North Korean Economy Watch

From the Associated press (via the Herald Tribune)

North Korea is offering China US$100,000 (€64,500) to help earthquake survivors.

The North’s Korean Central News Agency said Saturday the country made the offer to China’s government, which is scrambling to cope with the aftermath of Monday’s magnitude 7.9 quake. It did not elaborate.

Read the full article here:
North Korea offers US$100,000 in aid for Chinese earthquake survivors
Associated press (via the Herald Tribune)
5/17/2008

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-5-13-1

Small and mid-sized Chinese companies are now looking toward North Korea. The Chinese press reported on May 5 that the industrial union of Dungta, a small city of just over 500,000 located south of Sunyang in Liaoning Province, recently spent seven days looking into opportunities in the North on the invitation of the Choson Bongwha Company.

The purpose of this recent invitation appears to be that North Korea is looking to improve small and mid-sized industrial activity by allowing foreign entities to set up shop. The North was seeking investment for an oil paint factory, a textile factory, and a rolling mill. The Chairija factory in China’s Dungta City is planning to invest three million euros (aprox. 470 million won) to set up a paint manufacturing facility in the DPRK.

The reason Chinese businesses are looking toward North Korea is that even in China wages have been growing sharply, and as labor laws are amended it has become more difficult to hire employees, driving up production costs and lowering the competitiveness of exports. Cheap and easy labor in North Korea is turning the eyes of many Chinese companies.

The importance of this latest visit by the Chinese industrial representatives was reinforced by the invitation by the Choson Bongwha Company, which specializes in commission-based textile production. This appears to be related to the North Korean authorities’ plan of boosting the standard of living throughout the country by hosting Chinese heavy industries. Recently in the North, companies have joined in partnerships with Chinese businesses to manufacture lighting and cigarettes, showing that Chinese businesses are also interested in enhancing their presence in North Korea’s domestic market.

Just as South Korea’s small and medium-sized businesses have turned to China in order to stay competitive, now Chinese companies are eyeing North Korea’s cheap labor force in order to maintain their edge.

With the likelihood that food is coming into short supply in North Korea, the authorities and individuals alike have implemented strategies to minimize the adverse effects.

I am keeping a running list of official and civil responses here as they appear in the media.

1. The DPRK supposedly ended rations for mid-level cadres (party and state employees), though food can still be purchased in markets. Unless the government is hoarding its grain supplies, this probably has the effect of improving food distribution (transferring food stocks outside Pyongyang), though not to the satisfaction of those who were used to receiving it for “free.”

2. The DPRK asked China for food aid. (Requested 150,000: tons of corn. Received: 50,000 tons on their first ask)

3. Propaganda extolling people not to waste food has been distributed to workers.

4. The DPRK has started cracking down on liquor production/sale.

5. Lets grow potatoes!

6. Distributing food stocks to military families from military warehouses.  This will hopefully take some of the pressure off the price of grains in the markets.

7. Solicit food aid from the US.

8. Officials begin to demand more bribes!

9.  The KPA halts military exercises to assist in farming.

10.  Propaganda campaign to educate the population about alternative foods (Good Friends via OneFreeKorea)

11. China increases food export quota

News of the DPRK’s food shortages began to surface several weeks ago when Good Friends reported:

North Korea’s chronic food shortage has worsened to affect even some of the country’s elite citizens in the capital, a South Korean aid group said Thursday.

The communist nation has not given rice rations to medium- and lower-level officials living in Pyongyang this month after cutting the rations by 60 percent in February, the Good Friends aid agency said in its regular newsletter.

Pyongyang citizens are considered the most well-off in the isolated, impoverished country, where the government controls most means of production and operates a centralized ration system. Only those deemed most loyal to Kim Jong Il’s regime are allowed to live in the capital.

The food situation is more serious in rural areas, with residents in many regions in the country’s South Hwanghae province living without food rations since November, the aid group said. (AP)

Why was this the case?

Floods last August ruined part of the main yearly harvest, creating a 25 percent shortfall in the food supply and putting 6 million people in need, according to the U.N. World Food Program.

Over the winter, drought damaged the wheat and barley crop, according to a recent report in the official North Korean media. That crop normally tides people over during the summer “lean season” until the fall harvest.

North Korea’s ability to buy food, meanwhile, has plunged, as the cost of rice and wheat on the global market has jumped to record highs, up 50 percent in the past six months.

China also appears to have tightened its food squeeze on North Korea for domestic reasons. In order to meet local demand and control inflation, Beijing slapped a 22 percent tariff on grain exports to the North. (Washington Post)

So North Korea’s domestic agricultural production has fallen and so have commercial food imports (international inflation, OECD government subsidies for bio-fuels, and increasing fuel prices have combined to raise the prices of commodities such as rice and pork up to 70% in the course of a year). 

Compounding this problem, however, agricultural aid from North Korea’s two most reliable benefactors (China and South Korea) has dried up.

[China] has quietly slashed food aid to North Korea, according to figures compiled by the World Food Program. Deliveries plummeted from 440,000 metric tons in 2005 to 207,000 tons in 2006. Last year there was a slight increase in aid, but it remained far below the levels of the past decade. (Washington Post)

And strained relations with the new Lee government in South Korea have not helped:

The South typically sends about 500,000 tonnes of rice and 300,000 tonnes of fertiliser a year. None has been sent this year and without the fertiliser, North Korea is almost certain to see a fall of several tens of tonnes in its harvest (Reuters)

So what will be the mitigating factors that prevent another humanitarian emergency?

“The reason for the mass starvation that occurred in late 90s is that North Korea faced natural disasters without expanding the market’s capability to substitute for the broken planned economy capability, and so the damage to North Korean citizens was inevitably large.”

“The market in North Korea has expanded in the last 10 years. The supply and demand structure of daily necessities, including food items, has been formed.”

“Because the market capacity has expanded, the possibility of a mass-scale starvation occurring is no longer high. In actuality, the change in food prices is being monitored at the market.”

-Dong Yong Seung, the Samsung Economic Research Institute’s Economic Security Team Chief, speaking at the 19th Expert Forum sponsored by the Peace Foundation (Daily NK)

Mr. Dong’s analysis addresses the improved efficiency of DRPK’s market supply chains but does not address the effects of an adverse supply shock. 

The UN seems ready to help, although it has not been asked:

Institutionally, mechanisms are in place in North Korea to ring the international alarm bell before hunger turns into mass starvation. The World Food Program monitors nutrition in 50 counties, and the Kim government has become expert in asking for help.

“The North Koreans know that they are facing a difficult situation and have made it increasingly clear in the past few weeks that they will need outside assistance to meet their growing needs,” the U.N. official said, asking not to be identified because of the sensitivity of the issue.

North Korea, which even with a good harvest still falls about 1 million tonnes, or around 20 percent, short of what it needs to feed its people, relies heavily on aid from China, South Korea and U.N. aid agencies to fill the gap.

The UN official said it was clear from a variety of sources that the food security situation was worsening in North Korea and that it needed to be addressed.

Last month Kwon Tae-jin, an expert on the North’s agriculture sector at the South’s Korea Rural Economic Institute told Reuters that if South Korea and other nations did not send food aid, the North would be faced with a food crisis worse than the one in the 90s.

The U.N. Food and Agriculture Organisation said in late March it sees the North having a shortfall of about 1.66 million tonnes in cereals for the year ending in October 2008.

The North will start to feel the shortage the hardest in the coming months when its meagre stocks of food, already depleted by flooding that hit the country last year, dry up and before the start of its potato harvest in June and July. (Washington Post)

The UNWFP, however, will be under pressure from its donors to monitor food aid and make sure it is not diverted to non-emergency uses.  Under these conditions, it is not likely that they will be asked to provide much aid until a catastrophy is already underway.  So with the UN out of the picture, who is best positioned to prevent the reemergence of a humanitarian crisis in North Korea today? China.  

Despite China’s own food probelms, however, it is always likely to capitulate, at least in part, to North Korea’s emergency requests.  China does not want to deal with another North Korean famine, particularly during the Olympic season, and they certainly do not want to deal with any political instability that could result. 

Yonhap reports that the DPRK has asked the Chinese for 150,000 tons of corn this year.  Chinas says they will give 50,000 tons–and that is just initially. (Yonhap)

UPDATE 4/14/2008: I still have not seen any reports in the media of Noth Korea seeking suport from Russia.

UPDATE 6/9/2008: China increases grain export quota to North Korea to 150,000 tons

(more…)

Last week we discussed the growing presence of North Korean companies in Russia.  This week, the Daily NK reports on China’s first steps at financial integration with North Korea:

China has introduced a new settlement system which allows North Korean business to open bank accounts in China and settle business transactions in Yuan, the Nikkei reported on Sunday.

With the adoption of the system, North Korean people and companies can open Yuan bank accounts within China after some formalities and use the accounts for trade settlement with their Chinese business partners. Accordingly, North Korea is now able to buy foreign currencies such as dollars and euros with its Yuan income from trade. In addition, North Korea can legally bring in foreign currencies or send them to third countries.

North Korean companies used to have difficulties of making a trade settlement with China in cash or by barter since the U.S. enacted financial sanctions on North Korea and China imposed economic sanctions regarding remittance and bank accounts after North Korea’s nuclear tests. However, China too suffered from the sanctions as the amount of Yuan smuggled into North Korea has skyrocketed proportional to the increasing volume of trade between North Korea and China.

The new settlement system will help reinvigorate the trade between two countries. However, the system can cause concerns at the Six Party Talks as it lowers the bargaining power needed to pressure North Korea to give up its nuclear programs, the Nikkei said.

Meanwhile, the People’s Government of Yanbian Korean Autonomous Prefecture announced last February that Jilin Province would allow North Korean people and companies operating in China to open Yuan bank accounts for trade purpose starting with February 20, 2008.

You can read the full article here:
China Lifts Sanctions on North Korea
Daily NK
Park Eun Jae
4/9/2008

Stephen Haggard and Marcus Noland published a piece focusing on North Korea’s economic integration.  Download it here: petersoninstitute.pdf

Although not the focus of the piece, here is an excerpt:

A first corollary of the injunction to avoid top-down approaches is that any collective development assistance must be extended in support of economic reform. Experience throughout the developing world demonstrates that assistance will have only marginal effects and may even have negative consequences if not coupled with policy changes. It is not simply that aid sustains the regime; since aid is fungible, even purely humanitarian aid will have that effect. The problem is that too much aid can delay or even undermine the reform process. Whatever the multilateral mechanism that ultimately emerges, it should encourage reform and economic opening in the North.

A second corollary of the injunction against top-down approaches is the importance of engaging the private sector: through trade, foreign direct investment, private capital flows (including remittances), and sheer expertise. Economic rehabilitation will require investment in social overhead capital, which will be led primarily by the public sector. But if North Korea is to evolve toward a self-sustaining market-oriented economy, private-sector involvement will be crucial. Participation of foreign firms means that projects are subject to the market test of profitability, and it encourages North Korean authorities to think of economic engagement in terms of joint gain rather than as political tribute.

(and)

North Korea is in need of depoliticized technical assistance for a whole panoply of issues running from the mundane but critical, such as developing meaningful national statistical capabilities, through basic agricultural and health technologies, to social infrastructure of a modern economy. This infrastructure includes policy mechanisms to manage macroeconomic policy, including through reform of the central bank; specify property rights and resolve commercial disputes; regulate markets, including financial markets as they emerge; establish and implement international trade and investment policies; and so on.

Read the full paper here:
A Security and Peace Mechanism for Northeast Asia: The Economic Dimension
Staphen Haggard and Marcus Noland
Peterson Institute Policy Brief
April 2008

Writing in today’s Asia Times, Dr. Leonid Petrov analyses the complexity of Russia, Rok, DPRK, and Chinese relations:

Russia and North Korea:

Territorial claims, in one form or another, involve almost all countries adjacent in this region with the exception of Russia and Korea. The Joint Russian Federation-DPRK Commission for the Demarcation of State Borders has recently completed its work by documenting and marking the 17-kilometer frontier. This strip of uninhabited and swampy land in the mouth of the Tumannaya (Tuman-gang) River plays an exceptionally important geopolitical role. It not only provides the two countries with land access to each other, but also prevents Chinese access to the East Sea (Sea of Japan).

China and North Korea: 

Here, some 50km north of the small port that forms the core of North’s Rajin-Seonbong Special Economic Zone, the interests of Russia and China are now at stake. Russia is rapidly repairing the railroad track, and China (in a similarly speedy manner) is constructing a new automobile highway, both leading from their respective borders to the port of Rajin. Russia, investing at least 1.75 billion rubles (US$72 million) into this project, seeks to strongly connect Rajin (and the rest of northern Korea) to its Trans-Siberian Railroad. China, in turn, hopes to divert the growing cargo traffic to its own territory, offering the efficient network of railroads for delivery of South Korean and Japanese goods to Central Asian and European markets. What position will the government of North Korea take in this clash of ambitions?

Russia and South Korea (energy and trade):

In 2007, the volume of the export of “black gold” from Russia to South Korea reached 38.13 million barrels (2.7 times more than in the previous year). The relative proximity of the Russian oil and gas fields is an attractive factor for Korean companies who actively search for alternatives to Middle East oil suppliers. This year South Korea will for the first time start importing natural gas from Russia. The expected volume of delivery during 2008 is 1.5 million tons (or 5.1% of South Korea’s annual demand).

and

Trade relations between Russia and Korea are steadily growing. According to customs statistics, last year Russia recorded the sharpest increase of South Korean imports (56.2% more than in 2006). Due to the inflow of “petro-dollars” the new class of nouveaux riches in Russia began actively buying Korean automobiles, cell phones, television sets and LCD monitors. South Korea exported to Russia goods worth US$8.1 billion (including $3.296 billion of automobiles, $859 million of mobile phone equipment, motor vehicles and spare parts worth $659 million). As for trade with North Korea, in 2006 Russia occupied third place after China and South Korea and absorbed 9% of the total $3.18 billion spent by the North on imports.

More on Russia/South Korea energy talk here. 

The whole article deserves reading here:
Russia lays new tracks in Korean ties
Asia Times
Leonid Petrov
3/5/2008

The Daily NK covers the release of KIEP’s analysis of North Korea’s external trade in 2007.  I cannot find the report in English, so I have to take the Daily NK’s word for it–insert caveat here.

Here are the highlights:

• The estimated total value of North Korea’s foreign trade decreased from US$2.996 billion 2006 to US$2.7 billion in 2007.

• China occupies 70% of the trade volume, up from 56.7 in 2006 (a startling increase).

• Trade with Japan fell to US$900,000, a decrease of 92% from 2006 (so it appears that some Chinese are getting rich from international trade restrictions).

• Trade with Thailand fell 42.4% since the nuclear test.

• Trade with the EU fell by 53.2% since the nuclear test.

To be honest I do not trust these numbers, so if someone comes across the KIEP report in English, please send it to me.

According to the Daily NK, the KIEP report is called: “Economic Prospect of North Korea in 2008” by Cho Myung Chul and Hong Ihk Pyo

The full story can be read here:
North Korea’s Economic Prospect for 2008
Daily NK
Yang Jung A
3/3/2008

Kang: North Korean Trade Potential
Council on Foreign Relations
12/17/2007

Last December, David C. Kang, a professor of government at Dartmouth College and an adjunct professor at Tuck Business School, discussed the North Korean economy for the Council on Foreign Relations. I have excerpted some of his comments below.

His view on the new North-South cargo train service:

It doesn’t have huge economic significance in the overall GDP of North Korea. But it does have major economic significance in the fact that what North Korea had to do in order to let a train go through was an awful lot of adjustment[…]in terms of linking up the railroad, all the ministries had to prepare.  The old [Korean Energy Development Organization] had this problem as well. [W]hen they wanted Americans and South Koreans working in North Korea to build this light-water reactor, [they] had to set up protocols [Post offices, phone calls, where they were going to stay, etc]. It is pretty significant in terms of how much they had to adjust.

He quoted the following figures on North – South trade:

From $200 million in 1998, to now exceeding $1.7 billion in 2007.   South Korea’s total trade volume is $250 billion.

His opinion on the direction of the North Korean economy:

At this point what we’re seeing is very initial steps on the part of North Korea as they try to open up reform and yet maintain control. At the same time, they are being forced into a number of institutional changes and mind-set changes that are the first step forward in this process.

His view of North Korea’s comparative advantage:

Most of the companies that have gone in—the South Korean companies that have gone in—are assembly and light manufactures, such as or textiles and light consumer goods. This is the sort of obvious point of departure. It’s not hugely capital intensive in terms of building factories, and can take advantage of North Korean cheap labor and South Korean technological advantages.

There are a lot of potential mineral resources in North Korea, which would require a whole infrastructure of legal reforms to happen before anyone would take care of them. But at this point the safest bets are the ones that are on the order of assembly and light manufactures in the North and then exporting them out.

His view of South Korea’s long term goals:

If there’s unification, or even better relations, and South Korean companies can use cheap North Korean labor, instead of having to send those factories to China or Vietnam—not only do they speak Korean, they’re culturally similar, and the labor would be cheaper.

[I]f you could reconnect the railroads, from Japan, through Pusan [South Korea], up through North Korea, then out to China and Russia, you would be linking up all these economies in a much more efficient way than they are now. So everybody wants that. But obviously there’s the political problem. And even on the infrastructure side, the North Korean rail system is so old and so decrepit, that basically it would have to be rebuilt from zero. But the potential upsides are massive, in the long run.

His view of China’s engagement:

China has been essentially as deeply involved in economic engagement with North Korea as has South Korea—and by some measures, actually more so. Whereas South Koreans just do this assembling, some Chinese companies are moving in and building full factories in the North. There’s a lot of interest in Chinese-North Korean economic relations on both sides.

Yonhap
2/12/2008

North Korea will begin using more than a hundred new buses with air conditioning for the convenience of a growing number of foreigners visiting Pyongyang, a U.S. government-funded radio station reported Tuesday.

Pyongyang’s municipal people’s committee recently requested a Chinese bus manufacturer to install air conditioning in 110 new buses to be used in the capital city, Radio Free Asia said.

The North already paid the cost in cash and 52 of the buses were already sent to Pyongyang, it said.

The communist state depends heavily on foreign aid to overcome its chronic energy shortage.

“North Korea is introducing buses with air conditioning to make Pyongyang look more advanced and urban in the eyes of foreign tourists whose number is on the rise,” the radio report said, quoting an unidentified source in China. “North Korean people have realized by watching TV dramas and other programs from South Korea that their living standards are not good enough.”