North Korean Economy Watch

According to the Joong Ang Ilbo:

North Korea has reused equipment and materials left from the halted construction work on light-water reactors, breaking a prior agreement with a multinational organization that oversaw the botched construction project.

According to the Unification Ministry and other sources, North Korea has taken 190 vehicles from the site in Kumho, South Hamgyong Province, and 93 pieces of heavy equipment, including cranes and excavators, and is likely using them for military purposes.

Sources said thousands of tons of steel bars and cement and communication devices are also being used by the North.

In late 2005, the Korean Peninsula Energy Development Organization, also known as KEDO, stopped construction of non-military nuclear reactors in the North. The work had begun in August 1997 as part of the 1994 Agreed Framework between the United States and North Korea. Under the terms of the agreement, Washington said it would build two reactors in the North in exchange for Pyongyang’s agreement to freeze all nuclear weapons activities.

But in October 2002, the United States said it had obtained intelligence that the North had been operating a clandestine program to produce highly enriched uranium to develop weapons and the U.S. State Department said North Korea admitted to doing so. By January 2003, the North withdrew from the Nuclear Non-proliferation Treaty. KEDO suspended its construction in November 2003.

Two years later, the KEDO’s board decided to terminate the construction project, which was about 30 percent complete. In December 2005, North Korea asked KEDO workers to leave the country and said they would not be allowed to repatriate equipment and construction materials.

At the time, KEDO and North Korea had agreed to leave materials at the site. Most belonged to South Korean subcontractors, and they had planned to sell off some of it to make up for financial losses stemming from the halted work.

In 2003, after the KEDO first suspended construction, the North said it would not allow the transfer of equipment unless it received compensation. A government official here said, “The North moved the equipment before we could even address the compensation issue, and that’s clearly in violation of our agreement. It can even be regarded as stealing.”

In January 2006, the Roh Moo-hyun administration in Seoul said the North had pledged to store the materials and that it expected the North to honor its word. Despite suspicions that the North had used some of the equipment in preparation for their second nuclear test this year, the current Lee Myung-bak administration has also remained silent.

But intelligence sources tell a different story.

They said the North started using equipment almost immediately after KEDO’s withdrawal and that the North Korean military was involved.

“North Korea is trying to keep South Koreans or KEDO officials from going near the construction base,” one source said. “Recent satellite photos of the site show that hundreds of the black covers that were used to conceal materials are mostly gone.”

Sources estimate equipment and materials are worth about 46 billion won ($39 million). South Korea, one of the founding members of the KEDO, spent $1.1 billion on the construction project.

Here is a satellite image of the KEDO reactors.  Here is an image of the KEDO residential compound.

According to ABC News:

North Korea has banned the use of foreign currency, another sign its hard-line communist government is intent on reasserting control over the country’s nascent market economy.

Reports say the decree warns of severe punishment for anyone using U.S. dollars, euros, yuan and other non-North Korean currencies. Foreign currencies previously were accepted in some shops, restaurants and other outlets, particularly those catering to foreigners.

The order, issued by North Korea’s state security bureau and going into effect Jan. 1, aims to “forbid the circulation of foreign currency,” China’s state-run CCTV television said in a brief report late Wednesday.

The Daily NK, a Seoul-based online news outlet, said the order prohibits all individuals and organizations apart from banks from possessing foreign currency. It said the decree was posted in public and at workplaces, and went into effect Dec. 28.

There was no mention of the new ban Thursday in official North Korean state media. In Seoul, a South Korean official confirmed the ban, speaking on condition of anonymity because he was not authorized to speak to the media on intelligence matters.

The order comes weeks after the government redenominated North Korea’s currency, the won, as part of a far-reaching currency overhaul aimed at curbing runaway inflation and reasserting control over the economy.

The latest currency decree gives businesses 24 hours to deposit all foreign currency in banks. “When it is needed for trade, it can be withdrawn after obtaining approval,” it said, according to the Daily NK.

The ban is aimed at seizing foreign money tucked away by those still engaging in private market commerce, analysts said.

“North Korea has a problem with people trying to exchange their money for foreign currencies, and then storing the savings in their cabinets since they don’t know how the value of the local currency might change, said Jeong Kwang-min, a research fellow at the state-run Institute for National Security Strategy in Seoul.

The new ban shows the regime’s intention to “firmly” resolve and bring the black market under control, Jeong said.

“The ban is meant to root out people still trading at markets,” said Yang Moo-jin of Seoul’s University of North Korean Studies. “More broadly, it’s aimed at smoothly completing the currency reform by restricting the use not only of local currency but also foreign currency.”

The latest ban also applies to foreigners, who must exchange foreign bills into North Korean won in order to purchase items, reports said.

Sweden’s ambassador to North Korea, Mats Foyer, said by e-mail Thursday that he had received no official notification of the decree.

If this policy change does take effect, it will represent the republic’s third foreign exchange management regime.

Initially, the DPRK (like most communist countries) used Foreign Exchange Certificates (FECs) to control the circulation of foreign currency.  When foreigners arrived in Pyongyang, they changed their local money for FECs which could be spent in various sanctioned retail outlets. The DPRK’s Foreign Trade Bank issued FECs which were different from local North Korean won (issued by the central bank) in both color and and purchasing power.  Capitalist Westerners received green FECs and expats from fraternal socialist governments received red FECs.  Coins were also differentiated.

Shopping could be a bit confusing, however.  Price tags could potentially hold three numbers: the green FEC price, the red FEC price, and the won price.  I believe that shops that catered to repatriated Japanese Koreans (such as the Rakwon Department Store near the Changwang Health Complex) were priced in actual yen, but it is possible these individuals were forced to exchange their yen into green FECs.  Expats from fraternal socialist countries reportedly complained because although their governments were underwriting the DPRK, the red FEC prices in department stores were often higher than the green prices.

As in China, FECs were eventually abandoned and hard currency shops and state-owned retailers began accepting hard currency directly. I am not sure how, why, or when this transition occurred, but it was in effect until this week.  Under this regime, tourists, diplomats, business persons and other visitors spent their dollars, euros, yen and yuan directly on goods and services in the DPRK, but the retail outlets in which they were allowed to make purchases were severely limited.  Prices were originally denominated in dollars but in 2004 they were changed to euros (though dollars remained just as acceptable).

Under this regulatory regime, most visitors to the DPRK could arrive and leave without ever seeing any local currency.  Some percentage of the foreign exchange undoubtedly ended up in KWP, KPA, and state coffers, however it is likely that quite a bit was skimmed off the top, legally or otherwise, in the process.  This would explain the shift to the new regime.

This third foreign currency management regime is interesting but not for the reasons cited in the media. In addition to striking a blow at the country’s markets, which it most definitely will, this policy brings all of the overseas trading companies operating under the protection of the KWP, KPA, and select ministries, under the indirect control of the Foreign Trade Bank. Whereas these organizations were previously allowed to hold some level of foreign currency on site for discretionary purposes, they will now be forced to deposit these funds in a Foreign Trade Bank branch or exchange them for won at the official rate. Additionally, all of the future earnings that these organizations generate abroad will need to be handed over for won when their agents return from assignments overseas.  It is highly likely that these companies will choose to keep their earnings overseas rather than repatriating them, or use their earnings to purchase cheaper goods which they can import into the DPRK (while pocketing the difference and keeping it in a foreign bank account).

The implications for tourists, visitors, and expats are also interesting.  This new policy would imply that the Korea Trade Bank will set up currency exchange kiosk at the airports, border crossings, retail outlets, and hotels for foreigners to swap their currency for local won.  Although we will have to declare our hard currency when entering the country, the fact that we are carrying local currency makes it easier for us to take advantage of spontaneous purchases–even potentially from private merchants and restaurants.  In other words, knowing that locals will not come into possession of hard currency, the North Korean government might give us more “economic freedom” in our time there.  Of course this is probably just wishful thinking.  The gap between the official and market exchange rate will also give rise to black market currency traders who will seek out foreigners to the best of their abilities.

Overall, it is difficult to see this policy as anything but a power grab.  Foreign exchange will become more difficult to obtain and so will the goods manufactured or grown overseas (including China). North Koreans will be left with fewer choices and as a result will  come under greater control of the state.  I am willing to believe that most North Koreans have enough sense to predict this outcome as well.  It will be interesting to see how well this policy sticks or whether entrepreneurial North Koreans will find ways to evade the new rules as they have done countless times before.

Additional Links:

1. Here is a link to the original ABC story.

2. Here is a wikipedia page about the DPRK’s monetary history.

3. Here is the Daily NK story mentioned above.

4. Here are previous posts related to the DPRK’s currency revaluation.

5. This Reuters article adds additional information.

6. Here is a report by the Institute for Far Eastern Studies (IFES)

7. Here is a rather humorous report on the “benefits” that the currency fiasco is bringing the North Korean people.

According to the Associated Press:

Military officials from the two Koreas communicated through new fiber-optic cables to help facilitate the travel of 330 South Koreans heading to an industrial complex in the North on Wednesday, Unification Ministry spokeswoman Lee Jong-joo said.

South Korea has sent fiber-optic cables and other equipment to the North to help its communist neighbour modernize its military hot lines with the South, she said.

The new hot lines replaced outdated copper cable hot lines that will remain as spare lines, said Lee, the spokeswoman.

The new hot lines will serve as a key mode of communication for border crossings for people travelling to and from the joint industrial complex at the North Korean border town of Kaesong, she added.

I assume the upgrade to fiber optic means that the bureaucracy of border crossing has been computerized.  Rather than reading information across the phone line border officials can now send it electronically (including photos) to speed up processing on the North Korean side of the border.

Read the full story here:
Divided Koreas open new, updated military hot lines to facilitate border crossings
Associated Press (via Winnipeg Free Press)
12/29/2009

According to the Choson Ilbo:

Around 30,000 foreign laborers live in the camps on Reem Island. They come from all over the world, including Pakistan, Bangladesh and China. The North Korean laborers live in a part of the camp 400 m from the entrance. “Money was pretty good about three to four years ago, but now it’s tough to find work,” said one North Korean worker.

Around 1,300 North Koreans work in Abu Dhabi and Dubai, according to sources. Altogether around 6,000 North Koreans work in the Middle East, 3,100 of them in Kuwait. Some 800 work in the UAE and Qatar, with another 300 in Oman and 250 in Yemen. North Korea has been sending workers to construction sites in the Middle East so they can earn hard currency to send back to their impoverished country.

The movement resembles the exodus of South Koreans who came to the Middle East in the 1970s and ’80s to work at construction sites, but the main difference is that the North Korean government takes away the money its workers earn there. When asked about their wages, one North Korean worker said, “A lot of us have many years of experience working overseas as carpenters or welders and make between $150 and $200 a month, which is about the same as the Pakistanis make.” But those wages are what the workers keep after they have made their “loyalty” payments to the North Korean government.

One source in Abu Dhabi said, “North Korean workers make between $300 and $500 a month, but the North Korean government confiscates $150 and even $250 as loyalty payments, leading to a lot of conflict.” North Korean labor export companies skim off an excessive amount of money from salaries. The level of discontent recently prompted the North Korean government to dispatch security agents who trawl construction sites on weekends to provide ideological “cleansing” sessions to workers.

Since the construction industry in the Middle East fell into a slump due to the global financial crisis, North Korean workers have been resorting to other means to make money. The most common method is bootlegging in Abu Dhabi, where alcohol is banned. But that is a criminal offense that carries to two to three months in prison and deportation. “The North Korean companies that sent the workers abroad are aware of the bootlegging but are turning a blind eye as long as the laborers pay portions of the profits,” one local source said.

Some North Koreans leave the construction sites and work as handymen or build fountains for private homes. In August, a North Korean worker was deported after wandering into the home of a high-ranking police officer. “There was an incident early this year where a North Korean agent brought home a worker who was caught making critical comments about the North,” a local source said.

Additional Information:

1. Here is a link to the full story excerpted above.

2. Here is the approximate location of the North Korean workers’ camp in the UAE.

3. According to IFES:  North Korea established ambassador-level diplomatic ties with the United Arab Emirates on September 18, [2007]. A joint statement said the two countries aim to “enhance understanding and boost the links of friendship and cooperation between their two peoples.” Ties with such an oil-rich nation on friendly terms with Washington could be significant as the North moves to dismantle nuclear facilities.

4. This story highlights a strange DPRK-UAE-Unification Church connection.

4. Here is a link to a similar story about North Korean loggers working in Russia.

5. North Korean workers were recently deported from the Czech Republic.

According to the AFP:

South Korea said Monday it would provide 26 billion won (22.2 million dollars) for humanitarian projects in North Korea, the second donation this month to its communist neighbour amid easing relations.

The unification ministry said it would donate 15.2 billion won to the World Health Organization’s programme for malnourished children and 4.7 billion won to the UN Children’s Fund UNICEF.

Spokesman Chun Hae-Sung said some six billion won has been allocated for a variety of other projects run by private groups.

“We decided to assist North Korean infants and children through private and international organisations, after considering the urgent situation in North Korea,” he told a briefing.

On December 18 the South shipped swine flu medication worth 15 million dollars to the North.

It was the first direct aid to Pyongyang from Seoul’s conservative government since it took office in February 2008.

Relations between the two Koreas have been interesting recently.   Official assistance from the South Korean government is at a near-term low, and the South Korean government spent little of the funds it appropriated for inter-Korean projects this year (See: here, here, and here).  South Korea has also tightened import rules for a number of North Korean goods (to protect local businesses), halted the export of luxury goods to the DPRK, and blacklisted DPRK businesses sanctioned by the UNSC. In addition, 2009 saw turmoil in the Kaesong Industrial Zone and a (predictable) naval clash along the NLL.

“Economic relations,” however, seem to have turned the corner recently.  Despite several months of decline, inter-Korean trade increased in the past two months.

According to the Choson Ilbo:

Christian Dietrich, a member of the UN Security Council committee investigating Congo, told VOA that the North Korean ship Birobong arrived in the port of Boma, Congo on Jan. 21, where it unloaded some 3,400 tons of weapons, 100 times the amount seized in Thailand earlier this month.

Dietrich said the committee was told the weapons were “modern” but was unable to find out any details. Assuming all the weapons were AK rifles, the weight would be equivalent to about 800,000 of them, he added.

North Korea in May also sent military instructors to train Congolese government soldiers for about four weeks, around the time the North conducted its second nuclear test.

Dietrich said there are indications that North Korea was the source of state-of-the-art weapons carried by insurgents in eastern Congo. In some cases, Congolese government soldiers have sold their arms to neighboring countries such as Zimbabwe, he said.

Under UN Resolution 1807, adopted in 2008, the UN must be informed in advance of all arms transactions with and military training for Congo, but North Korea did not. The UNSC committee is a watchdog that oversees implementation of the UN resolution.

Additional information:

1. Here is a link to the story about the arms intercepted in Thailand (Including updates).

2. The DPRK has long been involved in African political, economic, military, and cultural affairs.  When I read this story I immediately thought of Zimbabwe’s 5 Brigade which was trained by the North Koreans.  Here are a few stories which are related to the DPRK and Zimbabwe.

3.  The North Koreans also constructed the statue of Laurent Kabila in Kinshasa. The statue is located here.

According to CNN:

The Beijing-based Jinghesheng Investment Company has partnered with the Democratic People’s Republic of Korea (DPRK), North Korea’s formal name, to exhibit — and sell — 60 oil paintings and 30 traditional Korean ink paintings.

“They were all carefully selected by the DPRK’s Ministry of Culture,” said exhibit director Li Xuemei. Although North Korean artworks may be available in some galleries in China and other countries, said Li, “you don’t really know where they came from, but ours are surely authentic artworks from DPRK.”

Inside a hall, the gallery showcases works of twenty North Korean artists affiliated with museums and art academies in Pyongyang. Li said the gallery receives as many as 100 visitors a day on the weekend and about 60 on weekdays.

The pieces depict landscapes and modern life. Many were painted by seasoned Pyongyang artists who hold honorific titles as “People’s Artists” and “Merit Artists.”

One oil painting, a socialist realist piece entitled “Huge Waves in the East Sea,” is three meters high and ten meters long and covers an entire wall of the gallery. Four artists collaborated on the painting using a wide scope of greens and blues to create textured and turbulent waves crashing into taupe gray rocks against a backdrop of blue sky.

The collection also includes watercolors, elegant portraits of Korean women in modern and traditional dress and wildlife.

Li said the artwork is only sold to elite customers, typically Chinese entrepreneurs in affluent cities like Hong Kong, Guangzhou and Dalian. She said 30 percent of the works on display have already been sold, but she declines to quote any prices.

“Many people chose to collect this art because North Korea is a country still closed to the outside world, although it is seeking to open up in the future,” Li said. “This makes North Korean artworks a good investment. Some artists have already passed away, making their work more unique and valuable.”

While the arts’ value may increase over time, their North Korean artists will not see any cash returns.

“In North Korea,” Li said, “art is not private property and the value made from the sales will go directly to the state.”

One artist and three North Korean government officials flew into Beijing to attend the opening of the show but stayed away from the media and declined to be interviewed.

…

While contemporary North Korean art is typically laden with a heavy message, the artworks showcased in the 798 art district leaves out traces of politics or propaganda. New collections of North Korean art will rotate through the gallery until in the coming months.

“We’ll show artworks on rotation,” Li said. “We’ll show different styles in the next collection.”

Additional Information:

1. The gallery is located in Beijing’s 798 district located here.

2. Pictures of the gallery and art can be seen here.

3. Nick Bonner has his collection on display in Beijing as well.  His new web page is here.  His old web page is here. Mr. Bonner recently showed some North Korean art in Australia.

4. Felix Abt offers pieces by artists at Pyongyang’s Paekho Art Studio here.

5. David Heather sells North Korean art here and here from the Mansudae Art Studio.

6. A separate web page claims to be the official site of the Mansudae Studio here.

7. The Mansudae Art Studio is located here.

8. Here is another page claiming to sell North Korean art.  It seems to be based in Germany.

9. Here are a couple of books on North Korean art: Art Under Control in North Korea, North Korean Posters

10. Here is a book review of North Korean Posters which offers additional information.

According to Yonhap:

The U.N. development agency plans to restart its operations in North Korea in February after a two-year hiatus, a U.S. radio station reported Saturday.

Stephane Dujarric, spokesman at the U.N. Development Program (UNDP), told Voice of America that the remodeling of its Pyongyang office was completed in September and works are underway to install furniture and other equipment as well as to connect the Internet.

The office will become “fully operational” by the end of February, he said.

Currently, Jerome Sauvage, head of the UNDP’s Pyongyang office, and two other foreign staffers stay there, with two others due to arrive in Pyongyang in February, according to the spokesman. The UNDP has already recruited 13 North Korean employees, he added.

The UNDP launched development projects in the North in 1981 — including agricultural development, human resource development and economic reform programs. But it withdrew from Pyongyang in early 2007 after suspicions arose over the reclusive communist regime’s misappropriation of development funds.

On her visit to Seoul last month, UNDP Administrator Helen Clark said that her agency will reopen the office “with a small program — around $2.5 million a year and a very small number of employees.”

The UNDP, meanwhile, shut down its office in Seoul earlier this month as South Korea has transformed itself from a recipient of international assistance to donor.

Read the full article here:
UNDP to resume operations in N. Korea in February
Yonhap
12/26/2009

According to the US Treasury Department’s Press Release (h/t One Free Korea):

FinCEN Updated Advisory:
North Korea Government Agencies’ and Front Companies’ Involvement in
Illicit Financial Activities

VIENNA, Va. – The Financial Crimes Enforcement Network (FinCEN) today added an additional North Korean bank to its June 18 guidance to financial institutions regarding the involvement by Democratic People’s Republic of Korea (“North Korea”) government agencies and front companies in illicit activities. Based on new publicly available information, Kumgang Bank has been added to the list of North Korean banks. This update amends the FinCEN issuance of FIN-2009-A002, on June 18, 2009.

As further described in the guidance, the U.N. Security Council has called for enhanced monitoring of financial transactions, to prevent the financing of North Korea’s nuclear, ballistic missile, and other weapons of mass destruction (“WMD”)-related programs or activities. The Security Council’s action, combined with the potential that North Korea will attempt to evade these financial measures, illustrates the increased risk that North Korea and North Korean entities, as well as individuals acting on their behalf, pose to the international financial system and financial institutions worldwide.

FIN-2009-A002 can be read here.

Links to previous posts on sanctioned DPRK organizations (US and UN) can be found here.

According to the Choson Ilbo:

North Korea in late October informed the UN its food output this year was 5.01 million tons, it emerged on Tuesday. The yield included 2.34 million tons of rice, 1.7 million tons of corn, 560,000 tons of potatoes, 240,000 tons of wheat and barley and 150,000 tons of beans.

The figure represents an increase of 330,000 tons over the 4.68 million tons the North claimed last year. The original estimate was about 4 million tons.

North Korea’s rice harvest increased this year thanks to little harm from floods and droughts, according to North Korea sources. Corn output was poor due to cold-weather damage in the border region with China and Kangwon Province. “Kim Jong-il appears to have carried out the shock currency reform out of confidence that the food situation next year won’t be worse than expected,” speculated a source.

If it is not in urgent need of food aid, the North can afford to be tougher in its dealings with the South and the U.S. for the time being. But there is a chance that the North exaggerated the food output in a bid to demonstrate the success of a “150-day struggle” and a “100-day struggle” where people were swept off urban streets and forced into labor on the collective farms.

With 5.01 million tons of staples, the North would face little problem in feeding its population of 24 million for a year. Its late leader Kim Il-sung once said, “Daily food consumption is about 10,000 tons. If we had 5 million tons of grains a year, we would be able not only to dole out food rations but feed the people with sugar and candy.”

But the food shortage in the North arises not only from a chronic quantitative shortfall but also from uneven distribution and supply. The authorities place priority in food supply on the party and the military. The burgeoning merchant class can also manage. But the old, the weak and the urban poor, estimated at 10 to 20 percent of the population, are marginalized. “Organizations aiding North Korea also need to improve monitoring of distribution,” said a South Korean government official.

Meanwhile, the UN Food and Agriculture Organization said the grain output North Korea informed it of in mid-November was 3.53 million tons. A source said this was because potatoes and beans, which are included in ordinary grain yield estimates, were omitted. “The aim may be to get the maximum possible food aid from the international community,” the source speculated.

Previous posts citing DPRK agriculture statistics can be found here.

Previous posts about the DPRK’s agriculture policies and outcomes can be found here.

Previous posts about the DPRK’s food situation can be found here.

Read the full article here:
N.Korea’s Claims Food Output of 5 Million Tons
Choson Ilbo
12/23/2009