North Korean Economy Watch

Daily NK
Kim Min Se
1/26/2007

The “first-runners” are first-tier wholesalers who connect Chinese manufacturers and North Korean market owners in large cities such as Sinuiju, Hyesan, Hamheung or Chongjin. The goods transported by the first-runners to metropolitan markets in NK are met by second-runners in smaller cities.

South Pyongan province’s Pyongsong, Sunchon and Nampo are the hub for those second-runners, who move imported commodities to further deep into countryside of North and South Pyongan provinces and Hwanghae province.

Moon, a 38-year old shopkeeper in a market in Sunchon, South Pyongan, said “As soon as we hear the news that first-runners brought goods, we go to them with money right away. Since they run a huge amount of money, ordinary buyers can’t even meet them.”

Moon said that for second-runners including herself it took about half million NK wons (180 US dollars) to buy goods for one time. She buys merchandise from first-runners and sells it back to local storeowners.

For second-runners, it is crucial to procure enough high-quality goods with low price. If one buys bad products, he or she loses money. Same rule applies to first-runners.

Second-runners also hand over raw materials to manufacturers. The diminutive North Korean industry relies partly on them.

Chinese sugar and flour turn to bread and candy, and imported clothing materials are manufactured in home factories. Most of the manufacturers who buy raw materials from second-runners are individual handicraftsmen.

Lee, a clothing producer in Hamheung, sells her homemade clothes in market. Lee has had good relationship a number of second-runners, who trade Chinese fabric, so she can even buy stuff on credit.

Throughout the March of Tribulation in late 90s, North Korean people had depended on home industry for their basic necessities. And now it is estimated that significant amount of industrial products in North Korean markets are home-produced.

Those with little capital or without a stand in local market go to the most remote regions in high mountains or countryside and sell their handicrafts via train. Although it is not North Korean business slang, such activity can be classified as “third-running.”

The so-called “third-runners” trade their home-manufactured goods with country people’s corn, bean or rice, since it is rare to own a lot of cash in rural area.

In sum, once persecuted North Korean private markets are now reflecting every aspect of capitalist economy.

Korea Times
Lee Jin-woo
1/26/2007

Unification Minister Lee Jae-joung Friday told European businessmen active in South Korea that the government would try its best to guarantee stability and predictability at an inter-Korean industrial complex in Kaesong, North Korea.

“Construction of the Kaesong industrial complex has fallen behind schedule but will proceed as planned,’’ Lee said at a luncheon meeting held by the European Union Chamber of Commerce in Korea (EUCCK) at a Seoul hotel.

The speech was given in English. Lee, who gained his master’s degree from the University of Manitoba in Canada and his doctorate from the University of Trinity College in Toronto in 1988, enjoys delivering speeches in English.

The minister said a power grid with the capacity of transmitting 100,000 kilowatts of electricity will be established at the Kaesong site in the first half of this year. Seoul has discussed the construction of a communication center with Pyongyang to expand the communication network there.

“The South Korean government will foster the best environment to make the Kaesong an attractive investment site,’’ he said. “We’re looking forward to seeing many European enterprises join the upcoming expansion of the complex.’’

Lee said the flow of exchanges and cooperation between the two Koreas has continued and even expanded despite the North’s nuclear test on Oct. 9 last year.

“You may wondering why South Korea is focusing on economic cooperation with the North while putting aside many better investment chances,’’ Lee said. “That’s because we believe economic cooperation is a short cut to ensuring peace on the Korean Peninsula.’’

EUCCK plans to carry out its second visit to the site in March. The chamber’s trip in 2005 was the first visit by foreign enterprises.

“Seeing is believing,’’ Lee said. “If you go and see the factories there, you’ll fully understand what I’ve told you today. I promise to assist your visit to the utmost to ensure that you have a memorable and rewarding experience.’’

On Wednesday, Lee, who took office on Dec. 11, made his first visit to the site.

About 11,200 North Korean men and women are working together with 800 South Koreans at the joint inter-Korean industrial complex. The total production in the complex last December alone was worth more than $10 million.

The complex plans to house 300 companies, which would hire as many as 70,000 workers, when power and water supply grids are completed in the first half of this year.

Currently, the EU accounts for more than half of foreign investment in South Korea and is the nation’s second-largest export market after China. It has provided humanitarian assistance worth about $430 million to North Korea since 1995.

Korea Times
Na Jeong-ju
1/26/2007

If at least one member of a North Korean household moves to South Korea after reunification, more than 3 million from the North may head south if the two Koreas are reunited, the Bank of Korea (BOK) said Friday.

According to the BOK’s Institute of Finance and Economy, if such an exodus takes place in North Korea after reunification, the South may face serious economic consequences, the report said.

If Koreas adopt a German model, in which West Germany extended financial support to East Germany before and after reunification, South Korea would shoulder a total of $500-$900 billion in reunification costs. If the money is spent appropriately, it will take 22-39 years for North Korea to top $10,000 in gross national income, the report said.

The institute proposed South and North Korea try to reduce economic gap through economic cooperation programs. If the South supports the North through development programs, using its capital and the North’s cheap labor, it can reduce reunification costs considerably, it said.

“It is desirable for the two Koreas to designate special economic zones to reduce their economic gap and conduct programs to develop the North Korean economy,’’ the report said.

With the development programs, the South can spend much less than adopting the German model, the report said. The reunification costs will be cut to $300-500 billion, while the period for North Korea to see a GNI of $10,000 will be shortened to 13-22 years, it added.

Daily NK
Kim Min Se
1/25/2007

Since 2002’s 7.1. economic reform measures, North Korea’s markets have become most vital part of peoples life. North Korean market system operates from ‘general market’ with huge process chain to small local ‘yard market’ in the remote countryside. And, in between, there are always some brokers.

An importer buys goods from China and transports them through cargo trains or trucks to large cities in North Korea, such as Hamheung, Chongjin, Pyongsung or Nampo. Wholesale traders take those products and resell to local businesspeople. In North Korean jargon, such process is called “running.”

Usually imported goods from China or North Korean domestic ones take three steps of circulation; one or two laps of ‘run’ is added in case of mountain area.

Wholesale is mostly carried out by cars. Since oil and vehicles are not enough, sometimes wholesalers rent cars by themselves.

A forty one-year old trader working in Dandong, China, Kim, said that he purchases goods from Chinese factories firsthand. If the amount of import is huge, Kim uses freight. If not, a few trucks are fine for him. At maximum, Kim bought 60 tons of texture from China at once and resold it to North Korean wholesaler in one month.

In Hyesan, Yangkang province, 38-year old Choi, a broker of mainly Chinese cloths and shoes, sells his stuff to nearby Chongjin. Choi told the Daily NK “There are two types of so-called running; first run and second run. “Running” requires a lot of capital like money for vehicles. So the person must be patient and cautious when buying and selling something.”

According to the interview with Kim, using vehicle in wholesale business takes from 3.5 million NK wons (roughly 1,000 US dollars) to 35 million wons. The money includes not only car rental but also “transportation permit” application fee. Transportation permit is required when vehicle and personnel move inter-province, and costs relatively large amount of cash.

Kim keeps about twenty percent of total sales as his profit. The other 80% is comprised of original price of goods, car tax, gasoline and multifarious types of ‘extra expenses,’ or bribe.

The “first run” business is apportioned to a few with privilege in North Korea. Those who can earn cooperation from Security Agency and police are able to do the first run. Without bribery, it is impossible to obtain various permits that are essential for any businessperson.

In addition, to trade with overseas Chinese merchants, one must possess enough wealth and credit. Credit enables North Korean businessmen to buy goods in China with comparatively low price. Those first runners are, in most cases, wealthy North Koreans with ten thousand US dollars cash on their hand at any moment.

Well it seems that reports of the deal were premature–Hyundai Asan is not a shoe in.  the updated report is below.  The original story in the Korea Times is posted belw it.

N.K. denies report it will keep Hyundai Asan as partnerfor Kaesong tour
Yonhap
1/24/2007

North Korea on Wednesday denied reports that it withdrew plans to change its partner for tours of Kaesong, a border town, and collaborate with Hyundai Asan Corp., the operator of tours to the North’s Mount Geumgang, the North’s official media reported.

According to the Korean Central News Agency, a spokesman for the Korean Asia-Pacific Peace Committee (KAPPC) said it “has no formal agreement with the Hyundai side over the issue of tour of Kaesong and, moreover, there was no agreement with the latter in this regard in recent days.”

“The KAPPC’s stand (on the Kaesong tour project) is consistent and it feels no need to examine or consider any change,” it added.

Korea Times
1/21/2007
Lee Jin-woo

North Korea has hinted that it is willing to start the long-delayed Kaesong tourism project with Hyundai Asan instead of Lotte, a Unification Ministry official said on Sunday.

“When former Unification Minister Lee Jong-seok visited the Kaesong industrial complex on Dec. 8, North Korean officials said they have finalized their decision to carry out the project with Hyundai,” said the official on condition of anonymity due to the sensitivity of the issue.

The former minister stepped down from the post on Dec. 11. His successor, Lee Jae-joung, has not made any specific comment on the issue.

The official also said North Korea’s Asia Pacific Peace Committee has given a positive signal to Hyundai Asan Chairman Yoon Man-jun during Yoon’s visit to a joint inter-Korean tourist site at Mt. Kumgang in North Korea.

Pyongyang has not issued any official document to confirm the verbal promise of the committee, according to the ministry and Hyundai.

Pyongyang has asked Seoul several times to accept Lotte Tour, a subsidiary of Lotte Group, in place of Hyundai Asan, the North Korea-related business arm of Hyundai Group.

The South Korean government, however, has rejected the request, saying, “The contract signed between the North and Hyundai is still effective and legally binding unless the two sides agree to nullify the deal.”

On June 30, the former unification minister met with Lotte Tour Chairman Kim Ki-byung, asking the chairman not to get involved in the inter-Korean business.

Experts said the North and Hyundai are expected to have a tug-of-war over the Stalinist state’s request for a payment of $150 per tourist to Kaesong, the capital of the Koryo Kingdom (918-1392).

Pyongyang has set the higher admission fee, nearly 20 times more than the $20 Hyundai pays to North Korea for every South Korean traveler to Mt. Kumgang. Hyundai has claimed the demand is outrageous.

Since July 1, the North has banned South Korean visitors to the Kaesong inter-Korean industrial complex from visiting the city’s downtown area including historic sites.

Hundreds of South Koreans, mostly businesspeople and government officials, had been allowed to make an excursion to Kaesong during their visit to the industrial complex.

The Stalinist state also stirred much controversy by signing an overlapping contract with a small South Korean company, Unico, in 2005 despite its initial contract with Hyundai Asan to develop golf courses at the Kaesong Industrial Complex.

Hyundai signed a memorandum of understanding (MOU) with Emerson Pacific Group, which has been constructing golf courses at the scenic resort area at Mt. Kumgang, for the project in Kaesong.

Hyundai plans to develop a total of 66 million square meters of land by 2012, including information-technology complexes and residential districts at the industrial complex. The project commenced at an historic inter-Korean summit in June 2000.

Joong Ang Daily
Seo Ji-eun
1/22/2007

Last year was a nightmare for Hyundai Asan Co., the sole domestic operator of inter-Korean businesses. But the Hyundai Group affiliate sees brighter days ahead for its tourism program at Mount Kumgang, a scenic North Korean resort, this year, and is stepping up marketing efforts.

Earlier this month the company launched a radio ad campaign featuring a decades-old Korean children¡’s song including the lyric, “Let¡’s go to Mount Kumgang.” The commercial does not identify Hyundai Asan as the tour operator, and Hyundai Asan said the broadcast was aimed at promoting the destination among tourists.

The company is also offering discounts of 25 percent for people born in the year of pig, which falls this year and every 12th year, and students who took college entrance exams late last year. One parent per student can also receive the discount, which will last until late next month.

Perhaps helped by those events, a Hyundai Asan spokesman said the number of reservations for January has passed 10,000, which is around the monthly average.

“When tour programs to the inner part of Mount Kumgang launch this spring and the golf resort opens in October after starting trials in June,” the spokesman said, “we definitely expect more tourists unless unexpected political factors erupt.”

Hyundai Asan earlier in the month said it aims to attract 400,000 tourists to the North Korean mountain this year. It set the same goal last year but fell far short with 240,000 tourists when reservations plummeted after North Korea’s missile launch in July, severe floods during the summer and the North¡’s nuclear test in October. Immediately after the nuke test, 65 percent of customers began to cancel their reservations, and a large portion of travelers who would have crowded the resort to see the autumn foliage didn’t come.

More than 300,000 people, a record-breaking figure, visited Mount Kumgang in 2005.

Meanwhile, a government source close to North Korea said yesterday that North Korea would start a tourism project at Kaesong, a joint inter-Korean business site in the North, with Hyundai Asan instead of Lotte Tours, the company North Korea wanted to work with instead. Neither the Unification Ministry nor Hyundai Asan released an official statement regarding that issue.

Korea Times
Chang Se-moon
1/23/2007

Obviously, it is important to know the correct answer to this question. Sanctions that have no impact on North Korea’s economy will not change the behavior of North Korean leaders. If sanctions do have a significant impact, the possibility that North Korean leaders may be tempted to resolve the pending security issues through negotiations exists.
In answering the question, however, we need to keep in mind what the British economist John Maynard Keynes (1883-1946) said: “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor draw correct conclusions.’’ In plain English, Keynes stressed an unbiased economic way of thinking that could help us draw correct conclusions. In other words, until we review all the facts with an open mind we should not make up our minds.

This is exactly what we will do by assessing the impacts of economic sanctions on North Korea.

The first question that comes to mind is which sanctions are we talking about. If we review U.S. sanctions on North Korea since the outbreak of the Korean War in 1950, there would be too many sanctions imposed on North Korea to be practical. There are three important sanctions that are still in effect, however. One is the U.S. denial of a Most Favored Nation (MFN) trade status on North Korea’s exports.

This sanction was imposed on North Korea’s exports to the United States on September 1, 1951, following the outbreak of the Korean War. MFN tariffs are the lowest tariffs that are levied on imports to the U.S. Over 99 percent of imports to the United States qualify for the MFN tariffs. Without MFN status, tariffs on North Korean exports to the United States are so high that North Korea simply cannot even imagine exporting anything to the United States.

The second of the three important sanctions stemmed from the bombing of Korean Air 858 by North Korean agents on November 29, 1987. The explosion killed 115 innocent passengers and crew members. On January 20, 1988, North Korea was placed on the list of countries that supported international terrorism according to the U.S. Export Administration Act of 1979.

The importance of this sanction is that placement on the list has made it impossible for North Korea to borrow money from international financial institutions including the World Bank and the International Monetary Fund. Like the denial of MFN status, the placement of North Korea on the list of countries supporting international terrorism continues to this date.

The third of these three key sanctions relates to tightening of North Korea’s illegal financial transactions, which culminated in Banco Delta Asia’s termination of business dealings with North Korea as of February 16, 2006. You may know that Banco Delta Asia had long been suspected of handling North Korea’s illicit activities overseas such as laundering of counterfeit U.S. dollars and sales of illegal drugs

Banco Delta Asia is located in Macao, which is a Special Administrative District of China. Tightening of North Korean financial transactions was extended to North Korean trade during 2006. This added pressure on North Korea originated from U.N. Resolution 1540 following North Korea’s test-launching of long-range missiles on July 5, 2006, as well as from U.N. Resolution 1718 which followed North Korea’s nuclear test on October 9, 2006.

Are these sanctions having an impact on North Korea’s economy? Perhaps, a more accurate question is whether these sanctions are placing enough pressure on North Korean leaders to reconsider the possibility of returning to the negotiation table?

One aspect is the status of North Korea’s trade deficit. As you probably know, North Korea buys from other countries much more than it sells to other countries. When the amount of imports exceeds the amount of exports it’s called a trade deficit. North Korea’s annual trade deficit averaged about $800 million from 2003 to 2005. This figure does not include North Korea’s trade deficit against South Korea, since South Korea appears to consider any financial support to the North as a long-term investment rather than a trade deficit.

How has North Korea been paying for the trade deficit? The ways have been unique. Almost the entire deficit appears to have been financed by weapons sales, illicit activities, and funds flowing from South Korea through joint projects.

In fact, a study by the Korean Institute for Defense Analysis indicates that full implementation of U.N. Resolution 1718 would cause North Korea to lose just about the same amount ($700 million to $1 billion) by stopping exports of weapons and illegal drugs and counterfeit money.

The Economist Intelligence Unit is quoted to have estimated in 2003 that “North Korea earned as much as $100 million a year from counterfeit money, while in 2005, a U.S. task force estimated that “$45 million to $60 million in Pyongyang’s counterfeit currency (primarily in U.S. $100 bills) is in circulation,’’ reportedly, including some in Seoul’s Namdaemun Market.

Assuming that recently added sanctions will cause North Korea to lose about $800 million that it has been earning overseas each year, the next interesting question is how North Korea will pay for the annual trade deficit of $800 million in the future? If North Korea does not pay for its imports, other countries will refuse to sell products to North Korea and the North Korean economy will suffer.

North Korea cannot borrow from world financial institutions because of the 1988 U.S. sanctions that branded North Korea as one of countries supporting international terrorism. They cannot use the money from foreign direct investment because China and Korea are the only two countries that have been willing to invest in North Korea, but the combined amount is not even close to paying for the annual trade deficit.

Think of it this way. If you borrow money every year, and lenders believe that your ability to pay off the debt is rapidly declining, will lenders continue to lend you money? Not likely. With sanctions adversely affecting North Korea’s ability to pay for imports, North Korea will find it increasingly difficult to buy what it needs. The breaking point may not be imminent, but the future is predictable.

This is what I think will happen. North Korea will ask China to increase its foreign direct investment in North Korea by giving China more incentives for such investment. These incentives may include low taxes and free land. North Korea will ask South Korea to send more money.

For instance, as of July 1, 2004, Hyundai Asan and North Korea set the entrance fee to Mt. Kumkang at $10 for a day trip, $25 for a two-day trip and $50 for a three-day trip. On May 1, 2005, these fees were raised to $15, $35, and $70. On July 1, 2006, these fees were raised again to $30, $48, and $80. This is just one way.

North Korea may also ask South Korea to lend it a large sum of money with an empty promise of paying it back. This explains in part why it is so important for North Korea to have leaders of the South Korean government who are friendly to North Korea.

These desperate acts are likely to be very short of paying for the majority of the annual trade deficit. If sanctions continue to be effective, the likelihood of North Korea returning to the negotiation table increases. Economics is rarely boring, especially when it deals with real problems.

Yonhap
1/22/2007

North Korea will put strong emphasis on inter-Korean economic projects this year as the communist state insinuated that it is suffering from economic difficulties, a state-run think tank said Monday.

In its new year commentary, Pyongyang partially admitted that its economy is in bad shape and said its highest priority for 2007 is boosting the sagging economy, the Korea Development Institute (KDI) said in a report.

“Unlike in previous years, when the North placed political ideology, the military and the economic sector, in that order, as its three key areas of importance, North Korea set the economic sector ahead of those two other sectors in the commentary this year,” the KDI said.

“The North also skipped over commenting on a series of economic achievements, except for saying that it has secured a foothold for a new leap. … In addition, it said that it has gone through the ‘worst adverse situation’ in the past 10 years, showing that the economy was still suffering from difficulty in 2006.”

To boost the economy, the North may actively push for inter-Korean economic projects and depend on the South for increased economic support as its economic cooperation with other nations such as the United States and Japan has come to a near halt, the institute said.

In the commentary, the North also used a slogan, “put an importance on the Korean people,” a comment indicating increased inter-Korean cooperation, the KDI said.

Every Jan. 1, the communist nation releases its new year commentary on three state dailies, including the Rodong Sinmun, one of the only sources of information on the country’s economic policy plans.

Under the title, “Create a prosperous era of the Songun (military-first) Choseon,” the North urged its people to make concerted efforts to solve the economic problems in 2007 and make the country an economic power as a socialist nation.

According to many analysts, the North’s annual economic growth may have fallen below 1 percent last year, down from an estimated 1 percent growth in 2005 and 2.2 percent in 2004. A variety of global economic sanctions against Pyongyang could have contributed to the slower growth in 2006, the institute said.

Yonhap
1/22/2007

China has issued a permit to allow its citizens to take a tour of the North Korean Mount Geumgang, via South Korea, tourism officials said Monday.

Hyundai Asan Corp., the operator of the tourism business at the scenic mountain, signed an exclusive contract with a travel agency affiliated with China’s communist youth organ, they said.

Christian Science monitor
Donald Kirk
1/22/2007

More than a century after American mining engineers first opened up North Korea’s gold mines, a fortune in gold and other metals and minerals offers the prospect for North Korea to ease the pressures of financial sanctions.

The question, however, is whether North Korea can navigate around a US Treasury order that forbids institutions doing business in the United States from dealing with Banco Delta Asia in Macao, the main avenue for North Korean financial dealings.

The Treasury ban, first promulgated in 2002, has effectively frozen the North’s efforts to conduct international business. While it doesn’t extend to gold, market experts say that US officials have made it clear that banks should not buy North Korean gold.

“The US has been using coercion, innuendo, and sheer force to intimidate banks from dealing with North Korea,” says Colin McAskill, chairman of Koryo Asia Ltd., which invests in North Korea through the Chosun Development & Investment Fund. “We want to get a breakthrough on the six-party talks by getting the sanctions eased or lifted entirely. We’re at a very delicate stage.”

North Korea, says Mr. McAskill, “wants to move back into legitimate business.” Selling gold on the London market – the world’s largest – “is one way they can prove that,” he adds. “They have a wealth of minerals – gold, silver, zinc, magnesite, copper, uranium, platinum – that needs investment to extract.”

One indication of North Korea’s need to sell gold was its decision to provide information needed by the London Bullion Market Association (LBMA) to list the North’s central bank as a “good deliverer” of gold and silver. Listing with the LBMA is essential for refiners who want to sell their products in London. The bank’s listing was suspended 2-1/2 years ago when it failed to respond to LBMA requests for “proactive monitoring.”

The LBMA said it does not “take into account any political criteria,” and will keep the bank on its rolls for another three years without monitoring.

Despite the listing, market experts say the big banks that are major buyers of gold – and form the LBMA’s core membership – are not likely to flout the spirit of the US Treasury order against Banco Delta Asia, through which North Korea exported gold prior to the ban.

“The fact that they’re on the list does not mean they can deliver to the London market,” says Stewart Murray, the LBMA’s chief executive. “When we have sanctions, none of the facilities will accept delivery from a company or a country that is subject to these sanctions,”

Trying to build momentum for talks

The reluctance of buyers in London to deal in North Korean gold, widely seen as the likeliest legal way to mitigate the impact of the banking ban, adds urgency to another effort at six-party talks on North Korea’s nuclear weapons.

The chief US negotiator, Christopher Hill, has been traveling through northeast Asia, stopping off here, in Tokyo, and in Beijing after talks in Berlin last week with his North Korean counterpart, Kim Kye-Gwan. The Chinese are expected to set a date for renewing the talks, which broke off before Christmas amid North Korean demands for the US to lift the ban on Banco Delta Asia.

North Korea raised hopes for renewed six-party talks, saying “a certain agreement” was reached in Berlin last week. Neither Mr. Kim nor Mr. Hill have provided details, but analysts suspect that the two discussed the financial issue and its relationship to the ultimate purpose of six-party talks: getting North Korea to give up its nuclear weapons.

North Korea has been renewing its drive to sell gold for the past year since submitting to the LBMA’s monitoring requirements. At the same time, the North has sold relatively small amounts of gold in Thailand, with which it has developed a strong trading relationship in recent years. Last spring, North Korea exported 1.3 tons of gold to Thailand for nearly $30 million while also looking for markets elsewhere in the region.

“Why would you go to the trouble of going to London,” asks Roger Barrett, whose firm, Korea Business Consultants in Beijing, is helping to develop gold mining in North Korea. “They’re totally entitled to sell their gold.”

No reports of exports since July

Yet there have been no reports that North Korea has exported any gold since testing seven long-range missiles in July. Since the North conducted an underground nuclear test in October, which resulted in deeper sanctions from the UN Security Council, dealers have reportedly been even more reluctant to buy North Korean gold.

Estimates of North Korea’s gold reserves range as high as 2,000 tons, but mining has been sporadic since British, American, and then Japanese interests mined for gold beginning in the 19th century. With foreign expertise, North Korean mining may return to the period between 1983 to 1993, when its central bank sold an average of one ton a month on the London market.

“What we’re doing is normal business,” says Mr. Barrett in Beijing, explaining the efforts at reviving the mining industry. “We’re creating jobs for people, in line with the UN basic charter, in line with economic growth.”