North Korean Economy Watch

Asia Times
Bertil Lintner
1/18/2007

While the West and Japan have targeted North Korea’s overseas bank accounts to curtail its weapons program, Pyongyang has recently turned to more ingenious ways of maintaining its international businesses through substantial exports of gold, silver and other valuable metals.

Pyongyang has apparently found a willing conduit to global buyers through its many business connections in Thailand, which has recently emerged as the isolated state’s third-largest trading partner after China and South Korea. According to official Thai Customs Department statistics, North Korea shipped 500 kilograms of gold worth 398 million baht (US$11 million) to Thailand last April.

The following month, another 800kg of gold worth 635 million baht landed in Thailand courtesy of North Korea. Also, in June, 10 tons of silver worth 148 million baht was sent from North Korea to Thailand, followed by 12 tons worth 166 million baht last October.

In sum, North Korea exported 1.35 billion baht – or nearly $40 million – worth of precious metals to Thailand last year.

That is a substantial figure for North Korea, a country with an estimated gross domestic product of about $22 billion and whose total exports amounted to just over $1 billion, according to official statistics. Thailand is bound by the international sanctions imposed last October against North Korea by the United Nations in response to Pyongyang’s exploding an atomic bomb.

According to official Thai statistics, the gold and first consignment of silver were shipped to Thailand before the UN sanctions were imposed. But there is nothing illegal in North Korea exporting precious metals, unless, of course, the income from the sale can be tied directly to the country’s controversial weapons programs, which anyway would be extremely hard to prove.

Untapped riches
North Korea’s gold and silver mines remain largely untapped. According to Tse Pui-kwan, a Chinese-American chemist who joined the US Bureau of Mines in 1990, North Korea has significant deposits of copper, gold, graphite, iron, lead, magnesite, tungsten and zinc. When the Cold War ended and North Korea lost large amounts of foreign aid from both the Soviet Union and China, its mining industry fell into disrepair and extraction activities sharply declined.

But with new foreign cooperation, production has resumed, which the recent exports to Thailand clearly demonstrate. North Korea’s main gold mine is in Unsan county in North Pyongan province, about 150 kilometers north of Pyongyang. It was originally opened by a US firm in 1896, when Korea was still an independent and unified kingdom, and was later taken over by a Japanese company when the peninsula became a colony ruled by Tokyo in 1910.

Nearly a century later, consultants from Clough Engineering of Australia in 2001 inspected the same mine under the sponsorship of the United Nations Office for Project Services. They estimated that Unsan held 1,000 tons of gold reserves, which if true would make it one of the world’s major gold mines. Silver is also mined in the same area, while iron ore and magnesite are found in North and South Hamgyong provinces in the northeast.

North Korea’s extraction techniques are sometimes controversial. According to witnesses interviewed by the US Committee for Human Rights in North Korea for its 2003 report “The Hidden Gulag: Exposing North Korea’s Prison Camps”, there is a gold-mining labor camp near Danchun in South Hamgyong province, where thousands of prisoners are being held and forced to work under abysmal conditions.

In that same report, several witnesses claimed that “some of the mine shafts dated back to the early days of the Japanese occupation of Korea in the early 1900s. Accessing the veins of minable gold required descending and, later, ascending a wooden staircase 500 meters in length, using gas lanterns for light. Deaths from mining accidents were a daily occurrence, including multiple deaths from the partial collapse of mine shafts.”

The first attempt to modernize North Korea’s gold-mining industry was made by an Italian financier and former Foreign Ministry official, Carlo Baeli, who traveled to the country in the early 1990s and claims to be the first Westerner to do business with Pyongyang since the Korean War. He later wrote a book called Kim Jong-il and the People’s Democratic Republic of Korea, which was published in Pyongyang in 1990, obviously with official permission as it was printed by the state-owned Foreign Languages Publishing House.

Apart from painting a flattering portrait of the North Korean leader, the book describes Baeli’s first trip to Pyongyang in 1990, of which he wrote, “We were interested in investing in the mining industry, mainly in the extraction of gold and granite.” Baeli later signed a contract for a loan of $118 million to purchase mining equipment, and the goal was to resurrect no fewer than six gold mines across North Korea. The money was to be provided by international banks such as Midland Bank and the Naples International Bank. He also arranged for the mining equipment to be shipped from Italy.

But heavy flooding in the mid-1990s damaged both the equipment and the mines and, according to a 2006 report in Forbes magazine, Baeli today works as an adviser to the Pyongyang government at a tire-recycling plant. The car and truck tires are imported from Japan, get ground into granulate in North Korea, and are sold to China for road resurfacing, car mats and shoe soles. A lucrative business, perhaps, but not quite the golden dream Baeli had when he first arrived in Pyongyang nearly 17 years ago.

Another unusual partner in North Korea’s gold trade may have been the late Philippine dictator Ferdinand Marcos. In August 2001, the right-wing South Korean newspaper Munhwa Ilbo published a story claiming that Marcos in September 1970 had deposited 940 tons of gold bars at a Swiss bank in the name of the late North Korean dictator, Kim Il-sung. The report came from a former Marcos aide, and Munhwa Ilbo carried a copy of the bank-account certificate on its front page. The alleged gold bars were part of what a Japanese army general had looted from Asia during World War II, Munhwa Ilbo claimed.

That report was never independently confirmed, but it nevertheless reflects the mystique and speculation that still surround North Korea’s gold industry – and how little the outside world actually knows about it.

Financial pressures
When the US took action against Banco Delta Asia in Macau in September 2005, labeling it a “primary money-laundering concern” for North Korean funds, very little evidence to substantiate the charges was ever produced. North Korea lost $24 million when the accounts it held with the bank in the name of a front company, Zokwang Trading, were frozen. Zokwang, which had been operating in Macau for decades, also closed its office and relocated to Zhuhai province across the border in China proper.

The action against Banco Delta Asia, a privately owned bank that the Macau government later had to prop up to prevent it from collapsing, was the second move against North Korea’s assets abroad. In a much less publicized action, North Korea’s only bank located in a foreign country – the Golden Star Bank in Vienna – was forced to suspend its operations in June 2004. The Golden Star was 100% owned by the Korea Daesong Bank, a state enterprise headquartered in Pyongyang, and was allowed to set up a branch in the Austrian capital in 1982.

For more than two decades, Austrian police kept a close eye on the bank, but there was no law that forbade the North Koreans from operating a bank in the country. Nevertheless, Austria’s police intelligence department stated in a 1997 report: “This bank [Golden Star] has been mentioned repeatedly in connection with everything from money-laundering and distribution of fake currency notes to involvement in the illegal trade in radioactive material.”

Eventually the international pressure to close the bank became too strong. Sources in Vienna believe the US played an important behind-the-scenes role in finally shuttering Golden Star’s modest office on 12 Kaiserstrasse in the Austrian capital. Until then, Vienna had been North Korea’s center for financial transactions in Europe and the Middle East. Visitors to North Korea have noted that euro coins in circulation in the country – the US dollar is not welcome in Pyongyang – invariably came from Austria. (Euro notes are the same in all European Union countries, but coins designate individual member countries.)

Last October, in response to Pyongyang’s nuclear tests, Japan froze a dollar-denominated account that North Korea’s Tanchon Commercial Bank held with an unnamed Japanese bank. The account had a balance of $1,000 and had not been active for nearly a decade, so the move was mainly symbolic: to demonstrate to North Korea that it cannot use banks in Japan for any deposits, big or small.

So it is hardly surprising that North Korea is looking for new ways to manage and maintain its international business interests and for new partners when it is increasingly locked out of most foreign countries. That is where Thailand apparently comes into the picture.

In 2004, trade between Thailand and North Korea for the first time overtook trade between Japan and North Korea. Previously, a string of North Korean-controlled front companies, managed by the Chosen Soren, or the Pyongyang General Association of Korean Residents in Japan, had supplied North Korea with computers, electronic goods and other vital items.

In 2003, North Korea’s total trade volume to Japan was just over $265 million and fell even lower in 2004. At the same time, trade between Thailand and North Korea rose to more than $331 million in 2004. Two-way trade between Thailand and North Korea totaled $328 million in 2005, with Thai exports to North Korea amounting to $207 million and North Korean imports to Thailand totaling $121 million.

During January-November 2006 – the latest statistics available from the Thai Customs Department – trade totaled about $345 million, with Thai exports accounting for $200 million and North Korean imports $145 million. Thai imports of gold and silver have pushed those trade figures higher.

North Korea’s trade with Thailand grew mainly under the previous government of Thaksin Shinawatra, who at one point proposed signing a free-trade agreement between the two countries. In August 2005, Thaksin was formally invited by Kim Jong-il to visit Pyongyang. The visit never materialized, and since Thaksin was ousted last year in a military coup, the future of Thai-North Korean relations is very much in doubt.

But gold and silver are highly fungible and North Korea apparently has lots of the commodities. It appears Kim Jong-il has for now found at least one golden path around the international sanctions imposed against his regime’s nuclear tests.

Asia Times
1/10/2007
Ting-I Tsai

North Korea’s nuclear test has been a hot topic among analysts around the world. But inside the isolated Stalinist state, getting a hold of a pair of running shoes, a bicycle or a television set is still what most excites ordinary citizens.

And Chinese businesses continue to cash in on these material desires by selling goods manufactured at home or in North Korea at prices higher than their quality justifies, sparking much criticism.

When Pyongyang publicized its intention to initiate economic reforms in July 2002, most people had doubts about how far the policy would be taken. Four years later, the regime is still struggling to implement its reforms, but it has at least partly satisfied some of the daily demands of citizens by allowing more Chinese products to be manufactured in North Korea and more Chinese goods to be imported.

Shoes, bicycles, TV sets, beverages and clothes made in China or by Chinese companies in North Korea are helping to satisfy demand, but some disreputable Chinese companies are ruining their country’s reputation by dumping factory seconds and damaged goods on the market.

Over decades of isolation, North Koreans have been suffering not just from food shortages, but from a scarcity of basic consumer goods. In past years, Pyongyang has reportedly asked the South Korean government to donate thousands of tons of soap and clothes, as well as material for the production of 60 million pairs of shoes. In a visit to Pyongyang in November, products such as Colgate toothbrushes, toothpaste and a Japanese facial cleaner were carefully displayed in glass cases bearing price tags equivalent to US$2.60-$5.90, well beyond the financial reach of all but a few North Koreans.

After years of studying China’s experiences, Pyongyang is now gearing up to solicit foreign investment and advanced technologies to modernize its decades-old manufacturing base.

Supply and demand
“Because the supply can’t satisfy the demand, prices of most of the Chinese products simply soar in the North Korean market,” said Su Xiangzhong, chairman of a Tianjin company that founded a beverage-manufacturing joint venture, Lungjin, with a North Korean.

Trade between the two countries increased by 35.4% in 2004, followed by a 35.2% increase in 2005. By the end of October 2006, bilateral trade had reached $1.38 billion, a 4% increase over 2005.

Beijing-based Winner International Industries Ltd was one of the Chinese companies that foresaw North Korea’s consumption potential in 2000. By then, the company had co-founded a joint-venture running-shoe and clothing-manufacturing presence in North Korea. With advanced machinery from Taiwan, its shoe-manufacturing division is now capable of producing 8 million pairs of running shoes, according to an official from the company, who declined to identify himself. The clothing-manufacturing division, he said, has been a supplier to South Korean and Japanese companies. However, he added that orders from the two countries had recently decreased for unknown reasons.

Leather shoes for soldiers are of high quality, but they are not available to the average person. In Pyongyang shops catering exclusively to foreigners, a pair of leather shoes could cost as much as $326. The North Korean government is still soliciting foreign investment and purchasing shoemaking equipment via Chinese companies.

To get around in a country with underdeveloped public transportation, getting a pair of shoes is not enough. Taking advantage of that situation, Tianjin’s Digital Co started making bicycles in Pyongyang in October 2005, after the North Koreans agreed to let the Chinese take a 51% controlling share in the joint venture, virtually a monopoly, for 20 years.

It is estimated that the nation’s demand for bicycles is about 7 million, according to the Chinese media. The company now manufactures some 40 models and 60,000 bicycles annually, with the most popular model costing $26. In coming years, it plans to produce 300,000 bicycles annually and construct another three bicycle plants.

Aside from daily necessities, there are few entertainment options for North Koreans, which means there is a high demand for TV sets. Nanjing Panda, a TV maker, appeared to be the only Chinese company to foresee the emergence of the North Korean market when it invested $1.3 million there in 2002. After four years of operation, its 17-inch black-and-white and 21-inch color TV sets are reportedly the hottest items available in Pyongyang. With Panda products beginning to dominate the local market, it is becoming increasingly difficult for others to import TV sets into North Korea, according to Chinese business people.

The Panda joint venture is now digging up another potential gold mine by manufacturing personal computers (PCs) in North Korea.

In 2003, Chinese non-financial investments in North Korea amounted to just $1.12 million. That total, however, soared to $14.13 million in 2004, and reportedly reached $53.69 million in 2005. According to the Chinese media, there are now about 200 Chinese investment projects operating in North Korea. A Pyongyang-based foreign businessman described the Chinese investors as “by far the largest group by country doing business there, in all kinds of fields – plus they are from one of the few countries with the protection and representation of a big embassy”.

In March 2005, Chinese Premier Wen Jiabao signed an investment-protection agreement with his North Korean counterpart, and the two nations inked five bilateral economic-cooperation agreements between 2002 and 2005.

During North Korean leader Kim Jong-il’s visit to China last January, Wen introduced new economic-cooperation guidelines.

Despite these positive moves, controversy over the role of Chinese businesses has emerged. A Pyongyang-based Western businessman suggested that quite a few disreputable companies “go there with the intention of getting rid of old or damaged goods they can’t sell in China, and rip off North Koreans, who have no way to get their money back”.

“Also, a lot of fake goods come from China,” he added.

Still, more and more Chinese business people are rushing to Pyongyang. Su Xiangzhong, chairman of a Tianjin-based company, noted that his firm is creating a new beverage brand, like China’s Wahaha, in Pyongyang. North Koreans are also very interested in cooperating with Chinese enterprises in manufacturing and mining.

Chinese-made clothes for women and children, low-end and generic-brand household products and sundries, color TVs and PCs are popular products in North Korea.

Li Jingke, a Dandong-based Chinese businessman who runs the China-DPR Korea Small Investor Association, suggested that natural-resource exploitation and manufacturing are the best industries for foreigners to invest in, adding that more investment-friendly policies would likely be introduced in April. By then, he said, Chinese business people might need to become more concerned about unprofessional conduct.

“When North Korea introduces more liberalized policies, competent companies from everywhere will enter the market, which would likely eliminate the existence of those Chinese businessmen who don’t have modern commercial ideas in mind,” Li said.

Asia Times
Ting-I Tsai
1/10/2007

North Korea’s nuclear test has been a hot topic among analysts around the world. But inside the isolated Stalinist state, getting a hold of a pair of running shoes, a bicycle or a television set is still what most excites ordinary citizens.

And Chinese businesses continue to cash in on these material desires by selling goods manufactured at home or in North Korea at prices higher than their quality justifies, sparking much criticism.

When Pyongyang publicized its intention to initiate economic reforms in July 2002, most people had doubts about how far the policy would be taken. Four years later, the regime is still struggling to implement its reforms, but it has at least partly satisfied some of the daily demands of citizens by allowing more Chinese products to be manufactured in North Korea and more Chinese goods to be imported.

Shoes, bicycles, TV sets, beverages and clothes made in China or by Chinese companies in North Korea are helping to satisfy demand, but some disreputable Chinese companies are ruining their country’s reputation by dumping factory seconds and damaged goods on the market.

Over decades of isolation, North Koreans have been suffering not just from food shortages, but from a scarcity of basic consumer goods. In past years, Pyongyang has reportedly asked the South Korean government to donate thousands of tons of soap and clothes, as well as material for the production of 60 million pairs of shoes. In a visit to Pyongyang in November, products such as Colgate toothbrushes, toothpaste and a Japanese facial cleaner were carefully displayed in glass cases bearing price tags equivalent to US$2.60-$5.90, well beyond the financial reach of all but a few North Koreans.

After years of studying China’s experiences, Pyongyang is now gearing up to solicit foreign investment and advanced technologies to modernize its decades-old manufacturing base.

Supply and demand
“Because the supply can’t satisfy the demand, prices of most of the Chinese products simply soar in the North Korean market,” said Su Xiangzhong, chairman of a Tianjin company that founded a beverage-manufacturing joint venture, Lungjin, with a North Korean.

Trade between the two countries increased by 35.4% in 2004, followed by a 35.2% increase in 2005. By the end of October 2006, bilateral trade had reached $1.38 billion, a 4% increase over 2005.

Beijing-based Winner International Industries Ltd was one of the Chinese companies that foresaw North Korea’s consumption potential in 2000. By then, the company had co-founded a joint-venture running-shoe and clothing-manufacturing presence in North Korea. With advanced machinery from Taiwan, its shoe-manufacturing division is now capable of producing 8 million pairs of running shoes, according to an official from the company, who declined to identify himself. The clothing-manufacturing division, he said, has been a supplier to South Korean and Japanese companies. However, he added that orders from the two countries had recently decreased for unknown reasons.

Leather shoes for soldiers are of high quality, but they are not available to the average person. In Pyongyang shops catering exclusively to foreigners, a pair of leather shoes could cost as much as $326. The North Korean government is still soliciting foreign investment and purchasing shoemaking equipment via Chinese companies.

To get around in a country with underdeveloped public transportation, getting a pair of shoes is not enough. Taking advantage of that situation, Tianjin’s Digital Co started making bicycles in Pyongyang in October 2005, after the North Koreans agreed to let the Chinese take a 51% controlling share in the joint venture, virtually a monopoly, for 20 years.

It is estimated that the nation’s demand for bicycles is about 7 million, according to the Chinese media. The company now manufactures some 40 models and 60,000 bicycles annually, with the most popular model costing $26. In coming years, it plans to produce 300,000 bicycles annually and construct another three bicycle plants.

Aside from daily necessities, there are few entertainment options for North Koreans, which means there is a high demand for TV sets. Nanjing Panda, a TV maker, appeared to be the only Chinese company to foresee the emergence of the North Korean market when it invested $1.3 million there in 2002. After four years of operation, its 17-inch black-and-white and 21-inch color TV sets are reportedly the hottest items available in Pyongyang. With Panda products beginning to dominate the local market, it is becoming increasingly difficult for others to import TV sets into North Korea, according to Chinese business people.

The Panda joint venture is now digging up another potential gold mine by manufacturing personal computers (PCs) in North Korea.

In 2003, Chinese non-financial investments in North Korea amounted to just $1.12 million. That total, however, soared to $14.13 million in 2004, and reportedly reached $53.69 million in 2005. According to the Chinese media, there are now about 200 Chinese investment projects operating in North Korea. A Pyongyang-based foreign businessman described the Chinese investors as “by far the largest group by country doing business there, in all kinds of fields – plus they are from one of the few countries with the protection and representation of a big embassy”.

In March 2005, Chinese Premier Wen Jiabao signed an investment-protection agreement with his North Korean counterpart, and the two nations inked five bilateral economic-cooperation agreements between 2002 and 2005.

During North Korean leader Kim Jong-il’s visit to China last January, Wen introduced new economic-cooperation guidelines.

Despite these positive moves, controversy over the role of Chinese businesses has emerged. A Pyongyang-based Western businessman suggested that quite a few disreputable companies “go there with the intention of getting rid of old or damaged goods they can’t sell in China, and rip off North Koreans, who have no way to get their money back”.

“Also, a lot of fake goods come from China,” he added.

Still, more and more Chinese business people are rushing to Pyongyang. Su Xiangzhong, chairman of a Tianjin-based company, noted that his firm is creating a new beverage brand, like China’s Wahaha, in Pyongyang. North Koreans are also very interested in cooperating with Chinese enterprises in manufacturing and mining.

Chinese-made clothes for women and children, low-end and generic-brand household products and sundries, color TVs and PCs are popular products in North Korea.

Li Jingke, a Dandong-based Chinese businessman who runs the China-DPR Korea Small Investor Association, suggested that natural-resource exploitation and manufacturing are the best industries for foreigners to invest in, adding that more investment-friendly policies would likely be introduced in April. By then, he said, Chinese business people might need to become more concerned about unprofessional conduct.

“When North Korea introduces more liberalized policies, competent companies from everywhere will enter the market, which would likely eliminate the existence of those Chinese businessmen who don’t have modern commercial ideas in mind,” Li said.

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.”

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.

According to a report from the US Commerce Department, the US registered just $3,000 worth of exports to the DPRK, and it seems that it was just a single shipment of publicaitons.   This number does not count trade through third countries, and it does not count the occasional tourist or businessman who manages to get a visa.

US/DPRK trade would have been much higher this hear if the DPRK had gone through with the Arirang Mass Games last August.  Just about every tour company that offers trips to the DPRK was sold out with Americans eager to visit one of the most isolated countries in the world.

This story should be sobering to those who are trying to promote regime change in the DPRK through economic sanctions.  I personally think that the sanctions should be lifted for three reasons.  Firstly, only through increased trade will a constituency of elite North Koreans be able to consolidate resources and leverage their political influence for greater openness to international intergration.  Of course these things take time, but there are politicians in the DPRK who want this.  Blockades only strenghen the military and those prone to isolationist tendencies. Secondly, as far as I know, sanctions have never resulted in regime change.  Recent examples include Cuba, Iraq, South Africa, Lybia, Iran, and North Korea.  Sanctions punish the people who have no political recourse and entrench the ruling elites.  Thirdly, trade will promote the flow of information into the DPRK (which combined with non-militarism) will improve the domestic climate for opening up.

Here is the trade story:
Yonhap
12/4/2006

Bilateral trade between the United States and North Korea reached a mere US$3,000 in the first nine months of this year, a sharp drop from a year earlier, a state-run trade agency said Monday.

In the January-September period, the United States registered no imports from the communist country, with the only export item being publications, the Korea Trade Investment Promotion Agency (KOTRA) said in a report, citing the U.S. Commerce Department. The U.S. exported humanitarian food aid to North Korea worth $5.8 million last year.

From Businessweek:
Joe McDonald
11/5/2006

In the midst of tensions over North Korea’s nuclear program, a Western company is there searching for oil. Another just bought a bank.

“North Korea is hungry for business,” said Roger Barrett, the British founder of Beijing-based Korea Business Consultants, who recently took 11 Asian and European clients to Pyongyang to play golf and make contacts.

A small group of Westerners are taking on the challenge of doing business in the isolated North, hoping to get in on the ground floor as its communist rulers experiment with economic reform.

The obstacles are daunting. A Stalinist dictatorship, bureaucracy and language barriers. Foreign sanctions that block most financial transfers, making it hard to get paid and to get supplies. And now worries that United Nations sanctions imposed after North Korea’s Oct. 9 nuclear test could be expanded to a general clampdown on trade.

But the Westerners talk positively about the North as a business environment, with skilled workers and leaders who they say welcome foreign investment.

“They are very skillful and hardworking,” said Felix Abt, a Swiss businessman who oversees two ventures in Pyongyang, one that makes business and game software for sale in Europe and another that makes antibiotics and painkillers for the domestic market. “It’s sometimes faster to get licenses and necessary approvals here than it is in China or Vietnam.”

Barrett said that even as the U.N. Security Council debated the latest sanctions on the North, he got inquiries from investors interested in its rich mineral resources and low-cost manufacturing work force.

“Investors are rushing into China, but labor costs there are escalating, and companies are looking for an alternative,” Barrett said. North Korea “has absolutely the capabilities to take off like South Korea.”

So far the largest foreign business community in North Korea is from China, its main source of trade and aid.

South Korea accounts for most of the North’s foreign investment, with stakes totaling $620 million in an export-manufacturing zone and a resort for foreigners. China’s investments total just $31 million, according to the Chinese Commerce Ministry.

U.S. regulations allow American companies to trade with North Korea under limited conditions, though tensions between the governments and lack of diplomatic relations raises the risk of doing business. Britain, Germany, Sweden and other Western governments, meanwhile, have official relations with Pyongyang.

North Korea’s foreign trade has risen sharply, though the total was less than $4 billion last year, according to South Korean and Chinese government figures. Trade with the South soared by more than 50 percent in 2005 to just over $1 billion.

Most trade is carried out by North Korean state companies, not private entrepreneurs. And some partners are shying away. Trade with Japan, once the North’s No. 1 trading partner, tumbled from $1.3 billion in 2001 to just $200 million last year amid tensions with Tokyo over North Korea’s abduction of Japanese nationals in the 1970s and ’80s.

The Europeans’ chamber of commerce in Pyongyang had 12 members when it was launched last year. They include delivery company DHL Express, an Italian law firm and a German venture founded in 2003 to provide Internet access to foreign businesses in Pyongyang.

This tentative foothold follows the slow pace of economic reform in North Korea. Only in 2002 did North Korean leader Kim Jong Il allow limited free enterprise to revive a decrepit economy, which teetered in the 1990s following the loss of Soviet aid and then collapsed amid widespread food shortages. Still, foreign observers say officials are reluctant to give up control, despite prodding from Beijing, which wants faster reforms to reduce its ally’s dependence on aid.

Abt, the Swiss businessman, moved to Pyongyang in 2002 after seven years working in Vietnam, another Asian communist economy in the throes of reform.

“I heard that some economic reforms were in the pipeline, and I was quite thrilled to experience the beginning,” said Abt.

Now his Vietnamese wife takes their 14-month-old daughter to play at an international school. After work, he goes out to sing karaoke with North Korean co-workers.

But Abt has felt the bite of efforts to pressure the North.

Foreign banks have been leery since Washington last year sanctioned Macau’s Banco Delta Asia, which the U.S. said helped the North launder money. China told its banks this month to curtail financial transfers to or from the North.

“It’s getting difficult to make bank transfers to suppliers or to get money from customers,” Abt said.

He worries that the factory might have to shut down if U.N. sanctions block imports of required chemicals on the grounds that they also could have military uses.

Barrett said his clients have lost access to $11 million in Banco Delta Asia accounts that were frozen by the U.S. sanctions.

Colin McAskill, a British businessman who has done business with the North since the 1970s, is lobbying Washington to fine-tune its sanctions so the bank’s customers can withdraw money that was made legally.

McAskill is chairman of Hong Kong-based Koryo Asia Ltd., which said in September it was buying a 70 percent controlling stake in Daedong Credit Bank, North Korea’s first foreign-owned financial institution. The bank, which is 30 percent owned by a North Korean bank, serves foreign companies and has accounts at Banco Delta Asia.

North Korea also has turned to Western investors in hopes of developing oil resources and reducing its near-total reliance on China for fuel. It awarded a 20-year exploration concession last year to Aminex plc, a London firm.

Aminex is helping the North Korean government deal with other foreign companies, and in exchange gets to pick where it will drill for oil, its chief executive, Brian Hall, said by phone from London.

Aminex hasn’t felt any effects from the nuclear tumult, Hall said.

“We have good relations and no problems with the agreements but are closely watching the political situation,” he said.

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.

From Joong ang Daily 
10/25/2006
Rah Hyun-cheol

The tour program to Mount Kumgang and the Kaesong Industrial Complex are certain to be affected by the crisis over North Korea’s recent nuclear test.

But they’re not the only ones ― South Korea has hundreds of smaller companies that have business deals with the North, with some actually operating inside the country.

And they were at a loss when the South Korean government announced it would “proceed with economic cooperation projects, but private companies are to decide on their own about their future investment plans in the North.”

According to the Ministry of Unification and the Korea International Trade Association, companies with records of trade with North Korea totaled 515 as of last year. That figure includes 379 trading firms and 136 companies that process imported materials, trading $420 million worth of products with the North. That amount accounted for 40 percent of South Korean trade with the North for the year, compared with 16.7 percent from the Kaesong Industrial Complex and 8.2 percent from the tour program to Mount Kumgang. Over the first eight months of this year, 395 companies have participated in trade with the North.

“It’s hard to predict what North Korea will come up with, and the South Korean government seems to be lost in its policy decision-making. Besides, the United States and China display different opinions. It’s nearly impossible to foresee the future,” said a head from one of those companies, who declined to be named. “I tried to grasp the real situation in the North by visiting on my own but had to give up the trip as China Southern Airlines shut down the route linking Beijing and Pyongyang.”

What the businesses fear the most is the possibility that trade with North Korea will be abruptly suspended if the North conducts additional nuke tests or economic sanctions against the country intensify.

A senior executive from Hanabiz.com, a firm in charge of dispatching North Korean workers in information and technology to Korean software companies in Dandong, China, said, “The recent nuclear test by North Korea has not dealt a serious blow yet to my company. However, it has become difficult to send cash to North Korean business partners after some Chinese banks restricted money transfers to the North.”

From the New York Times:
Jim Yardley
10/25/2006

[edited]Sanhe, China–Truckers carrying goods into North Korea across the sludge-colored Tumen River say inspections are unchanged on the Chinese side. Customs agents rarely open boxes here or at two other border crossings in this mountainous region, truckers and private transport companies say.

Nor are any fences visible, like the barrier under construction near China’s busiest border crossing at the city of Dandong. There were early reports that inspectors in Dandong were at least opening trucks for a look, but so far statistics and anecdotal reports in the Chinese news media indicate that, essentially, everything remains the same.

What is visible here, though, is the growing and, in some ways, surprisingly complicated trade relationship between China and North Korea. China remains North Korea’s most important aid donor and oil supplier, but, conversely, China is now importing growing amounts of coal and electricity from North Korea. Chinese entrepreneurs, meanwhile, are starting to buy shares in North Korean mining operations and, in one case, trying to gain access to the Sea of Japan by leasing a North Korean port as a potential shipping hub.

The upswing in Chinese economic activity — which is already raising questions about whether the intent is more strategic than commercial — is one of the reasons that China has sent mixed signals about how aggressive it will be in inspecting border trade to meet the United Nations sanctions. For now, at least, some truckers in this region say the only change in border inspections has come on the North Korean side, where customs agents are checking loads more carefully for items deemed contraband by Kim Jong-il’s government.

“We used to sit with North Koreans that we know and have a chat,” said Jiang Zhuchun, a trucker waiting to cross into North Korea on Tuesday afternoon. “But after the nuclear test, we are only allowed to sit alone in our trucks.”

The United States has praised China for approving the sanctions against North Korea, and Secretary of State Condoleezza Rice used her visit to Beijing last week to emphasize the common desire to restart diplomatic talks on North Korea’s nuclear program. China’s leaders are said to be deeply angered over the nuclear test and have signaled they may take a harder line against their longtime ally. Last week, some banks in Dandong froze certain accounts and financial transactions with North Korea.

But the question of inspections along the 866-mile border between China and North Korea is a different matter. The sanctions authorized countries to inspect cargo entering and leaving North Korea and barred the sale or transfer of material that can be used to make nuclear weapons. Yet the sanctions are still less than two weeks old, and some details have still not been worked out. For example, the sanctions ban luxury goods without defining them.

The United States wants tightened border inspections by China as a tool for squeezing the North Korean economy and ensuring that North Korea cannot buy or sell nuclear materials. China is worried that destabilizing North Korea could begin an exodus of refugees and has resisted changing inspections. This week, with rumors swirling about a possible border crackdown, the Foreign Ministry spokesman, Liu Jianchao, said China intended to comply fully with the sanctions, but also said inspections along the border would remain “normal.”

The Yanbian Korean Autonomous Region, the name of the sprawling district that includes the Sanhe border checkpoint, is not the primary trade route between China and North Korea; Dandong, with its more direct route to Pyongyang, the North’s capital, is by far the busiest. But the Yanbian area is wedged into a geopolitical hotspot where China, North Korea and Russia all come together.

In interviews and visits to three crossings from Yanbian into North Korea, truckers, transportation company agents, investors and others confirmed without exception that trade is continuing across the border much as it always has. Customs agents examine bills of lading but usually open shipments only when they are tipped in advance to someone trying to smuggle goods like beer or liquor without paying customs duties, several people said.

“No matter who you talk to, they will tell you there is not much difference,” said Jin Lanzhu, whose trading company is one of the largest in the region.

On Wednesday morning inside the Chinese customs yard in the border city of Tumen, small groups of North Koreans, each wearing their mandatory pins with images of either North Korean leader Kim Jong-il or his father, Kim Il-sung, waited to cross the bridge. They had nylon sacks stuffed with shoes and clothes, television sets, a refrigerator. Some carried bags of rice.

“How many bags do you have?” asked a female Chinese customs agent in a blue uniform. She looked them over and walked away without opening any. She did forbid the North Koreans to take several boxes of fruit because of a problem with worms. Then, the men began loading the sacks onto a flatbed truck operated by the customs office to carry smaller loads to the North Korean side. Two North Korean women complained to a local taxi driver that they had to pay 400 yuan, or about $50, for the service.

“They don’t really check over here,” one North Korean woman said of Chinese customs. “They do on the North Korean side.”

A similar scene unfolded later in the day at a smaller crossing in the dingy town of Kaishan, where the customs port is so small that trucks take a dirt road to a crumbling checkpoint. On Wednesday, a young soldier watched laborers load about 150 used televisions and boxes of medicine into a North Korean truck that had crossed the river to collect the shipment.

“I’m here for security,” the soldier said.

Trade between China and North Korea has grown rapidly in recent years — as has North Korea’s trade deficit with China, in part, because China no longer appears to be selling oil at a subsidized rate. China now accounts for almost 40 percent of North Korea’s total foreign trade; bilateral trade has more than doubled to $1.1 billion in 2005 from $490 million in 1995. In Yanbian alone, trade with North Korea jumped 82 percent in 2004 and another 20 percent in 2005, according to a local newspaper account.

Divining what the increased traffic says about the state of North Korea’s economy is a subject of debate. New research and interviews in the Yanbian region suggest that North Korea, a country that regularly suffers blackouts, is now exporting growing amounts of coal, minerals and even electricity to China, which is hungry for energy and raw materials. In exchange, North Korea is no longer importing as much raw material and machinery as it had in the past.

Instead, North Korea is importing food, clothes, daily sundries, outdated televisions and appliances and, of course, oil. The trend could suggest that North Korea’s recent experiments with private markets may be expanding, some analysts said.

A recent study by the Nautilus Institute, a San Francisco-based research group, used customs statistics to describe the trend, but also concluded that it might indicate that North Korea’s nonmilitary manufacturing industries were in sharp decline. One Chinese investor in a North Korean coal mine agreed. “They seemed to have stopped the factories,” said the investor, who asked not to be identified. He said doing business with North Korea was very risky and cautioned that numerous Chinese businessmen had lost money. “There are zero guarantees and protections.”

Even so, Chinese entrepreneurs and companies, both private and state-owned, are starting to buy interests in North Korean mines to export raw materials. The amount of investment is not clearly defined, but different Chinese proposals call for building truck routes between inland trade centers in northeast China to the North Korean coast, according to Chinese media accounts.

A Chinese property developer, Fan Yingsheng, told the Chinese news media that despite the nuclear test, he was still pursuing plans to develop the North Korean port of Rajin into a shipping center for goods from China. He said he would soon fly to Pyongyang to sign a final agreement.

The flurry of Chinese activity has not gone unnoticed by South Korea and others in the region, analysts say. Like China, South Korea has resisted harsh economic sanctions and refused to shut down its own trade deals with North Korea in part because of concerns about a swift collapse of the North Korean government. But South Korea is also positioning itself, to some degree against China, to be the dominant player in the future of North Korea.

China, meanwhile, has said the activity is not strategic positioning but natural economic outgrowth for a booming, entrepreneurial economy in need of resources. Li Dunqiu, a North Korea specialist with a research institute under China’s State Council, or cabinet, recently wrote that “laws of the market economy” were the driving force in Chinese investment in North Korea.

Along the border, it is easy to see how the daily traffic from China is a lifeline for North Korea. One woman from Yanbian said her family had recently come across to buy rice and other essentials. But Mr. Jin, the owner of the trading company, said charity was not at the essence of China’s trade with North Korea.

“The business interest is the most important thing,” he said. “Helping them comes after that.” Then, pausing to reflect on the potential and perils of trading with North Korea, he added: “North Korea is just like China in the past. It is a blank sheet of paper. You can draw wherever you want to. The question is whether the paper is going to be there at all times for you to draw on.”