North Korean Economy Watch

The Daily NK recenty published some interesting “factoids” on the DPRKs creeping marketization.  Highlights below:

Real estate
“The sale of houses has become a natural occurrence in regions with the exception of farming areas, and even realtors, or “brokers,” have surfaced. Such a reality is rooted in the mass-scale provision of residential homes after the mid-90s, places where the famine victims had lived.”

“In the real estate market in Chongjin or Hamheung, one-story houses with two rooms and a kitchen are being sold for 2,000~3,000 dollars downtown. Recently, a new class called “donjoo” (which means the master of capital or money), which acquired wealth by hanging around the corrupt elite class, has been buying and selling luxury apartments in high-demand areas.”

“This does not mean that a change in the legal system has allowed the private ownership of real estate to be officially acknowledged. People can just change the name on the permit to live in the state houses by giving bribes to government affiliates within the relevant departments.”

Small-scale manufacturing
“In fishing villages, 12 and 14-year old middle-school students are employed for 1,100~1,300 won per day to make nets. This surpasses the 2,000~3,000 won salary for teachers and 10,000 ~ 15,000 won for the most coveted job as a laborer in state-operated coal mines.”

Read the full article here
Real Estate Business Appears in North Korea
Daily NK
Kim So Yeol
8/7/2008

Excerpt from the Choson Ilbo:

Asan said Thursday it paid US$675,250 to North Korea to cover costs accrued by 10,380 South Korean tourists who visited the mountain resort on July 1-11, until the tours halted after a South Korean tourist was shot and killed by a North Korean soldier at Mt. Kumgang.

Asan sends the payment at the end of each month, at the rate of $30 per person for a one day tour, $48 for two days or $80 for three days. Later this month, Asan will pay a further $928,560 to the North to cover the cost of trips to another tourist destination, Kaesong City. The cumulative payments Asan made to the North for the first six months of the year amounts to $10.7 million for the Mt. Kumgang tour, and $5.1 million for the Kaesong tour.

Read the full story here:
Asan Pays N.Korea for July Tours
Choson Ilbo
08/08/08

Despite tensions between North and South Korean this year, South Korea is still delivering promised energy aid to the North:

Under a six-nation accord signed last year, South Korea has started delivering energy assistance to North Korea.

This week’s shipment included 600 tons of round steel bars.

Seoul has so far provided assistance worth 124,000 tons of heavy fuel oil.

Read the full story here:
South Korea supplies the North with energy
Birmingham Star
08/08/08 

North Korean Cigarette Production: Chinese Cigarettes Disappear
Daily NK
Moon Sung Hwee
8/12/2008

The market share of North Korean cigarette manufacturers has been increasing because North Korean cigarette factories have turned their gaze on domestic low-priced brands instead of counterfeit products.

A source from North Korea explained on the 8th that “There are lately dozens of cigarette brands which are being produced in North Korea, from low-priced ones to expensive ones made for high officials. Now, we rarely see people looking for foreign-made cigarettes in the markets.”

He added that “We can see 500 won per pack cigarettes and also cheap brands, like 300 won cigarettes which are made by individuals. When compared to rice prices, cigarette prices have sharply declined, as well as their quality having advanced when compared to the pack price.”

According to the statistics of the Korean International Trade Association, since 2000 imports of Chinese cigarettes have increased every year and in 2003, reached a maximum of 9.4 million dollars.

The source continued, “Competition to obtain Chinese cigarettes among Cigarette smugglers was keen, but now, consumers of North Korean cigarettes are increasing in number and the productivity of manufacturers is increasing as well. Therefore, individuals who produced cigarettes at home took a heavy blow to their business.”

North Korean cigarette makers converted from counterfeit to private development

Since the early 1990s, North Korea has felt keenly the necessity of earning foreign currency after suffering the aftereffects of the collapse of socialism in Eastern Europe. Accordingly, North Korean authorities have had an interest in producing and trading drugs and counterfeit cigarettes that need a low initial investment and quickly convert into money. Since 1992, North Korea has mass produced imitations of Mild Seven, Crown, 555, Dunhill and other international brands.

When suffering the “March of Tribulation” in the late 1990s, middle managers started taking an interest in counterfeit cigarette markets, which had been occupied by the authorities. In Nampo, Pyongsung, Pyongyang and other big cities, with the appearance of counterfeit cigarettes made by individuals, competition between the national cigarette traders and private manufacturers in the jangmadang started. Workers of cigarette factories kept secretly packing papers of the counterfeit cigarettes and sold them to the private manufacturers.

The North Korean authorities eventually took measures to punish the private manufacturers, to confiscate their products and search the workers’ bodies one by one.

However, after printers were allowed to be used in some factories related to IT departments of universities in 2002, managers of printers being in collusion with private manufacturers started printing the packing papers of cigarettes.

Production of tobacco leaves privately, manufacturing of cigarettes by the factory

After the start of the 2000s, North Korean authorities turned their gaze on domestic demand for cigarettes. The biggest North Korean cigarette factory is Ryongsung Cigarette Factory, where most counterfeit cigarettes made by North Korea were produced. As sales increased since 1997, the No. 39 Department of the Workers’ Party, which operates, accumulates and manages Kim Jong Il’s slush funds, has been directly operating the factory. The top quality counterfeit cigarette in North Korea, CRAVEN “A,” so called “Cat cigarette” by North Koreans, are produced in the factory.

The past price of CRAVEN “A” was much more expensive than Chinese cigarettes, such as Hongmei, BAT, Zhangbaishan and Tianping, being equivalent to two kilograms of rice. However, among cadres and the wealthy they were excessively popular. At the time, Chinese brands of cigarette in North Korea were generally valued at around the price of one kilogram of rice.

With profits increasing since 2003, North Korean authorities have tried to increase production by re-opening ruined factories that had closed their doors for lack of resources during the March of Tribulation.

In 2002, “Rasun” and “Sunbong,” which were produced in cooperation with Chinese entrepreneurs, came out in the Rajin-Sunbong area at a lower price than Chinese cigarettes.

Competition between factories to produce high quality and tasty cigarette toughens

Meanwhile, some of private manufacturers who went under in the competition have disappeared from the cigarette market or been merged with big factories.

There is no reason for being poor if North Korea works like it produces cigarettes

The source said that “These days, affiliates with cigarette factories buy dried tobacco leaves from individuals.”

According to the source, on seeing the high quality of cigarettes, people currently say, “That’s the reason why we should open and reform our market and system. If we produce other goods like we produce cigarettes, we won’t have any reason for being poor anymore.”

The Ryongsung Cigarette Factory in Pyongyang produces “Pyongyang,” “Geunseol (construction),” “Hyunmoo (a kind of mythological animal),” “GGoolbeul (Honey Bee),” “MT. Daesung,” “Dongyang (the Orient),” “Saseum (Deer),” and “Galmaegi (Sea Gull)” and the Sungcheon Cigarette Factory produces “Haedangwha (Sweetbrier),” “Yonggwangro (Furnace),” “Deungdae (Lighthouse),” and “Manbyungcho (a name of a herb).”

Koksan Factory in Hoiryeong produces cigarettes for soldiers; “Baeseung (ever-victorious),” “Ildangbaek (a match for a hundred),” “Chobyung (Sentry),” and “Poongnyon (a fruitful year).”

UPDATE:  (Reuters) Secretary of State Condoleezza Rice told Japan that Washington would not remove North Korea from a US list of state sponsors of terrorism on the initial deadline of Monday, Japan’s foreign minister said.

ORGINAL POST: Marcus Noland comments in a Newsweek International op-ed how recent US policy changes towards North Korea (delisting the DPRK as a state sponsor of terror and exempting sanctions under the Trading with the Enemy Act) amount to very little:

Lifting the trade restrictions will have a minimal impact. North Korea will remain one of a few countries that does not have normal trade relations with the United States, meaning its exports will continue to be subjected to punitive tariffs of up to 90 percent.

Removing North Korea from the terrorism list means that Washington can now legally support it for membership in international financial organizations such as the World Bank. But the White House is under no obligation to actually do so. North Korea also remains excluded from US government programs that encourage trade and investment.

North Korea’s declaration will trigger a reconvening of the Six-Party Talks, which includes China, South Korea, Japan, and Russia. The inadequate nature of the declaration guarantees there will be yet another round of negotiations in which North Korea will reveal a bit more in return for further concessions. It is no accident that up to 50,000 metric tons of US food aid is expected to arrive in North Korea early this month. 

Writing in 2004 (yet relevant today), Marcus Noland wrote about these issues in depth.  Below are excerpts from his op-ed on US tariffs:

US importers of DPRK products are required to obtain prior approval from the US Treasury’s Office of Foreign Assets, certifying that the products were not produced by North Korean entities designated as having engaged in missile proliferation. Subject to this condition, approval is routine. US government officials report that they receive only a handful of such requests each year. Their impression is that business conditions in the DPRK pose a greater impediment to bilateral trade than the regulatory regime.

…

So, at present, with the exception of military-related products, there are few specific legal restrictions on the ability of Americans to export to or invest in the DPRK. Imports are subject to a prior approval process, but this is based on a transparent and narrowly delineated certification requirement.

Yet there is little trade between the United States and the DPRK. North Korea is among the few countries that the United States does not grant normal trade relations (NTR) status to, and North Korean exports are subject to the so-called column 2 tariff rates established by the infamous Smoot-Hawley Tariff Act of 1930. These tariffs tend to be the highest on labor-intensive products such as garments, in which North Korea is conceivably competitive. Though their incidence is an accident of history, and not an intentional slap, the column 2 tariffs represent a serious potential impediment to trade. Some countries, notably China, have successfully exported to the United States despite being subject to the higher column 2 tariffs (though even China eventually gained NTR status on a year-to-year basis). Most countries that have recently obtained permanent NTR, such as China, have done so through the World Trade Organization (WTO) accession process. The DPRK has shown no interest in joining the WTO.

This disinterest is unfortunate. The United States does not grant the DPRK quotas under the Multi-Fibre Arrangement (MFA), a worldwide network of bilateral trade quotas on textiles and apparel (due to expire in 2005), and WTO accession could aid the DPRK in this regard. In the case of the similarly diplomatically problematic Burmese government, the US government found it politically easier to accept an increase in Burmese exports to the United States than to negotiate publicly a textile agreement under WTO auspices with the repressive regime. WTO membership has its privileges. In any event, the DPRK is one of the rare countries that chronically do not fill their MFA quotas in Europe, where there are no sanctions, suggesting that the problem lies in DPRK’s inability to compete, not in trade barriers.

However, should the DPRK obtain NTR status, the United States would likely classify it as a nonmarket economy (NME) and subject it to onerous antidumping rules on the Chinese template. The point is that improved diplomatic relations is no panacea—the United States can be protectionist on purely economic grounds, regardless of politics.

Conversely, the United States trades with some low-income countries preferentially, unilaterally granting them limited tariff-free access through the Generalized System of Preferences (GSP), subject to standards concerning workers’ rights, intellectual property protection, and drug trafficking. Given North Korea’s disregard for internationally accepted labor standards, it is inconceivable that the United States would grant North Korea GSP privileges under current practices, even if diplomatic relations were normalized. Yet China, which has never received GSP privileges, vividly demonstrates that it is quite possible to prosper without such advantages.

Today, internal conditions and practices in North Korea, not legal restrictions, greatly impede bilateral trade. However, with sufficient reform and improvement in competitiveness, a broad range of policy issues would become increasingly relevant. In this regard, DPRK accession to the WTO would be advantageous. In the meantime, rather than complaining about US policy, North Korean officials would be better served by redoubling their reform efforts.

For more information, read the full articles below:
Partially True Confessions: How Big is the North Korea Deal?
Marcus Noland, Peterson Institute
Newsweek (Link via the Peterson Institute)
7/7/2008

The Legal Framework of US–North Korea Trade Relations
Op-ed in JoongAng Ilbo, via the Peterson Institute web site.
Marcus Noland
4/27/2004

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-8-8-1
08/08/08

According to Choi Hyun-soo, vice director of the DPRK Department of Agriculture, “The issue of increasing agricultural production is related to the serious political issue of the fate of the construction of a strong and prosperous socialist nation, and even moreso, the fate of our style of socialism,” rather than simply an issue of economic affairs.

In an interview published in the latest issue (July 24) of the DPRK Cabinet publication, “Democratic Chosun”, Vice Director Choi stressed that several years of natural disasters had prevented last year’s grain production from reaching a satisfactory level, making increased grain production this year an even more important issue. While Choi recognized the impact of the natural disasters, he also blamed the “villainous isolation and oppression machinations of the imperialists” for causing the North’s scant grain production. He also pointed out that the sudden jump in rice, corn, wheat and other grain prices around the world has been cause for concern, and “these days, there are no countries offering food or in a position to provide it.”

He went on to state, “If countermeasures to prevent damage during the monsoon season cannot be implemented, farmland and crops could be severely damaged,” and the lack of heavy rains is no reason for complacency, but rather, efforts to prevent flood damage need to continue. The (North) Korean Central Broadcasting Station also reported on July 24, “Good agricultural cultivation is an important political task,” and, “Good agricultural cultivation and easing of the eating problem is precisely the utmost important matter for the success of socialism and the protection of our system and ideology.”

Choson Ilbo
8/7/2008

It seems likely that North Korea will finally join the worldwide web and provide Internet service from next year. Kim Sang-myung, the chief of the North Korea Intellectuals Solidarity, a group of former North Korean professionals, at a symposium in the National Assembly on Wednesday said, “According to the Internet Access Roadmap it launched in 2002, North Korea will begin providing Internet service for special agencies and authorized individuals as early as next year.”

Kim defected from North Korea in 2004, when he was a professor of computer engineering at Communist University. An expert on North Korea’s information technology, he is currently an adjunct professor at Kyonggi University and a fellow at the Institute of North Korea Studies.

Implementation of the roadmap, which major agencies such as the Workers’ Party, the Ministry of Post and Telecommunications, the Ministry of Electronic Industry, and the North Korea Academy of Sciences have pushed for under the instructions of North Korean leader Kim Jong-il since 2002, is now at its final stage, he said.

First of all, North Korea will establish infrastructure for a super-speed Internet service network by laying optical cables between Pyongyang and Hamhung and extending them to Chongjin and Shinuiju this year. North Korea has recently succeeded in consolidating security solutions for the prevention of online leaks of data to foreign countries and of online intrusions, and in enhancing service stability.

It has also recently finished necessary consultations with the Internet Corporation for Assigned Names and Numbers (ICANN) for the Internet service in North Korea. In this situation, North Korea can begin providing Internet service any time provided equipment for server and Internet-based relay systems is supplied, Kim said.

“North Korea is strongly determined to be part of the global community through the Internet,” he said. “After watching China and Vietnam control the Internet effectively although these countries have opened up Internet wireless networks since the early days of their opening, the North has concluded that it can now introduce the Internet service.”

Currently, North Korea provides only a limited service via a kind of Intranet called Kwangmyong, through which it is possible to access databases on scientific and technological information at North Korean central government agencies.

In the last several months the Daily NK has reported on North Korea’s anti-corruption campaigns, particularly in Sinuiju and Hyesan, major DPRK/China trade hubs. Additionally, we have seen stories of how the Chinese are making life harder for resident North Koreans in the run up to the Olympics.

These measures, both of which should have an adverse impact on trade volume between the two coutries—and thus on tax revenues—made this recent report in the Daily NK all the more surprising. China’s Yanji Customs House (along the North Korean border) has reportedly seen a 226% increase in tax revenue this year from trade with North Korea.

How can China and the DPRK make life difficult for traders/entrepreneurs and still see an increase in the value of traded goods and corresponding tax revenue?  According to the article:

Jilin Newspaper in China reported on the 4th that “[…]For the first half of this year, tax revenues vis a vis North Korea totaled 34.22 million Yuan, up 226.2 percent from the year before.

The newspaper continued, “During this period, entrepreneurs in Yanji imported 64 thousand tons of iron ore from North Korea; that is a 2.3 percent increase from the same period a year ago. Accordingly, the tax amount of collected was 29.13 million Yuan, which is 66.1 percent of the total tax revenue derived from North Korea.”

The Yanji Custom House covers seven border gateways with North Korea, such as Juanhe-Wonjeongri, Shazi-Saebyul, Tumen-Namyang, Sanhe-Hoiryeong, Kaishantun-Sambong, Naping-Musan, and Guchengli-Samjangri.

According to the Yanji Custom House statistics, the Naping-Musan border gateway, where iron ore collected from the Musan mine enters China, is the first ranked for commercial traffic, and Guchengli-Samjangri, the gateway for North Korean timber, is second.

Tonghua Steel Group, Yanbian Tianchi Trade Incorporated Compay, and Zhonggang Group purchased 50-year mining rights for North Korea’s Musan mine in 2005. Since late 2007 they had been discussing a seven billion Yuan additional investment in it but that failed due to conflicting views on cooperative investment rate proportions, methods of withdrawing invested funds and other issues. As a consequence of the stalled investment, the Musan mine’s exports to China have not grown relative to last year’s figures.

So most of the trade that goes through Yanji is in raw natural resources, particularly iron ore and timber, and trade in these resources seems to be carried out by Chinese companies and is probably supported (protected) by senior policy makers on both sides of the border.  Rather than looking at politics as an explanation, it might simply be another result of rising global commodities prices.

The tax windfall could come from one of two sources: A volume (unit) import tax (ex: $1 for each ton of iron) or an ad valorem import tax (ex: tax on the monetary value of the goods).  It is not likely they impose much of an export tax to make a difference.

If China imposed a unit tax, the revenue gains would have to come from surging imports.  In this case, it would be likely that the Chinese companies had fixed-price contracts with their North Korean suppliers, and that  the increase in global commodity prices simply made DPRK iron ore comparatively very cheap.  When (if?) global iron prices fell, we would expect to see China decrease imports from North Korea.  But according to the article, iron imports are up only 2.3%—not enough to explain the surge in revenue.

It is more likely that China imposes an ad valorem tax on North Korean imports and the contracts between the Chinese companies and North Korean suppliers are set at (near) market prices.  Simply put, taxing the monetary value of increasingly valuable imports has been beneficial for the Chinese government.  Even though production at the Musan Mine has not increased much, revenues are probably way up.

Given the status of the Musan Mine as the DPRK’s largest, it is likely that funds raised from this mine are firmly under control.  It would be interesting to know the customs receipts in Dandong, Laioning Province, across the river from North Korea’s Sinuiju.  Sinuiju seems to have suffered the brunt of the DPRK’s anti-corruption drive, and it is the main railway and trade artery between North Korea China.  Most of the companies targeted for inspection were in Sinuiju.  Have Chinese tax collections/trade rebounded there?

Read the full story here:
226% Rise in Tax Revenues at Yanji Custom House
Daily NK
Lee Sung Jin
8/6/2008

North Korean Posters is a colorful and engaging book for those interested in North Korean, communist, or socialist-realism art. Portraying over 250 North Korean posters from the past fifty years, along with English and German translations, the book is the most comprehensive collection of North Korean political art of which I am aware.

Each page offers vivid images of the values and goals the regime has tried, and continues to try, to instill in its own people.  In order to help readers, particularly those who did not grow up under socialism, get a sense of the themes highlighted in communist political propaganda, the art work is grouped into categories: Constructing the People’s Paradise, Undeterred Defiance (military), Loyalty and Devotion, Defending the Revolution, and United We Stand.

This colleciton was put together by a gentleman named David Heather, who according to Forbes:

… first encountered such work […] when he met a North Korean painter exhibiting at an art fair in Harare, Zimbabwe in 2000. They kept in touch, and in 2004 Heather accepted his friend’s invitation to visit the North Korean capital, Pyongyang, and to get a tour of his atelier: the state-run Mansudae Art Studio. In truth it’s more factory than studio. The complex, says Heather, covers 30 acres and houses around 1,000 artists making paintings, posters and other artwork, including nonideological pottery. Their output is used to decorate public buildings and subways, or is given as gifts to state officials.

While some posters are reproduced as prints, most are copied up to 100 times each by hand. Rarely are two such copies identical; each qualifies as an original artwork. North Koreans, says Heather, are used to doing many tasks by hand. On public lawns, for example, he has seen people cutting grass with scissors.

“I looked around the studios and had certain ideas,” says Heather, whose previous ventures include a child care business in the U.K. that failed in the 1990s. Before leaving Pyongyang he signed a contract with the studio to find markets for its artwork outside Asia.

Starting in 2004 he began shipping hundreds of works of art to London. He rented a gallery in Pall Mall and hoisted a North Korean flag outside. In 2007 he unveiled a public exhibition of his collection–the biggest ever of North Korean art outside Korea. “I was expecting demonstrations outside, people camping out, protests.” Instead he sold–from this exhibit and from a second, smaller one at London’s Foyles bookshop–some 100 propaganda posters, 30 paintings and 5 or 6 pieces of pottery. Most buyers were American. He says he hauled in a total of $220,000 for pieces he had bought for $50,000.

A few posters in the book will be familiar to DPRK visitors, since they often appear at prominent locations.  I commissioned two paintings in Pyongyang, and they are both in this book.  A few others can be seen in travelers’ photos. If you are interested in ordering the book, click here.  To learn a little more about how North Korean art is produced, order Art Under Control in North Korea here.  If you are interested in buying authentic North Korean paintings, contact the Pyongyang Art Studio.

UPDATE: Here are some exapmles from the BBC.

Institute for Far Eastern Studies (IFES)
(NK Brief No. 08-8-5-1)
8/5/2008

The latest edition (2008, no. 2) of North Korea’s quarterly economic publication “Economic Research” urged for further regulation of public finance in order to ensure that the public finances necessary for the construction of an ‘Economically Powerful State’ are available.

The journal, which was brought into South Korea on July 29, contained an article titled, “Further Strengthening of Public Finance Regulations at the Present Time [will serve as] Important Collateral to Completely Guarantee the Capital Necessary for Socialist Economic Construction.” In the article, it stressed, “Public finance regulation is one form of state regulation through the monetary sector,” and, “Public financial security for the construction of an economically powerful state varies considerably according to how regulation and distribution functions are carried out.

North Korea has set the goal of construction of a ‘Strong and Prosperous State (Ideologically, Militarily, and Economically Powerful State) by 2012, the 100th anniversary of the birth of the country’s founder, Kim Il Sung. In light of that goal, Pyongyang has prioritized economic prosperity for this year, the 60th anniversary of the DPRK government, calling for a ‘full-scale offensive’ by all the people of the North.

“Economic Research” stresses the following three points for strengthening public finance: 1) further strengthening the coordination of the state’s guidance for economic enterprises, 2) ensuring the utility of economic enterprises, and, most importantly, 3) strictly establishing public finance regulations.

In particular, the establishment of public finance regulations was defined as, “guaranteeing efficient use of capital through the protection and endless expansion of the country’s public financial resources, as well as the complete protection of the capital necessary for state and business operations and efficient elimination of all current misappropriation.” This type of statement makes it appear as if diversion and misappropriation of North Korean finances are regular occurrences.

The journal called for strengthening of management and organization for the financial offices of public finance centers, businesses, and organizations in order to effectively enforce public finance regulations, and for the creation of auditing committees at enterprises and organizations to ensure this takes place.