North Korean Economy Watch

Yonhap
Sohn Suk-joo
7/4/2007

South and North Korea will hold new round of working-level talks this week to discuss ways to cooperate in light industry and natural resource exploration, the Unification Ministry said Wednesday.

The two-day talks slated to be held in the North Korean border city of Kaesong on Thursday come as North Korea moves to take initial steps to shut down its main nuclear facilities.

In April, South Korea reconfirmed the agreement to supply industrial materials worth US$80 million to the North starting in June to help revive its sagging light industry in return for the right to develp natural resources in the North.

Under the deal, North Korea will allow a team of South Korean experts to conduct an on-site survey of three zinc and magnesite deposits in its mountainous northeastern region for 12 days beginning June 25. In return, the South will ship 5 million tons of polyester fabrics worth $800,000 to the North on June 27.

But the schedule has been postponed as the two sides failed to thrash out differences on the price and list of industrial materials the South is to provide the North in exchange for the right to develop natural resources in the communist country. The North called for more than the South had earmarked for in the shipment, according to South Korean officials.

In 2005, South Korea agreed to offer industrial raw materials to the North to help it produce clothing, footwear and soap starting in 2006. In return, the North was to provide the South with minerals, such as zinc and magnesite, after mines were developed with South Korean investments guaranteed by Pyongyang.

But the economic accord was not implemented, as North Korea abruptly cancelled the scheduled test runs of inter-Korean cross-border trains in May last year, apparently under pressure from its powerful military. The two Koreas carried out the test run of trains across their heavily armed border in mid May.

Korea Times
Yoon Won-sup
7/3/2007

Kim Yun-kyu, who stepped down as vice president of Hyundai Asan, South Korea’s operator of inter-Korean business and tourism, due to illegal use of corporate funds in October 2005, is resuming work with North Korea.

Kim set up his own company for North Korean business last year, dubbed Acheon Global Corp., which imported 531 kilograms of caviar from North Korea via the East Coast train on June 21, and entered the Gaeseong Industrial Complex, according to the Unification Ministry.

The importing of the caviar is Acheon’s first business transaction with North Korea, which was finalized by Kim’s aide Yuk Jae-hee, vice president of Acheon and former executive of Hyundai, during Yuk’s visit to Mt. Geumgang in North Korea June 18 to 20.

Kim will visit Mt. Geumgang Thursday, the first time since his resignation, to discuss additional imports with North Korean government officials. His North Korean counterpart is a business association in charge of fisheries.

Kim is reportedly seeking to bring North Korean sand to the South. Accordingly, he visited Gaeseong June 19, and Yuk plans to visit Gaeseong soon for further discussion on sand importing.

However, the two CEOs of Acheon are not likely to meet senior North Korean government officials, though they previously have met with and will, again, meet with working-level officials on inter-Korean affairs, in Gaeseong and Mt. Geumgang.

“Kim got approval from North Korea to visit the country for trade of agricultural and fishery projects, and the discussion has been conducted according to the purpose of his visit to North Korea,” a South Korean government official said on condition of anonymity.

Kim already discussed imports of North Korean fisheries and sand to the South and the establishment of an office in Gaeseong, with Choi Seung-chul, vice chairman of Asia Pacific Peace Committee of North Korea.

In line with Kim’s plan, Acheon signed a contract with the Korea Land Corp. to rent 1,400 square meters of land in the Gaeseong complex.

A building is to be set up there to accommodate restaurants, coffeehouses and other facilities for workers in Gaeseong, but it is not yet decided what kind of facilities will be built by Acheon. A permanent office of Acheon also is likely to be set up in Gaeseong.

Some observers say Kim’s resumed activity may lead to competition with Hyundai Asan regarding inter-Korean business, but the dominant opinion is that the chance is slim for the time being.

Kim led the inter-Korean business with Mt. Geumgang tourism and Gaeseong complex under the confidence of late Hyundai Group founder Chung Ju-yung and his late son Mong-hun, former president of Hyundai Asan. Now Hyun Jung-eun, widow of Chung Mong-hun, leads Hyundai Asan.

Daily NK
Yang Jung A
7/3/2007

A North Korean insider source relayed on the 2nd that citizens’ complaints have been rising because the North Korean government recently gave guidelines to sell a portion of products which have been selling with popularity at the jangmadang (markets) only at state-operated stores.

This source, who resides in North Pyongan, revealed in a phone conversation with DailyNK, “Recently, plastic floors have been popular, so “plastic sales” is earning a lot of money. However, government authorities have mandated that the commerce office directly oversee plastic floors and that they be sold at state-operated stores.”

The insider relayed, “Families above middle-class have been showing a lot of interest in acquiring furniture. Besides floors, drawers on which TV can be placed and cabinets displaying wines and others are very popular.”

Previously, floors made of paper covered the floors of houses, but since North Korean civilians’ standard of living started rising recently, Chinese-made plastic floors decorated in flowers is drawing popularity.

He said, “Rumor has been leaking that pork (1,700 North Korean won per kg), the price for which has declined recently, is also directly managed by the commerce office, along with plastic floors.” “Besides this, the complaints of merchants have been rising since rumor starting circulating that the list of items to be overseen by the office will increase.”

He added, “Would they want to do any business given that individual sales are discouraged and turned over to national control when sales go even remotely well? There are grievances due to the fact that earning a livelihood through jangmadang sales is not even allowed, on top of the lack of provisions.”

Further, he said, “Regulations regarding people engaging in “Chapan-Jangsa (sales by trucks)” using privately-owned buses or trucks exceeding eight tons have begun. If one is caught, the vehicles become registered as national property and the vehicle owner receives a salary from the country instead.”

“Chapan Jangsa” refers to carrying out wholesale while ferrying the load on trucks. The “plastic floor” and “Chapan Jangsa,” along with what is popularly known as “ice (drug) sales” are counted are the top three business that brings in the most amount of money.

“The complaints of people are high, but the scope of regulation is wide-ranging, so there are people who think that the inspections will stop after several times.”

Even guideline to prevent wearing of wedding dresses

He also said, “Since October 2006, there were even guidelines to prevent wearing of wedding dresses at weddings. Not only wedding dresses, but wearing white gloves were also prohibited.”

In North Korea, wearing wedding dresses at weddings became a trend seven to eight years ago. Nowadays, many civilians are known to wear them. Even if they do not wear wedding dresses, North Korea’s general wedding culture is donning flowers on the chest part of dresses and on the head and putting on white gloves.

Additionally, the insider relayed, “The size of the flower of the groomsmen and the bridesmaids should not be bigger than the groom’s and the bride’s. The flower of the groom and the bride is fixed at 7cm and the flower of the groomsmen and bridesmaids fixed at 5cm. In the case with those who go against the orders and get their pictures taken after marriage, the photo volunteer in charge’s volunteer card (employment permit) can be revoked.”

Korea Times
Tong Kim
7/1/2007

Recently I visited Gaeseong with a South Korean humanitarian group that provides anthracite for fuel to underprivileged people in both Koreas. The group carries out a voluntary campaign in the name of “sharing love and anthracite.’’ It so far has provided the poor with over ten million pieces of processed anthracite.

Our trip to Gaeseong was to deliver another 50,000 pieces of processed anthracite in five large trucks. From Seoul we drove only about 45 minutes to reach the southern border of the Demilitarized Zone (DMZ). I had passed through the Panmunjeom Joint Security Area a couple of times traveling to Pyongyang before, but it was the first time for me to travel on the paved direct highway to the Gaeseong Industrial Complex.

Upon arrival at the Bongdukni railroad station _ about a few miles north of the complex _ we were welcomed by the vice chairman of the Gaeseong People’s Committee, who appreciated the provision of anthracite as well as our offer to help North Koreans unload the anthracite.

From Bongdukni we went to Gaeseong City, where we visited several famous historic sites of the old capital of the Goryeo Dynasty (918-1392), including the Seonjuk bridge, where the stain of bloodshed by a king’s royal servant remains, still detectable. Standing at the courtyard of Sungkyunkwan, which was the dynasty’s highest royal educational institute, were gigantic ginkgo trees more than a thousand years old.

The buildings were impressively well maintained. On display inside the buildings were neatly arranged historical artifacts, which help visitors see what life was like in Korea a millennium ago. With other cultural assets, like the royal tombs and an old Buddhist temple, I thought Gaeseong would present itself as an excellent tourist attraction.

Then we went to a “hotel district’’ where many traditional tiled Korean homes remain undamaged as if they had never withstood the Korean War. An able tourist guide told us that these buildings are now used as lodging for tourists. We were led into one of the homes, where we had a good traditional dinner served in Korean brassware.

From there we went to the complex, which I knew was controversial from a political perspective since its inception. Opponents ask why South Korea should help North Korea when it spends scare resources on the development of missiles and nuclear weapons. Proponents argue it is a constructive approach to the eventual resolution of security and political issues.

After I saw the vast area of the industrial park _ one million pyeong (approximately 25 square miles) _ I felt there would be no way to reverse the course of inter-Korean economic cooperation. Under a 50-year lease, Hyundai Asan has cleared the land by leveling off the hills and filling the rice paddies and fields, and it is still building the necessary infrastructure to support the industrial park.

At present 22 South Korean companies _ mostly small- and medium-sized firms _ are operating in the complex and five new plants are under construction. On this North Korean territory, about 12,000 North Korean employees are working with 680 South Koreans, who are largely managers. By 2012, the complex is expected to employ over 100,000 North Koreans.

These companies produce goods _ including shoes, clothes, watches, kitchenware, plastic containers and electric cords _ mostly for South Korean consumers. Under a neo-liberal policy pursued by the ROK government, the complex makes sense as the average monthly wage is only $57, which is only half of Chinese labor costs and less than 5 percent of South Korean counterparts’ salaries.

After an overview briefing at the Hyundai Asan Control Center, we went to the Shinwon Clothing Plant, where 880 North Korean women _ who looked between 20 to 40 years-of-age _ were working hard concentrating on their jobs along the 15 production lines on two floors. There were no dividing walls on each floor. The uniformed workers all looked healthy and productive.

The plant’s manager told me he has only nine people from the South to work with the North Koreans. His company began operating in February 2005 with 330 workers on two production lines. He said his company is satisfied with the productivity and the workmanship of its North Korean employees. His company provides many facilities for the workers, including a large dining hall where the workers receive free meals, recreation rooms, showers and even a Christian chapel.

Perhaps the future of the expanding industrial park depends very much on the exportability of its products to overseas markets including the United States. This brings up two points: resolution of the North Korean nuclear issue and the inclusion of the complex as an “outward processing zone’’ as discussed but still pending resolution in the agreed Free Trade Agreement with the United States.

Without exportability, which I doubt would be fully feasible before North Korean denuclearization, the industrial complex may not be able to attract big international companies who keep looking for lower labor costs to compete in the contemporary neo-liberal global market.

There are other problems with the inter-Korean industrial park, including the transparency of the payment system, labor practices and environmental concerns. But these are only peripheral issues compared to the issue of war and peace, which also affects the South Korean economy. As the nuclear issue seems to be moving forward, and as I believe it will be resolved at the end, I do see good prospects for success of the complex.

We went to Gaeseong, a city of 300,000 people, through some poverty-stricken rural villages. It was heartbreaking to see North Korean people who looked undernourished and poorly sheltered in their rundown homes with broken windows. I saw children looking skinny, underdeveloped and hungry _ walking home after school, with their arms on the shoulders of their buddies, just like I used to do when I was their age.

I visited North Korea many times but I never had an opportunity to observe the economic plight of the North Korean people in the rural areas. I could see only a little bit of the deprivation last month when I went to Inner Geumgang Mountain through a few under-populated villages beyond the DMZ.

I know the conservatives blame the North Korean regime for this. My problem with them is such blame or hard-line policy has not helped alleviate the hardship of the poor people whose poverty is not their fault. I support humanitarian aid to the North, despite some negative views.

I know North Korea is trying hard to improve its economy in order to better feed, clothe and house its people. I have seen some encouraging indicators of change in North Korea. Once it feels free of perceived threat from outside, I expect the North to give up its nuclear program and concentrate on transforming the economy, which will eventually lead to political and social transformation as well.

It is time to work harder to resolve the security issue, while providing minimum humanitarian aid to the people in the North. Providing anthracite is a good example of humanitarian assistance, which I believe should enlist broad support from the South Korean public. What’s your take?

Tong Kim is former senior interpreter at the U.S. State Department and now a research professor at Korea University and a visiting scholar at Johns Hopkins School of Advanced International Studies (SAIS).

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
Kim Tae-gyu
6/27/2007

A private association composed of South Korea’s major software developers plans to establish software centers in Pyongyang and Gaeseong late this year.

The Korea Software Financial Cooperative (KSFC) said Wednesday that it aims to sign a contract on the centers with its northern counterpart, Samcholli General Corp., this summer.

Such high-profile software companies as Samsung SDI, LG CNS, SK C&C and PosData are members of the Seoul-based association together with about 1,000 other outfits.

“We visited Pyongyang last week and agreed in principle to set up software centers in the capital city and Gaeseong Industrial Park,” KSFC official Kim Seok-hyun said.

“We are now ironing out details. The best scenario is that we ink an agreement in July or August to open the centers late this year,” said Kim who heads the North Korean project.

The envisioned centers will hire North Korean technicians and will come up with various computer programs demanded by 1,000-plus members of the KSFC.

“High-tech employees at the centers will develop software that will be used in the South or shipped out of the country,” Kim said. “The facilities are not symbolic ones aimed at improving the South-North relationship.”

Kim added the contract will be a win-win for the two Koreas that have been divided over the past half-century.

“We will be able to create software at much lower prices thanks to the cheap but experienced work force of the North rather than finding a low-wage platform in other countries,” Kim said.

“In comparison, the North will earn dollars through the partnership as well as give its engineers an opportunity to learn advanced technology,” he said.

In the long run, Kim said the software centers will roll out products, which were ordered by foreign companies to South Korean firms.

This is not the first time that a South Korean company attempted to take advantage of software-producing skills and know-how of the Northern engineers.

KT, the South’s top fixed-line telecom operator, started developing sophisticated software via an outsourcing contract with Samcholli General Corp. in 2005.

Korea Times
Ryu Jin
6/26/2007

Tourists who want to visit the inner part of Mt. Geumgang in North Korea, better known as “Naegeumgang’’ in Korean, will be able to leave for the resort area on any day of the week, starting next month.

Hyundai Asan, the South Korean operator of the inter-Korean tourism project, said Tuesday that the Naegeumgang tour, which has so far been carried out three times a week, will be available everyday from July 1.

North Korea had previously agreed to accept only three groups of tourists every week. Each group, composed of no more than 150 visitors, crossed the border every Monday, Wednesday and Friday for a two-night, three-day stay there.

But the two sides finally decided to increase the tours, as applicants have risen sharply in recent weeks since the new tour program was officially launched on June 1.

“We plan to bring 30 groups of visitors to the resort complex on our Naegeumgang tour next month,’’ a Hyundai Asan official said. “But tickets have already been booked almost fully.’’

Mt. Geumgang, which has long held both aesthetic and spiritual allure for Koreans, can be divided into three parts: Naegeumgang (inner, western part), Oegeumgang (outer, eastern part) and Haegeumgang (seashore part).

Since the first tour to Oegeumgang in 1998, an increasing number of visitors have made the trip to the resort area. Most were South Koreans with fewer than 8,000 visitors coming from 48 other countries.

North Korea allowed the inner part of the mountain, Naegeumgang, to be visited toward the end of this year, which military and political experts evaluate as a “bold step’’ when its strategic importance is taken into account.

Hyundai Asan said early this month that more than 1.5 million tourists have visited Mt. Geumgang in the past decade. The company anticipates the number of tourists that visit the mountain resort this year to exceed 400,000.

The Naegeumgang tour is operated from April to November for 420,000 won ($450) per person including a two-night stay in a hotel, which is just 30,000 won higher than that of the tour program to Oegeumgang and Haegeumgang.

On the first day, visitors check in at the hotel and enjoy a North Korean acrobatics show and dine on unique North Korean cuisine. On the second day, tourists explore the beauty of Naegeumgang, followed by a brief trip to Oegeumgang on the last day.

Yonhap
Lee Joon-seung
6/25/2007

A factory-apartment being built in the inter-Korean industrial complex in Kaesong, North Korea will be opened to South Korean clothing and stuffed goods manufacturers in September, a state-run industrial complex operator said Monday.

The 21 billion won (US$22.6 million) manufacturing and residential facility will house 33 companies and 2,500 workers from both South and North Korea, the Korea Industrial Complex Corp. (KICOX) said.

“More than 100 companies want to use the factory apartment,” said KICOX President Kim Chil-doo, indicating the level of interest by local companies. He said one of the chief merits of moving operations to the complex is cheap labor costs of around US$58 a month.

Kim said wages can only go up by less than 5 percent on an annual basis in accordance with pre-set agreements.

Most companies that wanting to use the new facilities are small- and medium-sized enterprises struggling to deal with the flood of cheap imports from China and Southeast Asia.

Construction on the five-story building began in May 2006, and the facility includes manufacturing areas, living quarters and a training center for North Koreans.

Kaesong park is the most prominent outcome of inter-Korean rapprochement that began with the landmark 2000 summit between their leaders.

At present there are 23 companies operating in the special economic cooperation region and 16 in the process of starting operations there. About 260,000 square meters are currently being used, but this is being expanded to 3.3 million square meters by the end of the year. The extra space could hold 300 companies.

KICOX said the factory-apartment has considerable advantages over other plants in Kaesong since it provides comprehensive support for small companies under a single roof, cutting operational costs in electricity, water and training of North Korean workers.

The corporation, which operates 32 state-run industrial parks in South Korea, said companies are expected to move into the factory-apartment in August ahead of the official opening.

Daily NK
Park Hyun Min
6/23/2007

Power transmission lines not used since May 1948 have been reopened to supply electricity to North Korea. The Ministry of Commerce, Industry, and Energy and the Korea Electric Power Corporation (KEPCO) held a commemoration ceremony for the completion of the Pyonghwa (Peace) Substation on June 21st. The substation will supply electricity to a first-phrase zone (3,3mn square meters) in the Kaesung Industrial Complex. Kim Young Joo, the Minister of Commerce, Industry, and Energy, Lee Won Gul, the CEO of KEPCO, and Lee Yoon Sung, a member of National Assembly participated in the ceremony.

Natural sources of electricity were abundant in North Korea before the Korean War because most electronic power facilities built during Japanese colonial period were concentrated in the North. Southern provinces of the Korean peninsula received electricity from the North through the 154kV power-transmission line between Pyongyang and Susaek Substation in Seoul until May 14, 1948.

The new substation was completed at a cost of 35bl dollars. The line runs 16km from Munsan Substation in Paju, Gyeonggi, South Korea, through the DMZ, and terminates at the Kaesung Complex. It consists of 48 pylons, 154kV power-transmission wire, and outdoor substations in Kaesung. The substation is supplying 100 thousand kilowatts of electricity to approximately 300 factories located in the first-phrase zone of the Kaesung Complex. As demand increases, the amount of electricity supplied by KEPCO could double. KEPCO has already been supplying electricity to specific factories in the Kaesung Complex since March, 2005.

In his congratulatory speech, Kim Young Joo compared “the historic linkage of power transmission lines to repairing blood vessels between the South and North, which were ruptured in May 14th, 1948.” He added that “Completing the construction of Pyonghwa Substation will strengthen the foundation of Korean Peninsula peace. North-South cooperation can flourish by supplying a stable source of electricity to the Kaesung Complex.”

Korea Herald
Matthew Lamers
6/21/2007

“Would you rather pay $1,000 a month for a laborer in South Korea, or would you rather pay $60 a month for a laborer in North Korea? It is up to you.”

When Byun Ha-jung, general manager at Hyundai Asan, put that question to a bus full of potential investors visiting North Korea, a sputter of chuckles filled the air.

But he was serious.

Yesterday, Hyundai Asan invited just over 100 guests to tour North Korea’s Gaeseong industrial park, just a few kilometers away from the Demilitarized Zone.

The potential benefits of investing in Geaseong are enormous. Up for grabs for almost anyone willing to front the cash, are factories for 43,900 won ($47.32) per square meter, even cheaper than in China, and an educated and hard working labor force that demands only about $2 a day.

Development of the complex has been steaming ahead and senior vice president of Hyundai Asan, Jang Whan-bin, said that the reason is that South Korean corporations are essentially being squeezed by rising labor costs in China and elsewhere. “It is difficult to compete with Chinese companies. Some South Korean companies that have moved production facilities to China will have to return to Korea” to maintain competitiveness, “and Gaeseong is the best alternative.”

Gaeseong’s laborers are a fraction of the cost in comparison to workers in developing countries like China and Vietnam. The minimum wage for North Korean workers in the industrial park is $50 a month for a six-day work week. Each worker is entitled to 14 days holiday per year, and maternity leave is up to 150 days, 60 of which are paid.

In 2004, the first 255 North Koreans were hired to work in the complex and as of February 2007 there were over 11,000. That number is expected to swell north of 70,000 before the first phase of the complex’s development is completed.

Han Cheon-seung, co-CEO of Citigroup Global Markets Korea, said that the North is “one of the last frontiers for development. The workers’ quality is quite high here. I think this project is really going to work.” Han added that he thinks the biggest draws for Gaeseong are labor, quality and the Korean connection. “Labor is about 1/30 of the cost here,” and the logistics of having factories located on the peninsula “is much easier than having factories in Vietnam or China.”

“About 7,000 companies have moved abroad – 2,000 of those to China – but Gaeseong is much closer to home and there is no language barrier. One very important question is – can we trust the North Korean government.”

A pertinent question indeed. It is often quipped that the only thing reliable about the North’s government is its unpredictability.

Still, some potential investors were not fazed at all by the geo-political tension between South and North Korea. Others voiced great surprise that a project like Geaseong has been as successful as it has. “What impresses me is the (cooperation) for reunification, roads and railroads being reconnected, for example … In Germany, the Berlin Wall came down and that was it,” said Knut Kille, a native German, now executive vice president of Robert Bosch Korea.

Regarding the North’s nuclear programs, Hyundai Asan’s Jang said, “The overall development of the country is the most important thing. I am not concerned with only the nuclear issue.”