North Korean Economy Watch

Daily NK
Yang Jung A
7/9/2007

A North Korean insider source said on the 5th that the North Korean government sold the fishery licenses of coastal waters at Chulsan, North Pyongan during the crab catching season between May and July for a moderate price.

Chinese marine traders who bought the fishery licenses from North Korea are large marine companies based on Donggang in Lianoning.

The ship-owners and fishermen of North Korea, due to a huge decline in fishes with the Chinese ships’ competitive entry into Chulsan’s offshore waters after receiving the North Korean government’s fishery licenses, are supposed to be going through a hard time.

The source said, “Recently, with the exclusion of the neighboring sea off the coast of Chulsan near the People’s Army’s marine head where the fish farms are located, the fishery licenses to the offshore of the Chulsan-Donggang (China) have been sold to Chinese businessmen. Tens of Chinese fishermen have bought the rights.”

The source said, “The organization in charge who has issued the fishery licenses is not the marine products association, but the No. 64 naval squadron in charge of the this region’s seashore boundary.

Donggang in Liaoning in China located in the mouth of Yalu River, is a small-size city across from Bidan Island.

He said, regarding the price of the fishery licenses, “A small boat is 1,000 Yuan (US$133) per day and a large boat which can accumulate over 100 ton is around 7,000 Yuan (US$ 922) in Chinese currency.”

He added, “The rumors say besides the costs of the licenses, a lot of money has been handed over to North Korea in the negotiations process.”

“Due to monopolizing of the Chinese fishing boats, North Korea’s ships anchored at decks of Donggang are barely seen. North Korean businessmen who have smuggled marine products using small-size boats are having a difficult time because they cannot go out to sea where the current is rough and a lot of gas is required.”

North Korea’s fishermen are saying they have no choice but to go out to the far sea, because they cannot go near the oceanic region operated by Chinese ships.

The source also said, “Chinese ships surreptitiously attacking North Korean ships in their permitted region and beating people have been occurring frequently.”

The Korea Martime Institute, in a report which was announced early this year, said, “The C
hinese government is promoting advancement of North Korea’s operations when the complaints of the country’s fishermen climaxed due to the reduction of ships in the Yungeun Sea and the decline in their income.”

On one hand, besides the oceanic operation rights, the situation is that China’s direct investment in North Korea’s resource development, such as the mining rights being handed over to China, is increasing.

China, instead of investing 70 hundred million Yuan at Musan Mine in 2005, is exercising its 50-year mining licenses to take 10bn tons of iron ore annually.

Yonhap
7/2/2007

In a sign of burgeoning economic ties, a group of South and North Korean officials jointly visited South Korean companies in China and Vietnam, the Unification Ministry said Monday.

The delegation consisting of seven South Koreans and as many North Koreans working at a joint management office of the Kaesong industrial complex visited the companies in Shanghai, Shenzen, Guangzhou, Hanoi and Ho Chi Mihn City for 10 days from June 19. They were given tours and received briefings on the companies’ operations, the ministry said.

“It was a good opportunity for North Korean economic officials to learn from rapidly developing socialist countries,” a senior ministry official said, asking to remain anonymous. “They must have shared the need to further promote inter-Korean economic ties.”

It marks the first time that South and North Korean officials made an overseas trip together to assess the development of South Korean companies, the official added.

In the North Korean border city of Kaesong, a capitalist enclave, South Korean businesses use low-cost skilled North Korean labor to produce goods. Monthly production in the complex exceeds US$10 million.

Currently, 23 South Korean companies employ about 15,000 North Korean workers at the site developed on a trial basis. These include construction workers and workers at a management office. The number of North Korean workers is expected to increase to more than 350,000 when the complex becomes fully operational in 2012.

Korea Times
Andrei Lankov
6/24/2007

The recent refugee crisis in China attracted much attention to the situation around the border between the two countries. Indeed, in recent decades the porous border with China has provided the major exit opportunities for both would-be defectors to the South and refugees escaping the food shortages and poverty of the North.

Most Communist countries guarded their borders against both intruders who tried to get in, and against defectors who wanted to run away from the not-so-perfect Communist paradises. From this point of view, the border with China constitutes a serious challenge. It follows two rivers _ the Amnok and the Tuman (Chinese read the same characters as Yalu and Tumen). Both are shallow in the upper streams, and completely freeze every winter. Thus, a determined defector or smuggler can always find his or her way across the border. At least until the late 1950s _ despite of the persistent efforts of both Korean and Chinese security agencies _ smugglers systematically crossed into China and back.

In the 1950s it was not only smugglers who moved across the border. Some of that human traffic included a number of North Korean dignitaries who chose to run away to China instead of being purged. One of the most famous incidents of this kind took place in early September 1956. On August 31 of that year a group of prominent North Korean leaders openly challenged Kim Il-sung’s policy at the plenary meeting of the KWP Central Committee. They wanted to replace him with a more moderate leader, but their proposal was voted down and they were immediately put under house arrest. They appeared to be doomed, but their ingenuity helped them to find a way out (they were former underground activists, after all!). In the middle of the night the rebels managed to secretly leave the house and then drove away in a car provided by a sympathetic friend. They easily reached the border and then proceeded to China where they were eventually granted asylum. Their example was later followed by other dissenting officials.

There was a movement from China as well. At the end of the 1960s, when the “cultural revolution” was at its height, some ethnic Koreans from China fled to the DPRK which in those years was a more stable and prosperous society. Since the relations with China were quite bad in the late 1960s, these refugees were not extradited and stayed in the North.

The ethnic composition of the region is favourable for those who, for whatever reason, want to make a clandestine border crossing. There are two million ethnic Koreans in China, and most of them live close to the border. Many ethnic Koreans have relatives in North Korea, and a small number of them are even technically DPRK citizens _ the so-called chogyo (in 1997 the number of chogyo was estimated at 6,000 or some 0.3 percent of the Korean population in the region).

On the other hand, in the DPRK there are a small number of ethnic Chinese or huaqiao. The ethnic Chinese from the DPRK and ethnic Koreans from the People’s Republic were allowed to visit their relatives throughout the 1970s and 1980s, when the governments of both countries tried to minimize the foreign contacts of their citizens. Their status was unique _ and widely used for commercial purposes. This trade, however, seldom if ever required illegal border crossings. In most cases, the traders arrived with proper visitor’s visas and large sacks of merchandise.

Generally speaking, the border with China was never protected well, especially when compared with the DMZ, arguably the world’s most heavily protected border. This was deemed unnecessary. The North Korean authorities believed that the runaways would be, in all probability, apprehended by the Chinese police and then extradited back to the North. Of course, occasionally the Chinese might have made a political decision about granting asylum to a disgruntled cadre, but it was too unusual a circumstance to warrant an expensive upgrade of the border protection system. In essence, the Chinese police served as a better deterrent to those with defection in mind than North Korean guards.

And there was not much incentive to run away _ at least for commoners. North-East China was one of the poorest parts of the PRC, and until the late 1980s North Koreans enjoyed much higher standards of living than their brethren across the border.

Things changed dramatically in the early 1990s. From that time, the movement across the border _ both legal and illegal _ began to increase until it developed into a full-scale refugee crisis soon after 1995.

Daily NK
Kim Min Se
6/19/2007

Having received permission from North Korean authorities, North Korean restaurants that are operating in China or in Southeast Asia are making fixed payments of $10,000 to 30,000 to North Korea.

The portion of payments made to North Korea by North Korean restaurants operating in China or Southeast Asia is a known reality, but this is the first time that the amount that these restaurants made to North Korea became known.

Kim Myung Ho (pseudonym, 59), who has experience running a North Korean restaurant in China under the auspices of a North Korean foreign currency-making activity organization, met our reporter in an unnamed quarter of Dandong in China on the 13th. He said, “Under the influence of each ministry in the administration or a money-making business, North Korea is trying to competitively establish restaurants abroad.”

According to Mr. Kim, the amount remitted by the restaurants is decided according to the number of waitresses and employees.

He said, “The amount sent back to the North is $10,000 if the number of employees is less than or equal to 15, but if it exceeds 20, then the amount of remittance is $20,000, and over that, the amount is capped at $30,000.”

Mr. Kim said, “Every year, the sum total is counted at the business headquarters in Pyongyang, but if there’s even a small default or lack of results, then the threat of evacuation is given.”

Currently, there are over a hundred odd restaurants which are known in China, Vietnam, Cambodia, and Laos. In the case that $10,000~30,000 is sent to North Korea every year, it can be calculated that North Korea is earning approximately several tens of thousands of dollars through overseas restaurant operations alone.

Mr. Kim revealed, “North Korean restaurants are receiving the limelight as main foreign currency-making activity businesses. Because they are pursuing business competitively, they have had to shut down operations one after the other due to the inability to manage internal affairs, such as employees breaking away.”

The shutdown of two North Korean restaurants, named “Pyongyang Moran Restaurant” and “Pyongyang Restaurant,” for several months due to the running away of waitresses was a confirmed fact of Daily NK’s investigations.

Presently, there are special trade companies who try to achieve the foreign-currency making activity plans issued by each ministry of the North Korean government. Most of North Korean restaurants that are operating overseas right now are associated with these trade companies.

Mr. Kim said, “Foreign currency collected in these ways is used as operating capital of superior offices Party and as a portion of the Party. Anything besides this, higher than that, is hard to say.”

The reason for the expensive price of food at North Korean restaurants is due to these remittance amounts. They exceed the price of food at surrounding restaurants by three times. In Dandung City, nangmyeon (Korean buckwheat noodle), which can be obtained for 6 Yuan at a high-class Chinese restaurant, is two times pricier at 10~15 Yuan at North Korean restaurants.

The price is expensive, but what makes these restaurants popular, which cannot be found at no other restaurant, is the performances accompanied by song and dance of North Korean waitresses. Performers are usually 20~25 young women who draw customers by singing North Korean songs and even Chinese songs.

Mr. Wang, a Chinese patron seeking a North Korean restaurant in the evening of the 14th, confessed, “I like the fact that I don’t have to seek out a karaoke, because I can sing and dance with the ladies of Pyongyang.”

Further, he expressed contentment that “I can receive high-class service which is difficult to receive at a Chinese restaurant, so it is good for entertaining business partners.” North Korean restaurants are drawing popularity by its unique business method of simultaneously providing food and amusement. Recently, they have tried to actively rouse regular customers by not only providing performances, but dancing with the customers.

A person of Korean-Chinese descent, who is pursuing North Korea-Chinese trade in Dandung, expressed, “It’s disappointing to see the sight of restaurants multiplying when trade is not sanctioned normally due to the lack of foreign currency. Businesses are operating with food and entertainment due to a lack of good income sources; in Dandung alone, there are over 10 restaurants.”

Washington Post, A17
Glenn Kessler
6/15/2007

North Korea took possession yesterday of about $25 million in funds previously frozen by a Treasury Department investigation, potentially clearing the way for Pyongyang to fulfill its commitment to shut down an aging nuclear reactor.

An impasse over transferring the money had stalled an agreement announced in February that the Bush administration had hailed as a first step toward ending North Korea’s nuclear activities.

Under that agreement, which angered President Bush’s conservative supporters, the United States was supposed to end the Treasury investigation within a month and North Korea was to shutter its reactor at Yongbyon by April 14. But North Korea refused to take that step until it received money caught up in the investigation.

The reactor had been frozen under a 1994 deal with the Clinton administration, but in 2002 Pyongyang restarted it after a dispute with the Bush administration. Experts estimate that North Korea — which conducted its first nuclear test in October 2006 — has obtained enough plutonium from the reactor for as many as 12 nuclear weapons.

Late this year or in early 2008, North Korea would need to produce fresh fuel to keep the reactor going, says a recent report by the Institute for Science and International Security.

The Treasury Department had targeted Banco Delta Asia, in the Chinese special administrative region Macau, alleging it was involved in money-laundering for North Korea. But the Treasury’s action had wider repercussions, essentially convincing banks around the world not to do business with North Korean firms.

Though the Treasury Department agreed to allow the return of money tainted by illicit activities, no bank was willing to transfer the money without explicit assurances that the Treasury would take no regulatory action. North Korea could have withdrawn the money in cash, but many experts suspected Pyongyang demanded a wire transfer to signal to financial institutions that it was once again part of the financial system.

U.S. officials trying to save the deal desperately searched for a willing bank, but each time an arrangement seemed possible, complications arose. Finally, after Russia indicated that one of its banks could help, the Treasury arranged for the Federal Reserve Bank of New York to transfer the money to a dormant North Korea account at a Russian bank that operates in the Far East, near the border with North Korea.

“Basically all of it has been transferred,” the Macau government said in a statement yesterday. “For Macao, this incident has come to a conclusion.”

When the Treasury ended the Banco Delta Asia investigation in March, it formally ordered a broad range of U.S. financial institutions to stop doing business with BDA. But that order did not include the banks’ regulator — the Federal Reserve system — which allowed the New York Fed to handle yesterday’s transaction without requiring an exemption from the Treasury.

Still, a group of Republican lawmakers this week asked the Government Accountability Office to examine whether the transaction complies with money-laundering and counterfeiting laws.

N Korea fund transfer ‘under way’
BBC
6/14/2007

The transfer of North Korea’s funds from a bank in Macau – a key issue in nuclear disarmament talks – appears to be under way.

A Macau finance minister reportedly said $20m of Pyongyang’s $25m (£12.7m) had left a blacklisted bank in Macau.

The money was earlier reported to be going to a North Korean bank account in Russia, via the US Federal Reserve.

North Korea insists it must access its funds before abiding by a deal to begin shutting its nuclear facilities.

Q&A: North Korean money in Macau
BBC
6/12/2007

In February North Korea agreed to a timeline for giving up its main nuclear site by April – in return for badly-needed fuel and the return of $25m from a bank in Macau.

But the money has yet to be transferred, and the site remains open.

Now, though, the Russians are offering to step in and get the money to Pyongyang, which could remove a key sticking point in neutralising North Korea’s nuclear capability.

How has such a small amount of money become such a sticking point?

The money is, in a sense, only the visible part of a broader problem.

Dozens of North Korean government departments do their international business through a bank in Macau called Banco Delta Asia.

But in September 2005, the US Treasury accused BDA of being a conduit for laundering money for Pyongyang, triggering severe limits on the bank’s dealings with US financial institutions – and a freeze on $25m of North Korean money in the bank’s accounts.

According to the Treasury, BDA was a “willing pawn” of North Korea, helping process as much as $500m a year in dirty money without asking awkward questions.

The move sent relations between Washington, DC and Pyongyang – frosty at the best of times – into the deep freeze.

Between then and now, the $25m became a tool for the US to achieve a deal on North Korea’s ambitions for nuclear weapons – and an excuse for North Korea to stall.

So has a deal been reached now?

Yes, in February this year. North Korea pledged to give up its nuclear reprocessing activities in exchange for thousands of tonnes of fuel.

At the same time, the $25m would be unfrozen, and could – in theory – head back to North Korea.

But the money has yet to leave Macau, because at the same time the US Treasury cut BDA off altogether from the US banking system.

This ultimate sanction, in banking terms, was made under section 311 of the USA Patriot Act – passed shortly after the 11 September 2001 attacks on New York. Effectively, it bars any financial institution from having anything to do with BDA, if they want to do business with or in America.

Understandably, therefore, attempts to find a way of wiring the money back to North Korea have failed.

Banks in China and Vietnam have been approached and have refused to get involved.

One US bank – Wachovia – has been asked by the US State Department to consider helping out, but it points out that it will need assurances that it is not in breach of section 311 before it can do anything.

What is Russia offering to do?

Russia is one of the partners in the six-way talks over denuclearisation of North Korea, and – given that it shares a border with North Korea – has a powerful interest in moving discussions along.

Early in June, Russian officials suggested that a Russian bank might step in to get the frozen $25m from Macau to Pyongyang – directly or via intermediaries.

The US Treasury has now acknowledged the possibility of Russian assistance.

But Russia is likely to require cast-iron assurances that US sanctions against banks which carry out transactions with North Korea will not apply.

One possibility would be for the money to go first via the New York branch of the US central bank, the Federal Reserve, and then on to Russia’s own central bank before being paid into Moscow’s Far East Commercial Bank, where North Korea has a long-unused account.

But what does a country like North Korea need money-laundering services for?

North Korea, in practical terms, is flat broke.

Its trade is minimal, its agriculture is suffering, and its contact with the outside world is severely limited.

But according to the US Treasury, not to mention many experts elsewhere in intelligence and financial crime, Pyongyang has for the past two decades made up for its lack of legitimate trade by taking an unhealthy interest in faking US banknotes, smuggling counterfeit tobacco products and even the narcotics trade.

Much of the proceeds, the US claims, have been laundered through BDA, which has also facilitated huge bulk cash shipments back to Pyongyang – as well as large trades in precious metals.

BDA, it should be said, has always strongly denied the allegations, insisting its business with North Korea is above board.

Why does the US not just send the money back itself?

In theory, the US could have provided a bank with the reassurance it needs to get involved, although that has yet to happen – and could, in any case, be legally tricky. “Difficult, yes; impossible, no,” was how the State Department’s spokesman described it.

Similarly, reports have suggested that since 2001 there has been a conduit for fund transfers between the State Department’s credit union and the Foreign Trade Bank in Pyongyang.

But as far as the Treasury is concerned, the ball is now in Macau’s court. It is up to the regulators there to work out how to get the money back to North Korea – and in the meantime the section 311 rule stays in force.

In any case, after years of playing hardball with North Korea, the last thing the current US administration wants is look as if it is doing things Pyongyang’s way.

Can’t North Korea get it back any other way?

It could – for instance, through a direct withdrawal from BDA back to Pyongyang.

Alternatively, if the US is right that bulk cash shipments have been going on for years illicitly, perhaps the technique could be used for above-board purposes.

But as far as North Korea is concerned, that kind of deal is unacceptable.

It seems that the authorities in Pyongyang want the transfer to pass through the international financial system, so as to send a signal that handling North Korean money does not mean instant ostracism.

Not only that; keeping the matter rumbling on means more time to extract concessions – and, some experts fear, to keep reprocessing nuclear material.

Daily NK
Han Yong Jin
6/14/2007

[NKeconWatch: Lots of pictures in original article]

The Emperor Hotel and Casino in Rajin-Sunbong has re-opened. It had earlier been a source of Chinese authority concern over remote gambling as the casino attempted to attract foreign tourists.

The North Korean regime designated Rajin and Sunbong as a special free economics and trade zone in December, 1991 and encouraged foreign businesses to locate there. Hong Kong’s Emperor Group opened a five star hotel with 100 guest rooms and a casino in July, 2000.

However, Cai Haowen, a superintendent at the Transportation Ministry in Yanbian-Zhou, embezzled approximately $425,000 of public funds and threw away all the money for gambling in the Emperor Hotel Casino, causing the Chinese government to close the hotel’s casino on January 11st, 2004.

Chinese bloggers who have visited the hotel released photos through a Chinese portal site, sina.com.

Bao Yong visited the Emperor in April and noted that the hotel is 50 km from Huichun, China, and the only tourists were Chinese. North Koreans were not permitted and there was no evidence of Russians. There were just Chinese cars with license plates from Liaoning, Heilongjiang, and, predominantly, Yanbian in the parking lot.

He said that “the strict hotel and casino management seemed more like agents or gangsters than managers, who were everywhere, creepily scrutinizing gamblers’ movement and attitudes.” They prevented him from taking photos inside the casino.

Yonhap
6/10/2007

Products made in an inter-Korean industrial park in the first four months of the year were valued at US$48.1 million, about 24 percent of which, or $11.3 million worth of products, were exported, South Korea’s unification ministry said Sunday.

Last year’s comparable figure during the cited period was 18.4 percent, or $2.3 million, according to the ministry.

The industrial complex, located in the North Korean border city of Kaesong, is one of two flagship projects the South operates with the North in the spirit of reconciliation that developed following the historic inter-Korean summit in 2000.

Over 13,000 North Korean workers are currently employed by 22 South Korean companies there. They produce garments, utensils and other labor-intensive goods.

The biggest importer of Kaesong-made goods was the European Union (EU), followed by China, Russia and Australia.

The ministry did not give figures on how many goods made in the industrial park the countries imported.

Asia Times
Andrei Lankov
6/5/2007

It is clear that the current Western approach to dealing with North Korea is not working. Some people in Washington obviously still believe that financial or other sanctions will push the North Korean regime to the corner and press Pyongyang into relinquishing its nuclear program. But this is very unlikely.

First, neither China nor Russia is willing to participate in the sanctions regime wholeheartedly. Neither country is happy about a nuclear North Korea, but they see its collapse as an even greater evil. However, without their participation, no sanctions regime can succeed. More important, South Korea, still technically an ally of the United States, is even less willing to drive Pyongyang to the corner. And finally, even if sanctions have some effect, the only palpable results will be more dead farmers. The regime survived far greater challenges a decade ago when it had no backers whatsoever.

So what can be done? In the short run, not much. Like it or not, Pyongyang will remain nuclear. There might be some compromises, such as freezing existing nuclear facilities, but in general there is no way to press North Korean leaders into abandoning their nuclear weapons.

This is not good news, since it means that the threat will remain. Earlier experience has clearly demonstrated that every time North Korean leaders run into trouble, they use blackmail tactics, and they usually work. In all probability, there will be more provocations in the future. Since Pyongyang’s leaders believe (perhaps with good reason) that Chinese-style economic reforms might bring about the collapse of their regime, they have not the slightest inclination to start reforming themselves.

This leaves them with few options other a policy aimed at extracting aid from the outside world, and regular blackmail is one of the usual tools of this approach. Thus the threat persists unless the regime or, at least, its nature is changed, but how can this goal be achieved if pressure from outside is so patently inefficient? The answer is pressure from within, by nurturing pro-democracy and pro-reform forces within North Korean society (and also pro-reform thoughts within the brains of individuals).

Of all assorted “rogue regimes”, North Korea is probably most vulnerable to this soft approach. On one hand, unlike the bosses of the assorted fundamentalist regimes, North Korea’s leaders have never claimed that their followers will be rewarded in the afterlife; they do not talk, for example, about the pleasures of otherworldly sex with 72 virgins.

Their claim to legitimacy is based on their alleged ability to deliver better lives to Koreans here and now, and Pyongyang’s rulers have failed in this regard in the most spectacular way. The existence of another Korea makes the use of nationalistic slogans somewhat problematic as well.

North Korea’s leaders cannot really say, “We have to be poor to protect our independence from those encroaching foreigners,” since the existence of the dirty-rich South vividly demonstrates that under a reasonably rational government, Koreans can be both rich and independent (and also free).

This leaves Pyongyang with no choice but to seal the borders as tight as no other communist regime has ever done before, on assumption that the common folk should not know that they live a complete lie. This self-imposed information isolation is the major condition for the regime’s survival, and breaking such a wall of ignorance should be seen as the major target for any long-term efforts directed at bringing change to North Korea.

The power of soft measures is often underestimated, not least because such policies are cheap, slow and not as spectacular as commando raids or even economic embargoes. However, their efficiency is remarkable.

In this regard, it makes sense to remember a story from the relatively recent past. In 1958, an academic-exchange agreement was signed between the Soviet Union and the United States. Back then the diehard enemies of the Soviet system were not exactly happy about this step, which, they insisted, was yet another sign of shameful appeasement.

They said this agreement would merely provide the Soviets with another opportunity to send spies to steal US secrets. Alternatively, the skeptics insisted, the Soviets would send diehard ideologues who would use their US experience as a tool in the propaganda war. And, the critics continued, this would be done on American taxpayers’ money.

The first group of exchange students was small and included, as skeptics feared, exactly the people they did not want to welcome on to US soil. There were merely four Soviet students who were selected by Moscow to enter Columbia University for one year of studies in 1958. One of them, as we know now, was a promising KGB operative whose job was indeed to spy on the Americans. He was good at his job and later made a brilliant career in Soviet foreign intelligence.

His fellow student was a young but promising veteran of the then-still-recent World War II. After studies in the US, he moved to the Communist Party central bureaucracy, where in a decade he became the first deputy head of the propaganda department – in essence, a second in command among Soviet professional ideologues.

Well, skeptics seemed to have been proved right – until the 1980s, that is. The KGB operative’s name was Oleg Kalugin, and he was to become the first KGB officer openly to challenge the organization from within. His fellow student, Alexandr Yakovlev, a Communist Party Central Committee secretary, became the closest associate of Mikhail Gorbachev and made a remarkable contribution to the collapse of the communist regime in Moscow (some people even insist that it was Yakovlev rather than Gorbachev himself who could be described as the real architect of perestroika.)

Eventually, both men said it was their experiences in the United States that changed the way they saw the world, even if they were prudent enough to keep their mouths shut and say what they were expected to say. So two of the four carefully selected Soviet students of 1958 eventually became the top leaders of perestroika.

There is no reason to believe that measures that worked in the Soviet case would be less effective in North Korea. Academic exchanges are especially important, since the policy toward North Korea should pursue two different but interconnected purposes. The first is to promote transformation of the regime or perhaps even to bring down one of the world’s most murderous dictatorships. However, it is also time to start thinking about what will happen next, after Kim Jong-il and his cohorts vanish from the scene.

The post-Kim reconstruction of North Korean will be painful, expensive and probably lengthy. Right now North Korea is some 20 times a poor as the South, and the gap in education between two countries is yawning. With the exception of a handful of military engineers, a typical North Korean technician has never used a computer.

North Korean economists learn a grossly simplified version of 1950s Soviet official economics, and North Korean doctors have never heard about even the most common drugs used elsewhere. This means that in the case of a regime collapse, the North Koreans would be merely cheap labor for the South Korean conglomerates – a situation bound to produce tensions and hostility between the two societies. A North Korean who in 20 years’ time will look for a decent job should be made employable, and the best way to ensure this is to start thinking about his or her education right now.

Academic exchanges with North Korea would have dual or even triple purposes. First, they would bring explosive information into the country, hastening domestic changes (probably, but not necessary, changes of a revolutionary nature). Second, they would assist North Korean economic development, thus beginning to bridge the gap between the two Koreas even while the North was still under Kim Jong-il’s regime. Third, they would contribute to more efficient and less painful reconstruction of post-Kim North Korea.

Of course, all these scholarship programs should be paid for by the recipient countries. North Koreans have no money for such exchanges (and to paraphrase a remark by North Korea expert Aidan Foster-Carter, North Korean leaders are people who never do anything as vulgar as paying). But all three targets are clearly in the interest of the world community, and anyway the monies involved would be quite small.

North Korea’s leaders are no fools. They understand that such exchanges are dangerous, and they do not want future Korean Yakovlevs and Kalugins to emerge. Back in 1959-60 they even decided to recall their students from the Soviet Union and other countries of the Communist Bloc and did not send their young people to study anywhere but in Mao Zedong’s China until the late 1970s. In other words, for two decades Pyongyang’s leaders believed that those countries were way too liberal as an environment for their students.

However, they also understand that without exchanges they cannot survive in the longer run. Even now, Pyongyang is doing its best to increase exchanges with China, sending numerous students there.

Another important factor is endemic corruption. There is no doubt that nearly all students who will go overseas will be scions of the Pyongyang aristocrats, the hereditary elite that has been ruling the country for decades. A high-level official might understand that sending a young North Korean overseas is potentially dangerous. But if the person in question is likely to be his nephew, he will probably choose to forget about the ideological threats.

Of course, no sane North Korean leader would ever agree to send students to the US or to South Korea. However, there are many countries that are far more acceptable for them. The Australian National University a few years ago had a course for North Korean postgraduate students who studied modern economics and financial management. Australia or Canada or New Zealand might be good places for such programs.

While English-language education is preferable, since English is the language of international communication in East Asia, there is a place for European countries as well, especially smaller ones, whose names do not sound too offensive to the Pyongyang bureaucrats – such as Switzerland or Hungary or Austria.

Such programs should be sponsored by those countries whose stakes are the highest, such as the US, Japan and South Korea, but smaller and more distant countries also should consider sponsoring such an undertaking. This is not a waste of money, nor even a good-looking humanitarian gesture for its own sake. As history has shown many times, former students tend to be sympathetic to the country where they once studied, and they normally keep some connections there.

North Korea has great potential, and when things start moving, those graduates are likely to be catapulted to high places, since people with modern education are so few in North Korea. This means countries that consider small investments in scholarships for North Koreans will eventually get large benefits through important connections and sympathies that their business people, engineers and scholars will find in some important offices of post-Kim North Korea.

Scholarships for North Korean students are not the only form of academic exchanges. North Korean scientists and scholars should be invited to Western universities, and books and digital materials should be donated to major North Korean libraries in large numbers. Of course, only selected people with special clearances are allowed to read non-technical Western publications in North Korea, but they are exactly the people who will matter when things start moving.

It is well known that students and academics who come back from longtime overseas trips are routinely submitted to rigorous ideological retraining upon their return to North Korea. But does it help? Unlikely. If anything, heavy doses of obviously nonsensical propaganda make a great contrast with what they have learned and seen, thus putting North Korean society in an even less favorable light.

Of course, they will not say anything improper when they come back home, but they will see that there are other ways of life, they will see how impoverished, bleak and hyper-controlled their lives are, and they will think how to change this. Sooner or later, these people will become a catalyst for transformation – and their skills will help to ease the pains of the post-Kim revival of North Korea.

Daily NK
Kim Yong Hun
6/5/2007

Despite the nuclear test last October, trade between North Korea and China has increased steadily. Rather, signs of North Korea’s economic dependence on China is becoming more obvious.

According to statistics recently released by the Ministry of Unification, “2007 1st Quarter, North Korea’s trade status with China,” trade between the two countries recorded $330mn, a 13.8% increase compared to 2006. While North Korea exported $130mn worth of commodities, an increase of 45% compared to the previous year, imports equaled a total of $200mn, a small decrease of 2.4%.

Last year, trade between both North Korea and China totaled $1,699.6mn recording the highest amount of trade ever in history and even this figure had risen 7.5% compared to the year before.

Analysts argue that North Korea’s economic dependence on China is increasing as a result of sanctions implemented by the international community and delay of the February 13 Agreement.

Even until last year, the trade deficit had increased to $764.17mn, an increase of 29.9% compared to 2005. However, in the first quarter of 2007, the trade deficit seems to have taken a major plummet of 61.3% down to $74mn.

North Korea’s main trade commodities are fuel based including coal and minerals, accounting for $45mn (49% increase to 2006) of exports to China, and 34.7% of total exports. In detail, $33mn of minerals, $12mn of medicine, $7.7mn of steel and $6.2mn of fisheries are exported also.

On the other hand, goods imported into North Korea are again fuel based including petroleum and crude oil and account for $31mn (42.5% decrease to 2006) of imports. Further, machinery equates to $17mn of imports, electric appliances $16mn and filaments $11mn.

In the report, the Ministry of Unification indicated North Korea’s major export to China as coal and minerals and analyzed, “This is the result of China’s increased demands for economic growth.”

The Ministry reported, “The majority of imported goods are energy, electric appliances and machinery” and added, “Demand for these light industry goods have increased from an expansion in North Korea’s consumer market. Imports have risen as a result of materials necessary for industrialization.”

According to a report recently released by the U.S. Congressional Research Service (CRS) “North Korea’s Economy,” the amount of trade that occurred between the U.S. and North Korea barely reached $3,000 in 2006, the lowest figure ever recorded since 1990. The only items exported to North Korea were books and newspapers and no imports were received by the U.S, revealed the CRS.

Furthermore, 2006 recorded an all time low of $130mn trade between Japan and North Korea, undoubtedly a reflection of Japan’s strong implementation of economic sanctions on North Korea. Since 1995, Japan has been supporting North Korea with a total of 1.2mn tons of food aid but suspended the aid relief in late 2004 following the issue of Japanese abductees.

Russia’s exports of minerals and coal to North Korea surged dramatically in 2003 and in 2006, total trade with North Korea recorded $220mn. Hence, Russia became now one of the big three trading partners of North Korea with China, South Korea, the CRS reported.

Korea Times
Andrei Lankov
6/3/2007

Kim Il Sung’s North Korea has always been a tough customer, and nobody knows who was more irritated by its constant antics: its foes or its friends. It has been a tough ally, ready to cheat and manipulate its sponsors. Since the 1950s most of its patrons have had to put up with its style _ largely because of their grand strategy, of course.

In the long run, it was probably the Soviets who were subject to Pyongyang’s diplomatic frolics most frequently, but China has the dubious honor of being the first country to enjoy such an experience in the early 1950s. Somewhat surprisingly, this happened during the Korean War when only a massive Chinese intervention saved Kim Il Sung’s regime from a sorry end.

Recent document-based research by Chinese scholars, especially by the formidable Shen Zhihua, has provided us with new insights into the early history of relations between the two supposedly “fraternal” countries. Now it is clear that the picture was anything but rosy.

When the North Korean troops invaded the South, it was implied that the Chinese forces would step in if the situation took a dangerous turn. Nonetheless, until late September, Pyongyang ignored Chinese advice and kept Beijing in the dark about the frontline situation. This drove the Chinese military attache and ambassador mad, but they could not do much about it.

The situation changed in October when Kim Il Sung had lost the war: by late October 1950, there was hardly one battle-ready battalion in the North Korean armed forces. The Chinese rushed in a large expeditionary force, but soon a question arose: who was to be in charge of the united armed forces?

Kim Il Sung clearly assumed that he would stay in command, and would have operational control over the Chinese units. This was unacceptable to the Chinese. To an extent, this was a clash of two nationalisms (and nationalisms of East Asia are notorious for being particularly virulent). However, there were real considerations involved as well.

First of all, the Chinese force far outnumbered the North Korean army. Second, the Chinese generals did not have much trust in the military competence of their North Korean colleagues. Peng Dehuai, whose task was to save the North, did not hide his outrage about Pyongyang’s style of operations. He was especially angry about the meaningless defense of a doomed Seoul, where about 30,000 North Korean soldiers were killed in late September. In late 1950, he sent a telegram to Beijing in which he labeled the North Korean style “childish”.

However, Kim Il Sung and other North Korean leaders avoided the issue, so the two armies (or, to be more precise, the Chinese army and the remains of the North Korean army) for a while acted independently–often, with sorry results. On November 4, for instance, the lack of coordination even led to a battle in which the North Korean tanks mistakenly attacked Chinese infantry, and thus unwittingly helped a semi-circled American unit escape.

At the same time, the Chinese attempts to incorporate the North Korean units into their own forces were met with resistance on the part of Kim Il Sung. He needed an army of his own, and was not ready for concessions.

It took more than a month to solve the question of joint command. Perhaps, the problems would have last longer, had Stalin not sent a cable demanding an immediate rectification of the situation. Stalin’s advice had to be taken seriously, and his intervention put an end to delays. The Joint Command was headed by Peng Dehuai, with two Chinese-speaking Korean generals acting as his deputies (incidentally, both generals were purged by Kim Il Sung a few years after the war).

However, new tensions arose in December 1950 when the railways came to be discussed. The Chinese forces could be supplied only by rail, and those lines were subjected to intense bombing. The railways had to be managed carefully, but the Chinese commanders discovered that Korean administration gave preference to cargo related to the economic needs of Korean reconstruction, rather than to military supplies. As a result, the Chinese and Koreans ran two different railway administrations, operating on the same railway network. It’s easy to imagine how this influenced the efficiency of the transportation system.

After a few months of discussion the North Koreans agreed to have a joint railroad command, but on the conditions that they would exercise overall control. By that time, most of the rolling stock had been provided by China, and the Chinese soldiers were also doing most of the maintenance work, hence the Chinese generals assumed that they should have the upper hand. But the Koreans did not agree. For them, this was an issue of their territorial rights, sovereignty, and other important symbols. For the Chinese, this was a question of their soldiers’ lives.

Once again, direct Soviet involvement was necessary to put an end to the squabbling. Stalin had no patience for the petty ambitions of his not very efficient satellite, and he was still in position to control the North. Hence, Stalin himself cabled Pyongyang demanding they agree to the Chinese conditions. In May 1951, after his august intervention, Pyongyang gave in.

These early squabbles were a sign of things to come. Over the years, North Korea has developed a peculiar diplomatic style, harsh and unbending but remarkably successful. It used to be applied to Moscow and Beijing. Nowadays the same tricks work wonders in dealing with the current sponsors of the regime, Beijing and Seoul as well as with Washington. But that is another story…