North Korean Economy Watch

Joong Ang Daily
Lee Young-jong
12/13/2006

North shows an interest in Kaesong legal systems

North Korea has shown interest in introducing the legal taxation and accounting systems used in the market economy at the Kaesong Industrial Complex, Vice Unification Minister Shin Un-sang said yesterday.

Speaking at an academic forum sponsored in Seoul by the North Korean Law Research Institute to discuss how to establish the systems in the complex, Mr. Shin said, “North Korean officials’ perceptions in regard to establishing market-economy legal systems for the Kaesong Industrial Complex are changing. In the past, they have shown negative perceptions, but lately they have expressed a high interest and sympathized with the necessity of those systems.”

The vice unification minister said establishing a legal framework in line with international standards is essential for the stable development of the complex.

In the complex, 15 subregulations on taxation, labor and so on have been enacted since it opened in December 2004. Currently, about 10,000 North Koreans work in 18 South Korean companies in the complex.

Meanwhile, Jay Lefkowitz, the United States’ special envoy on human rights in North Korea, said last week that Seoul needed to use the complex as a pretext to pressure Pyongyang on human rights issues by opening it up for international inspection.

He said Seoul was one of the few countries to have enough leverage to pressure the North.

Korea Times
Lee Jin-woo
12/12/2006

Kaesong to Test Market Economy

Vice Minister of Unification Shin Un-sang said Tuesday North Korea is interested in introducing a market-style economy in the joint inter-Korean industrial complex in Kaesong, North Korea.

“It’s been true that North Korea has been quite reluctant about introducing market economy-based regulations,” Shin said during a seminar on inter-Korean relations and North Korean law held in Seoul. “However, they recently agreed on the need to develop new legal conditions for the Kaesong Industrial Complex, especially in terms of taxation and accounting.”

The vice minister said the new regulations for Kaesong have great symbolic meaning in that they would significantly help North Korea better understand the legal system of a market economy, which is different from their Stalinist system.

Shin predicted that if the market system is working successfully in Kaesong, North Korea would expand the capitalist system in the rest of the country although he was unsure when the expansion would be made.

Shin, however, said there would be a number of stumbling blocks that the two Koreas have to deal with, as the two nations’ legal systems differ in many respects.

The two Koreas abide by a special law comprising some 15 lower-level regulations on minimum wages and basic taxation, mainly aimed at the management of the joint inter-Korean venture.

The number of North Koreans working for the 18 South Korean firms at the industrial complex surpassed 10,000 last month, according to the Ministry of Unification.

It’s been 34 months since Hyundai Asan, the South Korean developer of the joint industrial park, first hired a group of 42 North Korean construction workers in February 2004, the ministry said.

Official Web Page:

Northeast Asia can be considered the last major economic frontier on the Asian continent.  The region has enormous economic potential, but this potential can only be realised through dynamic cooperation and sharing of resources.

Recognising Northeast Asia’s considerable potential and geopolitical significance, UNDP in 1991 agreed to support the initiative of the countries in the region to establish an institutional mechanism for regional dialogue and further cooperation.   For the past twelve years, the Tumen River Area Development Programme has facilitated economic cooperation among the five member countries: China, the Democratic People’s Republic of Korea (DPRK), Mongolia, the Republic of Korea (ROK), and the Russian Federation.  The member countries are equally represented in the Consultative Commission for the Development of the Tumen River Economic Development Area and Northeast Asia, which meets annually at Vice Ministerial level.

The main objectives of the Tumen Programme are to:

• attain greater growth and sustainable development for the peoples and countries in Northeast Asia, and the Tumen Region in particular;
• identify common interests and opportunities for cooperation and sustainable development;
• increase mutual benefit and mutual understanding;
• strengthen economic, environmental and technical cooperation; and
  work to ensure that the Tumen Region is attractive for international investment, trade and business.

The first phase of the Tumen Programme involved extensive planning and background studies.  An interim phase focused on investment promotion and development initiatives designed to build momentum for the region as a growth triangle.  The second phase built on the institutional framework for regional cooperation created by the multilateral agreements concluded in 1995.  The third – and current – phase continues to address factors fundamental to regional economic cooperation and is designed to ensure the sustainability of this regional cooperation framework.

Why the Focus on the Tumen Region?
The Tumen Region has great potential as a major entrepot for international trade because of the strategic location of the Tumen transport corridor, the strong complementarities of the Tumen River Area, vast natural and human resources, and the area’s accessibility to the resources and markets of Northeast Asia.

Northeast China and Mongolia are landlocked and therefore have a strong interest in access to ports in DPRK and the Russian Far East.  Overseas shippers also have a stake in the Tumen transport corridor, for it offers a much shorter route to affluent and new markets, and facilitates transit trade to a number of destinations.

The local governments in the Tumen Region have been steadfast supporters of the Tumen Programme since its inception.  It appears that central governments in Northeast Asia are now re-emphasising the value of the Tumen Region, particularly its strategic transport corridor.  Northeast Asian governments are rapidly improving the Tumen Region’s infrastructure network and transport services.  They are also working to create legal and institutional mechanisms conducive to cross-border trade and transport.  The Tumen Programme is actively facilitating the creation of an enabling environment through “soft” infrastructure and human capacity building.

Why is Regional Cooperation so Important?
Regional cooperation is a vital part of the development process and a building block for effective participation in world trade and capital markets.  For the Tumen Region, which partly consists of small and remote areas of large countries, economic cooperation is an effective way to avoid marginalisation.  Cross-border cooperation also helps resolve environmental issues and facilitates the adoption of international environmental standards.  Most importantly, enhanced economic cooperation in Northeast Asia helps improve political relations and stability, in turn vital elements for investment and economic growth.

It is worth recalling how remote and closed the Tumen Region was just a dozen years ago, to appreciate the full significance of its role as a frontier for economic cooperation in Northeast Asia.  Much has been achieved during the Tumen Programme’s existence, particularly in terms of opening borders and increasing interaction in a region that was, until recently, tense and largely closed.  A new trade and transport corridor has been created, which will – in time – evolve into an economic corridor with a significant impact on poverty reduction and improved living standards in the region.

The Future of the Tumen Programme
The prevailing political and economic climate in the region has altered dramatically since the start of the Tumen Programme in 1991.  The Soviet Union has dissolved, China and ROK have established diplomatic relations and a major trading partnership, and there has been a degree of rapprochement between DPRK and ROK.  The transition to stronger economic systems in the countries that relied on the Soviet Comecon trading system has reinforced the logic of economic cooperation in the Tumen Region.  The increased participation of DPRK, Mongolia and the Russian Far East, combined with the rapid expansion of the Chinese economy, will help the Northeast Asian economy grow.

Dynamic cooperation has found increasing expression in Northeast Asia, and relations in the region continue to improve, helped by stronger economic links.  Despite major improvements in the geopolitical circumstances of the region, however, much remains to be done.  The Tumen Programme is the only initiative that brings the member countries together on a sub-regional basis, and its existing institutional structure and multilateral agreements should be utilised to maximum effect to help Northeast Asia achieve peace and prosperity.

Yonhap
12/6/2006
Byun Duk-kun

Unification Minister Lee Jong-seok returned to South Korea Wednesday after a two-day visit to North Korea aimed at rallying support for a cross-border tourism program criticized by the United States.

The South Korean government’s point man on North Korea arrived in the country’s eastern city of Goseong shortly after crossing the heavily-fortified border with North Korea around 5 p.m.

Lee was the highest-ranking South Korean official to visit the South Korean-developed tourist destination in Mount Geumgang since the communist North tested a nuclear device about two months ago.

The visit was geared towards meeting South Korean officials and businesspeople at the North Korean resort, but it followed Washington’s intensified criticism against the tourism program.

The United States had long opposed the inter-Korean tourism program, but never too explicitly. It asked the Seoul government to halt the country’s cross-border project with the North after Pyongyang conducted its first nuclear weapons test on Oct. 9.

The Mount Geumgang tourism program appears to be “designed to give money to North Korean authorities,” Assistant Secretary of State Christopher Hill said while traveling here in October.

Hill represents Washington in international negotiations aimed at persuading the North to abandon its nuclear ambitions. The talks are also attended by the two Koreas, Japan, China and Russia.

Seoul remained taciturn on the U.S. demand, only taking what U.S. critics called “eye-washing measures.”

The unification minister, however, said the tourism program must “continue” and “be developed further.”

“We must never take a break from trying to ease tension between the North and South Korea, no matter how difficult the times and conditions are,” the minister said while meeting with reporters at the North Korean resort,

“In that sense, these projects (with North Korea) must continue to be developed and widened,” he added.

Seoul was never expected to halt, let alone suspend, the tourism program, but the minister’s remarks come amid international efforts to punish the North for its nuclear test.

Shortly after the Oct. 9 test, the United Nations Security Council approved a resolution that prohibited the transfer to North Korea of any financial resources or assets that can benefit the communist nation’s nuclear and weapons of mass destruction programs.

Millions of dollars have been paid to Pyongyang since the Mount Geumgang resort opened in 1998, while Hyundai Asan, the South Korean developer of the resort, regularly pays large amounts of money to the North in the form of admission fees levied on South Korean tourists traveling there.

The South Korean government claims the money is unlikely to be used for the North’s nuclear or WMD programs, though it admits there is no way of knowing for certain.

The U.N. Security Council has yet to decide whether Seoul’s continued, and apparently renewed, support for the Mount Geumgang tourism program runs counter to its North Korea sanctions resolution.

“I believe no one can dispute the positive effects that the Mount Geumgang tourism program and the Kaesong industrial complex project have had on North-South relations,” said Lee.

The unification minister has offered to step down from his Cabinet post and is expected to be replaced next week by Lee Jae-joung, senior vice chairman of the presidential National Unification Advisory Council.

He was scheduled to arrive in Seoul later in the day.

Korea Times
11/26/2006

A North Korean insurance company compensated a South Korean firm for a car crash at the joint inter-Korean industrial complex in Kaesong, North Korea, for the first time, reports said yesterday.

A bus belonging to the Kaesong Industrial District Management Committee, which legally belongs to the Stalinist North, and a vehicle of the Korea Land Corp., a state-run company of South Korea, collided at the complex on July 12, according to reports.

The South Korean company had its car repaired in the south, but asked a North Korean insurance company to cover the bill, which was estimated to be around 1.1 million won ($1,160).

After consulting both companies, the North’s insurance company decided the bus driver was responsible for 80 percent of the incident, paying some 840,000 won, which was actually paid in U.S. dollars, to the South Korean company on Sept. 21.

Some 21 South Korean firms operate factories, using cheap but skilled North Korean labor in the complex, which opened in June 2004. The number of North Koreans at the complex exceeded 10,000 last week, according to the Ministry of Unification.

N. Korea invites S. Korean Buddhist leader to Pyongyang
From Yonhap
11/22/2006

North Korea has invited the head of South Korea’s top Buddhist sect, the Jogye Order, to visit Pyongyang before the end of the year, officials at the Buddhist order said Wednesday.

North Korea made the invitation to Ven. Jigwan during a ceremony commemorating a renovation of a temple at North Korea’s Mount Geumgang on Sunday, but he replied it would be difficult this year due to his tight schedule, the officials said.

Joong ang Daily
11/20/2006

Hyundai Asan Corp., a South Korean company spearheading inter-Korean economic projects, said yesterday it is considering slashing jobs or wages at a scenic North Korean mountain resort that has been opened to Koreans.

The restructuring underscores how Hyundai Asan is struggling with a falling number of tourists to Mount Kumgang on North Korea’s east coast amid growing security concerns over the communist neighbor’s nuclear test in early October.

North Korea has opened the mountain to Koreans since 1998 as part of the South Korean government policy of engaging North Korea and helping Pyongyang’s moribund economy.

“The number of tourists is sharply falling to less than 100 people a day, due to the North’s nuclear test and seasonal factors,” said Hyundai Asan Chief Executive Yoon Man-joon, who was visiting the mountain resort to mark the eighth anniversary of the tourism project.

“We are now studying a number of ways to narrow losses, including a reorganization of the workforce,” he told reporters.

After the North’s missile tests in July and nuclear test last month, the tourism project is now facing its biggest challenge with the daily number of tourists dropping as low as 80, Hyundai Asan officials say. Hyundai Asan is delaying its plan to open the inner part of the mountain to South Korean tourists to March or April next year because of the falling number of tourists, Mr. Yoon said.

Joong Ang Daily
11/18/2006

Eight years have passed since the first tourist from South Korea entered North Korea to explore Mount Kumgang, one of North Korea’s most scenic mountains, but the picture at Hyundai Asan, operator of the tour program, is not so picturesque.

Demand for the tour has plummeted after North Korea’s nuclear weapon test last month.

Only 22,000 tourists visited Mount Kumgang in October, a popular fall season. Originally, 40,000 made reservations but almost half canceled because of the nuclear test.

For the first 10 months of 2006, a total of 226,000 tourists have visited the North Korean mountain, 20 percent less than the previous year and well below the company’s target of 350,000 for this year.

“Next year the tour area will be expanded to inner-Kumgang, and a golf course will be ready in May. We expect to attract more tourists,” said an official from Hyundai Asan.

Meanwhile, two conservative citizen groups, Right Korea and the Citizens’ Coalition to Stop Nuclear Development of North Korea, rallied Thursday. They want the tours stopped, saying it is a source of foreign currency for North Korean dictator Kim Jong-il.

From the Daily NK
11/9/2006

On Tuesday, a number of residents in Hoiryeong, North Hamkyong Province mass-protested in front of the Nammun (a south gate) market for “compensation of market refurbishment payment” and against the merger of Hoiryeong markets, according to a North Korean source.

The inside source told the Daily NK through a telephone interview that evening ,“From this morning, more than a hundred shopkeepers, their families and the residents of Nammun district rushed to the market management office to request compensation of market refurbishment fees and repeal of Nammun market closure.”

The informant said that the mass protested against the local government because they were stirred by the authority’s decision. It is extremely exceptional that such a mass protest occurs in North Korean society.

They formed lines to present their opinions and in the meantime, some traders shouted phrases such as “Refund the refurbishment payments!” The primitive type of protest in North Korea, in which any kind of private mass activities are forbidden, means much more than western societies’ demonstrations. “No one particularly led the incident,” the informer testified, “but outraged merchants poured into the management office as a group.”
Security officers forcefully dispersed the protestors and crowd.

He added that Hoiryeong local security officers, fearing a spreading of the protest, forcefully dispersed the protesters and crowd. And it was not clarified whether any of the protestors got arrested.

Nammun market is two kilometers southeast of Hoiryeong city, and a frequent place for shopping of food and other basic supplies by local residents.

The incident occurred when the market management officials started to remove the market.

The officials had been collecting three thousand NK won per trader as “refurbishment fees” since late October.

That morning, however, the market management office ordered all the markets in Hoiryeong to be combined with newly constructed Hoiryeong Market, which is located former Hoiryeong Southern middle school, unilaterally, and started to remove the shops in the Nammun market.

Shopkeepers of Nammun market, having been unaware of such a decision, could not accept the order, the informant told the Daily NK. And none of them was guaranteed with a spot at the new Hoiryeong Market; even if one was, there would be a lot of time and money to be spent before actually having a shop at the new market.

Those shopkeepers of the Nammun Market, waiting for the opening hour, saw the removal of their stands, and sought the management officials. When they found any official unavailable, an angry outburst came.
There was a violent clash among angry residents.

The stand-owners and their families went to the office and asked accountable senior officials for compensation, which they did not receive. One protestor reportedly shouted, “It is ridiculous to walk five kilometers (to the new Hoiryeong Market) to buy a piece of Tofu!”

It was informed that amid the protest there was a violent clash among angry residents. When a man watching the demonstration said it was meaningless to protest, shopkeepers assaulted him for collaborating with the officials.

As soon as an act of violence happened, tens of security officers came to the site and dispersed the protestors and bystanders. Meanwhile, traders vehemently resisted and abused the security guards.

The newly built Hoiryeong Market is constructed at the site of closed Hoiryeong Southern middle school with about 700 sale stands, which are one meter long and a half meter wide. A down payment of 200,000 NK won (US$690) and daily rental fee of 10 to 30 won are required for a stand. Black market exchange rate is over 3000 won per US dollar while official one is 140 per a dollar.

Joong Ang Daily
11/8/2006

Amid continued concern that money spent on the Kaesong inter-Korean industrial complex fuels Pyongyang’s military, the Unification Ministry said yesterday that most of the wages paid by South Korean companies buy daily supplies and food for North Korean workers.

Song Yong-deung, 66, a Korean-Australian who operates a Kaesong-based food and supply company jointly owned by North Korea, told the ministry that his company regularly provides goods to North Korean workers, according to a press release from Goh Gyeong-bin, an official in charge of the complex. Song’s company gets money from North Korean authorities, who in turn accept the wage payments from the South Korean companies operating the complex. The North Korean workers do not directly receive their salaries.

According to data provided by Mr. Song and the ministry, South Korean firms pay an average of $600,000 per month in wages, of which about 45 percent is deducted for fees such as insurance and taxes. In March, after the deductions, a total of $295,000 was paid to the North, of which $219,000 went to Mr. Song’s company to purchase goods, such as rice, for the workers.

Unification Ministry officials said yesterday the bulk of the information provided by Mr. Song matched Seoul’s own assessment on how the money sent to the North is being used. Asked why the ministry has not tried in the past two years since the complex opened to verify how the money sent for wages was being used, Yang Chang-seok, a ministry spokesman, said Seoul has repeatedly asked the North to provide a detailed account of the cash flow, but other than stating the workers bought supplies, little information has been provided.

“Given the nature of the North’s closed society, confirmation itself is problematic,” the spokesman said.

The efforts by Seoul to cast a light on the flow of the money being paid to the North comes at a time when Washington is pushing Seoul to curb inter-Korean projects, citing transparency issues over money sent to the North. Over the weekend, President Roh Moo-hyun vowed to continue with inter-Korean projects in a policy speech addressed to the National Assembly. Currently, there are 15 companies operating at the complex employing 9,632 North Koreans.

The announcement came as U.S. delegation visited Seoul this week to discuss how to implement the United Nations sanctions resolution against the North.

From Businessweek:
Joe McDonald
11/5/2006

In the midst of tensions over North Korea’s nuclear program, a Western company is there searching for oil. Another just bought a bank.

“North Korea is hungry for business,” said Roger Barrett, the British founder of Beijing-based Korea Business Consultants, who recently took 11 Asian and European clients to Pyongyang to play golf and make contacts.

A small group of Westerners are taking on the challenge of doing business in the isolated North, hoping to get in on the ground floor as its communist rulers experiment with economic reform.

The obstacles are daunting. A Stalinist dictatorship, bureaucracy and language barriers. Foreign sanctions that block most financial transfers, making it hard to get paid and to get supplies. And now worries that United Nations sanctions imposed after North Korea’s Oct. 9 nuclear test could be expanded to a general clampdown on trade.

But the Westerners talk positively about the North as a business environment, with skilled workers and leaders who they say welcome foreign investment.

“They are very skillful and hardworking,” said Felix Abt, a Swiss businessman who oversees two ventures in Pyongyang, one that makes business and game software for sale in Europe and another that makes antibiotics and painkillers for the domestic market. “It’s sometimes faster to get licenses and necessary approvals here than it is in China or Vietnam.”

Barrett said that even as the U.N. Security Council debated the latest sanctions on the North, he got inquiries from investors interested in its rich mineral resources and low-cost manufacturing work force.

“Investors are rushing into China, but labor costs there are escalating, and companies are looking for an alternative,” Barrett said. North Korea “has absolutely the capabilities to take off like South Korea.”

So far the largest foreign business community in North Korea is from China, its main source of trade and aid.

South Korea accounts for most of the North’s foreign investment, with stakes totaling $620 million in an export-manufacturing zone and a resort for foreigners. China’s investments total just $31 million, according to the Chinese Commerce Ministry.

U.S. regulations allow American companies to trade with North Korea under limited conditions, though tensions between the governments and lack of diplomatic relations raises the risk of doing business. Britain, Germany, Sweden and other Western governments, meanwhile, have official relations with Pyongyang.

North Korea’s foreign trade has risen sharply, though the total was less than $4 billion last year, according to South Korean and Chinese government figures. Trade with the South soared by more than 50 percent in 2005 to just over $1 billion.

Most trade is carried out by North Korean state companies, not private entrepreneurs. And some partners are shying away. Trade with Japan, once the North’s No. 1 trading partner, tumbled from $1.3 billion in 2001 to just $200 million last year amid tensions with Tokyo over North Korea’s abduction of Japanese nationals in the 1970s and ’80s.

The Europeans’ chamber of commerce in Pyongyang had 12 members when it was launched last year. They include delivery company DHL Express, an Italian law firm and a German venture founded in 2003 to provide Internet access to foreign businesses in Pyongyang.

This tentative foothold follows the slow pace of economic reform in North Korea. Only in 2002 did North Korean leader Kim Jong Il allow limited free enterprise to revive a decrepit economy, which teetered in the 1990s following the loss of Soviet aid and then collapsed amid widespread food shortages. Still, foreign observers say officials are reluctant to give up control, despite prodding from Beijing, which wants faster reforms to reduce its ally’s dependence on aid.

Abt, the Swiss businessman, moved to Pyongyang in 2002 after seven years working in Vietnam, another Asian communist economy in the throes of reform.

“I heard that some economic reforms were in the pipeline, and I was quite thrilled to experience the beginning,” said Abt.

Now his Vietnamese wife takes their 14-month-old daughter to play at an international school. After work, he goes out to sing karaoke with North Korean co-workers.

But Abt has felt the bite of efforts to pressure the North.

Foreign banks have been leery since Washington last year sanctioned Macau’s Banco Delta Asia, which the U.S. said helped the North launder money. China told its banks this month to curtail financial transfers to or from the North.

“It’s getting difficult to make bank transfers to suppliers or to get money from customers,” Abt said.

He worries that the factory might have to shut down if U.N. sanctions block imports of required chemicals on the grounds that they also could have military uses.

Barrett said his clients have lost access to $11 million in Banco Delta Asia accounts that were frozen by the U.S. sanctions.

Colin McAskill, a British businessman who has done business with the North since the 1970s, is lobbying Washington to fine-tune its sanctions so the bank’s customers can withdraw money that was made legally.

McAskill is chairman of Hong Kong-based Koryo Asia Ltd., which said in September it was buying a 70 percent controlling stake in Daedong Credit Bank, North Korea’s first foreign-owned financial institution. The bank, which is 30 percent owned by a North Korean bank, serves foreign companies and has accounts at Banco Delta Asia.

North Korea also has turned to Western investors in hopes of developing oil resources and reducing its near-total reliance on China for fuel. It awarded a 20-year exploration concession last year to Aminex plc, a London firm.

Aminex is helping the North Korean government deal with other foreign companies, and in exchange gets to pick where it will drill for oil, its chief executive, Brian Hall, said by phone from London.

Aminex hasn’t felt any effects from the nuclear tumult, Hall said.

“We have good relations and no problems with the agreements but are closely watching the political situation,” he said.