Korean official to defect. “If the regime collapses, the people they’ve mistreated will be looking for revenge.”

At the peak of the famine that killed more than a million North Koreans in the mid-1990s, Mr. Pak, the former government official, says his parents weren’t short of food. Their home had three refrigerators regularly replenished with imported provisions by the Communist Party. Mr. Pak uses a pseudonym to protect family members still in the North from government retribution.

“The elites have had more freedom to do their own business” since economic overhauls in 2002, says Yang Chang Seok, a senior official at South Korea’s Unification Ministry, which oversees relations with the North. “People have earned a lot of money from trading.”

These days in Pyongyang, members of the ruling class are ferried around in imported cars and live in well-appointed — and well-guarded — apartment complexes. Their children race around city parks on in-line skates and play American computer games.

Says Mr. Pak: “If you can afford to pay, there’s nothing you can’t get.”

Daily NK
12/15/2006
Kim Young Jin

According to an interview with recent defectors, North Koreans do not trust their armed forces anymore [and] detest the soldiers.

Mr. Kim, a 27-year old defector, had an interview with the Daily NK in Yanji, Jilin Province, China, and said that most of the North Korean residents called the soldiers “son of a bitch.”

“In the past,” Kim recalled, “North Korean people like[d] the army and called them people’s army. We were always hospitable to them. And they actually deserved to receive hospitality.”

Such popular attitude toward armed forces had changed since the Great Famine in the mid-90s, Kim said.

“Now, soldiers only plunder ordinary people,” Kim said with disappointed voice.

“A few years ago,” the defector told his personal experience to the reporter, “several soldiers sneaked into my house brandishing axes. And they stole our dog. I was just shocked.”

Although the authorities advertise grandeur of the military-first policy, people are tired of the army’s violence and have even given up last remaining confidence on their military, according to Kang’s testimony.

Kang, a 23-year old defector living in Tumen, China, said “Nobody wants to go to the army because it can’t even feed soldiers. People rather hope to earn money by doing business.”

In North Korea, among graduates of high school, college students and laborers are exempt from enlistment. However, those who must serve tried hard to evade the army service, Kang said. He added “Many people pay money to avoid draft and others often desert. Only those from poor families go to army.”

“Nowadays, North Korean young men avoid marriage until accumulating some amount of money. Only ex-soldiers do not know much about the reality of lives and how they have changed. So the marriage market is heavily favored against young women,” Kang said sarcastically.

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.

Daily NK
Park Hyun Min
11/28/2006

In its editorial on the 27th, the Rodong Shinmun, North Korea’s state newspaper, strongly encouraged the populace on the integrity of Military First policy.

This newsgroup argued “Our invincible revolutionary army will first of all make our country flourish in riches” and “Though many countries have perished because of a weak army, no country has ever collapsed because of starvation.”

This claim has risen amid expectation made by the WFP following North Korea’s nuclear experiment, which predicted that as international sanctions intensify and North Korea exhausts all its autumn harvest in which it is currently living off, by next year April, the country will be hit by sever starvation.

The newsgroup stated “We earnestly hope for prosperity and putting all things aside, it is blatantly obvious that we need to take deterrent forces” and strongly justifying indirectly the nuclear experiment. “Accomplishing prosperity another countries’ way is stupid fantasy. Our revolutionary army is national sovereignty and our military-first spirit is autonomy. This is a historical fact that cannot be changed.”

Further, the newsgroup stated “We are in a generation where today the nation’s economic power is influenced by developments made in national defense” and emphasized “The construction of national defense will soon be economic construction and the power of national defense will soon be economic power. Prioritizing and putting the development of our national defense first is the best way in developing our economy.”

Further claims were made “The greatest tragedy to our nation is not economic obstacles or poverty in a materialistic lifestyle but the defeat of our mind.” This is propaganda as a result of a recent situation for “anti-socialism” that is arising within North Korea and attempts by the regime to control this commotion.

The newsgroup added “The fact that we were successful in conducting a cutting edge nuclear experiment with only our strength and our wisdom simply goes to show the potential of our technological advancement” and “while living at the beginning of a strong military period, supporting Kim Jong Il is the pride and fortune of our people.”

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.

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.

The Plight of North Koreans in China and Beyond
International Crisis Group
10/26/2006
PDF Here: Perilous Journeys.pdf

Executive Summary

Scores of thousands of North Koreans have been risking their lives to escape their country’s hardships in search of a better life, contributing to a humanitarian challenge that is playing out almost invisibly as the world focuses on North Korea’s nuclear program. Only a little over 9,000 have made it to safety, mostly in South Korea but also in Japan, Europe and the U.S. Many more live in hiding from crackdowns and forcible repatriations by China and neighbouring countries, vulnerable to abuse and exploitation. If repatriated to the North, they face harsh punishment, possibly execution. China and South Korea have held back, even during the Security Council debate over post-test sanctions, from applying as much pressure as they might to persuade Pyongyang to reverse its dangerous nuclear policy, in part because they fear that the steady stream of North Koreans flowing into China and beyond would become a torrent if the North’s economy were to collapse under the weight of tough measures. While there is marginally more hope Beijing will change its ways than Pyongyang, concerned governments can and must do far more to improve the situation of the border crossers.

Even without a strong response to the 9 October 2006 nuclear test that targets the North’s economy, the internal situation could soon get much worse. The perfect storm may be brewing for a return to famine in the North. Last year, Pyongyang reintroduced the same public distribution system for food that collapsed in the 1990s and rejected international humanitarian assistance, demanding instead unmonitored development help. Funding for remaining aid programs is difficult to secure, and summer floods have damaged crops and infrastructure.

Hunger and the lack of economic opportunity, rather than political oppression, are the most important factors in shaping a North Korean’s decision to leave “the worker’s paradise”. A lack of information, the fear of being caught by Chinese or North Korean security agents and financial limitations are more significant barriers than any actual wall or tight security at the border. China compensates for the virtual absence of border guards with a relentless search for North Koreans in hiding. In

October 2006, Chinese authorities began to build a fence along the frontier and conduct neighbourhood sweeps to find and arrest the border crossers. Despite these formidable obstacles, the willingness among North Koreans to risk their lives to escape is growing stronger, and arrivals in the South are likely to hit a record this year. The most important pull factor shaping the decision to leave is the presence of family members in China and, increasingly, South Korea. The nearly 9,000 defectors in the South are able to send cash and information to help their loved ones escape. To a lesser but significant extent, information is beginning to spread in the North through smuggled South Korean videos, American and South Korean radio broadcasts, and word of mouth – all exposing North Koreans to new ideas and aspirations.

Most North Koreans do not arrive in China with the intention of seeking official asylum, but because Beijing is making it ever more difficult for them to stay, a growing number are forced to travel thousands of kilometres and undertake dangerous border crossings in search of refuge in Mongolia or South East Asia. The mass arrests of 175 asylum seekers in Bangkok in August 2006 and a further 86 on 24 October provide vivid examples of host country hospitality being stretched to the limits.

The vast majority of North Koreans who have made it to safety resettle in South Korea. In most instances, this is a choice motivated by language, culture and the promise of being reunited with family members. In a growing number of cases, the overly burdensome procedures for being granted asylum anywhere else is the deciding factor. With the exception of Germany, the governments that have pressed most vigorously for improving North Korean human rights, namely the U.S., the European Union member states and Japan, have taken in only a handful of asylum seekers.

A loose network of makeshift shelters focused on humanitarian aid has evolved into a politically-charged but fragile underground railroad on which some North Koreans can buy safe passage to Seoul in a matter of days, while others suffer years of violence and exploitation. If they are to minimise the exploitation of the most vulnerable and enhance the much-needed aid this network delivers, concerned governments must commit to a sustainable solution.

None of the policies proposed in this report would create unmanageable burdens for any government. Unless North Korea’s economy collapses completely, the numbers of its citizens crossing international borders will continue to be restricted by many factors, not least Pyongyang’s tight controls on internal movement and the financial cost of securing an escape route. However, it is time to back up strong words and resolutions about the plight of North Koreans with actions, both because humanity demands it and because if the international community cannot quickly get a handle on this situation, it will find it harder to forge an operational consensus on the nuclear issue.