North Korean Economy Watch

According to the Daily NK:

According to data released by a South Korean government-run think tank today, trade between North Korea and China during the first five months of this year increased 27.9% ($2.5 billion USD) over the same period last year.

The Korea Development Institute believes that imports into the North totaled $1.46 billion for the period, whereas exports to China increased 29% to total $1.05 billion, leaving North Korea with a $410 million trade deficit.

Much of the growth in North Korean exports lies in coal; anthracite, a compact mineral coal, now accounts for more than 58% of the country’s total exports, not to mention half of all Chinese imports during the period. China largely provided North Korea with energy products and machinery.

Excluding trade with South Korea, China accounted for 89.1% of North Korea’s total trade volume, the report reveals. Again, this is a dramatic increase over last year’s figure of 52.6%, showing Pyongyang’s growing reliance on trade with its only major ally.

Read the full story here:
Sino-NK Trade Trends Up Once More
Daily NK
Clara Fontana
2012-7-20

According to the Asahi Shimbun:

Currently 300 undergraduate and 70 graduate students are enrolled in the PUST’s three departments: electronic and computer engineering; international finance and management; and agriculture and life sciences. Thirty computers, with access to the Internet, are available for graduate students. At least some of those computers seem to be made by Chinese subsidiaries of South Korean electronics giants Samsung Electronics Co. and LG Electronics Inc., he said.

The goal of the university is to nurture personnel capable of working in the international community.

About 50 professors from Europe, the United States, Australia and elsewhere give lectures in English, with the content of the courses left to their discretion, Park said, and lectures on economics include finance, investment, insurance, equity and trade in Europe and the United States.

The students at PUST are selected from among those who have studied at least two years at the country’s top universities, including Kim Il Sung University and Kim Chaek University of Technology. Students live in a dormitory, and tuition and living expenses are free. Each student is given a monthly allowance of $10 (790 yen) in card form, which they can use to purchase daily commodities and school supplies at a campus store.

When a large number of the country’s students were recruited for construction work and other projects in preparation for the 100th anniversary in April of the birth of North Korea’s founder, Kim Il Sung, PUST students received special exemptions.

In September the university plans to send the first three students to study at a British university.

The story also reports “a business school in Pyongyang founded by a Swiss investor is proving popular among bureaucrats and corporate workers,” but I heard as recently as last week that this endeavor has not been operational for a few years.

Read previous articles on PUST here.

Read the full story here:
N. Korea opening up to education on capitalism
Asahi Shimbun
Akira Nakano
2012-7-20

Today The Committee for Human Rights in North Korea (HRNK) is releasing “Coercion, Control, Surveillance, and Punishment: An Examination of the North Korean Police State” (PDF) by Ken Gause.

Here is the table of contents:

Part I: The Internal Security Agencies
–State Security Department (SSD)
–Ministry of People’s Security (MPS)
–Military Security Command (MSC)
–Neighborhood Watch Units (In-min-ban)
–Ad Hoc Social Monitoring Organizations
Part II: What the Internal Security Agencies Do
–Surveillance of North Korea’s Citizens
–Investigation and Detention
–The Role of Internal Security Agencies in Trials
–The Role of the Internal Security Agencies in Prisons
Part III: History of the Internal Security Apparatus
–Formative Years (1945 and 1950)
–Purging the Enemies of the State (1950s and 1960s)
–Kimilsungism and the Monolithic Guidance System (1970–1980)
–Kim Jong-il as Heir Apparent (1980–1994)
–Intrigue Following Kim Il-sung’s Death (1994–1998)
–Kim Jong-il Regime
–Laying the Groundwork for Kim Jong-un’s Succession
–Kim Jong-un Regime
Conclusion
–Appendix I: Biographies of Key Internal Security Officials
–Appendix II: An Example of a North Korean Ministry of People’s Security Decree.180
–Appendix III: An Example of a North Korean Arrest Warrant

Additional Information:
1. Here is coverage in Yonhap

2. Here is coverage in the AFP

Below I have posted some excerpts from a recent Andrei Lankov article on bribery in the DPRK along with the economic bullet points:

Bribery has little to do with ethics or honesty but relative costs and benefits:

The incorruptibility of the old bureaucracy has a rather simple and rational explanation: Most of the time, it did not pay to be a corrupt official under Kim Il-sung. Money was of surprisingly little use in the 1960s and 1970s, when pretty much everything was rationed and distributed by the state according to predetermined quotas and norms.

In those days officials lived significantly better than the average North Korean, no doubt. But they were affluent not because they had significantly more money (the wage differential between a top official and a humble worker was remarkably low), but rather because they had access to higher-quality goods and services that were not available to the common people. One of my North Korean interlocutors said: “Back in the 1980s, I did not care about money. Nobody did, since money did not buy much in those days.” In those days, in the 1970s or 1980s, one had to be an official to drink beer every week, to smoke cigarettes with filters, or feast on pork a few times a month. But officials did not buy these goods at market; rather they received them from the state as part of their special (very special) rations.

In this situation, it did not make sense for an official to accept bribes as a reward for overlooking some misbehavior or violations of some rules. Money would not be particularly useful and at the same time there was a significant risk of being caught. If caught, an unlucky official would at best lose his or her job and at worst even freedom, and no amount of money would compensate for this disaster.

In highly regulated economies, bribery and growth are positively correlated:

We are conditioned to see official corruption as an evil, but in present-day North Korea, corruption might be a life-saver. The average North Korean gets most of his or her income (about 75%, if recent estimates are to be believed) from private economic activities – these include private agriculture, trade and small-scale household production, and myriad other things. Nonetheless, nearly all of these activities remain technically illegal. Unlike China, North Korea has never undertaken serious economic reform, so private economic activities are still considered crimes, even though they have long become, in practice, a universal norm (and without such activities many would be unable to stay alive).

The only reason these activities are able to exist is corruption. Without widespread corruption, many more North Koreans would probably have perished in the great famine because there would have been no way to have private agriculture, and it would have been nearly impossible for private traders to move food across the country, delivering it to areas where the food situation was especially dire. After all, trade in grain and long-distance travel for commercial purposes are both technically crimes. No markets would be possible had the local bureaucracy been serious about enforcing a multitude of bans and restrictions on commercial activities.

Although corruption will lead to low levels of growth, it will impede overall development in the long-term:

Even when the Kim family regime meets its eventual demise, when a new North Korea emerges, the culture of corruption may remain as part of its heritage. And perhaps eventually it will become a serious burden to a resurgent North Korean economy.

Regarding this last point, see this post.

Read the full story here:
North Korea’s culture of bribery
Asia Times
Andrei Lankov
2012-7-13

Institute for Far Eastern Studies (IFES)
2012-7-12

After Kim Jong Un’s succession following the death of his father, Kim Jong Il, added attention is drawn to the economic cooperation between China and North Korea.

The DPRK-China economic cooperation has totaled 990 million USD from January to April this year, a rise of 16.5 percent against the previous year. Other economic cooperation projects are also underway as appropriate system and regulations are currently being established along with recruitment and training of employees.

According to Yonhap News Agency on July 4, Chinese commerce ministry invited about 20 North Korean economic government officials and scholars to Tianjin for training in special economic zones from late May. The main purpose of the training was identified; to promote and revitalize the special economic zones in North Korea, including Hwanggumpyong and Wihwa Islands and Rajin-Sonbong.

The invited North Korean trainees are top officials from economic, administrative, finance, and customs sectors to receive two-month training in Tianjin from Chinese experts with years of experience and knowledge in the area of operations, management, and investment promotion of economic zones. The entire training cost is supported by the Chinese government with full support of education and accommodations.

The details of the program consisted of a month of training in theoretical background and a month of practical training in economic zones of Shanghai Pudong and Shenzhen.

Hwanggumpyong and Wihwa Islands began as China and North Korea partnered up to develop it as the next Kaesong Industrial Complex. Last June, China’s Commerce Minister Chen Deming and the DPRK’s vice-chairman of National Defence Commission Jang Song Thaek met and hosted the groundbreaking ceremony for the development of the area. However, the development in Hwanggumpyong area is making a slow progress.

On June 25, Kyodo News Service of Japan reported that China and North Korea both expressed to delay the joint development project of Hwanggumpyong for the lack of economic value after North Korea conducted its satellite launch. However, on the following day, Chinese foreign ministry made a statement that Hwanggumpyong joint development project was on track and criticized Kyodo for the inaccurate account of the situation.

China has obtained port usage right of Rajin Port in 2008, which connects Tumen River with Hunchun of Jilin Province in China. The construction for the 53 km-long road that connects Rajin with Hunchun is expected to be completed by the end of this year and sea route to this area will officially take off. China invested in the entire cost of construction as it hopes to develop it into an international distribution base, as a part of the Chang-Ji-Tu Development Project in Northeast China.

Nearly 70 percent of China-DPRK trade is located in Dandong and Sinuiju area. Many experts agree that it will be a matter of time before the development of Hwanggumpyong economic zone become full-fledged. Despite the apparent delay in development, North Korea has already established a Law on Hwanggumpyong and Wihwa Islands Economic Zone and joint management committee were formed consisting of Chinese and North Korean officials. Rapid progress in this zone can be expected after the New Yalu River Bridge is completed in 2014.

As economic trade and cooperation between North and South Korea ebbed, North Korea is likely to increase its efforts with China, combining the land and manpower of North Korea with China’s resources and technologies to develop other SEZs similar to Kaesong. However, a large-scale dispatch of North Korean employees to China will be difficult challenge to overcome.

Jakub Rehor and Geoffrey See of Choson Exchange post interesting information on insurance in the DPRK:

According to the Choson Exchange:

In the planned, state-controlled economy of North Korea, familiar concepts (including insurance) acquire a very different meaning. In a market economy, insurance coverage indemnifies individuals or corporations for losses suffered due to natural disasters, accidents, sickness, or death. In North Korea, what is called “insurance” functions as a fundraiser for certain entities in the government.

There are two kinds of insurance products in North Korea, individual and enterprise insurance. Both are compulsory and are administered by KNIC (Korea National Insurance Corporation). Compulsory individual insurance is deducted automatically from salaries, and is used to fund the state-run healthcare system. Individuals cannot file claims under this insurance; all payments go into the healthcare system to cover its costs and to other state-directed uses. This individual insurance program was originally administered by Korea Central Bank, but parts of it were moved to KNIC where it formed a new department.

Individuals do not have the option of buying property or life insurance in DPRK. Only state-owned enterprises can use property insurance. Compulsory enterprise insurance covers property losses from all major perils (there is exclusion for war). There are no separate policies or riders for windstorm, earthquake, flooding, etc. Instead, policies specify coverage by type of property (animal insurance, machinery insurance, etc.)

Pricing is set without regard to individual risks and loss history. Rather, insurance operates on a pooled basis, with the goal of roughly matching premiums with claims and administration costs. There are no reserves and the state absorbs any losses or profits. As a result, KNIC has no incentive to care about profitability or correct pricing (and, presumably, service) for local insurance operations priced in North Korean won.

There is no independent regulatory authority in DPRK overseeing KNIC’s activities. In theory, the Central Bank and Finance Ministry should be involved, but in reality they don’t have the expertise or political backing. The only oversight of KNIC comes from the party which provides mainly political supervision.

Given the pooled nature of the compulsory policies and lack of risk-based pricing, KNIC acts mainly as an administrator, collecting premiums and disbursing payments. In this position it functions as a revenue generator for the government via two channels:

1. It fails to pay market replacement value of losses. Claims are settled at official government prices which do not reflect market reality.

2. It has been alleged that KNIC has been involved in reinsurance fraud. Media reports claim that European reinsurers write policies for KNIC which then submits false claims, or retains a portion of the claim settlement payments rather than passing it on to the insured.

The existing insurance arrangements in DPRK are clearly inadequate for the needs of foreign joint ventures operating in the Special Economic Zones. If North Korea hopes to attract foreign investment, it needs to modernize its insurance system to bring it into line with expectations of outside investors.

Reuters offers a tale of how remittances from defectors in the South are making life easier for their family members who remain in the DPRK (a topic discussed here before). According to Reuters:

Next morning, she wired 15,000 yuan ($2,400) to the broker’s account at a bank in China, near the border. His wife confirmed receipt of the funds, informed her husband, and the defector’s brother got money in North Korea, a state where the average income is estimated at just $1,200 a year.

Brokers typically charge up to 30 percent fees for such transactions, but by and large, they work well.

“I heard it only took 15 minutes for my brother to get the money (after funds were wired),” said the defector, who is officially listed as dead in North Korea. “Two days later, my brother called me back saying ‘Thank you. We will spend your money wisely’.”

…

Some 70 percent send money home to the country they fled, says the Organization for One Korea, a South Korean support and research institute on North Korean defectors. Annual flows are estimated at $10 million a year as defectors try to help out families in a country where many are malnourished and lack access to basic healthcare.

…

Incoming funds from South Korea have become so significant that they have been dubbed the “Mount Halla Stream”, named after the tallest mountain in South Korea, said Kang Cheol-hwan, the author of “The Aquariums of Pyongyang,” a survivor’s account of North Korean gulags.

This has helped offset a decline in funds from ethnic Koreans living in Japan that dominated in the mid-1980s and was known as the “Mount Fuji Stream”.

“In the past, pro-Pyongyang people in Japan and some Korean Americans sent money but they grew old and strong sanctions from Japan also took a toll. So the generation providing remittances has changed and it is now the defectors in South Korea who are doing it,” said Kang.

I have also interviewed a few former North Koreans about remittances. They all report it is common and brokers charge about 30%.

Read the full story here:
Insight: A secret plea for money from a mountain in North Korea
Reuters
2012-7-11

According to Yonhap:

A South Korean company in the inter-Korean industrial zone in North Korea paid about $7,000 in corporate income tax to the North last year, the Unification Ministry said Wednesday.

It was the first time a South Korean company has paid a tax to North Korea since 2004 when the two Koreas opened the complex in the North’s border city of Kaesong to boost cross-border economic cooperation.

South Korean companies in Kaesong are subject to a 10 percent to 14 percent corporate income tax, but their taxes are exempted for five years after first generating profits, and are reduced by 50 percent for the ensuing three years, according to the ministry, which handles inter-Korean affairs.

The company and three others also paid about $153,000 in corporate income taxes to the North’s authorities this year for their profits in fiscal year 2011.

The development indicates that some South Korean companies have begun to make money for their operations in the industrial complex that marries South Korean capital and technology with cheap labor from the North.

The complex is now home to more than 120 South Korean small and medium-sized companies, which produce clothes, utensils, watches and other goods.

Last year, the production of the industrial complex reached an all-time high of US$400 million. The complex has produced $1.65 billion worth of goods since 2004.

A ministry official said more South Korean companies are expected to pay corporate income taxes to the North next year. He did not give details on how many South Korean companies make money in Kaesong.

Read the full story here:
S. Korean company in Kaesong paid first corporate tax to N. Korea
Yonhap
2012-7-11

Institute for Far Eastern Studies (IFES)
2012-7-10

June 30 marked the six-month period since Kim Jong Un was appointed as the supreme leader, after the sudden death of his father, Kim Jong Il on December 17.

For the first six months in power, Kim Jong Un made a total of 80 official activities, which was 19 activities more than Kim Jong Il, in the same period, last year. Out of the 80 official activities, 28 (35 percent) activities were military related. This is drastically higher than his father’s 3 activities, a mere 5 percent of his total activities. Kim Jong Un holds the top titles in the military, party, and the government as the supreme leader, first secretary of the Workers’ Party of Korea, and first chairman of the Korean People’s Army. But he mainly concentrated on the military for the first half of 2012.

However, his inspection to military units gradually decreased, from 10 in January to 5 from February to April. In May, he made 3 visits while he did not make any visits in June. This suggests he is slowly retreating from military related activities.

In the first half of 2011, Kim Jong Il concentrated heavily on the economy, making 29 onsite inspections (48 percent) to economic sectors while Kim Jong Un has made only 3 visits (3.8 percent) thus far. However, Kim Jong Un made 16 visits to the construction sites of apartment buildings, amusement parks, and other community related sites and appeared in 9 commemorative photo sessions. Upon a closer examination, Kim Jong Un engrossed on visiting military units from January to April and switched over to housing and community sites from May to June. This can be interpreted as an effort in following his father’s undertaking to revive the economy, taking heed to the improvement of welfare for the people.

In particular, it is interesting to note that North Korean media is reporting photo sessions as official activities of its leader. Kim Jong Il has also took photos after his official visits but Kim Jong Un is attending photo sessions as the sole activity. Many experts construe this as image manipulation attempt, to associate Kim Jong Un with Kim Il Sung, as he mingles with the people in photographs.

Another major difference with his father is Kim Jong Un’s lack of diplomatic activities. Kim Jong Il made numerous visits to China and Russia last year and engaged in a total of 7 diplomatic activities which includes inviting Meng Jianzhu, Chinese minister of public security visit to Pyongyang in February. Except for sending congratulatory messages to Cuba and other countries, Kim Jong Un has yet to engage in diplomatic meetings.

One commonality is, Kim Jong Un like his father is enjoying various cultural performances between field inspections. Kim Jong Il is recorded to have attended 18 performances while Kim Jong Un attended 8.

The latest report by KCNA on Kim Jong Un’s official activity is visit to nearly completed Rungra People’s Pleasure Park and the construction site of Breast Cancer Institute in Pyongyang Maternity Hospital on July 1. This is his official visit in 24 days since he attended the 66th anniversary ceremony of Korean Children’s Union.

On the other hand, while Kim Jong Un is increasing contact with the people, control and regulation of the people are also stiffened. After Kim Jong Un rise to power, the number of defectors is steadily declining. According to the Ministry of Unification, only 610 defectors entered the country this year (January to May), which is a drop of 42.6 percent from the previous year of 1,062. An official from MOU confirmed that the decrease in the number of defectors can be attributed to the tightened border control by the North Korean authorities.

UPDATE 6 (2012-9-24): The Associated Press reports that WIPO didn’t violate sanctions. According to the article:

The U.N. patent agency says it has been cleared of breaking sanctions against North Korea by sending computers to the regime in Pyongyang.

The Geneva-based World Intellectual Property Organization said Monday that a U.N. panel found it had not violated any of three U.N. Security Council resolutions by providing technical assistance to North Korea.

In July, the Foreign Affairs Committee in the U.S. House of Representatives launched an investigation into whether WIPO had violated U.N. sanctions by sending computers and other technology to Iran and North Korea.

WIPO has insisted it did nothing wrong in providing ‘‘standard IT equipment’’ to the patent and trademark offices in those two countries. The Iran review is still pending.

UPDATE 5 (2012-7-24): A preliminary assessment by the State Department has concluded that WIPO did not violate U.N. sanctions when it sent materials to the DPRK. According to a State Department briefing on July 24:

QUESTION: Two small things. One on WIPO, if that’s how it’s pronounced. WIPO. So following suggestions that WIPO allowed the transfer of banned technology to Iran and North Korea, has the United States been able to mount its own investigation of this?

MS. NULAND: Well, first and foremost, to repeat what we said here last week, we share the concerns raised here in Washington, in the media, regarding these equipment and software transfers by WIPO. We’ve been concerned since we first learned that they had transferred equipment to both North Korea and Iran. We’ve been in contact with WIPO and urged them to institute substantive safeguards.

Our own preliminary assessment, but we are still seeking more information from WIPO, is that there doesn’t appear to have been a violation of UN sanctions. However, this has now been referred to the sanctions committee for them to make their own determination, so we will await the views of the respective UN sanctions committees. We are also seeking more information from WIPO so that we can conclude our own work on whether there was any violation of U.S. law, but we don’t yet have everything that we need in order to make that assessment.

QUESTION: I understand that you don’t yet have everything you need to make a final assessment. But based on what you have, are you able to make a preliminary assessment as to whether or not any U.S. laws were broken?

MS. NULAND: I don’t have a preliminary assessment for you. We’re still seeking some more detail from WIPO.

QUESTION: And then one last thing. I believe there was supposed to have been a hearing in the House today on this that got canceled, I think because the WIPO officials were not going to be available to testify. Are you – given that you don’t yet have all the information that you want, are you satisfied that you are getting enough cooperation from them?

MS. NULAND: Well, we are continuing to work with them, and that is a conversation that is ongoing. I think we are – we have seen a number of positive steps from WIPO with regard to their procedures going forward that are important. For example, they have agreed to a commission that will have an external and independent auditing ability with regard to their projects to try to prevent this kind of thing from happening in the future. As I said, they’re going to seek a retroactive opinion from the sanctions committee, which wasn’t evident at the beginning of this. And they’re also going to ensure that any future projects are reviewed by their legal counsel. But we are still working with them on some of this U.S. stuff that we need.

QUESTION: But you don’t feel like they’re stonewalling you on this?

MS. NULAND: We do not. No.

Here is what the Chicago Tribune had to say about the canceled House committee hearing:

On Tuesday, the ranking Republican and Democrats on the U.S. House Foreign Affairs Committee accused Gurry of preventing two senior WIPO staff members from testifying before a planned committee hearing, forcing its cancellation.

The staff members asked to testify were James Pooley and Miranda Brown, a source familiar with the matter said.

“Director-General Gurry is obstructing this committee’s investigation of WIPO’s transfer of U.S.-origin technology to rogue regimes under international sanctions — a transfer that occurred on his watch,” Republican chairwoman Ileana Ros-Lehtinen and ranking Democrat Howard Berman said in a statement.

A WIPO spokeswoman was not immediately available to comment on the statement. Gurry told Reuters late last week that he would allow “a properly competent person” to testify.

…

Lawmakers have suggested that the United States freeze contributions to WIPO until they are satisfied it is cooperating, although this would likely have a limited impact on the U.N. agency, which relies on member state contributions for only 10 percent of its budget.

UPDATE 4 (2012-7-19): WIPO has issued this statement on their web page:

Information and Clarifications Concerning WIPO’s Technical Assistance Programs
Geneva, July 19, 2012
PR/2012/717

Following some recent media attention and requests for information from certain member states relating to WIPO’s technical assistance programs, WIPO Director General Francis Gurry provided the following information and clarifications concerning the actions that have been undertaken, or are being undertaken, by the Organization in relation to the provision of technical assistance to countries that are the subject of United Nations (UN) sanctions.

The Director General reiterated that the Secretariat is treating concerns relating to the Organization’s technical assistance programs to countries that are the subject of UN sanctions with the utmost seriousness.

The actions undertaken include:

1. Following the expression of initial concerns over the provision of standard IT equipment to patent and trademark offices for the processing of intellectual property (IP) applications, new internal procedures were established and made operational on May 1, 2012. Under these procedures, all managers must refer any activity proposed in a country subject to UN sanctions to WIPO’s Legal Counsel for guidance and clearance. The Legal Counsel will, wherever necessary, consult the appropriate UN Sanctions Committee. Additionally, any work plan for a country subject to UN sanctions will be submitted at the commencement of each calendar year for guidance by the appropriate Sanctions Committee.

2. The provision of standard IT equipment to the IP offices of the Democratic People’s Republic of Korea (DPRK) and the Islamic Republic of Iran that occurred in the preceding years, within the context of the Organization’s business modernization program for IP Offices in developing countries, is being referred to the relevant UN Sanctions Committees for their information and guidance.

3. The initial steps are being undertaken for a full external and independent review of the technical assistance provided to countries subject to UN sanctions.

4. A new internal instruction has been issued ending any provision of IT hardware in any of WIPO’s technical assistance programs.

The Director General reiterates his commitment to transparency and re-affirms the readiness of the Secretariat to continue to provide any information requested by any of the member states of the Organization.

While the legal advice received with respect to the technical assistance provided to DPRK and Iran was that the technical assistance was not in breach of UN Sanctions, it is hoped that the measures outlined above will provide assurance that the Organization is treating this matter with the seriousness that it warrants.

For further information, please contact the Media Relations Section at WIPO:

Tel: (+41 22) – 338 81 61
Fax: (+41 22) – 338 81 40
E-mail

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