North Korean Economy Watch

According to Yonhap:

Inter-Korean trade has fallen more than 30 percent since the South cut almost all business relations with the North after Pyongyang was blamed for torpedoing one of its naval ships in late March, the customs office here said Friday.

According to data provided by the Korea Customs Service, the trade between the two Koreas came to US$123.06 million in June, down 32 percent from April, when they still kept their ordinary business relations despite a probe into the naval disaster.

…

South Korea’s exports to the North amounted to $56.88 million in June, down 27 percent from April, while imports decreased 36.5 percent to $66.18 million over the same period, the data showed.

Inter-Korean trade also dropped 21 percent from May, with its exports to and imports from the North falling 4 percent and 32 percent, respectively.

Despite such a sharp shrinkage, the customs office said the decline was not as steep as expected thanks to the Kaesong complex, which takes up most inter-Korean trade.

“The reason why the decline was not as sharp as expected is because we still keep a trade channel open in the Kaesong complex, which accounts for around 70 percent of total trade with the North,” a customs official said.

South Korea is the North’s second-largest trade partner after China. A suspension of inter-Korean business would cause a significant impact on the efforts of the reclusive communist nation to secure cash, according to experts.

Earlier, a state-run think tank here said inter-Korean trade suspension could cost North Korea about $280 million annually, adding to pressure on the North’s cash-strapped regime in governing its country.

Read the full story here:
Inter-Korean trade falls more than 30 pct amid heightened tensions
Yonhap
8/6/2010

UPDATE: This story was picked up by the Financial Times (8/11/2010):

North Korea has offered the Czech Republic 20 tonnes of ginseng in lieu of payment for some of its debts.

However, Prague has turned down the deal, instead suggesting that Pyongyang pays in the valuable mineral zinc, which can be resold on international markets.

North Korea owes the Czech Republic $10m from the days when the Czech Republic was under communist rule and the two countries traded with each other regularly. Communist Czechoslovakia was a leading supplier of trucks, trams and machinery to North Korea, creating a large pile of debt.

Pyongyang reportedly offered $500,000 worth of ginseng, a root which is reputed to boost memory, stamina and libido, as a down payment.

However, consumption of ginseng in the European country is low, with just 1.4 tonnes used each year.

North Korea’s economy is struggling as international sanctions tighten and it hopes to be able to barter its way out of handing over valuable cash.

Non-cash transactions between socialist countries is common, with Cuba sending Venezuela doctors in exchange for discounted oil.

A Czech government spokesman has said that the countries were in negotiation over how the debt would be paid.

“We have been trying to convince them to send, for instance, a shipment of zinc,” the deputy finance minister told the MF Dnes newspaper.

ORIGINAL POST: According to the Korea Times:

North Korea has offered to pay its debt to the Czech government with ginseng, according to a local Czech daily newspaper.

MF DNES, a daily newspaper based in Prague, reported last Saturday that North Korea has recently suggested to the Czech Finance Ministry that it would pay 5 percent of its debt — approximately $500,000 — with ginseng.

“We are trying to persuade them (North Korea) to give us, for example a bulk of Zinc instead, so that we could sell it to someone else,” Tomas Zidek, deputy finance minister, told the newspaper in Czech.

North Korea is believed to have a significant amount of zinc in deposits.

The paper went on to say the consumption of ginseng in the Czech Republic is very small, and it only imported 1.4 tons last year. The amount of ginseng worth $500,000 will be roughly 400 tons, securing the supply for more than 200 years.

But, to Czech’s disappointment, North Korea seemed to have made up its mind, as it sent a delegation with samples of ginseng.

North Korea is known to be Czech’s 10th biggest debtor, which goes back to the communist governments. The North bought many trams and vehicles from former Czechoslovakia.

Read the full story here:
North Korea wants to pay back debt in ginseng
Korea Times
Kim Se-jeong
7/26/2010

According to Forbes:

Last year India exported roughly $1 billion to North Korea, up from an average of barely $100 million in the middle of the past decade, reports the Confederation of Indian Industry, a trade organization–most of that in refined petroleum products. The trade group says that North Korea’s exports to India were a minuscule $57 million, including silver and auto parts. (South Korean trade figures suggest India’s exports are much lower.)

The commercial tie has no deep historical roots and is curious, to say the least, given Pyongyang’s closeness with China, India’s commercial rival, and its connection to the A.Q. Khan nuclear network in Pakistan, India’s enemy.

North Korea needs oil to maintain power plants and to keep its outsize military on the move. It apparently has enough hard- currency reserve from its murky export trade to buy on the spot market. India, for its part, has ramped up refining but gotten ahead of domestic demand. Further, by keeping an artificial lid on pump prices until recently, Indian policy encouraged these oil sector producers to look for clients overseas. “India is the largest exporter of refined products east of the Suez [meaning the Middle East and Asia],” says Fereidun Fesharaki, chairman of Facts Global Energy in Singapore. A lot of enhanced supply came online in 2009, mostly from Reliance Industries, which has the world’s largest refinery, and the Essar Group, the Mumbai steel and energy giant. At current usage and demand “India needs 15 years of demand to absorb this current supply,” he adds.

Until June the New Delhi government kept a cap on domestic gasoline prices, running up a $10 billion subsidy bill, or roughly 7% of its budget. While state-owned companies were compensated for their losses, those in the private sector were on their own, causing them to look for other markets, especially since the price for crude has doubled, to $78 per barrel since 2004. “Their incentive is [to find] who in the world is desperate enough to take the products, and it’s usually Iran or North Korea,” says Fesharaki.

Some North Korea watchers are caught off guard. “I was flabbergasted by the increase in trade,” says Stephan Haggard, director of the Korea-Pacific Program at UC, San Diego. “North Korea is basically engaged in close to barter trade.” No one seems more surprised than Pratap Singh, India’s ambassador to Pyongyang, who says he has no idea of trade volume because the North Koreans won’t supply credible data, much less working phone lines. “How did you manage to get through?” he asks a reporter.

Like other oil refiners, neither Reliance nor Essar exports fuel to North Korea directly. That’s too much of a risk politically (even though this trade isn’t barred under current UN sanctions) and economically, as Pyongyang has been known to slip on its payments. Instead, the fuel is sold through a network of traders and banks in Dubai and elsewhere. Trade data nevertheless record the origin of the refined petro goods.

Curiously, both New Delhi and the U.S. State Department, which have bumped along in relations complicated by India’s own nuclear development, show no alarm. A spokesman for India’s Ministry of Foreign Affairs says all international strictures are observed and nothing sinister is at hand. Washington won’t comment without verifying the data.

Perhaps a little more attention is in order since India is selling more than mere oil to North Korea. Last year, according to Indian trade data, India also exported $2 million in goods in a category called “nuclear reactors, boilers, machinery and mechanical appliances”–most likely water pumps, computer data storage units, ball bearings and machine tools. Could they be used to maintain a nuke plant in some way? Maybe.

“North Korea, over the years, has attained skills to disguise their trade activities and also to utilize materials they have for other purposes,” says Jennifer Lee, a research analyst at the Peterson Institute for International Economics in Washington. “Countries need to be especially careful in what they export to North Korea.”

Read the full story here:
Look Who’s Helping North Korea
Forbes
Megha Bahree
7/22/2010
(Magazine date: 8/9/2010)

According to Yonhap:

The volume of goods brought into South Korea from a joint factory park in North Korea has remained unchanged despite Seoul’s trade ban slapped on Pyongyang in May in retaliation for its deadly attack on a South Korean warship, the government here said Tuesday.

The volume of products transported from the Kaesong industrial park stood at 6,953 tons in June, compared to 7,004 tons a month earlier when South Korea banned trade with North Korea and cut the number of South Korean workers staying in the North Korean border town, the Unification Ministry said in a release.

“There has been little difference in the amount of manufactured products brought in since the May 24 measures,” which the South imposed after a multinational investigation found the North responsible for the March sinking of the Cheonan, it said.

Ministry spokesman Chun Hae-sung said currency conversions for the data were not immediately available.

North Korea has denied any responsibility for the attack in the Yellow Sea that left 46 sailors dead. About 121 South Korean firms operate in Kaesong, employing 44,000 North Korean workers — the last remaining major symbol of detente between the divided countries.

According to the ministry that handles cross-border affairs, the amount of goods brought into South Korea for the first half of this year nearly doubled compared to the same period last year. The figures signaled the Kaesong factory park continued to grow even though the relations between the Koreas have soured since 2008.

But many of the Kaesong companies have complained of falling orders and are seeking rescue funds, arguing the deteriorating political relations are increasingly becoming a liability for their businesses.

Read the full story here:
Influx of goods from inter-Korean factory park stays consistent: gov’t
Yonhap
Sam Kim
7/20/2010

Institute for Far Eastern Studies (IFES)
NK Brief No.10-07-08-2
7-8-2010

As inter-Korean commerce has all but dried up in the wake of the Cheonan incident, trade between North Korea and China appears to have continued to grow. According to Chinese customs statistics released on July 6, trade with North Korea from January to May amounted to 983.63 million USD; 18.1 percent more than the 833.07 million USD reported for the same period last year.

North Korea imported 727.192 million USD-worth of Chinese goods (29 percent increase over the same period last year), but exports dropped by 4.9 percent, amounting to only 256.438 million USD. This indicates a 60 percent increase in North Korea’s trade deficit with China, which was 470.757 million USD in the first part of 2009. With South Korean sanctions against the North halting all inter-Korean trade outside of the Kaesong Industrial Complex following the sinking of the Cheonan, it is expected that Pyongyang will become even more economically dependent on Beijing.

During this period, crude oil accounted for most of North Korea’s imports from China, as Pyongyang bought 254,000 tons (slightly more than the 247,000 tons in early 2009). However, due to rising international fuel prices, this oil cost the North 157.097 million USD, a 76 percent increase over what Pyongyang spent during this period last year.

In addition, rice (24,400 tons), corn (31,400 tons), beans (20,500 tons), flour (34,000 tons) and other necessary food imports totaling 11,300 tons reflected a 41 percent increase over the same period in 2009. The cost of fertilizer imports also jumped sharply, amounting to 81,943 tons, or 115.6 percent more than the 38,004 tons imported from January to May 2009. Increasing imports of food and fertilizer are a result of the growing agricultural difficulties being faced in the North. Based on current prices, aviation fuel imports also grew by 46.8 percent, freight trucks by 98.7 percent, automobile fuel by 47.4 percent, and bituminous coal by 137 percent.

The top ten official imports of Chinese goods by North Korea were as follows: crude oil (21.6 percent); aviation fuel (3.1 percent); freight trucks (2.9 percent); automobile fuel (2 percent); bituminous coal (1.9 percent); fertilizer (1.8 percent); beans (1.6 percent); flour (1.6 percent); rice (1.5 percent); and corn (1.1 percent).

North Korea’s exports to China were mainly underground natural resources. The top ten exported goods were: iron ore (17.1 percent); anthracite (16 percent); pig iron (9.6 percent); zinc (5 percent); Magnesite (3.6 percent); lead (2.4 percent); silicon (2.3 percent); men’s clothing (2.2 percent); frozen squid (2.1 percent); and aluminum (1.9 percent).

According to Yonhap:

North Korea could take more provocative acts before the November summit of the Group of 20 nations in South Korea if history is any indication, a Japanese investment bank said on June 4.

Nomura International warned that North Korea may display more “bad behavior” similar to the March sinking of South Korea’s 1,200-ton corvette Cheonan, of which North Korea stands accused.

“Experts are wondering whether North Korea’s bad behavior… may be no coincidence,” said Alastair Newton and Kwon Young-sun, two Nomura economists, explaining that North Korea has done similar acts when South Korea hosted global events.

North Korean agents bombed a Korean Air jet in mid-air 10 months before the 1988 Seoul Olympics, killing all 115 passengers and crew members on board, while naval ships of the two Koreas clashed in the Yellow Sea in 2002, the year South Korea co-hosted the World Cup event with Japan.

“Especially given the domestic stresses and strains from which North Korea appears to be suffering at present, we should be braced for the possibility of more of the same — and, possibly, worse — for some time to come,” the economists said in a 40-page report titled “North Korea: Through a Glass Darkly.”

The economists expected that tensions on the Korean Peninsula will ease somewhat shortly, but were skeptical whether there will be practical progress in the global efforts to denuclearize the secretive regime.

“If the six-party talks resume — and we believe they may as China in particular looks to keep Pyongyang in check without risking regime collapse — we are doubtful that North Korea will be prepared to make or deliver on meaningful concessions in response to the demands of the international community,” the report said.

Nomura said it sees a low probability of North Korea’s imminent collapse, especially in the run-up to Kim Jong-il’s succession and the 100th anniversary of the birth of Kim Il-sung, the leader’s father and the founder of the regime, in 2012.

At the same time, the bank doubted the political status quo in Pyongyang is sustainable for more than a short period.

While placing a relatively low probability on the reunification of the two Koreas in the foreseeable future, the Nomura report said the cost of the reunification will be heavy and burdensome.

In order to reduce the possible costs, the Nomura economists suggested of adopting “less ambitious and more realistic” methods — such as the “one country, two systems” model used by China and Hong Kong.

You can download the Nomura report here (PDF).

Additional reports and statistics on the DPRK economy can be found here.

Congressional Research Service (CRS) reports can be found here.

Other unrelated studies can be found on this post as well.

According to the AFP:

North Korea’s economy is expected to continue shrinking this year after South Korea cut off most trade in protest at the sinking of a warship, a report said Tuesday.

“The North is very likely to see its economy shrink this year,” said the report from South Korea’s state-run Korea Development Institute (KDI), without estimating a figure.

“Our outlook is based on a forecast that its external trade will likely post a setback.”

The communist state’s economy contracted 0.9 percent in 2009, according to an earlier report from the South’s central bank.

The South in May announced a ban on most trade after a multinational investigation concluded that a North Korean torpedo sank the warship in March with the loss of 46 lives.

The KDI said at the time the ban would cost the impoverished North hundreds of millions of dollars a year, noting that Pyongyang posted a 333 million dollar trade surplus with its neighbour last year.

The South’s central bank says the North’s economy shrank 1.1 percent in 2006 and contracted by 2.3 percent in 2007, but grew 3.1 percent in 2008 until contracting again last year.

A further shrinkage this year could spark an economic crisis, Tuesday’s report said.

“North Korea’s economy could be hurled into a very precarious situation,” it said.

“As experienced by the nation in the mid-1990s, a crisis could more likely be prompted by consecutive contractions for a relatively long period of time, rather than a one-off steep economic downturn.”

The North’s economy fell deep into trouble in the 1990s after the break-up of the Soviet Union and the loss of its crucial aid.

The country suffered famine in the 1990s which killed hundreds of thousands and it still grapples with severe food shortages.

Since 2005 the regime has been reasserting its grip on the economy, with controls or outright bans on private markets.

A currency revaluation last November, designed to flush out entrepreneurs’ savings, backfired disastrously. It fuelled food shortages as market trading dried up and sparked rare outbreaks of unrest.

The North was forced to suspend its campaign against free markets.

The United Nations in June last year tightened sanctions following the North’s missile launches and nuclear test earlier in the year.

Read the full story here:
N.Korea economy to shrink on trade cutoff: report
AFP
7/5/2010

According to Yonhap:

Trade between North Korea and China in the January-May period increased 18 percent compared to last year, a sign that Pyongyang continues to expand economic ties with Beijing amid soured relations with Seoul, figures showed Tuesday.

North Korea imported US$727.2 million worth of goods from China and exported $256.4 million in the five-month period this year, according to figures recently released by Chinese customs authorities and obtained by Yonhap News Agency.

Read the full story here:
Trade between N. Korea, China rises, signaling closer economic ties
Yonhap
Sam Kim
7/6/2010

According to Yonhap:

The widening inter-Korean economic and social gaps could eventually increase the cost of unification, a report showed Friday, highlighting the importance of the private sector’s role in “limiting the gap.”

According to the report compiled by the Organization for Economic Cooperation and Development, South Korea’s economy is about 38 times larger than the North’s and 18 times larger on a per-capita basis as of the end of 2008.

North Korea’s total trade volume remains just 0.4 percent of South Korea’s, while production of electricity and steel stands at a mere 6 percent and 2.4 percent, respectively, the report showed.

The report also noted that the North Korean economy grew 3.7 percent in 2008 following two years of contraction but its currency reform in late 2009 triggered “serious economic problems,” pointing to a tough road for the reclusive country’s future growth.

The North is also showing a marked gap with the South not just in the economic field but also in social and welfare areas such as high infant mortality rates and relatively short life expectancy, according to the report.

“The large gap in income and health will boost the eventual cost of economic integration,” said the report.

“The expansion of trade driven by private sector firms in the South, in line with the government’s strategy of limiting cooperation to projects that are economically viable and that do not overburden taxpayers in the South, provides the best hope for limiting the gap,” it added.

The report comes as inter-Korean trade and investment except for an industrial park in the border town of Kaesong was suspended after a multinational investigation recently proved that the North torpedoed one of South Korea’s patrol ships in March, killing 46 sailors.

The two Koreas are still technically at war as no peace treaty was signed at the end of the 1950-53 Korean War.

Of course, Yonhap does not bother to tell us the name of the study or provide a link!

I think I found it however. I am 99% confident that Yonhap is citing the OECD Economic Surveys: Korea 2010.

The reason I was able to locate the report was because one of the quotes Yonhap provided above was used word-for-word in the OECD Economic Surveys: Korea 2008. Check out the last sentence of paragraph 2 on page 54.

Institute for Far Eastern Studies (IFES)
NK Brief No. 10-06-07-1
6/7/2010

In 2009, North Korea’s foreign trade (not including inter-Korean trade) amounted to 3.41 billion dollars, 10.5 percent less than 2008, which saw the largest amount of DPRK overseas commerce since 1991. Exports were down 5.97 percent (1.06 billion USD), while imports were down 12.45 percent (2.35 billion USD), recording a 1.29 billion USD trade deficit.

These figures come from a KOTRA analysis of the Korea Business Center (KBC)’s statistics of trade with North Korea by foreign countries. Because North Korea does not reveal trade statistics, this ‘mirror analysis’ method of analyzing the statistics of its trading partners is the only method available.

Looking at each country’s trade figures individually reveals that China is the North’s largest trade partner. DPRK-PRC trade amounted to 2.68 billion USD last year, 78.5 percent of all the North’s foreign trade. The North exported 790 million USD worth of goods to China, while its imports from China amounted to 1.89 billion USD. As North Korea’s trade with China continues to grow relative to that with other countries, so too, does its economic dependence on Beijing. In 2003, DPRK-PRC trade amounted to 42.8 percent of its overall foreign trade. This grew to 48.5 percent in 2004, accounted for more than half (52.6 percent) in2005, hit 56.7 percent in 2006, 67.1 percent in 2007, and 73 percent in 2008.

North Korea’s main imports from China were crude oil and petroleum (330 million USD, down 44.2 percent from 2008), boiler and machinery parts (160 million USD, up 10 percent), and electrical components (130 million USD, up 31 percent). Top exports to China included coal (260 million USD, up 26 percent), minerals (140 million USD, down 34.1 percent), and textiles (90 million USD, up 20.7 percent).

Germany, Russia, India, and Singapore were the North’s 2nd thru 5th largest trade partners. Trade with Germany was up 33.7 percent, amounting to 70 million USD, while trade with Russia, India, and Singapore dropped off. After these countries, Hong Kong, Brazil, Thailand, Bangladesh, and the Netherlands made up the rest of the top 10 trade partners, which account for 92 percent of all the North’s overseas trade.

In addition, with continuing sanctions against the North by the United States and Japan, there were no exports to these countries, and imports from these countries amounted to a mere 2.7 million USD and 900,000 USD, respectively.

Inter-Korean trade for 2009 amounted to 1.68 billion USD. This was down 7.8 percent from the previous year. North Korean imports from the South were down 16.1 percent, recording 740 million USD. This was largely impacted by the closing of the Keumgang Mountain tourism project.

Combined, North Korea’s total foreign trade was down 9.7 percent, to 5.09 billion USD. 53 percent of this was with China, while 33 percent was with South Korea.

Continued international sanctions against the North and the possibility of additional unilateral sanctions from several countries means DPRK foreign trade will likely shrink more in 2010. It is also expected that the North’s economic dependency on China will continue to grow.