North Korean Economy Watch

UPDATE: I know all of you were wondering how the DPRK fared in the 2008 International Mathematical Olympics!  It is certainly the most under-reported story of the year!

North Korea improved over last year’s performance to capture 7th place! The team’s individual results can be found here.  Un Song Ri led his team to victory scoring a 97.94% and capturing 12th place individually.

Scoring ahead of the DPRK: China (PRC), Russia, USA, Republic of Korea, Iran, Thailand. 

ORIGINAL POST: I was perusing the Korean Friendship Association web site this morning, and noticed this post:

Author: Alejandro Cao De Benos
Subject: International Mathematic Olympics

A Delegation of 6 DPRK students (16 to 19 y.o.) and 2 professors from KIM IL SUNG University and Pyongyang Middle School Number 1, are now in Madrid to participate in the International Mathematic Olympics.

On 15th will be the opening ceremony, 16th and 17th the exams. 21st will be the closing ceremony. (100 countries participate)

After the exams, they are invited by the organizing Committee to tour Madrid city center, Aranjuez, Toledo, Salamanca and enjoy typical Flamenco dance.

I just said goodbye to them after sharing 5 days in the capital. They are studying day and night, eager to get the best marks in the competition.

Ri dongji, best of success for all the team!!

This competition originates in the former USSR and Warsaw Pact countries.  Some quick background info can be found on the competition’s Wikipedia site and official site.

Here are the annual results (grouped by country) since the competition started in 1959.  Of all these years, the DPRK (PRK) only competed in 2007-Hanoi (8th place – see team results here), 1992-Moscow (16th place – team results here), 1991-Sweden (Disqualified – the only team ever disqualified.  Not sure why—anyone out there know?), and 1990-Beijing (19th place – team results here).  Here are the results for all the individuals who have competed on the DPRK team.

Here is where the 2008 team’s results will be posted.  The web page gives a contact name (Ham Yong Chol) and email address.  Some enterprising journalist out there should try to get a story.  

UPDATE 2: According to the Associated Press:

[A South Korean] NIS official, who asked not be named, citing an internal policy, told The Associated Press that China had no plans to close all bridge links with North Korea “out of concerns of diplomatic friction with North Korea.”

The official also said China would not ask all North Koreans in China to leave, saying that Beijing plans to crackdown on North Koreans who illegally stay in China and Beijing plans to restrict renewing visas for North Koreans. 

UPDATE 1:  According to the Associated Press, China plans to close all the bridges to the DPRK during the Olympics, starting next month.  This will have a devastating impact on trade with Sinuiju, Manpo, Hyesan, Hoeryong, and many other trading hubs along the Chinese border.

ORIGINAL POST: According to an interesting article in Bloomberg (thanks to reader) China is acting to reduce the chances that North Korea issues will interfere with coverage of the Olympic games in Beijing this summer.

According to the article:

China asked some North Korean work units to leave the country or move their business operations during the Olympic Games, according to documentation from the North Korean embassy obtained by Bloomberg News.

Citing security issues, China asked North Koreans, except trade representatives and government-dispatched personnel, to leave by July 31 and not return until the end of September, the Korean-language statement said. The embassy in Beijing gave the order to North Koreans in a July 11 directive, according to a copy of the document obtained by Bloomberg News.

The order took effect from July 13 and those who delay departure would be fined or not allowed to reenter China, according to the document. Workers scheduled for dispatch to China from July 1 should delay their departure until Sept. 25, it said.

and…

It isn’t clear how authoritative the directive is. Five North Korean businessmen contacted by Bloomberg news provided different departure dates, or said they were not affected by the directive. The people refused to be identified in print, citing possible recriminations.

A press attaché at the Chinese embassy in Tokyo who declined to give his name said he wasn’t aware of the directive and that there would be no way to confirm its existence.

Read the articles here:
China asks some North Koreans to leave ahead of Olympics
Bloomberg
Hideko Takayama
7/15/2008

Report: China to shut down all bridges linked to NKorea during Olympics
Associated Press
7/21/2008

China to step up inspections at border with North Korea during Olympics to stop migrants
Associated Press
Kwang-Tae Kim
7/22/2008

UPDATE 13-August 28:   Yoon Man-jun stepped down as CEO of Hyundai Asan over the July 11 killing of the 53-year-old South Korean woman by a North Korean soldier at the North’s Diamond Mountain resort, the company said in a statement. The company quoted Yoon as saying that he wanted to take “moral responsibility” for the death. (ETN news)

UPDATE 12-August 8: Despite bringing a halt to tourism in Kumgangsan, South Korea sent arrears to the DPRK.  From the Choson Ilbo:

Despite stalemate over the shooting death of a South Korean tourist at North Korea’s Mt. Kumgang, tour operator Hyundai Asan made its July payment for tours to North Korea.

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.

Update 11-August 8: DPRK to expel all remaining ROKs from Kumgnag starting August 10.   

UPDATE 10-Auguts 4: KCNA issues statement. 

UPATE 9-August 3: Though no date was given, North Korea intends to expell most remaining South Koreans from Kumgang (Yonhap):

North Korea’s official media said earlier in the day that Pyongyang will expel all “unnecessary” South Korean personnel from the Mount Geumgang resort, where a South Korean tourist was shot dead by a North Korean soldier last month.

More than 260 South Korean workers are stationed at the scenic resort, according to Hyundai Asan, the South Korean tour organizer. 

UPDATE 8-July 26: North Korea succeeds in preventing shooting concerns from being mentioned in official summary of ASEAN meeting.

UPDATE 7- July 23: South Korean government prevents South Korean civic groups from visiting DPRK until the North’s government agrees to participate in shoting investigation. (Donga Ilbo) 

As of Tuesday, six organizations had been offered invitations to visit the DPRK (Donga Ilbo):

One hundred members of the Korean Teachers and Educational Workers’ Union applied for permits to visit North Korea during August. In addition, 120 South Gyeongsang Province officials including Governor Kim Tae-ho are reportedly planning to visit the regime.

Humanitarian organizations such as Good Neighbors International, Nanum International and the Korean Sharing Movement will reportedly send 40-150 delegates to the North in August (for the former two) and September. In addition, North Korean officials invited around 120 members of Peace Three Thousand, and the representatives of the two will meet in Gaesong on Saturday to discuss the invitation.

These organizations [would] stay two to four days in North Korea and [] attend joint meetings with the North Korean Teachers’ Union, visit North Korean industrial facilities, tour Mount Baekdu, and attend an Arirang performance – a play propagandizing the regime.

UPDATE 6- July 21: Suspension of the Kumgang Tours will cost the DPRK $20 million per year.  If South Korea suspends the Kaesong tours (to the city, not the industrial zone) it will cost the DPRK government $15 million. (Choson Ilbo)

Maybe these numbers are sinking in. According to the Donga Ilbo:

North Korean officials recently followed one after another in expressing their perplexity regarding the incident, and fell over themselves to invite a horde of South Korean civic groups in August. These recent moves by the North have led some to believe that the North Korean authorities have somehow changed its stance towards the South.

An American source who recently met with North Korean officials in China and a working-level official at a South Korean civic group also said, “North Korean authorities told us that the shooter was a ‘very young’ person.”

The source added, “North Korean authorities told us that the incident equally took them aback. They added that especially at a time when the South Korean authorities are anxious to give them 50,000 tons of corn, those who thought the incident was intentional simply do not know anything about their regime.”

Unification Ministry spokesman Kim Ho-nyun also confirmed the Dong-A Ilbo’s report that North Korea invited a large group of South Korean visitors to Mount Baekdu and Pyongyang.

The Choson Ilbo remains skeptical. 

UPDATE 5 – July 17: The North’s story has changed.  DPRK rejects South’s inspectors. Seventy percent of officials of the United Front Department who were in charge of foreign affairs with South Korea were expelled from their positions early this year. It seemed to be an initiative step for taming the Lee administration and controlling the South’s policy (Daily NK).

UPDATE 4 – July 15: South Korea ups the ante by threatening to suspend tours of Kaesong unless the DPRK participates in the Kumgang shooting investigation (Bloomberg). 

NKeconWatch analysis: Suspending tours to Kumgang is relatively expensive for both North and South.  Hyundai and the South Korean government spent a lot of money developing the facilities, and by this time, the North Koreans who were earning from the project have grown accustomed to the cash flow.  The tours of Kaesong are different, however.  The South invested relatively little capital in the Kaesong tours, so suspending them idles few of their resources but hits the pocketbooks of the North Koreans who sponsor the program.  Could the Kaesong Industrial Zone be turned into a bargaining chip? 

UPDATE 3 – July 14: South Korea officially casts doubt on North Korea’s portrayal of events leading up to the shooting based on CCTV video and an eyewitness account. (Choson Ilbo) 

UPDATE 2: This story in the Korea Times (h/t ROK Drop) seems to indicate that there was a witness to the shooting and that there were no substantial barriers or warnings that vacationers could wander into a restricted military zone.   

UPDATE 1: The North Koreans expressed regret for the shooting, but says the responsibility lies entirely with Seoul.  They also refuse to cooperate with the South Korean government in an investigation of the incident citing that they have already sorted things out with Hyundai Asan. Although South Korea’s President Lee Myung-Bak ignored the situation in a parliamentary speech he gave shortly after the shooting, the Unification Ministry has now publicly stated that the shooting was “wrong by any measure, unimaginable, and should not have occurred at all.” 

ORIGINAL POST:Tourism numbers at the Kumgnag resort were up this year, despite high political tensions. 

From the AP:

A North Korean soldier fatally shot a South Korean tourist Friday at a mountain resort in the communist North, prompting the South to suspend the high-profile tour program just as South Korean’s new president sought to rekindle strained ties between the divided countries.

The news of the unprecedented shooting of a 53-year-old woman at Diamond Mountain resort emerged just hours after new President Lee Myung-bak delivered a nationwide address calling for restored contacts between the two Koreas, which have been on hold since he took office in February.

Kim said South Korea would suspend future Diamond Mountain tours until it completes an investigation. The other some 1,200 tourists already at the resort are to complete their tours as scheduled by as late as Sunday, said Hyundai Asan, the South Korean company that operates the resort.

Links to full stories below the fold:

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Institute for Far Eastern Studies
NK Brief No. 08-7-17-1
7/17/2008

Recent transformations in the North Korean economy and society have led the government to draft policies to link the social welfare matrix to the social security law. The ‘Democratic Chosun’, a publication of the Central Peoples’ Standing Committee and the Cabinet, has on five occasions (April 3 and 4, May 14, 16, and 23, 2008) run articles titled, “Regarding the Social Security Law,” explaining recent changes to the law and its affects on the North’s social welfare.

This law contains six sections and 49 articles, the purpose of which is to strictly establish the structure and methodology of the nation’s social security system, and to protect the health of the people while providing them with secure and happy lives. Details of the law have not yet been made available.

North Korea established the National Social Security Law on August 30, 1951, although it was not actually enforced until after the April 14, 1978 Socialist Labor Law was passed. North Korea’s social security system is a means with which to control the country’s socialist economy, and also acts to restrict the lives of the people, as well. From when the September 8, 1948 Constitution was passed right up until today, North Korea has provided its people with social insurance and social security systems. Society’s sick, feeble, and handicapped receive treatment assistance or material support from the social insurance system.

By looking at past transitioning countries, one can see that transforming systems and quickly changing social and economic structures lead to linking of social security with social welfare in order to protect the society’s weak. In North Korea, the passing of the July 1, 2002 Economic Management Reform Measures and other sudden changes in the social and economic environments raised concerns regarding the issue of protecting the country’s most vulnerable. Combined with the North’s food shortages, the protection of the society’s elderly, children, pregnant, and other vulnerable elements has become a special issue of concern for North Korean authorities.   

NKeconWatch commentary:
This article surprised me.  Aside from this post, IFES updates are pretty well researched.  Does anyone really believe that the dejure intent and defacto incidence of legislation in North Korea are the same?  You would have to be completely ignorant of life in any communist country to actually believe the statement, “From when the September 8, 1948 Constitution was passed right up until today, North Korea has provided its people with social insurance and social security systems. Society’s sick, feeble, and handicapped receive treatment assistance or material support from the social insurance system.”

Not only is health care under-supplied in the DPRK, it is also not provided free-of-charge.  I am told by people who have had to obtain health care in the DPRK that you generally have to pay bribes to get access.  This was the reality of life in most communist countries. Here is a much better analysis of the supply of health care in the DPRK. 

As for the concern of North Korean authorities to maintain a social safety net during a difficult economic transition, this is no doubt true for a number of DPRK policy makers.  But the people who actually make decisions are still siding with security hawks who refuse to give aid workers and NGOs the freedom they need to effectively help people.

From the BBC:

A North Korean worker was killed and four others were injured in an accident in the Kaesong industrial complex in North Korea, Southern officials said.

It happened when a steel frame collapsed at a factory owned by a South Korean company, Pyeongan, on Wednesday.

An investigation into the cause of the accident is reportedly under way.

Two of the four injured are in critical condition, a spokesman for South Korea’s Unification Ministry said, according to Associated Press.

They are all being treated in a hospital in the zone.

Read the full story here:
N Korea worker killed in Kaesong
BBC
7/17/2008

Netherlands Centrum voor Handelsbevordering
27 September – 4 October 2008  
View the information flyer with more information here: it-tour_dprk.pdf

For the past decades, the Democratic People’s Republic of Korea (DPRK) also known as North-Korea has been one of the most isolated countries in the world. Until recently, foreign companies could hardly enter this country. Inspired by the economic successes of its neighbouring country China, North-Korea has since a few years opened its doors for foreign enterprises. The DPRK established several free trade zones to attract foreign investors. In 2002 North Korea started to experiment with the Kaesong Industrial Region, near the South-Korean border. Moreover, other areas were designated as Special Administrative Regions, such as Sinŭiju near the border with China.
 
Currently, China and South-Korea are the most important trade partners of North-Korea; their mutual trade is growing fast. Also for European companies there are many opportunities to trade with North-Korea. During the recent seminar: ‘Doing Business with North-Korea’ (The Hague, 30 May) the representative from North-Korea highlighted that there are business opportunities in several fields, including Textile Industry, Shipbuilding, Agro Business, Logistics and Information Technology.

DPRK finds itself at the beginning of a new era of openness. In North-Korea there is a need for many foreign products and investments. The Chamber of Commerce Amsterdam, GPI Consultancy and the Netherlands Council for Trade Promotion are organizing an economic mission to investigate the business opportunities for foreign companies in this country. This unique economic mission to North-Korea will take place from 27 September to 4 October 2008. Our partner in North-Korea is the Pyongyang Chamber of Commerce. Mr. Renze Hasper, Member of the Board of the Chamber of Commerce Amsterdam, will be the mission leader of this economic mission. 
 
The program includes individual matchmaking, company visits, network receptions and dinners. Furthermore, a visit is being planned tot the Kaesong Industrial Region.

GPI Consultancy is responsable for the IT-program of the mission. As an example, the program for the IT-delegates has been attached; they will visit firms in Pyongyang in the field of software development, animation, cartoons, computer games and BPO (Business Process Outsourcing). Similar matchmaking visits will be arranged for delegates from other business sectors.
  
The mission is open for participants from other countries as well.
If you are interested in joining this trade mission, please contact:

Paul Tjia
GPI Consultancy
P.O. Box 26151,
3002 ED Rotterdam,
The Netherlands
E-mail: paul@gpic.nl
tel: +31-10-4254172 
fax: +31-10-4254317
Website: www.gpic.nl 

North Korea’s agricultural and food markets suffer from a number of permanent constraints that prevent their efficient operation.  Rail transport is slow and/or unreliable, internal travel restrictions for “ordinary” merchants, and poor road conditions limit the distance food can travel before it goes bad.  Restrictions on communications and lack of a futures market makes it difficult to know how much food is available in each location, or what is expected to be available in each location.  This leads to hoarding, volatile prices, and a mismatch between local supply and demand.  Compounding these basic problems is a poor business environment characterized by collective farming practices, corruption, bribery, poor property rights protection, poor contract enforcement, and ex-post expropriation of profits.  Given these constraints, it is amazing agricultural and food markets work at all. 

In addition to these factors, the DPRK’s food markets suffered a number of adverse supply shocks this year from flooding, China’s restrictions on food exports, and a decrease in expected food aid from China, South Korea, and the US (See the effects on prices in this chart by Noland/Haggard/Weeks here). The arrival of food aid has since brought some of these prices down.

This week, the Daily NK reports on two other causes of price increases in the DPRK: Anti-corruption campaigns and restrictions on farming private plots.

Anti Corruption campaigns (more here and here)

He reported that “From March to late April, for almost 40 days, inspections were undertaken nationally. In Hwanghae Province, the inspection groups under the Central Court came down and confiscated food which the cadres in farms had embezzled. In some cases, they confiscated 500-1000kg of rice and grains from cadres’ households by searching with metal sticks in their backyard.”

The Director of the Ministry of Administration of the Chosun (North Korea) Workers’ Party Jang Sung Taek and his inspection group went to Shinuiju and inspected persons in charge of trading.

No. 112 Land System

The No. 112 land system operates whereby the authorities offer a certain width of fallow lands, which are different by grade of food distribution amount, to national public servants and clerical workers, given in order to make them solve their food problem by farming instead of relying on distribution. Ishimaru explained that “However, the new Kim Young Il cabinet abrogated this system and banned them from planting seeds on those fields.” 

Read the full story here:
Intensive Inspections in March and April a Direct Reason for Rise in Food Prices
Daily NK 
Kim So Yeol
7/4/2008  

UPDATE: From Voice of America:

North Korea’s foreign minister signed the Treaty of Amity and Cooperation – often called the TAC – at the conclusion of the Association of Southeast Asian nations regional security forum, Thursday in Singapore.

The deal was drafted in 1976, and has been signed by all of ASEAN’s ten members, plus 14 other nations including South Korea, with whom North Korea has never formally concluded its 1950s war.

Alan Chong, a political science expert at the National University of Singapore, says the TAC is very general, but sets a framework for peace.

“It has been morally binding in a positive way rather than legally binding. It is a diplomatic device that commits signatories to this notion of a minimal peaceful coexistence, you know, ‘Don’t resort to the use of arms and other physical hostile measures the moment you have international disputes,'” said Chong.

ORIGINAL POST: According to Bloomberg:

North Korea agreed to sign the Association of Southeast Asian Nations’ non-aggression treaty, Kyodo News reported yesterday, citing a letter by the communist state’s Foreign Minister Pak Ui Chun.

North Korea has requested the treaty not be imposed on its relations with countries outside the 10 ASEAN members, the news service said, citing the letter from Pak to Singaporean Foreign Minister George Yeo, ASEAN current chairman.

ASEAN member nations: Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam.

Read the full stories here:
North Korea Signs On to Southeast Asia ‘Amity’ Pact
Voice of America
Kurt Achin
7/24/2008

North Korea to Sign ASEAN’s Non-Aggression Treaty, Kyodo Says
Bloomberg
Takahiko Hyuga
7/11/2008

Incredible! 

Burger Chain ‘Rebuffed N.Korean Overtures’
Choson Ilbo
7/10/2008
 
Influential North Koreans tried to bring McDonalds into the country, but the fast-food chain declined citing lack of profitability, Radio Free Asia reported Wednesday. RFA quoted Nancy Mazeska at MacDonald’s International Franchise Division as saying the person who contacted the chain probably had “political connections” and a “history of success in North Korea.” But due to the poor infrastructure and distribution network and probable lack of demand, McDonalds decided to take a rain check.

McDonalds at one point thought about letting its franchise in South Korea handle North Korean operations, she said. She did not comment further on who the businessman was and when he contacted the company. According to North Korean press, mass-produced hamburgers were distributed in universities in Pyongyang in September 2000 at the orders of North Korean leader Kim Jong-il.

Many thoughts are running through my head:

1.  Can you imagine?  The “golden arches” right next to the Arch of Triumph in Pyongyang.  Of course the North Koreans would make sure that their “golden arches” were the largest in the world—3 meters taller than the ones in America.

2. Rumor has it that no two countries with a McDonald’s in them have ever attacked each other…with one recent exception: the bombing of Serbia in the 1990s.  Despite the fact that McDonald’s is frequently targeted by anti-American activists, the opening of a franchise in Pyongyang would in fact be a great symbol of hope.

I remember visiting the first McDonald’s in the Soviet Union just after it opened in Moscow.  I stood in line for hours to eat food that tasted exactly like it did in America (of course I was living in England at the time and their food didn’t taste much better than the Soviets’).  The reason I stood in line for so long is because so many Russians wanted to try it as well, and it was finally considered politically acceptable.  The same would probably be true of Pyongyang residents, and the line out the door would be telling.

3.  The hamburger is not entirely unknown to North Koreans.  All outbound flights on Air Koryo serve a hamburger (or at least it is some kind of meat patty in a much larger bun with a piece of lettuce).  In business class, you get it on a plate.  I don’t think it is that great, but it is made in the DPRK.  Here is a bad photo I took of the alleged burger.

UPDATE: 4. ROK Drop wonders if they would have used US beef! 

As Marcus Noland has noted, one of the most difficult aspects of developing scenarios of North Korea’s future is that we do not know Kim Jong il’s vision for the DPRK after he has passed. Is he grooming members of his family to take his place or just to make sure they are wealthy and protected? Is Kim looking at China as a model? Some reports claim he is looking at Thailand’s royal family. What about a military dictatorship?

This week, Andrei Lankov weighs in with several scenarios he has outlined in four Daily NK stories:

Scenario 1:Kim Jong il follows the China/Vietnam model. Agriculture privatized along with a number of small- medium-sized firms. Workers Party remains in control. Lankov believes this scenario politically unobtainable since the inflow of knowledge of the outside world, particularly of the wealth in South Korea, will make incumbent political legitimacy almost impossible to maintain.

Scenario 2: The North Korean regime collapses because it does not have the power or resources to maintain its authority. If this happens, South Korean might not have any choice but to move to take over despite the high economic costs.

Scenario 3:If North Korea does collapse, South Korea does not have to be the only government to assert control in the territory. China has political and economic incentives to be heavily involved in North Korea’s re-composition, or to enter into a protective relationship with incumbent North Korean authorities. Market reforms would follow and opposition would be manageable.

Scenario 4: Weak political power gives various factions (including the military) space to revolt. Neither China nor South Korea want to get involved in an internal clash and North Korea descends into medium-term chaos.

Taking a step back, I use Lankov’s examples to build a broader scenario map using his drivers (regime strength/weakness and foreign intervention/non-intervention):

(Click on image for larger view)

Along the vertical axis is the strength of the DPRK’s central government. It is strong in the top two quadrants and weak in the bottom two quadrants. Along the horizontal axis is intervention or non-intervention by China or South Korea.

Using this framework, we see that Lankov’s first scenario falls into quadrant 2 (upper right), and economic reforms lead to a weakening of the central government, pushing the country into quadrants 3 or 4. This transition is based on the notion that the North Korean central government, or whichever coalition holds it together, can’t survive an economic transition, mainly due to the visible success of South Korea. I think this is an interesting argument, but I am not entirely convinced by it. Hong Kong is not inspiring revolts in China for the same reasons that North Korea does not need to fall prey to political upheaval—mainly, keep people from organizing and dispersing information, and make sure that some fraction of the productive gains from economic reforms are strategically redistributed as political rents. Of course, it would be interesting to see if a communist government could survive in Hong Kong if China was the giant, capitalist neighbor.

Special shout out to Herman Khan here.

Comments welcome.

ReadLinks to Lankov’s articles below the fold:
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