North Korean Economy Watch

Institute for Far Eastern Studies (IFES)
NK Brief No.10-01-08-1
2010-01-08

North Korean authorities appear to be closing regional, large-scale wholesale markets, one after another. According to the latest newsletter from the North Korean human rights group Good Friends (January 6), “Based on a Cabinet measure passed on December 30 of last year, North Korean authorities will suspend operations management of the Sunam Market in Cheongjin [LOCATION HERE] from the end of this March, effectively deciding to close [the market].”

Like the South Pyeongan Province Pyeongseong Market [LOCATION HERE] reportedly closed last year, the Sunam Market, North Korea’s representative wholesale market, was built less than five years ago. Good Friends reported that provincial authorities from North Hamgyeong Province plan to raze the market, located between Chumok and Cheongnam neighborhoods, and build a modern park and residential housing.

The newsletter revealed, “More than 40 percent of Cheongjin residents rely on the Sunam Market to maintain their lifestyles, and if the market is closed, there will be considerable consequences,” and added that those who trade in the market or rely on it for their shopping are already worried about how they will continue to put food on the table if the market gets shut down.

It has also been reported that the Chupyeong Market [LOCATION HERE], in the Sapo district of Hamheung City, South Hamgyeong Province, will also be closed. The Chupyeong Market, which attracts as many traders as the Pyeongseong Market, apparently specializes in the wholesale trade of imitation goods. Good Friends explains that the Chupyeong Market is a very busy and crowded market, with many shoppers coming and going, and this has also led to an increase in scams, thefts and other crimes. It is anticipated that following the closing of the Sunam Market early in the year, the next move authorities make will be to shut down the Chupyeong Market, as well.

A directive has been issued that North Korean authorities are to ban the sale of manufactured goods in the country’s permanent markets, and that all goods are to be sold only in state-sanctioned retail stores, and at state-set prices. However, sources inside the North report that traders are gauging the attitudes of local authorities, and often not turning over their goods for sale in retail stores. This, along with the North’s currency reform and ban on foreign currency, as well as the increase in farmers’ wages, has led to huge increases in exchange rates and prices.

Currently, workers in state-operated enterprises are being paid anywhere from 1,500 won to as much as 5,000 won per month. With the currency revaluation, this is considerably more than they were making before, but taking into account the massive increases in prices, as well, the impact of the higher wages is negligible.

The EU has issued a list of 12 DPRK officials who will be denied entry visas to member countries.  According to the Choson Ilbo:

The EU has imposed sanctions targeting North Korea’s top leadership over the country’s nuclear weapons development. Twelve officials were blacklisted, many of them thought to be leader Kim Jong-il’s closest advisers.

The list includes Vice Marshal Kim Yong-chun (74), the minister of the armed forces, as well as Jang Song-taek (64), the director of the North Korean Workers Party’s Administration Department who is Kim Jong-il’s brother-in-law. Six of 13 members of the powerful National Defense Committee were blacklisted.

At a session of the Environment Council in Brussels on Dec. 22, the EU approved new sanctions against North Korea, including an entry ban on individuals and goods. EU regulations are binding on the 27 member states and overrule individual national laws.

The four other blacklisted committee members are O Kuk-ryol, the deputy chairman of the National Defense Commission; Jon Pyong-ho, the secretary of the Central Committee and head of the Committee’s Military Supplies Industry Department; Paek Se-bong, the chairman of the Second Economic Committee of the Central Committee; and Ju Kyu-chang, the first deputy director of the Defense Industry Department. Also on the blacklist are Hyon Chol-hae, the deputy director of the General Political Department of the Armed Forces, and Pak Jae-gyong, the deputy director of the Logistics Bureau of the Armed Forces.

So Sang-guk, the chair of the Physics Department at Kim Il Sung University who laid the technical groundwork for the North’s nuclear development, and Pyon Yong-rip, the president of the State Academy of Sciences, were also blacklisted.

The legal statement issued by the EU can be found here on page 16. The complete list of officials affected by the travel ban are listed here on page 3.  The UN Security Council sanctioned five individuals in 2009.

The EU also maintained its ban on Air Koryo.  According to Yonhap (h/t The Marmot):

Air Koryo, North Korea’s air carrier, has been banned from offering flight services to Europe for a fifth year after having failed to meet international safety requirements, U.S. international broadcaster Radio Free Asia (RFA) said Saturday.

The North Korean carrier has been involved in the list of carriers prohibiting from flying to the 27 members of European Union that was released this year, RFA said.

Air Koryo reportedly has a fleet of about 20 planes made between the 1960s and 1970s in the Soviet Union.

UPDATE: Here are the EU regulations adopted on Dec 22, 2009. Thanks to Mike.

According to the Choson Ilbo:

North Korean authorities have been rounding up money changers in major cities since Jan. 4, it emerged Friday. Sources in North Korea said an average of 20 money changers were arrested in each major city, including 17 in Pyongyang and 23 in Sinuiju since Jan. 4.

After a shock currency reform in early December, authorities banned the use of foreign currency. In the past, residents had used U.S. dollars in hotels or markets without having to change them into North Korean won.

It seems the State Security Department and the Ministry of Public Security and members of the village resident organizations secretly investigated people’s dollar holdings prior to the currency reform, the sources said.

Heads of the resident organizations from each village reportedly discovered who spent dollars, and the two security agencies investigated foreign currency managers in agencies and enterprises.

The crackdown on money changers appears to be aimed at confiscating the dollars they hold. But more broadly, the North seems determined to ferret out all newly wealthy people by gathering information about state agencies or individuals who have engaged in under-the-counter foreign currency dealings, the sources added. A North Korean businessman who was recently in China said, “The crackdown has quickly frozen the exchange market in the North.”

Rich people who were not affected as seriously by the currency reform because they hold cash in foreign currency are reportedly becoming edgy. Some are now experiencing hardship because they have not been able to change their dollars into North Korean won.

A huge private exchange market has come into existence in the North since 2000. In the early days, only small-scale dealers were engaged in the market, but once they had more than US$100,000, they even opened clandestine offices. In some cases, dealers handle nearly $1 million and work closely with state agencies in Pyongyang.

Officials who handle foreign currency whose source is hard for them to reveal reportedly rely on private money changers instead of government banks. Many money changers even in provincial regions are said to hold more than $100,000.

Read the full story here:
N.Korea Cracks Down on Money Changers
Choson Ilbo
1/11/10

According to an AFP report that cites Good Friends:

Good Friends, citing its own contacts in the reclusive North, said prices for rice and corn doubled last week at markets in the capital Pyongyang and in the eastern port city of Chongjin.

Rice prices ranged from 120-150 won per kilogramme (2.2 pounds) in Pyongyang and 110 to 140 won in Chongjin last week — up from 40 to 50 won reported on December 30, the group said.

Corn also traded higher at 70-75 won last week — up from 20-25 won on December 30 in the areas, it added. Seoul’s unification ministry, handling cross-border issues, could not confirm the data.

The official exchange rate is 135 won to the dollar but the black market rate is between 2,000 and 3,000 won.

The report came as the World Food Programme struggles to raise relief funds for the food shortage-hit North.

Major donors — including South Korea and the United States — refuse to help in protest at its second nuclear test in May last year.

Statistics available at the WFP website display it raised 89.8 million dollars as of late last month, around only 18 percent of its target of 492 million dollars in relief funds for the communist North.

Read the full article here:
Food prices soaring in N. Korea: group
AFP
1/10/10

According to Yonhap:

The latest “Issue and Policy” report by the Science and Technology Policy Institute said North Korea has traditionally been strong in the polymer chemistry and single carbon material sectors, as well as in such biotech areas as animal cloning. It has also been competitive in nano science, mathematics, nuclear technology and missiles.

The report added that Pyongyang has in recent years built up its competitive knowhow in software, including the Linux computer operating system, as part of efforts to use science and engineering to bolster economic growth.

The communist country operates the Korean Computer Center and Pyongyang Information Center dedicated to improving the country’s software infrastructure.

“Cooperation can take place in relatively new fields such as nanotech, biology and chemistry where North Korea has traditionally been strong,” the report said.

The latest findings, however, said that because there are differences in the quality of research conducted by engineers and scientists from the two countries, cooperation should take place in stages.

In the report, the think tank recommended that South Korea first provide assistance to upgrade North Korea’s laboratory equipment and help train experts. After making inroads into these areas, Seoul can move to carry out full-fledged joint research and open laboratories where scientists from both countries can work together, the report said.

Read the full story here:
Two Koreas can cooperate in chemistry, biotech and nano science: report
Yonhap
1/6/10

According to the Daily NK:

The 2010 total budget for South Korea’s Ministry of Unification has risen to approximately $135.3 million overall, a year-on-year increase of 26.9%. This incorporates a project budget of $103 million. The project budget excludes personnel costs and other overheads.

The slice of the project budget earmarked for defector support is $73.07 million, some 70.9% of the total. Other budgeted items included unification education ($7.3 million, 7.1%), situation analysis ($4.7 million, 4.6%), unification policy ($3.6 million, 3.7%) and support for abductees ($3.9 million, 3.7%). In addition, the budget for inter-Korean meetings, information and economic cooperation was set at $10.2 million dollars.

The most significant increase is that for North Korea situation analysis projects, which has risen from just $0.35 million in 2009 to $4.8 million this year.

This steep budget increase comes as a direct result of a new situation analysis department, set up in May, 2009 for the purposes of systematic investigation and analysis of the North Korean situation. The size of the budget is similar to that for equivalent undertakings during the period up until the late 1990s when North Korea situation analysis was one of the primary tasks of the Ministry of Unification.

A strategic decision to try and take back the lead in information gathering seems to have been a factor in the decision to proceed with this project and allocate a substantial slice of the budget to it. The Ministry of Unification’s decision to proclaim 2010 a “key turning point” and forge ahead in inter-Korean relations requires the establishment of support systems to gather and analyze data.

Despite being technically in charge of inter-Korean relations, the Ministry of Unification has always relied heavily on intelligence agencies for information. This project appears to reflect the Ministry’s desire to understand inter-Korean relations independently and establish a system imbued with the Ministry’s own character.

The decision seems also to incorporate an implicit understanding that the Ministry of Unification should be able to demonstrate its information gathering capacity in various locations, not least inter-Korean economic cooperation locations like the Kaesong Industrial Complex.

In reality, the Ministry is also in a good position to systematically collect up-to-date information on North Korea from persons entering Hanawon, the education center for defectors, and from those South Koreans who visit North Korea with Ministry approval. Finally, the Ministry is also best-placed to interact with international organization officials who have information regarding the provision of aid and economic and agricultural conditions.

The major projects the Ministry of Unification is pursuing within the budget in order to strengthen its North Korea situation analysis capacity are; ▲ Development of a “North Korea situation index;” ▲ Establishment of a system to digitize North Korean broadcast data collection; and ▲ Establishment of infrastructure for the analysis of gathered data.

The Ministry is investing $1.62 million in its North Korea situation index development project. The aim is to develop an objective statistical index to evaluate situational changes in North Korean politics, diplomacy, military, economy, society and culture.

The digital data collection project is simply to facilitate the changeover from analog to digital data collection.

Infrastructure for the analysis of North Korea data simply means establishing a database on individuals during this year, extending the range of information into the fields of geography and industry in 2011.

In other areas of the budgetary allocation, unification education targeting the young is an interesting feature this year.

The Ministry has earmarked $0.53 million for a “Grand Youth Peaceful Reunification Rally” in commemoration of the 60th anniversary of the Korean War. The budget for school unification education has increased 8.2 times from $0.27 million in 2009 to $2.24 million this year.

The Ministry also plans to spend a further $4.5 million this year to acquire land and fund designs for the second Hanawon project, which is scheduled for completion by 2012 at a budget of $31.21 million. Currently, a number of possible sites in Gangwon Province are being considered.

Separate from the regular Ministry budget, inter-Korea cooperation funding levels are set in accordance with the state of inter-Korean relations. The South Korean government plans to prepare a budget for the ‘Grand Bargain’ using inter-Korean cooperation funds as and when progress is made in inter-Korean relations.

Read the full article here:
Unification Ministry Budgets for New Intelligence Role
Daily NK
Kim So Yeol
1/6/10

Institute for Far Eastern Studies (IFES)
(NK Brief No.10-01-06-1)
2010-01-06

On January 1, North Korea published its annual New Year’s Joint Editorial in the Rodong Sinmun (official newspaper of the Central Committee of the Workers’ Party of Korea), Josonimmingun (newspaper of the Korean People’s Army), and the Chongnyonjonwi (newspaper of the Central Committee of the Kim Il Sung Socialist Youth League).

The editorial introduces North Korea’s general policy direction for 2010. In the international realm, the editorial highlights the establishment of a peace regime between Pyongyang and Washington, as well as improving inter-Korean relations. Domestically, the editorial focused on improving the standard of living for the people by improving agriculture and light industries. It appears that the North has decided to focus on domestic and international stability.

This policy approach appears to be an attempt to strengthen the basis for the North’s drive to build a ‘Strong and Prosperous Nation’ by 2012, but in the mid- to long-term, it also seems to have been adopted with Kim Jong-eun’s succession in mind.

This year’s joint editorial focused primarily on the North’s economy. More than anything, it centered on improving the lives of the people by boosting light-industrial and agricultural output. This was highlighted in the editorial’s title, “Bring about a radical turn in the people’s standard of living by accelerating the development of light industry and agriculture once again this year that marks the 65th anniversary of the founding of the Workers’ Party of Korea,” and was a consistent theme throughout the article.

Focusing on increased economic output specifically in light industry and agriculture, it is clear that the Kim Jong Il regime is seeking to boost public support by solving food and clothing shortages.

It is also noteworthy that in the editorial’s section on the economy, there is absolutely no mention of the ‘national defense industry’ that has been prominent in previous New Year’s Joint Editorials. National defense has been prioritized in previous joint editorials, with one article emphasizing that “everything necessary for the national defense industry must first be ensured in order to meet the economic line of the Military-First Era.” The defense industry was briefly mentioned, however, in the editorial’s section emphasizing the importance of scientific and technological development.

Substantial points of the economic portion of the editorial include the following:

– The need to “bring about a radical turn in the people’s standard of living by accelerating the development of light industry and agriculture once again this year that marks the 65th anniversary of the founding of the Workers’ Party of Korea.”

-“Light industry and agriculture are the major fronts in the efforts for the improving of the peoples’ standard of living. . . . an all-Party, nationwide effort should be directed to mass-producing consumer goods.”

-“The agricultural sector should sharply increase grain output by thoroughly applying the Party’s policy of agricultural revolution, like improving seeds, double cropping and improving potato and soybean farming.”

-“We should radically increase state investment in fields related to the people’s lives, and all sectors and units should supply fully and in time the raw and other materials needed for the production of light-industrial goods.”

-“We should gain access to more foreign markets, and undertake foreign trade in a brisk way to contribute to economic construction and the improvement of the people’s standard of living.”

-“Socialist principles should be maintained in commodity circulation, and the quality of welfare services should be decisively improved.”

-“The fundamental secret of making a new leap in this year’s general offensive is in launching a campaign to push back the frontiers of science and technology in all sectors.”

-“The defense industry sector, a major front in pushing back the frontiers of science and technology, should continue to lead the efforts to open the gate to a great, prosperous and powerful country.”

According to the Korea Times:

When the South Korean government lifted a ban on the sales and distribution of North Korean paintings in 1998, the southerners’ curiosity in the North’s art surged.

With increasing demands, many works found their way into the hands of South Korean collectors through various channels, notably via China. And galleries in South Korea competed to hold exhibitions.

Soon, it became a fanciful thing among art collectors in South Korea to have a piece or two of North Korean art. A work by a well-known painter such as Jung’s was sold at a minimum of 10 million won ($8,800) apiece.

For cash-strapped North Korea, suffering from a moribund economy, the paintings were more than a piece of art. They also turned out to be a new cash cow. And as in any greedy business, the reputation of the North Korean art market became tainted, as counterfeit and duplicate products started to surface.

Experts believe that most of the spurious acts were actually made inside North Korea. Sometimes the painters themselves were not free from blame either.
…
North Korea sells hundreds of paintings by its artists, including those who work for the state’s Mansudae Art Studio in Pyongyang each year to galleries in China – a de facto gateway for North Korea to reach the outside world. The paintings then are sold to South Koreans and other collectors.

But besides the official export quantity of paintings, there are also “unofficial” paintings, entrusted privately by some artists to North Korean merchants who share the profit with the painters after selling them on the black market.

“Of course, the sales of these paintings go unreported,” said Lee. “In North Korea, an artist’s paintings are state property. So, when an artist’s paintings are displayed in countries and if they were illegally sold paintings, the painter will be in a position to deny that it’s his works.”

With the rising popularity of North Korean paintings in South Korea, North Korea sometimes produced low-quality paintings en masse. A few years back, North Korea did some trade with a major South Korean company. Lacking sufficient cash, North Koreans proposed they would make up the payment in arts products. The South Korean company accepted the offer.

“I was called in by the company to examine the value of the paintings. It was a huge container. Inside it was full of paintings. But the quality was all poor.

“I suggested the company burn them all, fearing that if they entered the art market, it would cause disruption with such a huge volume when many people cannot tell their values,” Lee said.

Last April, Lee had a chance to meet with another renowned North Korean painter, Sun Woo-young, in China. When asked about the situation, Sun also reportedly told Lee that only 11 out of 150 paintings, put on sale in South Korea, were authentic.

North Koreans acknowledge that there are forged or duplicate paintings circulating, but insist that they are done in China by Chinese painters. But Lee believes that most forgeries are done within North Korea.

“Chinese counterfeit painters prefer to copy famous Chinese paintings, not North Korean paintings, because selling Chinese paintings can make more money,” Lee said.

The official gallery Web site of the Mansudae Art Studio also recognizes the controversy surrounding the North Korean paintings. On the section of the “Frequently Asked Questions,” one question is: “How do I know the works are original?”

The authenticity debate also comes amid North Korean art’s increasing popularity overseas. In recent years, the North held art exhibitions in a number of countries, including the U.K., Germany, Italy, the U.S. and Australia, receiving favorable reviews.

Lee said for North Korean paintings to be recognized internationally, the transparency of their authorship, distribution and authenticity should be strengthened.

“If quality control is not maintained, selling North Korean paintings the way they do now is like shooting one’s own foot. It will come back to get you.”

So here are the economics: Once the South Korean government eliminated a ban on selling and distributing North Korean art,  demand predictably exploded among South Korean collectors.  A market developed where North Korean art studios were exporting pieces to Chinese middle men who were then able to resell to the South Koreans. The demand was so high that at one point some North Korean companies were able to pay for imports with North Korean art (though in the case above it did not turn out well).

This would not be so interesting were it not for the unintended consequences.

In the market described above, the rents from economic activity (selling paintings) are primarily divided between the Chinese middlemen and the North Korean art studios.  The artists themselves probably received little from the transactions.  However, some clever (and popular) North Korean artists figured out they could earn some cash for themselves if they clandestinely produced works of art for export through trusted intermediaries.  Under this clandestine trading model, the rents are divided between the artist and his trusted middleman/men.  The particular split depends on the relationship between supply and demand–which we do not know.   This type of activity is pretty much what we also see on collective farms: farmers produce less for the collective and more from their private plots.  As a result individual incomes and private production increase.

This kind of activity however was popular enough to spawn a market in counterfeit paintings!  Once other painters realized the kinds of returns that premium paintings were earning abroad, they jumped into the counterfeit business! This of course causes problems in the market for North Korean art because collectors do not know if they are buying an original or not.  In the limit, adverse selection could cause the market to unwind.

But this almost never happens because economic problems create opportunities for profit.  We know there are organizations and individuals out there who can solve this problem   Is there an entrepreneur out there who can get into the business of certifying and registering North Korean art or fund someone who can?

To learn more about this, read the full Korea Times article below:
Fake NK Paintings in Wide Circulation
Korea Times
Sunny Kee
1/7/2009

According to Yonhap:

Lianxing Wen, a geophysics professor at the State University of New York in Stony Brook, and his graduate student, Hui Long, located the epicenter of the second nuclear test on May 5 last year with a margin of error of only 140 meters, compared with 3.8 kilometers achieved by the U.S. Geological Survey.

“We locate the 2009 test at 723 meters north and 2,235 meters west of the 2006 test,” the scientists said in the study, which was published in the January-February edition of Seismological Research Letters of the Seismological Society of America.

Identifying the coordinates of the 2009 test site as 41°17′38.14″N latitude and 129°4′54.21″E longitude, the scientists said their findings should help Asian monitors to pinpoint the location of another nuclear test should North Korea ever decide to go ahead with one.

“The location of any future nuclear test around this particular test site will be pinpointed in real time, with a similar precision,” Wen said in a separate email interview. “With its exact location known, the wave propagation effects due to location geology can be accurately accounted for, leading to a more accurate determination of yield.”

North Korea conducted its first underground nuclear test in Oct. 9, 2006 in Punggye-ri in its northeastern county of Kilju, according to U.S. and South Korean officials.

Wen and Long said they analyzed the seismic waves from the first nuclear test to understand the geological complexities of the earth in the region, and used the data to reduce the uncertainty involved in determining the ground zero of the second test.

“The strategy is not to try to fully understand the complexities of the jungle (earth), but to take advantage of the forensic evidence of the jungle complexities that are imprinted in the recordings” of the first nuclear test, the scientists said in a separate introduction to their thesis.

The waveforms from the first test were obtained from nine seismic stations based in Japan, South Korea and China, the study said.

North Korea conducted its second nuclear test amid a deadlock in international talks aimed at stripping it of its nuclear ambitions, raising tensions and inviting harsh U.N. sanctions.

“High-precision location would reveal, in real time and at great accuracy, an increasingly complete view of the geographic network of a nation’s nuclear test infrastructure,” the paper said.

“Logistically and economically, it is convenient to use the same facilities to do multiple tests. Environmentally, it would confine nuclear wastes in a particular site,” Wen said in the email.

Their paper, “High-precision Location of North Korea’s 2009 Nuclear Test,” can be found here PDF.

Here is the location on Wikimapia.

According to KBS (h/t RoK Drop):

The number of North Koreans who fled to South Korea in 2009 is known to be close to three-thousand.

A Ministry of Unification official said more than 2,200 women and almost 680 men from North Korea entered South Korea in 2009, totaling more than 2,950 in a preliminary tally.

The official added that this makes the cumulative number of North Korean escapees total approximately 18-thousand, which is almost certain to surpass 20-thousand in 2010.

Soms interesting supplementary information was posted at Yonhap:

The number of North Korean defectors hiding in China is estimated to have shrunken in recent years to almost one tenth the level seen in the late 1990’s, a U.S. demographer said Thursday.

The assessment is a controversial but important factor in shedding light on the conditions of those North Koreans who live in China. The defectors live under the constant fear of deportation because their country considers defection a capital crime.

Activists and relief groups say tens of thousands of North Korean defectors live in China, but Dr. Courtland Robinson at Johns Hopkins University Bloomberg School of Public Health said the number may have dropped to between 6,000 and 16,000 as of 2007.

“About a decade ago, people were literally being starved to death and fleeing to China,” Robinson said in an interview, putting the 1998 figure between 50,000 and 130,000. Famine had reportedly killed as many as 2 million people in North Korea in the mid-1990s.

An official at South Korea’s Unification Ministry, which handles affairs involving North Korea, said he could not support the figures given by either activists or Robinson, arguing it was impossible to determine the exact number of those defectors in hiding.

Robinson, speaking on the sidelines of a conference on North Korean defectors in Seoul, said he had turned to local residents in China as informants to assess the number of defectors living in their towns. He then applied demographic methods to come up with what he called “plausible ranges” of a population.

“The very essence of these measurements is to start selecting sites randomly, not sites where you think North Koreans may be living,” he said.

“It’s a combination of things that has contributed to the decrease. Tightened border security on both sides is one,” Robinson said. “Defectors have also evolved in terms of their understanding of how difficult it is to live in China.”

China reportedly stepped up its crackdown on North Korean defectors ahead of its hosting of the Summer Olympics in August 2008. Under a treaty forged in 1998, China is believed to arrest and repatriate North Korean defectors even though they could face imprisonment, torture and even execution.

Chinese residents are reportedly rewarded with cash if they report North Korean defectors, who find it difficult to hide their identities or get a job because they can’t speak Chinese.

Robinson said defectors have apparently accelerated the pace at which they “move on through China,” heading to countries such as Thailand where it is deemed safer or easier to go to South Korea.

Over 16,000 North Koreans have come to South Korea since the 1950-53 Korean War that ended in a truce rather than a peace treaty. The annual number of defectors is increasing year by year and the Unification Ministry expects the accumulated figure to top 20,000 this year.