North Korean Economy Watch

Policy Forum Online 06-70A: August 23rd, 2006
DPRK’s Reform and Sino-DPRK Economic Cooperation

Analysis by Li Dunqiu
CONTENTS

I. Introduction
II. Analysis by Yi Li Dunqiu
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I. Introduction
Li Dunqiu, Director of Division of Korean Peninsular Studies at the Institute of World Development Center of Development Studies, writes, “Sino-DPRK economic cooperation is growing in depth and width but both sides adopt a low-profile and practical attitude… In fact Chinese enterprises, both private and state-owned, are looking for greater room for their future development as a result of the constantly improving market economy in China. Amid such backdrop, the DPRK naturally becomes their target…It is not difficult to see that laws of the market economy are the most fundamental reason behind Chinese enterprises’ investment in DPRK.”

The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Nautilus Institute. Readers should note that Nautilus seeks a diversity of views and opinions on contentious topics in order to identify common ground.

II. Analysis by Li Dunqiu
– DPRK’s Reform and Sino-DPRK Economic Cooperation
by Li Dunqiu
DPRK’s change is by no means accidental. It has its profound international and domestic backgrounds. DPRK has made tremendous efforts in shackling off the shadow of the Cold War and integrating into the constantly changing international community, but with little result. Leaders of DPRK have no choice but to explore a new way that suits its country. Amid this backdrop, DPRK is slowly but steadily promoting its reform, which is low-profile but pragmatic.

From the end of 1990s, DPRK has begun to make adjustments to its economic theories and policies, putting forward such new views and propositions as pragmatism, building a strong socialist country, focusing science and technology, new concepts and improving economic management modes. A series of “Measures to Improve Economic Management Order” was issued on 1 July 2002. The adjustment this time, comparing with previous ones, was strong in enforcement and wide in the areas involved, thus injecting new impetus in its economic recovery and development. Though DPRK’s economic reform is only introducing rational elements of the market economy to make up pitfalls of its planned economy with the prerequisite of adhering to the latter, it should be commended as a major innovation in DPRK’s theories and practice in building socialism. Early this year, we saw new phenomenon from the DPRK side. It started with Kim Jong Il ‘s visit to China accompanied by premiers of the State Council in mid-January to learn the successful experience of China’s reform and opening up, followed by Chang Song-taek’s eleven-day China inspection tour accompanied by over thirty high-ranking economic officials, and then Cabinet Premier Pak Pong Ju’s elaboration of this year main tasks in economic work on the Fourth Plenary Session of the Eleventh Supreme People’s Congress. These new changes were not only widely reported but also aroused great interest among the international community in the country’s economic changes.

I. DPRK’s Guiding Principle Undergoing Quiet Changes.

Basic Theories of DPRK’s Economic Reform

At present DPRK has not yet established systemic theories to guide its economic reform. But Chairman Kim Jong Il has proposed new ideas which have become the basis for its economic reform.

Pragmatism

It was first proposed by Kim Jong Il after he became General Secretary of the DPRK Labor Party. There is no works which systematically elaborates Pragmatism. But according to economists from DPRK, pragmatism has two meanings, i.e. to bring actual benefits for the people, and to be profit-oriented instead of suffering losses. The former is the principle while the latter is the detailed content.

To follow the rule of pragmatism in economy is to seek economic benefits and for companies to make profits. To this end, the Fiscal Law amended by DPRK in April 2004 changed the ultimate goal of companies from “reducing cost” to “increasing net income”, so as to help them be profit-oriented. At present, pragmatism is the principle that must be followed in all DPRK’s economic work. Its economists have vividly compared it with China’s “seeking truth from facts”. It is fair to say that pragmatism will become theoretic basis for people in DPRK to liberate their minds and promote economic reform.

Theory with Economic Development at the Core

The strategy that DPRK has established with economic development at the core is mainly embodied in its goal of “building a strong socialist country”. Entering into the new century, DPRK has proposed three targets including building its country into a strong military, political and economic power. It maintains that it has already achieved the first two with the third one yet to achieve. As a result, the goal of “building a strong socialist country” means that economic development is its core task at the moment.

Theory of “New Thinking”

Labor News, DPRK People’s Army and Young Pioneers DPRK, in their joint editorials on the New Year Day of 2001, put forward the “new thinking”, stressing that “priorities at the moment were fundamental changes in ideas, ways of thinking, styles of struggle and work to meet requirements of the modern times”. Chairman Kim Jong Il also pointed out that, having entered the modern times, it is necessary to update thinking according to the new times instead of living the old way on the basis of the past, and that they should boldly abandon those that should be abandoned instead of being restricted to the old ideas and sticking to the past and the outdated. “In the 21st century efforts should be made to approach and solve all questions with new ideas and from new height.” In addition, DPRK’s Labor News pointed it out in its editorials that “they should be bold in reform”, “further improve DPRK’s economic management system to meet the requirement of the new environment and new atmosphere”, and that priorities for the Labor Party in the 21st century is to ensure that the ideas, ways of thinking and working styles conform with the requirement of the new century.

Approach the Word “Reform” with Prudence

Though DPRK introduced elements of the market economy through constitutional amendments in 1998 and consequently adopted some reform measures, it strongly dislikes such words as “reform” and “opening up” and they are forbidden in the adjustment of its economic policies.

Despite this, the essence is “reform”, though different in word, evidenced in their newly issued policies for economic adjustment which were targeted at the outdated demands and practices that were divorced from reality. DPRK’s Labor News pointed it out in an article entitled “On the Rules of Socialist Economic Development” on 21 November 2001 that “those who manage the economy, i.e. people of DPRK, do not have enough experience, there are still room for improvement and perfection due to short history of socialism, and that the economy cannot be developed if those that are outdated, backward and separated from reality are not abandoned.” It is clear that this kind of “abandoning” has the implication of “reform”. Therefore it is reform unsuitable for DPRK instead “reform” itself that it is opposed to. In fact it is nonetheless progressing with economic reform both in theory and in practice in spite of it all. It was not until June 2003 that DPRK’s Central News Agency finally used the word “reform” though it quickly dropped the word again. The reason behind its prudence with the word “reform” is because it once openly expressed its opposition to and criticism against reform in China and former Soviet Union in its major official media.

Learn Reform Experience from Foreign Countries

DPRK’s supreme leader Kim Jong Il has visited China for four times since 2000, most of which were aimed at inspecting China’s economy. His unofficial visit to China from 10 to 18 January 2006 and inspection of China’s economic work in Beijing, Hubei and Guangdong Provinces attracted great attention from the international community.

The nine-day visit in China was rich in content, clear in objective and profound in significance. Kim brought his team to Beijing, Wuhan, Yichang, Guangzhou, Zhuhai, Shenzhen and they listened carefully to introductions made by government officials and companies managers in those provinces and cities, with the aim of learning and drawing upon China’s experience. He was deeply touched and impressed and even had “sleepless night” when he arrived in Beijing following the tour in China’s south. He said that he was unwilling to see the current situation in DPRK and hoped to see further progress in its economic and social development by absorbing the vigor and vitality from the market economy while continuing its planned economy; that he hoped to learn from China and do a good job in DPRK’s future economic development by combining its national conditions with actual situation. It was the first time for him to voice such opinions, indicating that leaders of DPRK were transforming their mode of thinking, acknowledging and accepting China’s development concepts; and that they were exploring laws of economic development in order to prepare for profound and comprehensive reform with DPRK style.

It is more important to note that the visit gave him a chance to see the fact that China’s reform had neither weakened the leading role of the Chinese Communist Party nor aroused social upheaval. It had instead enhanced the reputation of the Communist Party and its international influence, which removed his worry that reform and opening up might undermine the stability of the authorities. Shock waves continued among the high-level officials after he came back from the visit. Unprecedented views were voiced and new explanations made on major theoretic questions like what was socialism, how to evaluate capitalism. High-level officials were asked to theoretically keep abreast with the times and unify their thinking.

Only two months later, Chang Song-taek, First Deputy Minister of the Department of People’s Group and Capital Construction of the Central Committee of the DPRK Labor Party, headed an “expert team” of over thirty high-ranking economic officials to the places that Kim had just visited. His 11-day visit was yet another demonstration of DPRK’s aspiration to learn from China. In addition, DPRK also sent various economic delegations to China to study its experience in reform. It started to send trainees to China, Viet Nam and countries in Europe since its economic reform in 2002, equipping them with knowledge of market economy, finance, trade and hi-tech in particular. It thus started its nationwide campaign from the top down to study economics.

II. DPRK’s Economy and Current Policy Options

From 2000 DPRK has gained positive economic growth from the previous negative one. Of course the rate was very low, around 0.5%–1% for six years in running. Some estimated that growth rate in 2005 reached 2%, an opinion shared by some DPRK officials though genuine figures were hard to obtain in the country. DPRK’s economy has recovered and is poised to continue its steady growth in 2006.

There are two sets of mechanisms in DPRK, i.e. the military and the civilian. The most important economic sectors are controlled by the military, a noticeable feature of its economy. Strength and efficiency of the factories run by the military are higher than their civilian counterparts. Take the Taean Glass Factory for example. It was built with the assistance of the Chinese Government. At first a civilian factory was designated but its workers were low in efficiency and poor in quality, with which the Chinese side became dissatisfied. Consequently a military factory took up the role and all went well afterwards. With good cooperation, the project was successfully completed. This example showed that talents of economic development are mostly with DPRK’s military. It is therefore, like China in its first phase of reform and opening up, formulating policy to transform some military factories into civilian ones to support local economic growth.

All signs show that economic work has become the priority of DPRK. Leaders of the country and the Labor Party are concentrating their time and efforts on economic work. Main measures for this year are as follows:

Agriculture is the main task of this year’s economic development.

The Fourth Plenary Session of the Eleventh Supreme People’s Congress was convened on 11 April, on which Premier Pak Pong Ju delivered a report entitled Review of Work in 2005 and Plan for 2006. He stressed that the central task of the economic development for this year was “to develop agriculture in a decisive manner to successfully solve the food problem for the people in DPRK”.

In recent years DPRK has always taken agriculture as the “primary task” of its economic development. In order to solve food shortage it launched “Potato Revolution” and “Seed Revolution” in 2001, advocating the growth of agricultural crops with short mature periods and great harvests. Agricultural technicians cultivated new breeds of potatoes with no virus and high yields, in order to “supplement rice with potatoes”. Thanks to increased government input in agricultural production and development in agricultural science and technology, grain production has risen in recent years, reaching 4.6 million tons in 2005, the highest in ten years. With experience accumulated and benefit gained, DPRK has realized the importance of agriculture. It will continue to take it as the priority and central task of this year’s economic work. It is especially notable that when Kim Jong Il visited China last January, he went to the Crop Institute of the Chinese Academy of Agricultural Science, a sign which fully vindicated the importance attached to agricultural science and technology.

Work Hard to Develop Foreign Trade and Attract Foreign Investment.

Premier Pak Pong Ju stressed in his above-mentioned report that it was necessary to work hard to develop foreign trade and actively explore foreign markets to achieve diversification and multi-lateralization of trade in accordance with the changing environment and practical demands. DPRK has enhanced foreign trade up to an unprecedented height, which was a new change itself. Though US had begun its financial sanction against DPRK since the end of last year, its foreign trade increased by a large margin in 2005, reaching 3 billion USD in total, the highest since 1991. Trade between DPRK and ROK reached 1.05 billion USD in 2005 and this figure was not included in the total volume. It is estimated that this year DPRK will actively explore new markets in the EU and ASEAN countries while continuing to grow its trade with China and ROK.

China is DPRK’s largest trading partner. Sino-DPRK trade reached a historic high at 1.58 billion USD in 2005, up 14%. China’s export accounted for two thirds of its total. DPRK mainly imported food and energy from China, up by 35.2% annually and reaching 1.08 billion USD in 2005. Growth in Sino-DPRK trade was partly attributed to decrease in bilateral trade between DPRK and Japan, which stood at 0.194 billion USD in 2005, down by 23%.

Meanwhile DPRK is working actively to introduce foreign investment, including capital and technology. It organized two international commodities fairs, one in the 1980s and the other in the 1990s, to be followed by annual fairs every spring since 2000. The fairs were then held twice every year since 2005, one in spring and one in autumn.

The 9th Pyongyang Spring International Fair was grandly held from 15 to 18 May 2006. The total area of the exhibition hall was 16.5 thousand sq meters and it hosted 217 companies from 13 countries and regions in the world including China, the Netherlands, France and Germany. Products on display ranged from chemicals, electronics, pesticides, agricultural machines to cosmetics, pharmaceuticals and foods. Of the 196 foreign participating companies, 179 were Chinese, with 80% from China’s Liaoning Province. Contractual value topped 100 million Euros.

Ms Choe Lian-shi, Division Chief of DPRK’s Bureau of International Exhibition, said in her interview with the Xinhua New Agency that the main purpose for such fair was to help DPRK companies to know the world and for the world to know DPRK’s market. It was also to help DPRK companies establish links with their foreign counterparts in order to promote export, explore international markets and introduce advanced foreign technology to promote its economic development.

She pointed out that during the fair held last year, contracts, both for import and export and joint ventures, valued 70 million Euro, among which, export contracts amounting 30 million Euro, import contracts 32 million Euro and joint venture 8 million Euro.

She also stressed that Chinese companies took up the bulk of the participants. They came this time with the China Committee for the Promotion of International Trade, which made them more orderly and organized. All this showed that economic relations between China and DPRK were constantly developing and trade has become more active.

Apart from this DPRK also cooperates with the relevant sides in China to hold commodity fair and trade and investment talks in Beijing, Dandong and other cities in China several times a year.

Recently DPRK has organized some companies suitable for foreign markets to go outside the country to conduct foreign trade and economic cooperation. Construction companies in DPRK like Foreign Construction Co. sent thousands of experts and technicians to scores of countries and regions including Russia, Bangladesh, Kuwait and Libya to engage in project and labor contracting. Mansudae Overseas Development Group undertook to build bronze statues, monuments and other works of arts, and fit out buildings and parks in over 70 countries and regions to earn foreign currencies for the country. President statues in the seven African countries like Equatorial Guinea, Togo and Gabon, monument of the people’s heroes in Ethiopia, and the grain museum in Malaysia were all works of the company. DPRK Industrial Tech Co. opened branches in China and other countries to conduct trade in new technology, inventions and patents by replying on the institute and production bases attached to DPRK’s Academy of Sciences.

Improve Modes of Economic Management

Premier Pak Pong Ju also stressed in the report that efforts should be made to improve modes of economic management, to ensure practical benefits while reflecting socialist principles. DPRK has carried out factory and company reform through market price instead of planned price. It will also partially give up the state plan in production and sale. These measures are not only suitable for small- and medium-sized factories and enterprises but also for large-sized ones. Governments may purchase products from them according to market prices. They are also allowed to introduce foreign capital, establish joint-ventures or earn profits through trade within their capacity.

Speed up Development of Science and Technology

Another agenda of the Fourth Plenary Session of the Eleventh Supreme People’s Congress was extremely noticeable. It was the report entitled Speed up Development of Science and Technology to Build a Strong and Prosperous Country, delivered by Choe Thae Bok, Secretary General of the Central Committee of DPRK’s Labor Party. Development of Science and Technology as one of the priorities of DPRK’s future development, the report was regarded as indication of the importance attached to science and technology development and its aspiration to embrace the information society. A strategic goal of its science and technology development is to become a major software country by 2022.

It is not common for DPRK’s Supreme People’s Congress, its highest body of power, to add on the agenda the development of science and technology. Media in DPRK have stressed on many occasions that the 21st century is a century of science and technology and a century of information, and that without the development of science and development it is impossible to achieve the goal of “building a strong and prosperous country”. The Supreme People’s Congress deliberated carefully and adopted the report, fully testifying its importance on science and technology and the fact that science and technology development had become a nationwide consensus.

Special Economic Zones remains an important option for DPRK.

Kae-song Industrial Park is a successful cooperation between DPRK and ROK and the two sides have decided to expand its scale on the current basis. Covering an area of 10,000 sq meters, it is planned to expand to 1 million sq meters. Many small- and medium-sized enterprises in ROK intend to invest and start business in the park as labor price in China’s coastal region in the south east is rising. Products manufactured there can be regarded as ROK-made and exported to a third country.

The DPRK Government might copy China’s special economic zones to establish new such zones along the border areas between China and DPRK. It is reported that DPRK planned to establish a new economic zone on the Bidan Island on the lower reaches of the Yalu River and build it into a future financial center. The establishment of such zones remains an important option for DPRK but it is also very prudent due to previous failure.

III. DPRK’s Energy and Mineral Recourses

DPRK has severe shortage of energy, especially oil. 90% of its oil supply comes from China. It also has oil trade with Russia but the amount is trivial as it does not have enough foreign currency. Russian oil companies sell oil to DPRK at price lower than international market price. DPRK has almost no oil reserve to speak of. It is currently working actively with China to exploit oil in its West Sea.

Electricity is also in short supply in DPRK though its supply is slightly better compared to oil. DPRK is rich in water recourses so the Government tries to develop small hydro power stations. And in accordance with the principle of those who develop will benefit, local governments are encouraged to build such projects according to their own conditions, and with good results. It is claimed by DPRK officials that the country is in fact equipped with conditions to build large hydro power stations. That’s why Kim Jong Il and other high-level officials in DPRK visited China’s Three Gorges Hydro Power Project in Yichang early this year. But because of its tension with US and its fear of conflicts or wars, the Government only encourages small- and medium-sized hydro power stations before its relations with US has improved. In addition, it also stresses thermal power since it is rich in coal and able to provide sufficient fuel. Consumption of coal ranks the first among all energy, to be followed by hydro power.

DPRK is now studying new energy and hopes to convert it into actual use in production and life, i.e. solar power and biogas.

There are four important recourses in DPRK: rich forest resources; important mineral resources like abundant coal, iron ore, graphite, gold, silver, lead, zinc, magnesite, all of which now allow the participation of foreign companies; 8600-kilometer coasts with no pollution, which are rare in the world and hold great potentials for fishing, aqua-culture, processing of sea food once foreign capital and technology are channeled in; rich tourist resources, that may become one of its future pillar industries.

DPRK has abundant mineral recourses, with over 360 kinds confirmed and 200 kinds economically viable. It is noticeable that the reserve of its magnisite ranks the first in the world, accounting for 56% of the world’s total. Its top ten minerals include tungsten, molybdenum, graphite, heavy spar and fluorite. The reserve of copper and ilmenite is calculated in tens of millions of tons and that of white jade, jadeite, black jade and sand jade is also abundant. Since it has such a large reserve of metal and energy mines, 70% of its industrial raw materials and fuels are self-sufficient. But there is no oil and pitch coal (raw material for charcoal), both of which are necessary for iron and steel industry though anthracite and brown coal are abundant. Coal, iron ore, lead and zinc core, limestone and magnisite take up the bulk of DPRK’s mineral industry but only 30% of the capacity is utilized due to restrictions of outdated equipment and poor technology. Iron ore is exploited in over 20 mines represented by Musan Mine. With a reserve of 1 billion tons, it is a famous open mine in the world and the largest in a country with an iron output of 8 million tons. Production of iron ore grew by 2-3% since 1970s, as a result of expansion and development of iron mines. But the growth has slowed down recently due to poor results of prospecting and outdated equipment. Foreign capital is now being introduced.

DPRK’s coal is divided into anthracite and bituminous coal. The former is mainly located in Pyongan-namdo and Pyongan-bukto while the latter in Hamgyong-bukto and Hamgyong-namdo. According to administrative division, there are four major coal mines in DPRK, namely Pyongan-namdo Mine, Pyongan-bukto Mine, Hamgyong-bukto Mine and Hamgyong-namdo. Currently there are over 100 national coal mines, 70 anthracite mines and 30 bituminous coal mines, and over 500 small- and medium-sized local mines.

In the 80-kilometer belt in the south of Pyongan-namdo stretching from east to west with Pyongyang at the center, the reserve of anthracite is abundant. Notable mines include Samsin (Samsindon, Daefon-gu) , Sadon (Sadon-gu), Ryongzen (Ryongzen-gu), Haelyong (Ladonza-gu, Haelyong, Gangdon-gun), Gangdon (Gangdon-gun), Gangso (Gangso-gun), Zencun (Zencun-gun), Wonstun (Wonstun-gun). There is anthracite in 668 sq kilometers in the north of Pyongan-namdo. Main coal mines there include those in Donstun, Syongbun, Jaenam, Joyang of Ganstun, Ganstun, Bonstun, Yamzum, Wyonlae, Xinlyon, Sonam of Bugstun-gun, Xiandon, Xinstun of Ensam-gun, Stunzen, Yongdae, Sunstun, Mujindae, Gigdon, and Ryongden, Ryongmun and Ryongcel of Kujang-gun, P’y?ngan-bukto.

Bituminous coal is mostly concentrated in the North Mine (north of Aoji) and South Mine (south of Chongjin) in Hamgyong-bukto and Anju Mine in Pyongan-namdo. Largest coal mines in the north include Aoji Mine in Undok-kun, Obun Mine in Musam, Hue Ryon Mine. There are seven ore strata that are 2-5 meters in depth in Anju Mine, producing brown coal of 5300kcal. With an annual output of 7 million tons, it is thus the largest mine in DPRK.

DPRK’s proven coal deposits are 14.74 billion tons, 11.74 being anthracite and 3 billion tons brown coal. Recoverable reserve, allowed by the current technology, is about 7.9 billion tons. Its coal production has dropped since the end of 1980s due to restrictions of technology and equipment. (See the table below for annual production since the 1980s)

*Unit: 10,000 tons

IV. Rapid Growth of Sino-DPRK Trade and Economic Cooperation

Sino-DPRK trade and economic cooperation grows at an eye-catching pace. With trade accounting for 40% of its total and investment 70%, China has thus become DPRK’s largest trading partner and source of investment. DPRK has been more dependent on China in food and energy supply. Main ports between the two countries have become or are becoming major vehicles of bilateral trade and economic cooperation. The friendly visit by Chinese President Hu Jintao to DPRK in October 2005 and Kim Jong Il’s China visit in January this year have further promoted political and economic cooperation between the two countries and injected new impetus in bilateral trade.

Trade between China and DPRK has increased by 14%, reaching 1.6 billion USD. DPRK import commodities like oil and corn from China, worth 1 billion USD, and export commodities like coal and iron ore to China, worth 0.5 billion USD. According to the statistics from Dandong Customs, 1.86 million tons of import and export went through the Dandong Port in 2005 at a value of 0.84 billion USD, up both in quantity and value by 10%, with 0.45 billion USD in China’s favor. It is estimated that DPRK will continue to expand trade with China this year. The two countries have planned to build a new road bridge across the Yalu River to meet the demands of the constantly growing trade.

Sino-DPRK Trade Volume from 1997 to 2005

*Unit: 100 million USD

Year DPRK’s Total Foreign Trade DPRK’s Trade with China China’s Export China’s Import

In recent years Chinese businessmen have accelerated their investment in DPRK. Those who took the lead in investing DPRK mainly came from Zhejiang, Jilin, Liaoning, Jiangsu and Guangdong Provinces with Zhejiang businessmen taking up the bulk. In 2003, 40 businessmen from Wenzhou, Yiwu, Dongyang, Cixi and Hangzhou headed by Lu Yunlei, agreed on cooperation intent with the operators of Pyongyang No. 1 Store. Guhui Trading Co. lead by Lu, obtained, unexpectedly, operating right of 15,000 sq meters of the store and corresponding 9,000 sq meters of warehouse. The deal was signed on 6 August 2003. Lu commented that what he valued was the market potentials in a country that was opening up. Lu also disclosed that he would invest several million of RMB to renovate the store and that operating space in the store would cover 10,000 sq meters, divided into over 300 booths to be further rented to Chinese businessmen to wholesale and retail small Chinese commodities, daily necessities in particular. The Zhejiang businessman commented opportunities in DPRK like this: “It is better to have our presence in the country but don’t expect too much from the first phase”.

It was the private companies that gave rise to the first wave of investing in DPRK. The second wave in 2005 was mostly generated by large state-owned enterprises, in areas like heavy industry, energy, mineral recourses and transportation, different from the first one.

At present DPRK has agreed to the joint-venture between China National Metals and Minerals Import and Export Corporation and its ??Coal Mine. This is not only the first established by China outside DPRK’s special economic zone but also represents an important measure by DPRK to open its recourses. Rydongden Coal Mine is the largest anthracite mine in DPRK. Covering an area of 18.8 sq kilometers, it has a reserve of 0.15 billion ton, 0.125 billion of which is recoverable. Its annual output is 1 million tons, equal to a medium-sized coal mine in China.

According to report issued by the Development and Reform Committee of Jilin, the province has reached a “barter” agreement with DPRK, transmitting electricity to the country in exchange of the mining rights of its Youth Copper Mine. With a total investment of 0.22 billion RMB, it is a typical experiment by DPRK to exchange electricity with mineral recourses. Jinlin Tonghua Iron and Steel Group will obtain 50-year mining rights in Musan Iron, the largest in DPRK, at a price of 7 billion RMB. Musan Iron, located in Hamgyong-bukto is the largest open mine in Asia, with proven reserve of iron powder about 7 billion tons. With iron content as high as 66%, it is able to be smelted directly.

Gold reserves in DPRK are also very rich. Guoda Gold Shareholding Co. Ltd., in Zhaoyuan, Shandong Province signed an agreement in 2004 with DPRK on gold exploration and smelting project. According to the agreement, a joint-venture would be set up for gold mining in ??? and bring back the ore to the company for smelting. ??? Gold Mine, which was set up quite early, has a considerable reserve and at least 150 tons can be recoverabled. But due to the lack of capital and outdated technology, operation of the mine has been at a standstill.

In September 2005 DPRK sold the 50-year exclusive operating rights of Najin wharf to Huichun, Jilin, in order to get the latter’s support for building a road from Tongsungu, Wonstunli, Kasung-si, to Najin Port. Sources from the Administrative Committee of the Border Economic Cooperation Zone in Huichun, Jilin, disclosed that the sale this time of the wharf in Najin Port was more of a corporate instead of government act. It was said that Fan Yingsheng, a real estate developer from Hunan, was the mastermind behind the deal and he alone would channel half of the 60 million Euro in payment.

Capital from Hong Kong is also coming. Early investments were mainly channeled to hotels, restaurants and the entertainment industry. But according to a recent report from Hong Kong media, a local businessman Qian Haoming reached a 3-billion USD agreement with the DPRK Government and China’s Ministry of Railway to build a railway from Tumen, border city in China, to Chongjin, port in DPRK. The agreement signifies that the deadlock between railway authorities of the two countries is being broken. There used to be three pending questions with the DPRK railway, i.e. overstock, arrears and withholding of Chinese cargo carriages. This forced the Chinese railway authority to take measures to restrict transportation between the two countries, like intermittent loading and goods limits. Statistics show that over 2000 carriages were held up in DPRK in 2004, 260 of which were for coal. It is reported that Hong Kong International Industry Development Co. Ltd., headed by Qian Haoming, promised to provide 500 to 1000 carriages to DPRK as required by the agreement.

Preliminary agreements have been reached at the moment between China and DPRK concerning minerals, railway and port lease. Sino-DPRK economic cooperation is growing in depth and width but both sides adopt a low-profile and practical attitude. It is necessary to point out that such development has aroused concern from relevant countries in North East Asia, which mistake China for having political motives. In fact Chinese enterprises, both private and state-owned, are looking for greater room for their future development as a result of the constantly improving market economy in China. Amid such backdrop, neighboring country DPRK naturally becomes their target. There are plenty of Chinese enterprises with strength ready to come into DPRK, more active than the government policy allows. During the National People’s Congress last march, delegates from local enterprises proposed a motion to the Central Government, calling for policy and legal guarantees for expanded and deepened economic cooperation with DPRK, including the establishment of special economic zones and free trade areas. It is not difficult to see that laws of the market economy are the most fundamental reason behind Chinese enterprises’ investment in DPRK.

Number of N. Korean Workers at Kaesong Complex Tops 8,000

The number of North Koreans working at the Kaesong Industrial Complex in North Korea has surpassed 8,000, government officials said Saturday.

The officials expected the figure to break the 10,000 mark this year.

A total of 8,266 North Korean workers are now employed by South Korean private and public firms operating at the Kaesong complex, the officials said, quoting data from the Kaesong Industrial District Management Committee, a North Korean corporation that oversees the complex.

Some 7,700 of them are employed by private firms, while the rest were hired by the two companies that support their operation _ the state-run Korea Land Corp. and Hyundai Asan, an affiliate of Hyundai Group in charge of North Korean business projects, according to the statistics.

Thirteen South Korean firms operate factories using cheap but skilled North Korean labor in the pilot zone of the Kaesong complex, which started up in June 2004.

Ten other firms are busy building factories in another pilot zone that opened last September.

From NK Zone:

Few details are available, but the zone will be in the Namyang Workers’ Zone in Unseong county, Hamgyeong Bukdo province in the extreme north of North Korea, opposite the Chinese city of Tumen

The report notes that there are roads and railways crossing the border and the area is a transit point for Chinese, Korean and Japanese goods and that citizens of third countries have access.

The agreement was signed at the Chinese embassy in Pyongyang between the head of the foreign affairs department of Hamgyeong Bukdo, Kim Cheol-geun, and the Chinese consul-general, Sun Xianyu

The report does not say if the agreement has NK central government approval, which is apparently a sticking point in the much bigger deal under which the Chinese city of Hunchun will lease the NK port of Rajin.

From Joong Ang Daily:

North sends upbeat note on inter-Korean projects
8/7/2006

North Korea has reaffirmed its commitment toward inter-Korean economic cooperation projects, a South Korean operator of an inter-Korean business project said yesterday.

“We are confident that ongoing inter-Korean economic cooperation projects such as the Mount Kumgang tours will produce new meaningful results,” the North’s Asia Pacific Peace Committee said in a letter to Hyundai Asan Corporation, the operator of a tour program to Mount Kumgang.

The North sent the letter on Tuesday, marking the third anniversary on Friday of the death of Chung Mong-hun, the late chairman of Hyundai Asan, an arm of Hyundai Group in charge of various business projects in the communist country.

Mr. Chung committed suicide in 2003 after being interrogated by prosecutors about slush funds he allegedly provided to politicians to promote his company’s North Korea business projects, including an inter-Korean industrial complex in the North Korean border town of Kaesong.

It is the first time that Pyongyang expressed its stance toward inter-Korean economic cooperation projects currently underway since it launched missiles in early July.

There have been concerns that inter-Korean cooperation efforts may hit a snag after the test-launches. In response, the South suspended humanitarian aid, including fertilizer aid. The North reacted by halting reunion events for families separated by the 1950-53 Korean War, and also suspended the construction of a 12-story reunion center at the Mount Kumgang resort on the North’s east coast. More than 1 million South Koreans have visited since the resort was launched in 1998.

Far fewer South Koreans visited the scenic mountain resort last month, according to Hyundai Asan. The number of people taking the cross-border tour in July dropped 43 percent compared with the same period last year. A total of 19,605 people traveled there last month, according to the company. 

Joong Ang Daily
August 01, 2006

With North Korea more isolated than ever from the international community over its nuclear program and recent missile launches, Pyongyang is taking steps to tighten controls on its people in a bid to show it can defy the international community, North Koreans interviewed in Beijing said.

“It seems that we have to sing the revolutionary songs again,” said one North Korean in Beijing, saying it was time for his country to get mentally tougher. “Nobody listens to us, thus the only way left is to stick together,” the North Korean said.

If Pyongyang hoped to gain more concessions in nuclear negotiations and resolve the issue of financial sanctions imposed by Washington on Banco Delta Asia through its missile launch, the results have been the opposite.

A United Nations Security Council resolution backed by Pyongyang’s long-time ally, Beijing, was adopted. The Bank of China also froze North Korean accounts at its Macao branch, a Korean lawmaker has said.

In addition, a senior official of the United States Treasury Department said recently, Singapore and Vietnam have made commitments to clamp down on illicit North Korean financial activities such as money laundering.

A source in Seoul who is familiar with North Korea’s circumstances said yesterday that Pyongyang has decided to halt exchanges with the outside until April of next year. The Arirang Festival scheduled for this month has already been cancelled.

Experts said a series of economic measures aimed at reviving the North’s ailing economy, which have been underway since 2001, will also likely be put on hold.

“Inside the North, there are even some calling for a halt of the Kaesong Industrial Complex and the Mount Kumgang tours,” said the source, who added that large numbers of North Korean college students are submitting requests to enlist in the military.

Recently, a senior North Korean official on a visit to Beijing said the North is fully prepared to engage in “a march of suffering.” Recent rhetoric coming out of Pyongyang reflects a war-like atmosphere in the country. The state-run Rodong Sinmun has warned that “invaders would be swept away by the fierce anger of the country.”

A government official in Seoul yesterday admitted that in the short run, diplomatic efforts to lure Pyongyang back to nuclear negotiations would be tough. “We are in a difficult situation, but what else can we do but try?” said the official.

From Joong Ang Daily:

A high-level Korean government official yesterday suggested that the Kaesong Industrial Complex issue be dealt with seperately from the free trade talks with the United States.

“It would be appropriate to discuss the matter on whether products manufactured from Kaesong Industrial Complex in North Korea should be recognized as South Korean in origin in a separate discussion from the free trade negotiation between South Korea and the United States,” said Chin Dong-soo, deputy finance and economy minister.

Mr. Chin said that even though Korea has persistently brought up the issue during the second round of talks, which took place earlier this month in Seoul, there has been no detailed discussion between the two parties.

“If we continue to push the matter while there is no response from the U.S. party, other issues that are being discussed at the free trade talks will likely be jeopardized,” Mr. Chin said.

From Korea Times:

Control on Sensitive Materials to NK Tightened

South Korea’s Ministry of Commerce, Industry and Energy has issued a warning to 80,000 local companies against any shipments of strategic materials to North Korea, officials said Wednesday.

In an e-mail message sent to trading companies, the ministry said international pressure was mounting to prevent Pyongyang from acquiring materials that can be used for the production of weapons of mass destruction. North Korea has been condemned by many countries as well as the U.N. Security Council for firing a series of missiles into the East Sea on July 5.

The ministry also said that with U.S. lawmakers poised to pass a law that penalizes foreign companies that ship dual-purpose materials to North Korea, Washington is expected to strengthen its international monitoring activities.

The message said it could lead to sanctions being imposed on all violators discovered by the U.S. surveillance.

In addition, the ministry said South Korean firms should be careful of shipping products to China and some Southeast Asian countries that could be resold to North Korea.

“If companies have any doubts about whether or not their shipping of products violated the strategic material export rules, they should not hesitate to ask the government,” an official said. He added that companies that ship products to the inter-Korean industrial complex in the North Korean city of Kaesong, just north of the demilitarized zone separating the two Koreas, should be particularly careful.

South Korea is a signatory to the Wassenaar Arrangement, a multilateral pact that restricts the export of commercial products that can be used to make weapons to certain countries. The United Nations has also stressed the need to monitor such trade.

Authorities here have said they will step up efforts to detect and penalize violations.

From Korea Times:

Inter-Korean Economic Projects Not Worrisome’ 

By Park Song-wu, Lee Jin-woo

Inter-Korean economic cooperation programs are not a worry to the United States as the money ending up in North Korea is not likely to be used for developing weapons of mass destruction (WMD), a ranking U.S. finance official said.

In an interview with the Voice of America on Tuesday, U.S. Undersecretary of Treasury for Terrorism and Financial Crimes Stuart Levey said what Washington worries about is the North attempting to abuse international financial institutions to secure funds for its development of WMD.

He said the Kaesong industrial park project and the Mt. Kumgang tourism program _ the two examples of cross-border cooperation _ are not the concerns the U.S. government has in mind to safeguard the international financial system.

In a related development, the Kaesong complex is expected to churn out products worth a record high of $6 million this month, despite security concerns on the Korean Peninsula caused by the North’s missile launches on July 5, an official at the Unification Ministry said.

Denying a negative outlook for South Korean factories in Kaesong, Ko Gyoung-bin, who is in charge of supporting the project, said “everything is going perfectly okay.”

“The total production amount is expected to reach $6 million for the first time since its opening in June 2004, almost 100 percent up from $3 million of last December,” he said during a press briefing in Seoul on Wednesday.

Ko said the export volume of Kaesong products has also been steadily increasing from $1.1 million in May to $1.6 million in June.

“I don’t agree with recent reports which tried to link North Korea’s missile threats with the Kaesong complex,” he said. “I met a few working-level North Korean officials involved in the project last week and they were determined to continue this project.”

As for concerns whether the North Korean government properly pays their workers the wages sent by South Korean firms, Ko said he is confidant that the money has not been diverted for other purposes.

“South Korea has paid some $500,000 to $600,000 for those 7,800 workers and their families each month,” he said. “I don’t think there’s enough room for North Korean authorities to use part of the relatively small amount of money for other purposes.”

He added the number of North Korean workers in the complex would reach 8,000 this month.

A North Korean worker there earns $64 in wages and allowances a month. Most of the money is paid on the 10th of the month. This month, it was paid as scheduled.

South Korea paid $6 million to rent the complex site for 50 years in 2004.

Earlier this month, the Korea Land Corp., a state-run land developer, which has been involved in the Kaesong project, decided to postpone the sales of some 516,000 pyong (1.7 million square meters) of land in the industrial complex to both South Korean and multi-national companies.

Unlike the present South Korean firms in Kaesong, which benefited from the inter-Korean cooperation fund with low interest rates and a three-year grace period to pay back borrowed money, companies which wish to newly join the project will be required to get loans from commercial banks after getting credit guarantee notes issued by the state-run Korea Credit Guarantee Fund (KODIT).

The industrial complex is expected to house about 2,000 South Korean companies employing nearly half a million North Koreans when it comes into full swing in 2012, according to the ministry.

From Yonhap:

Seoul to expand inter-Korean economic project despite U.S. concerns: official

A ranking South Korean official on Wednesday said the government may expand a joint industrial complex in North Korea’s border town of Kaesong at an early date despite concerns that money paid to North Korean laborers there may be used to build missiles.

“The Kaesong industrial complex is a project that runs strictly on the mechanism of a market system,” Goh Gyeong-bin, head of the office for the inter-Korean economic project at the Unification Ministry, told reporters.

He said the government may begin the next phase of the Kaesong development project as early as August or September, which would include leasing out 1 million pyeong of land at the joint complex to South Korean companies. One pyeong equals 3.3 square meters.

The remarks are in line with Seoul’s earlier stance that it does not need to halt the inter-Korean project despite concerns, mainly from the United States, that wages paid to North Korean workers may be forfeited and diverted by Pyongyang to build missiles and weapons of mass destruction.

The apparent opposition from Washington, although still tacit, intensified after North Korea launched seven ballistic missiles, including a long-range Taepodong-2 believed capable of hitting the U.S. west coast, earlier in the month, while the U.N. Security Council unanimously approved a resolution prohibiting missile-related dealings with the North.

South Korea’s point man on North Korean affairs, Unification Minister Lee Jong-seok, however, has refused to halt or suspend the economic project with the communist state, claiming the U.N. resolution does not require his or any other country to cut normal, legal economic relations with the North.

“What the international community, including the U.S., is worried about is the North making or taking money through illegal means,” Lee told a National Assembly committee on Monday.

Currently, 13 South Korean companies are operating at the industrial complex, where about 7,800 North Korean laborers are getting paid US$57 a month on average, according to Goh.

The ministry official said there was no way of knowing for sure whether the North Korean government was taking any of the wages, but claimed it wasn’t happening.

“There is no possibility. The amount tells us that,” Goh told Yonhap News Agency in a later telephone interview.

“Even though North Korea is an extremely poor state, it would take at least 50,000 (South Korean) won (about $50) on average to feed a family of four for a month,” he claimed.

He said the South Korean companies are paying about $500,000 to $600,000 a month to 7,862 North Korean employees.

“The issue (of possible diversion of funds) may become significant when the amount grows to a significant level through second and third phases (of the development project), but it really is not an issue at this time,” he said in the press briefing.

Between 300 to 800 South Korean companies, depending on the size of each business, are expected to move into the joint complex when the next phase of the development plan is completed, according to Goh.

The industrial complex is expected to house about 2,000 South Korean companies employing nearly half a million North Koreans when it comes into full swing in 2012, according to the Unification Ministry.

UPDATE: Contrary to a previous post (Listed below), South Korea is now insisting that goods made in the Kaesong Industrial Zone be labeled “Made in South Korea” for trade with the US, and the US is insisting that this will not be possible under the proposed FTA.  I hope someone will blink because reduced trade barriers will be good for both countries.

From the Joong Ang:

U.S. reaffirms its stance against Kaesong in FTA
7/25/2006
 
Franklin Lavin, the U.S. Department of Commerce international trade undersecretary, has reiterated the American position not to include goods produced in the Kaesong Industrial Complex in North Korea in the free trade agreement with South Korea.

“The simple fact is that a bilateral agreement is between two countries,” Mr. Lavin said in a lecture organized by the American Chamber of Commerce yesterday.

“We have no negotiating authority, no congressional authority, to include any other economic entity in that bilateral agreement.”

Koreans negotiators, pushing to include Kaesong products in the FTA with the U.S., cited earlier free trade pacts with Chile and Singapore, which accepted the offer, as a precedent. 

From the KBS:

Seoul Not to Compromise Kaesong Label
Friday, July 21, 2006

A top aide to South Korean President Roh Moo-hyun said Friday the South Korean government will not compromise on the issue of labeling goods manufactured in the inter-Korean industrial complex Kaesong as ‘South Korean-made’ in the ongoing talks for a free trade agreement (FTA) with the United States.

Senior presidential secretary for economic affairs Chung Moon-soo said that Seoul will never yield to Washington regarding the country-of-origin issue for South Korean products made in the Kaesong Industrial Complex.

South Korea’s Trade Minister Kim Hyun-chong also expressed a similar stance on the issue.

Earlier in Washington, U.S. Congress International Relations Committee Chairman Henry Hyde reportedly urged the U.S. government not to regard products made in Kaesong as South Korea-made.

In addition, Deputy U. S. Trade Representative Karan Bhatia has made clear that any deal that is beneficial to North Korea would run counter to the U.S. government’s position.

From the Korea Times:

Korea May Not Insist on Kaesong
By Park Hyong-ki
7/20/2006
 
Kim Jong-hoon, chief of Korea’s negotiating team with the United States on a free trade agreement (FTA), Thursday hinted that Seoul may not insist on including the Kaesong issue in the bilateral trade pact.

“We have not decided on which areas we will defend at all costs,’’ Kim told economic editors of newspapers and broadcasting stations. “I will consult decision-makers on the list.’’

Kim’s remarks came after last week’s negotiations in Seoul where the U.S. delegation, led by Wendy Cutler, rejected Seoul’s request for the exemption of tariffs on products made in the South Korean-led industrial complex in the North Korean town, in the event Kaesong-made goods are exported to the U.S.

The U.S. has reportedly been sensitive to transfers of cash to North Korea for fear they may sustain Pyongyang’s programs of weapons of mass destruction. About 6,000 North Korean workers work in Kaesong for about $60 per month. Kaesong is still in a developing stage so if more companies move in to set up shop, it would spell larger cash flows into the financially-strapped communist state.

Regarding Seoul’s decision to halve “screen quota’’ or its mandatory 146-day viewing of Korean films at theaters before FTA talks began, Kim said, “It provided an atmosphere conducive to the start of FTA negotiations.’’

He said that previous efforts to establish a bilateral trade pact with the United States were thwarted over the screen quota issue.

“We believed that if the screen quota remained intact, it would hobble any agreement at the last minute,’’ he said. “Besides, culture is a two-way street. We can’t just keep on insisting our position.’’

Talking about the rupture of the second round talks, Kim said that Wendy Cutler, chief U.S. negotiator, didn’t have authority to make spot decisions so had to consult with Washington, costing a lot on negotiating time.

The two sides are scheduled to meet for the third round in September in U.S.

Here is the position of the US (From the Donga)

The dissensions that had grown between Korea and the U.S. over the Gaesong Industrial Complex and tourism of Mt. Geumgang show signs of evolving into serious rifts.

At the U.S.-Korea Inter-Parliamentary Exchange Council press conference held at Rayburn House in Washington on July 18, the American chairman Edward Royce (Republican) emphasized the importance of where the profits from the industrial complex end up, stating the concern that the North Korean leadership may use the cash it earns for developing weapons of mass destruction such as missiles,

Officials from the Bush administration also recently noted that three laws on terrorism must be amended if the U.S. was to allow tax-free imports of goods produced in countries that support terrorism, such as North Korea, adding that such revision would be impossible for the U.S. Congress to accept. In effect, the U.S. will not be including products made in the Gaesong Industrial Complex in the Korea-U.S. Free Trade Agreement negotiations, because of the inconsistencies with existing laws and regulations.

Stuart Levey, U.S. Treasury`s undersecretary for terrorism and financial intelligence who visited Korea on July 16-18 is also reported to have met with Korean government officials and expressed a deep interest in whether a U.N. Security Council Resolution controlling the shipping of military supplies into North Korea would conflict with Mt. Geumgang tourism and the Gaesong complex.

In his statement upon departure from Seoul, disclosed on the U.S. Treasury website on July 18, he declared that they had discussed “issues of common interest, including the new United Nations Security Council Resolution that requires all member states to prevent the transfer of any financial resources in relation to DPRK`s missile or WMD programs.”

On July 18 Levey visited the Ministry of Finance and Economy (MOFE) and requested to know the Korean government’s position on the recent Security Council’s Resolution against North Korea; however a senior MOFE official replied that as the issue lies with the Ministry of Unification, MOFE was not in a place to provide an answer.

“We explained it [to Undersecretary Levey before he asked] because some concerns had been raised that the U.N. Security Council Resolution could clash with the Mt. Geumgang tourism and Gaesong Industrial Complex,” said Song Min-soon, chief presidential secretary for unification, foreign and security policy.

He went on to deny allegations that tensions had arisen between the two countries over the issue, stating that “Korean government officials had expressed there was no problem with the two enterprises regarding the purpose and range of domestic statutes, judicial judgement or international law mentioned in the Security Council Resolution, and Undersecretary Levey had responded that he understood well.”

While Washington has not demanded outright for South Korea to stop its industrial and tourism enterprises in the North, it has been reported to have conveyed strong concerns over the businesses bringing cash into North Korea.

However, a senior Korean official displayed a firm determination in pursuing the Gaesong project. “The Gaesong Industrial Complex is the epitome of the [current administration’s] North Korean policies. We will carry on with it no matter what difficulties are to be faced,” he said.

Fears have been raised that in case North Korea follows its arbitrary announcement on July 19 that it will no longer permit meetings of separated families with further measures to step up tension on the peninsula, South Korea and the U.S. could come to serious troubles over the Gaesong and Mt. Geumgang projects.

Meanwhile, a group of 56, comprised of people from credit assurance companies and from corporate banking divisions of banks such as Kookmin, Shinhan, Hana, Woori, Korea Development Bank (KDB), Kiup, City Bank Korea, Daegu, Busan, Kwangju, Jeonbuk and Kyongnam will be visiting the Gaesong Industrial Complex on July 21, sponsored by the Ministry of Unification.

Say that title five times fast.  From Yonhap:

KEPCO postpones construction of transmission tower in N. Korea indefinitely

Korea Electric Power Corp. (KEPCO), South Korea’s state-run electricity monopoly, has postponed its plan to construct a transmission tower in an inter-Korean industrial park in North Korea indefinitely amid rising tension on the peninsula in the aftermath of the North’s missile launches, the chief of the company said Monday.

“Since the inter-Korean relationship hit a deadlock due to a string of negative factors, such as North Korea’s missile firing, we have decided to put off a groundbreaking ceremony that had been slated for Friday to mark the construction of the transmission tower in the Kaesong industrial complex,” KEPCO’s Chairman & CEO Han Joon-ho said in a meeting with reporters in Seoul.

KEPCO had planned to build a transmission tower capable of sending 100,000 kilowatts of electricity from the South to the industrial park, located just across the demilitarized zone that separates the two Koreas.

The company currently transmits 15,000 kilowatts of electricity via 23 telegraph polls for more than 13 South Korean companies operating there.

The South Korean-built complex is a product of a historic inter-Korean summit in 2000 which set off a series of cross-border projects. About a dozen South Korean garment and other labor-intensive plants are currently in operation in the complex.

KEPCO’s announcement comes amid escalating tension between the two countries, triggered by the North’s missile launches on July 5.

Last week, North Korea withdrew all of its government officials from a joint dialogue office in Kaesong, cutting off the last direct channel for communication with Seoul.