North Korean Economy Watch

The DPRK’s recent efforts to reconstruct the Yongbyon 5MW nuclear reactor seem to have brought implementation of the “second” Agreed Framework to a halt, though it was already behind schedule.  This week the US sent Chris Hill to Pyongyang to try and rescue the process which is hung up on verification protocol.   The North claims to have sufficiently declared their nuclear capabilities and believe they should be removed from the US list of state sponsors of terror.  The US does not believe this condition has been met and seeks to establish a protocol to verify if the North’s declaration is accurate.

Japan is also set to extend sanctions (due to expire) on the DPRK.  According to Bloomberg:

Japan’s ruling Liberal Democratic Party decided to extend sanctions against North Korea for six months after their Oct. 13 expiration date, Jiji Press reported.

LDP lawmakers agreed to extend the sanctions because North Korea took steps to reactivate its nuclear program and made little progress in an investigation into Japanese nationals abducted by North Korean agents, Jiji reported.

Prime Minister Taro Aso’s Cabinet is likely to endorse the extension by Oct. 10., the Japanese wire service said.

The sanctions include a ban on North Korean imports and the entry of North Korean ships into Japanese ports. The extension will be the fourth since sanctions began after North Korea’s October 2006 nuclear test, Jiji said.

Just as the DPRKs hopes of restoring/establishing relations with Japan and the US start to dim, however, they have reached out to South Korea, with whom political relations had recently gone sour due to the South’s policy change from unsupervised aid provision under the “sunshine policy” to a quid-pro-quo relationship under a “policy of mutual benefits and common prosperity“.  Additionally, the fatal shooting of a South Korean tourist in Kumgangsan led to a deterioration in cooperation between the two governments and suspension of the inter-Korean project (a cash cow for the North).

How much was the Sunshine Policy worth to the North?  South Korean GNP lawmaker Jin Yeong, who analzed data submitted by the Unification Ministry and the Export-Import Bank of Korea, claims that the Kim and Roh administrations oversaw the transfer of 8.38 trillion South Korean Won in aid and loans since 1998.

Taking office in February 2003 after the second North Korean nuclear crisis emerged in September 2002, Roh doled out 5.68 trillion won to Pyongyang over his five-year term, double that of his predecessor Kim (2.70 trillion won).

Kim and Roh gave to North Korea 2.4 trillion won for building light-water reactors and in food aid; 2.5 trillion won to pin the price of rice aid to that of the global market; 2.8 trillion won for other aid including fertilizer; and 696 billion won in aid from advocacy groups and provincial governments.

In 2003, South Korean aid to the North reached a high of 1.56 trillion won. Then after North Korean leader Kim Jong Il declared that his country had gone nuclear in 2005, the Roh administration sent 1.48 trillion won to the North.

Jin said, “South Korea gave a loan with rice first in 2000. Payments on the loan are deferred for 10 years. Thus, we are to receive the first repayment installment in 2010. But most of the 2.4 trillion won in loans seem irrecoverable.”

PricewaterhouseCoopers Korea audited the fiscal 2007 accounts of Seoul`s inter-Korean cooperation funds, saying, “Considering the characteristics of the North Korean government, grave uncertainty exists over the possibility of redeeming the loans given to the regime. The ultimate outcome depends heavily on the conditions around the Korean Peninsula.”

Since President Lee Myung-bak took office this year, exchanges between the two Koreas have been rare. Still, aid to the light-water reactor and the Gaesong industrial complex projects and civilian donations have continued, amounting to a combined 211.3 billion won. (Donga Ilbo)

It appears the Russians are doing their part to bring the North and South together through a project they can all agree on—building a natural gas pipeline from Russia to South Korea via the DPRK:

South Korea plans to import $90 billion of natural gas from Russia via North Korea, with which it shares one of the world’s most heavily fortified borders, to reduce its reliance on more expensive cargoes arriving by sea.

State-run Korea Gas Corp. signed a preliminary agreement with OAO Gazprom, Russia’s largest energy company, to import 10 billion cubic meters of natural gas over 30 years starting in 2015, the Ministry of Knowledge Economy said in a statement. The accord was signed in Moscow during President Lee Myung Bak’s three-day visit that began yesterday.

Gazprom Chief Executive Officer Alexei Miller said after talks today between Lee and Russian President Dmitry Medvedev that the exact delivery route hasn’t been determined and that shipments could begin as early as 2015.

“Russia suggested a pipeline via North Korea, which is expected to be more economical than other possible routes,” the minister said in a news briefing. “Russia will contact the North to discuss this.”

“Transporting gas through North Korea could be risky for South Korea,” said Kim Jin Woo, a senior research analyst at Korea Energy Economics Institute. “But the project will ease tensions on the Korean peninsula if Russia successfully persuades North Korea” to accept the plan.

North Korea could earn $100 million a year from the gas- pipeline project, the Ministry of Knowledge Economy said.

“Russia will supply the fuel in the form of LNG or compressed natural gas if negotiations with North Korea do not work out,” according to the ministry’s statement. South Korea and Russia will sign a final agreement in 2010 when a study on the route is completed.

South Korea is turning to Russia, holder of the world’s biggest proven gas reserves, as it faces intensifying competition for energy resources from China and Japan. Asia’s fourth-largest economy depends on gas for 16 percent of its power generation.

Under the agreement, a pipeline to South Korea will be laid via North Korea from gas fields on Sakhalin Island in Russia’s Far East. The pipeline would initially carry 10 billion cubic meters of gas a year, or about 20 percent of South Korea’s annual consumption. The cost of the gas link’s construction is estimated at $3 billion, the ministry said.

Read the full articles here:
South Korea Seeks $90 Billion of Russian Natural Gas
Bloomberg
Shinhye Kang
9/29/2008

Liberal Gov`ts Gave W8.38 Bln to North Korea`
Donga Ilbo
9/30/2008

I have updated the list of Congressional Research Service (CRS) reports published on North Korea and posted them here.  I have also added a hyperlink under “pages” on the menu tab to the right.

Updates include:
US Assistance to North Korea: July 31, 2008
North Korean Ballistic Missile Threat: January 24, 2008
North Korea’s Nuclear Weapons Program: January 21, 2008
North Korea’s Abduction of Japanese Citizens and the Six-Party Talks: March 19, 2008
The Kaesong North-South Industrial Complex: February 14, 2008
The North Korean Economy: Leverage and Policy Analysis: August 26, 2008

Markets work because price increases send entrepreners strong signals of relative scarcity and potential profit opporunities (unless these price increases are caused by inflation).  Entrepreneurs who pick up on these signals, then, have a strong incentive to move the desired resources from where they are valued less to where they are valued more.

A Chinese official in Jilin claims entrepreneurs in his province hear these signals loud and clear—and they respond the way humans have for thousands of years–they arbitrage:

The head of the grains bureau of Jilin, the Chinese province bordering North Korea, Zhu Yehui, says a drought in North Korea is very serious, and there is a lot of corn smuggling from China into North Korea.

He says the price in North Korea is more than 10 times the domestic price in China.

I am going to go out on a limb to suggest that these Chinese smugglers (entrepreneurs) are also delivering food more cheaply (on average) than the World Food Program, and I also am willing to wager that they have better access to “sensitive areas.” 

Addendum: According to Yonhap North Korea’s grain crop last year reportedly amounted to 4 million tons. The U.N. Food and Agricultural Organization told U.S.-based Radio Free Asia last month that the North will harvest a half million tons less than last year.

Read the full article here:
China reports grain smuggling business active into North Korea
Australian Broadacsting Corporation
9/17/2008

The South Korean Ministry of Unification has reports on economic output at the Kaesong Industrial Zone.  Below are the highlights from Yonhap:

The total output by South Korean factories operating in North Korea has exceeded US$400 million, Seoul’s Unification Ministry said Monday.

Companies at the Kaesong industrial complex produced goods worth a total of US$410 million between January 2005, when the compound was opened, and July this year. One-fifth of all goods produced were exported, according to the ministry handling inter-Korean affairs.

The output in the first seven months of this year amounted to $140 million, up 51 percent from the same period last year.

As of August, 79 firms operated in the area, employing more than 32,000 North Korean workers, mostly women.

Read the full article here:
Production in inter-Korean business town tops $400 million
Yonhap
9/15/2008

Instutite for Far Eastern Studies (IFES)
NK Brief No. 08-8-28-1
8/28/2008

Recently published Chinese customs statistics reveal that trade between North Korea and China in the first half of 2008 was 1.151 billion USD, 25 percent higher than in the same period last year.

Exports were up 13.5 percent at 330 million USD, while imports grew by 31.1 percent to 820 million USD. This means that the trade deficit for this period, 491 million USD, was 44.1 percent greater than the first half of 2007.

Mining topped the list of North Korean export industries, with 118 million USD worth of ores exported to China making up 36.2 percent of all goods sent across the border. Exports included 71 million USD worth of fossil fuel, 39 million USD worth of steel, 30 million USD in clothing, and 9 million USD in aluminum. On the other hand, Chinese goods imported by the North included 302 million USD in fossil fuels, making up 36.9% of all imports. 68 million USD in machinery, 37 million USD in electronics, 30 million USD in food, and 30 million USD worth of vehicles (excluding trains) were also brought in.

Mining exports were up 69.4 percent over the first half of 2007, making up the largest part of the increase in exports. The rising international price on natural resources was a factor in the North’s increase in exports of iron ore. The 68.1 percent rise in the import of fossil fuels, on the other hand, made up the largest share of the increase in imports, and this can also be attributed to the increase in global fuel prices. 

The policy of mutual benefits and common prosperity

It doesn’t have the same ring as “Sunshine Policy,” and the acronym PMBCP is too long, but this is the English name of South Korean President Lee Myung-bak’s policy towards the DPRK. 

According to Yonhap:

We decided to fix an English name for the policy because there have been many different translated versions,” Kim Ho-nyoun, spokesman for the Unification Ministry, the top Seoul office on North Korea, told reporters.

He said the name was chosen because it best suits the government’s policy of pursuing a relationship of co-existence and co-prosperity with the North beyond the current phase of reconciliation.

The government aims at a firmer inter-Korean reconciliation than its two liberal predecessors, seeking to bring tangible benefits not only to the North but to the South as well, officials said.

President Lee Myung-bak pledged during his election campaign to help the North triple its per capita gross national income to US$3,000 if it abandons its nuclear programs and opens itself to the world.

The so-called “Vision 3,000” program is now part of Lee’s broader North Korea policy, officials said.

The goal of tripling the DPRK’s per capita GNI (GNP) to $3,000 is based on the assumption that the DPRK’s current per capita income is close to $1,000, which is a wild over statement.  Some more realistic assesments put it as low as $368 per year.  Here is a wrap up of the DPRK’s most recent economic stats from the Bank of Korea.

Read the full article here:
Gov’t sets official English name for N.K. policy
Yonhap
Shim Sun-ah
8/26/2008

Last week, the Choson Ilbo reported on trade, tourism and other exchanges between the two Koreas:

The number of [South Korean] tourists to North Korea plunged more than 60 percent last month following the shooting death of a South Korean tourist at Mt. Kumgang resort.

The Unification Ministry says the number dropped to about 21,000, almost a 20 percent decrease from July of last year. The resort was closed after the shooting.

The amount of trade between the Koreas also dropped 1.5 percent from last year.

Although commercial transactions at the jointly-operated Kaesong Industrial Complex in the North increased more than 28 percent year on year, non-commercial transactions, such as aid to the North, plunged more than 80 percent.

Read more here:
Tourism to N. Korea Drops 60% in July
Choson Ilbo
8/18/2008

Myanmar severed diplomatic relations with the DPRK after North Korean agents attempted to assassinate South Korea  president Chun Doo Hwan on his October 1983 visit to Rangoon.

Diplomatic relations between the two countries were restored in April 2007.  Shortly after, North Korea was accused of selling rocket launchers to Myanmar’s SPDC (Orwellian acronym for: State Peace and Development Council)–formerly known as SLORC (State Law and Order Restoration Council).

Now the AFP reports that trade has expanded into natural resources, with which Myanmar is abundantly blessed:

Military-run Myanmar is to begin exporting rubber to North Korea, in a further warming of relations between the reclusive governments of the two countries, a weekly newspaper reported Tuesday.

“They will start by importing at least 10,000 tonnes within the first year,” Khaing Myint of the Myanmar Rubber Planters and Producers Association was quoted as saying by the Myanmar Times.

“We are extremely pleased to add another client nation to our export destinations for our rubber. We expect the first batch to be delivered in October,” Khaing Myint reportedly said.

Read the full article here:
Myanmar to begin rubber exports to North Korea
AFP
8/19/2008

The most authoritative map of North Korea on Google Earth
Download it here

This map covers North Korea’s agriculture, aviation, cultural locations, markets, manufacturing facilities, railroad, energy infrastructure, politics, sports venues, military establishments, religious facilities, leisure destinations, and national parks. It is continually expanding and undergoing revisions. This is the eleventh version.

Additions include: Mt. Paegun’s Ryonghung Temple and resort homes, Pyongyang’s Chongryu Restaurant, Swiss Development Agency (former UNDP office), Iranian Embassy, White Tiger Art Studio, KITC Store, Kumgangsan Store, Pyongyang Fried Chicken Restaurant, Kilju’s Pulp Factory (Paper), Kim Chaek Steel Mill, Chongjin Munitions Factory, Poogin Coal Mine, Ryongwun-ri cooperative farm, Thonggun Pavilion (Uiju), Chinju Temple (Yongbyon), Kim il Sung Revolutionary Museum (Pyongsong), Hamhung Zoo, Rajin electrified perimeter fence, Pyongsong market (North Korea’s largest), Sakju Recreation Center, Hoeryong Maternity Hospital, Sariwon Suwon reservoir (alleged site of US massacre), Sinpyong Resting Place, 700 Ridges Pavilion, Academy of Science, Hamhung Museum of the Revolutionary Activities of Comrade Kim Il Sung, South Hamgyong House of Culture, Hamhung Royal Villa, Pork Chop Hill, and Pyongyang’s Olympic torch route. Additional thanks go to Martyn Williams for expanding the electricity grid, particularly in Samjiyon, and various others who have contributed time improving this project since its launch.

Disclaimer: I cannot vouch for the authenticity of many locations since I have not seen or been to them, but great efforts have been made to check for authenticity. These efforts include pouring over books, maps, conducting interviews, and keeping up with other peoples’ discoveries. In many cases, I have posted sources, though not for all. This is a thorough compilation of lots of material, but I will leave it up to the reader to make up their own minds as to what they see. I cannot catch everything and I welcome contributions.  Additionally, this file is getting large and may take some time to load.

Excerpt from the Choson Ilbo:

Asan said Thursday it paid US$675,250 to North Korea to cover costs accrued by 10,380 South Korean tourists who visited the mountain resort on July 1-11, until the tours halted after a South Korean tourist was shot and killed by a North Korean soldier at Mt. Kumgang.

Asan sends the payment at the end of each month, at the rate of $30 per person for a one day tour, $48 for two days or $80 for three days. Later this month, Asan will pay a further $928,560 to the North to cover the cost of trips to another tourist destination, Kaesong City. The cumulative payments Asan made to the North for the first six months of the year amounts to $10.7 million for the Mt. Kumgang tour, and $5.1 million for the Kaesong tour.

Read the full story here:
Asan Pays N.Korea for July Tours
Choson Ilbo
08/08/08