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Minerals, railways draw China to North Korea

Friday, November 18th, 2005

From the Asia Times:
By Michael Rank
11/18/2005

Chinese companies are venturing into North Korea, and both countries hope to reap the rewards. North Korea’s heavy industry is in a desperate state, but Pyongyang is hoping that Chinese investment will come to its rescue, while China sees the North as a convenient source of minerals, from coal to gold.

China’s increasing investment also means that North Korea is casting off its rigid juche, or self-sufficiency, policy and overcoming its deep historical suspicion of its giant northern neighbor.

Border trade in consumer items from televisions to beer has been booming since the 1990s, but now the focus is turning to the industrial sector. Deals are being reached on mines, railways and leasing a North Korean port to a Chinese company, but North Korea is notoriously secretive and few details have been published outside China. The deals include an agreement to “completely open” North Korea’s railways to a Hong Kong millionaire, as well as moves to revive ailing coal, iron and gold mines.

Tumen-Chongjin rail link rumored
Hong Kong businessman Qian Haomin is reported to have reached a US$3 billion deal with North Korea that also involves the Chinese Railways Ministry building a new rail link between the Chinese border city of Tumen and the North Korean port of Chongjin. The agreement marks an end to long-running tension between the Chinese and North Korean state railway authorities over North Korea’s retention of up to 2,000 Chinese goods wagons and reluctance to repay loans.

The Hong Kong news magazine Yazhou Zhoukan recently reported that these issues had been resolved and that Qian’s grandly named company Hong Kong International has agreed to provide the North Koreans with 500 to 1,000 freight wagons. Qian told the magazine that “after six months of effort, there are now hopes of solving the railway transport bottleneck between China and North Korea”, and this would help to integrate the economy of the entire northeast Asian region.

Qian’s ambitions are not limited to railways. Not only has he expressed interest in investing in a North Korean coal mine, but Yazhou Zhoukan also reported that he hopes to set up a special economic zone in the North Korean border city of Sinuiju. He has clearly not been deterred by the unhappy case of Yang Bin, a Dutch-Chinese multi-millionaire who was made head of a similar development zone in 2002. Before Yang could take up his post, he was arrested by the Chinese authorities for tax evasion and other economic crimes and jailed for 18 years.

Qian, aged 41, is originally from the southern Chinese province of Guangdong and moved to Hong Kong in 1993. He has been involved in North Korea since the early 1990s, and has apparently established a fruitful relationship with Prime Minister Pak Pong-ju. He has said that “to invest in North Korea has been my dream” because three of his uncles fought in the Korean war; one was killed and one was seriously wounded. The Hong Kong investor has signed a plastics, tire and battery recycling agreement with North Korea and has expressed interest in investing in the country’s largest anthracite coal mine, which now produces only 1 million tons a year, compared with 3 million tons at its peak.

Tonghua Steel looks North
Meanwhile, state-owned Tonghua Steel or Tonggang, based in the northeastern city of Tonghua, expects to sign a 7 billion yuan ($865 million), 50-year exploration rights deal with the Musan iron ore mine, said to be North Korea’s largest iron deposit. Tonggang, Jilin province’s largest steelmaker, hopes to receive 10 million tons of iron ore a year from Musan as part of its plans to increase steel production from a projected 5.5 million tons in 2007 to 10 million tons in 2010.

The planned deal reflects China’s immense and growing appetite for steel. Although the country already produces 30% of global output, it is heavily reliant on imports and is concerned about rising prices. A Jilin provincial trade official said importing iron ore from North Korea was attractive because of low transport costs, which would increase Tonghua’s competitiveness.

Tonggang officials say they expect the deal to be signed soon, and that of the 7 billion yuan (US$866.1 million) pledged, 2 billion yuan will be invested in transport and power lines. Company president An Fengcheng said agreement had already been reached with China Development Bank on 800 million yuan worth of soft loans and 1.6 billion yuan of hard loans, while “the remaining investment will come in in stages”.

Rajin deal to give China Sea of Japan access
China’s export boom is one of the great economic success stories of the past 25 years, but it is constrained by a lack of suitable ports. In particular, the country lacks a port on the Sea of Japan, but after attempted deals with Russia came to nought, the inland Chinese border city of Hunchun has reached an agreement for a 50-year lease with the nearby North Korean port of Rajin.

The ceding of Rajin, an ice-free port with a handling capacity of 3 million tons a year, will give access to the sea to inland areas of northeast China which, at present, must send freight long distances by rail to the port of Dalian on the Bohai gulf. The agreement also provides for the construction of a 5-10 square kilometer industrial zone and a 67 kilometer highway, and envisages that the Rajin area will become a processing zone for Chinese goods which will then be re-exported to southeast China.

A Hunchun economic official stressed that the leasing of the port is “a business deal and not a government deal”. The South China Morning Post reported from Hunchun that the man behind the deal is Fan Yingsheng, a property developer from Hunan province who put up half the initial capital investment of 60 million euros (US$70 million). The sum could not be denominated in dollars for political reasons.

The paper quoted the United Nations Development Program as saying this sum would only be enough to build the road to Rajin, and far more would be needed to rejuvenate the port. The deadline for final agreement is December 30, 2006, and it remains to be seen if a final deal will be reached in time.

An unusually frank North Korean trade official noted the possible pitfalls as well as the advantages of such deals. Kim Myong-chol, head of the Korean Council for the Promotion of Foreign Trade, said the deals would have to involve importing “highly advanced technology and equipment”, and added: “These agreements are not easy to put into actual practice and can run into many problems so far as funding and bilateral cooperation are concerned.”

“Because the amount of money involved in these cooperative projects is quite large and [North] Korea will be investing ports, roads, etc, there are rather great risks in such investment, and in addition because the domestic Korean economy and its policies, laws and regulations, etc, are unclear, many problems are likely to arise in carrying out these plans,” Kim told a Chinese website.

Coal and gold
Such concerns may have been in the mind of the president of China Minmetals Corp, Zhou Zhongshu, when he signed “an agreement on setting up a joint venture in the coal sector of the DPRK” [North Korea]. The deal was signed in October when Chinese deputy premier Wu Yi visited Pyongyang, and is said to be the first of its kind. North Korean Vice Minister for Foreign Trade Ri Ryong-nam urged the Chinese side to “provide advanced technology and set up a good model for other joint ventures and cooperation between the two countries”.

North Korea also has substantial gold deposits, and a Chinese company plans to invest in a “semi-paralyzed” North Korean gold mine and refine the metal at its base in Zhaoyuan in Shandong province. Guoda Gold Co Ltd reached a preliminary agreement last year with Sangnongsan gold mine, which is said to have gold deposits totaling at least 150 tons.

Guoda deputy manager Lin Deming said his company was attracted to North Korea because of low labor, energy and transport costs as well as the “highly favorable” investment terms offered, but gave no details. Chinese investment in North Korea is certainly increasing, but final agreement on a number of deals has not yet been reached, and political factors such as uncertainty over Pyongyang’s nuclear weapons program may well discourage Chinese companies from moving too fast.

Michael Rank is a former Reuters correspondent in China, now working in London.

Posted in China, Coal, Council for the Promotion of Foreign Trade, Foreign direct investment, Gold, Iron Ore, Labor conditions/wages, Railways, Rason Economic and Trade Zone (Rajin-Sonbong), Sinuiju Special Administrative Region, Steel, UNDP | 1 Comment »

The North Korean Criminal State, its Ties to Organized Crime, and the Possibility of WMD Proliferation

Tuesday, November 15th, 2005

Nautilus Institute
David L. Asher
11/15/2005

I am very pleased to be invited back to the Wilson Center to speak today. I enjoyed my time here this summer and want to thank my colleagues for the chance to be affiliated with the Center, which I consider the finest organization of its kind in Washington. I also wish to thank my former boss, Assistant Secretary Jim Kelly and the many members of our inter-agency team for kindly attending today. In particular, I want you to know of the extraordinary work that our friends and colleagues here from the United States Secret Service have done recently to safeguard our nation and our currency from a determined adversary.

I left the State Department in July and I want to be very clear that my remarks today are personal in nature. They in no way should be interpreted as representing the view of the US government, the Department of State or the Department of Defense. They also are drawn strictly from unclassified sources (the vast amount of information now in the public domain is indicative of the scale of the problem of DPRK criminality).

Let me make clear, I am a believer in the Six Party Talks. I applaud the efforts of my former colleagues, Chris Hill, Joe Detrani, and Jim Foster to effect positive diplomatic movement via direct dialog and clearly demonstrate to all the parties seated at the big table within the Diaoyutai State Guesthouse that the US is sincerely willing to join the international community in engaging North Korea to facilitate its denuclearization, its economic development, and its opening to the outside world. At the same time, given this objective, there should be no further room for tolerating the unacceptable and in many ways outrageous criminal and proliferation activities that the North Koreans continue to engage in.

Allow me to begin my remarks by laying out the major aspects of North Korean trans-national criminal activity. I will then look at the specific question of how the DPRK’s growing ties to Organized Crime groups and illicit shipping networks could be used to facilitate WMD shipments. I’ll propose a possible way to reduce this risk. I will conclude by frankly commenting on the nature of state directed criminality in the DPRK and its implications for international law and the DPRK’s status in the international community and the United Nations.

My research topic this summer at the Wilson Center was on the rise and fall of “criminal states” – government’s whose leaders had become intimately involved with trans-national criminal activity. I compared North Korea under Kim Jong Il with Serbia under Milosevic, Romania under Ceausescu, and Panama under Noriega. I won’t get into the details of this comparative research now but, suffice to say, the scale and scope of the other cases pale in comparison with present-day North Korea.

The rise of the criminal state in North Korea is no secret. It has occurred in full view of foreign governments and with increasing visibility to the world media. Over the last three decades agents, officers, and business affiliates of the DPRK have been implicated in hundreds of public incidents of crime around the globe. Incidences of illicit activity have occurred in every continent and almost every DPRK Embassy in the world has been involved at one time or another. This should be no surprise. North Korea is perhaps the only country in the world whose embassies and overseas personnel are expected to contribute income to the “Party Center,” not rely on central government funds for their operations. Such repeated illicit actions from diplomatic premises amount to a serial violation of both articles 31 and 41 of the Vienna conventions on Diplomatic Relations, which respectively convey that A. commercial, and most certainly, criminal activities for profit shall not be conducted by accredited diplomats or via accredited facilities and B. mandate that officials posted abroad must obey the laws of the nation to which they are posted. The DPRK routinely pays no attention to either critical provision of the Vienna conventions.

I am frequently asked “how much is this stuff going on?” Although it is hard to pin down the exact scale of the illicit activity we can make a rough guess. In 2003 the DPRK ran a trade deficit of at least $835 million and that if more broadly measured to exclude concessionary trade with the ROK was more like $1.2 billion. Even making a very bold estimate for informal remittances and under the table payments for that year, the DPRK probably ran a current account deficit of at least $500 million. Moreover, North Korea’s accumulated trade deficit with the ROK and China alone since 1990 is over $10 billion. North Korea has not been able to borrow on international markets since the late 1970s and has at least $12 billion in unrepaid debt principal outstanding. Yet, until recently – at least – it has managed to avoid self-induced hyper-inflation (which should have occurred given the need to reconcile internal and external monetary accounts, even in a communist country). Instead, the street stalls in Pyongyang and other North Korean cities seem to be awash in foreign made cloths, food, and TVs and the quality of life of the elite seems to have improved. What’s apparently filling the gap and accounting for the apparent improvements to the standard of living for the elite? The short answer as I see it: Crime. And if I am right, then the criminal sector may account for as much as 35-40% of DPRK exports and a much larger percentage of its total cash earnings (conventional trade profit margins are low but the margin on illegal businesses is extremely high, frequently over 500%).

Whatever the precise size of the criminal surplus, all analysts and law enforcement authorities agree that overseas illicit and weapons trading activities have become increasingly important sources of foreign exchange for the DPRK. These earnings have provided support to North Korea’s “military-first” economy and contributed to Pyongyang’s ability to resist demands from the international community for an end to its nuclear weapons program. They also apparently have persuaded the Kim Jong II regime it can affordably maintain its political isolation and resist the imperative for sweeping economic and social reforms that all other communist states have had to engage in. Given that periodic exposure of illegal dealings by North Korean officials overseas in the past has not resulted in serious or lasting consequences, Pyongyang may believe that an open door for global criminality exists.

Let’s review the scale and scope of the North Korean “soprano state.” As is well known the North Korean government is involved in a wide range of illicit businesses in partnership with organized crime groups or unilaterally. These include:

1. Production and overseas distribution of narcotics, in particular heroin and methamphetamines:

DPRK Narco trafficking continues as a major income generator, although less prominently perhaps than before. China continues to be the major market for North Korean drugs and the situation became so bad that in March of last year the Vice Minister of the MPS called a highly unusual “press conference” to announce his determination to cut into DPRK drug rings in Jilin province, on the border with North Korea (which some Chinese law enforcement officials have stated is “out of control”). Japan probably still comes in second. From 1998-2002 Japanese police interdicted nearly 1500 kg of meth that in six separate prosecuted cases was shown to have originated in the DPRK. This amounts to thirty-five percent of all methamphetamine seizures in Japan in that period and had a wholesale value of over $75 million and a street value of as much as $300 million. Given the chemical profile for DPRK produced meth (essentially of extremely high purity) several Japanese authorities I spoke with the week before last believe that a fairly large percentage of the meth coming in from Northern China today is consistent with DPRK origin. As elsewhere, in Japan to mask their fingerprints the North Koreans are going through triads, snakeheads, and other indirect channels. This has been less true with Heroin where North Koreans continue to be observed selling the drugs. The Australian seizure of 125 kg of Heroin worth $150 million off the Pong Su – a Worker’s Party linked vessel and with a KWP secretary on board – in my mind was hardly a random or isolated incident (it is not surprising given that the North Koreans had established an Embassy in Canberra the year before that one would assume needed to produce income for the center – it was Pyongyang’s way of saying “thanks very much”).

2. Production and international distribution of counterfeit currency, in particular the US dollar, as well as counterfeiting or illegally reproducing and selling numerous other items, in particular counterfeit cigarettes and pharmaceuticals.

Under International Law, counterfeiting another nation’s currency is an act of causus belli, an act of economic war. No other government has engaged in this act against another government since the Nazis under Hitler. North Korea has been counterfeiting the dollar and other currencies of importance the entire time it has been on the international engagement bandwagon. What does this say about the regime’s intentions?

As the recent DOJ indictment of Sean Garland and other members of the Official IRA for their partnership in the criminal distribution of counterfeit US currency reads: “Beginning in or about 1989, and continuing throughout the period of this Indictment, a type of high-quality counterfeit $100 FRNs began to be detected in circulation around the world. Their high quality made it particularly difficult for them to be detected as counterfeit by untrained persons. The United States Secret Service initially designated these counterfeit notes as “C-14342” and they came to be known as “Supernote” or “Superdollar.” Quantities of the Supernote were manufactured in, and under auspices of the government of, the Democratic People’s Republic of Korea (“North Korea”). Individuals, including North Korean nationals acting as ostensible government officials, engaged in the worldwide transportation, delivery, and sale of quantities of Supernotes.”

The Royal Charm and Smoking Dragon investigations that were concluded this summer revealed a willingness to sell millions of dollars in DPRK supernotes into the US by Asian OCs linked to the North Korea government. Whether this was a deliberate act of policy decided in Pyongyang or just business among crooks is hard to tell but it seems unusual that according to the public indictment the cost of the notes was less than 40 cents per dollar, far below the market value associated previously with the counterfeit supernotes, given their ability to be circulated without ready detection by the naked eye. One wonders how such a price could be obtained unless the notes were coming from a very high source inside the country in question.

The relatively sophisticated shipping methods for transporting supernotes uncovered in the FBI-USSS Royal Charm/Smoking Dragon investigations also needs to be given scrutiny, especially given our topic today. The following slides, reproduced from a Taiwanese newspaper article gives you a sense of how they move the notes around, falsely manifesting the cargo as a non-dutiable item (in this case as “toys”), falsifying port of origin information (to indicate a port in Northern China instead of in the DPRK), and cleverly concealing the contraband.

The production of counterfeit cigarettes also appears to be a very large and profitable business for North Korea and one with global reach. Indeed, Counterfeit cigarettes may well be North Korea’s largest containerized export sector with cargoes frequently coming from the ports of Najin and Nampo for shipment via major ports in China and the ROK throughout the world. Phillip Morris International, Lorillard, Japan Tobacco and others have identified numerous factories producing counterfeit cigarettes in North Korea. Affected industry participants have worked assiduously with relevant government authorities around the world to stop this trade. The numbers explain why. A forty foot container of counterfeit cigarettes might cost as little as $70,000 to produce and have a street value of 3-4 million dollars, so it’s not surprising that the North has focused on this business line-with its profits increased if tax stamps are forged (something that has been observed repeatedly of late, costing affected states such as California tens of millions in stamp revenue per year). A 1995 Associated Press article reported the seizure by Taiwan authorities of 20 shipping containers of counterfeit cigarette wrappers destined for North Korea. According to officials of the cigarette company whose label and trademark were being violated, the seized materials may have been used to package cigarettes with a retail value of $1 billion. Increasingly DPRK counterfeit cigarettes, counterfeit pharmaceuticals (especially counterfeit Viagra), and counterfeit currency are being moved in parallel. Royal Charm revealed that weapons, too, potentially even manpads might be run through the same channels. What could be next?

3. Smuggling sanctioned items, including conflict diamonds, rhino horn and ivory, and endangered species, utilizing official diplomatic means

I find this to be one of the most outrageous and unacceptable of the DPRK’s criminal acts, absolutely contravening international law, including the Convention on International Trade in Endangered Species of Wild Fauna and Flora. There are numerous notorious examples to cite. In the early 1980’s, five North Korean diplomats were forced to leave Africa for their attempts to smuggle rhino horns. The horns were transported from Luzaka to Addis Ababa to South Yemen. From there, they traveled to the consulate in Guangzhou, which ran operations in Macau, Zhuhai, and Hong Kong. This kind of activity has apparently not changed. As Stanford researcher, Sheena Chestnut, noted in a recent thesis, in the years since 1996, “at least six North Korean diplomats have been forced to leave Africa after attempts to smuggle elephant tusks and rhinoceros horns.” Ivory seizures directly linked to North Korean officials amounted to 689 kg in Kenya in 1999; 537 kg in Moscow in 1999; and 576 kg in France in 1998. I don’t have more recent data I can share publicly but I don’t think they have given up on the illicit ivory trade.

4. Money laundering for its own account and in partnership with recognized organized crime groups abroad:

The extent to which the DPRK uses banking partners around the world to launder funds has recently gotten a lot of attention in the wake of the Macau based Banco Delta Asia designation under Section 311 of the USA Patriot Act. The Treasury Department’s website paints a pretty clear picture: “One well-known North Korean front company that has been a client of BDA for over a decade has conducted numerous illegal activities, including distributing counterfeit currency and smuggling counterfeit tobacco products. In addition, the front company has also long been suspected of being involved in international drug trafficking. Moreover, Banco Delta Asia facilitated several multi-million dollar wire transfers connected with alleged criminal activity on behalf of another North Korean front company.”

5. Weapons smuggling and trading in WMD

Even while its customer base diminishes, North Korea defiantly remains in the business of selling MTCR class missiles and base technologies. It also continues to field more advanced systems domestically that could be exported. Logically speaking, as its stockpile of WMD grows so could its willingness to export technologies, systems, and even materials. Business and ideology conveniently mix in the minds of North Koreans, it seems, as they calculate where, when, and how to sell weapons and weapons systems.

Moreover, in the face of increased surveillance of DPRK flagged vessels, the threat of using conventional shipping means to move cargoes increases as does the incentive to use organized crime channels.

There are several thousand containers each year coming out of North Korea from its two main container cargo ports: Najin on the east coast and Nampo on the west coast. To get into the international maritime transport system, they have to go through friendly ports, typically in China, the ROK, and Japan. Virtually none of these containers in China is subject to inspection and few in the ROK. Japanese customs has made a bigger effort but it remains insufficient in regard to cargoes destined for non Japanese ports.

As we learned from the investigations concluded this summer, containers of counterfeit cigarettes, counterfeit currency, weapons, and other illicit items apparently produced in the DPRK or linked to a distribution chain it has ready access to have managed to make their way into the US. So could North Korean WMD if we don’t create a system to better scrutinize cargoes and enhance Maritime Domain Awareness to protect our SLOCs.

Unfortunately, neither the PSI no the CSI are attuned to addressing these threats. The Container Security Initiative is a worthy effort to move US customs outward, inspecting select cargoes destined for US waters overseas before they embark in our direction. I am impressed by the work being done by US Customs and ICE officers overseas to look into suspect cargoes and the dedication of personnel at the National Tracking center to identify ships and cargoes that may have not been covered by the CSI or fallen through the loop. Nonetheless, the CSI has no application to containers destined for non-US ports and, moreover, it is only operating in a small number of foreign venues. What happens to the majority of containers coming here or going elsewhere? Nothing.

Moreover, the hallowed Proliferation Security Initiative unfortunately remains much more talk that action. I support the initiative but it is not sufficient and does not substitute for a dedicated DPRK counter-proliferation policy. It is nice to see countries getting together to agree to intercept shipments but it is another to engage in such interdictions. There has not been one single PSI interdiction of a DPRK flagged vessel that I am aware of. Does this mean they have stopped sailing? A quick look at the “Lloyd’s List” database reveals this to not be true with many notorious North Korean vessels like the Sosang, which was interdicted shipping missiles to Yemen in December 2002 (before the PSI existed), still plying the high seas. What are these ships carrying? Moreover, I find the implicit premise that interdiction alone is adequate for stopping proliferation unsettling. Stopping a weapons shipment on the high seas is like stopping a drug shipment under dark of night-easier said than done. The odds are not good, especially when you face an adversary with access to near state of the art communications, excellent denial and deception, diplomatic immunities, and friendly criminal partners to facilitate its activities.

More decisive action is required, well beyond the PSI’s current scope. The AQ Khan network was brought down by a network disruption strategy that utilized all aspects of national power. Such a strategy may need to be mounted soon to stop a determined North Korea engaged in the weapons trading business.

Fortunately, there are some things in the area of peaceful international cooperation we can do to minimize the chance North Korean contraband, missiles, or WMD will get into the international distribution system. I propose that a special Container Security Initiative be created and applied to the DPRK, beginning in China and the ROK. Specifically, all containerized cargo out of North Korea should be mandated for inspection at the first international port of conveyance. Legitimate trade would be allowed to pass but illicit cargoes would be stopped. The US could not accept containers from ports that do not wish to join this special inspection regime. Such a regime would dramatically reduce the risk of weapons proliferation and cut into crime. Were all ships coming from the DPRK, whether bearing containers or not, subject to first order inspection the system would be even more effective. Given that DPRK trade represents a drop in the bucket for even major Chinese and Koreans ports, instituting such a regime should not be particularly onerous.

Down the road a more elegant solution is possible, whereby only smart containers can gain access to the international shipping system. The President recently announced a new policy on Maritime Domain Awareness (MDA). As Vice Admiral John Morgan has recently written, “MDA is the collection, fusion and dissemination of enormous quantities of data – intelligence and information to form a common operating picture (COP) – a web of integrated information which will be fully distributed among users with access to data that is appropriately classified.” Through the COP, specialists should eventually be able to monitor vessels, people, cargo and designated missions, areas of interest within the global maritime environment, access all relevant databases, and collect, analyze and disseminate relevant information.

This goal of Maritime Domain Awareness may sound overambitious, if not down right impossible. However, within the next five years, we likely will see the global deployment of such “smart-containers.” These sophisticated containers will be equipped with RFID tags that can not only broadcast the precise geo-location of the container but also be linked to relational databases that reveal detailed information on the container’s cargo: where it was loaded and by whom, when and where it was produced, and a host of other important information. IBM and Maersk have in fact just announced a pilot project to validate this smart container concept and allow the data to be trackable via an open information architecture.

In effect, driven by industry requirements even more than government regulations, by the end of the decade we can look forward to the development of a “world wide web of things” – the physical data tracking equivalent of the internet. Such a web promises to dramatically enhance supply chain management for multinationals, expedite and safeguard trade, and reduce counterfeiting. This is not science fiction: companies like Walmart have already demanded that their suppliers insert RFID tags into products with the goal of eventually being able to track in near real-time the status of virtually every asset in the company’s supply chain domestically and – relatively soon – globally.

Countries, ports, or companies not subscribing to smart container standards would be subject to automatic inspection or simply not be allowed to engage in international trade with countries participating in the initiative.

Conclusions:

North Korea is the only government in the world today that can be identified as being actively involved in directing crime as a central part of its national economic strategy and foreign policy. As a result, Pyongyang is radically – and perhaps even hopelessly – out of synch with international law and international norms. In essence, North Korea has become a “soprano state” – a government guided by a Worker’s Party leadership whose actions, attitudes, and affiliations increasingly resemble those of an organized crime family more than a normal nation.

North Korea’s serial violation of international laws and agreements begs the question whether it should be allowed normal protections granted to states under the United Nations treaties.

Its reliance on illicit activity for maintaining what my former colleague Bill Newcomb has termed the “palace economy of Kim Jong Il” perhaps makes it very hard for North Korea to abandon such activities and also provides Pyongyang a means to avoid serious engagement with the outside world. Thus, unless and until the North finds itself censured for its involvement in such activities and its illicit finances come under great pressure it may have few incentives to be cooperative and come clean and act normal.

The North must cease its dealings with trans-national organized criminals, its illicit export of weapons, its nuclear reprocessing, its threats to engage in nuclear proliferation, etc. Instead it should accept the extremely reasonable terms the US, with the others parties in the talks, have offered for promoting a positive and peaceful transformation of relations in the context of full denuclearization. If it does then next month’s talks should represent a turning point in the history of our relations with the DPRK. If it does not, as I have shown the evidentiary ground exists for the DPRK’s comprehensive diplomatic isolation and a systematic denial in diplomatic privilege, if not as a pariah state with nuclear weapons but as a criminal state engaged in causus belli acts against the United Nations, its laws, and its principles. I hope Mr. Kim Jong Il makes the right decision.

Posted in Arms shipment, Black markets, British American Tobacco (BAT), Counterfeiting, Drug smuggling, Economic reform, Fiscal & monetary policy, Illicit activities, International trade, Songun, Tobacco, Trade Statistics | Comments Closed

An Employee from the Emperor Hotel in Rajin Out to Do Business in a Market Place

Monday, November 14th, 2005

Daily NK
Kim Young Jin
11/14/2005

Employees from the Emperor Hotel in the city of Rajin in North Korea are said to make their livings by doing business in market places. The hotel is well known for its casino.

On the 13th day of this month I had an interview with a manager of the hotel, who I will call Kim Myung Chul (alias, 42 years of age) for the sake of his safety. “The hotel has had much difficulty paying wages to its employees since it closed its casino in February,” he said. “It laid off about half of its 300 employees, and even some of the remaining half had to open restaurants near the hotel or start business in market places for their livings.”

The Emperor Hotel is a five star hotel founded by the Emperor Group in Hong Kong that invested about 24 million dollars in it. It is well known for the finest casino in North Korea.

For the last two years, two high raking Chinese officials have lost a large sum of government money to the casino and the Chinese government complained to the North pressing it to close it. Thus, it was closed in February, and the hotel lost many Chinese tourists. The number of Chinese tourists had been almost 20 thousands a year before. Virtually the hotel is out of business now.

Chae Moon Ho, a former head of Traffic and Transportation Office of Yanbian Autonomous Prefecture in Jilin, China squandered 3,510,000 yuan (more than 434,000 dollars) of government money in the casino and was sentenced to 8 year imprisonment at the first trial. Mr. Wang, a former superintendent of highway construction, wasted 870,000 yuan (about 107,000 dollars) of government money in the casino and was taken into custody.

After these incidents, the Chinese government had prevented travel agencies around Yanbian area from holding North Korean tourism in March this year. It lifted the ban last September.

The following is some excerpts from the interview.

– When did you start to work for the Emperor Hotel?

I have been working in the hotel since 2000. People in Rajin call it Bipa Hotel or the Five Star Hotel. When the hotel was first opened, it was run in a capitalistic way. Even hostesses from Russia and China were recruited. But they have all returned now because they could no longer get paid. It took 3 years to complete its construction. I heard that it had been intended to be a 30 story building, but it is 7 stories high because the Emperor Group cut spending. Visitors were usually foreign gamblers and those Chinese who enjoyed fish and other seafoods.

– How is business now?

Business situation became very tough after the Chinese stopped coming. Usually thousands of Chinese people visited for the summer, and Russian and Chinese gamblers constantly came and went. But since the casino was closed and the Chinese stopped coming, it has been difficult for the employees to be paid. The hotel even laid off half of its employees. At frist 300 people were recruited, but there are less than 150 employees now. Among them, less than 50, mostly janitors, cooks, Karaoche coordinators, massagists, come to the hotel to work.

– Does the owner not pay the employees?

I do not know. Even though the owner is Emperor Group from Hongkong, the employees are controlled by the Administrative Committee of Rajin city. I suppose that wages must be distributed by the civil authorities. Anyhow, I have not been able to be paid since last spring.

– What kind of people are employed in the hotel?

High ranking people were eliminated from the recruit lest they be contaminated by capitalism brought in by foreign gamblers. For example, Kim Il Sung University graduates, partisans, workers involved with law and national defense and their family members were all eliminated. Mostly tall and good looking people from Rajin were accepted.

– How are the employees paid?

At first, we were well paid. We were not rationed but received wages. Until 2000, I received 300 yuan a month. At that time, 1 yuan($0.1237) was equivalent of 25 Chosun(NK) won($0.0125), and rice was quite cheap. Hence 300 yuan made a sound pay. Moreover, we were fed three times a day and allowed to sleep in the hotel, which was considerable benefits for us. But while business was getting difficult, employees were being turned into 8.3 workers one after another. Finally, payment started to be incomplete from last February. We could just take three meals a day thanks to the money the 8.3 workers gave to the hotel.

– What is 8.3 worker?

The hotel forced some of its employees to earn money all by themselves and to give some part of it to the hotel. 8.3 worker is called so because Kim Il Sung ordered the system during a factory visit on a third day of August.

– How do 8.3 workers earm money?

Some workers opened restaurants near the hotel, and others merchandize in market places. There are people like me who are out here in China and do business with old customers. Chinese tourists like to eat fish and other seafoods in Rajin. That’s why 8.3 workers like to open seafood restaurants near the hotel calling them branch restaurants of the hotel. There are more than 10 such restaurants near the hotel. There are also a few souvenir shops. If they earn money, they give some of it to the hotel. Those who merchandize are just like that. If you give some money to the hotel every month, you are not required to go there to work.

– Does the money go to Emperor Group?

No. It goes to the Administrative Committee of Rajin city. The hotel is just a Work Place: we are not under the owner’s control. We are required to take permission from the Administrative Committee to work outside the hotel.

– Do 8.3 workers make much money?

It is advantageous for business to be an employee for the hotel. We do not pay such heavy taxes as ordinary merchandizers do. It is also easier for us to occupy stalls in market places than for ordinary merchandisers.

– What is people’s life like in Rajin recently?

Outsiders envy Rajin and Seonbong because they compose the free trade zone, but the situation is on the contrary. The government takes more from Rajin and Seonbong because of the free trade. Rice is also more expensive. They are good places for the rich to live in but not for the poor.

Posted in China, Economic reform, Foreign direct investment, Gambling, Hoteling, Labor conditions/wages, Rason Economic and Trade Zone (Rajin-Sonbong), Tourism | Comments Closed

Kumgang update from Lankov

Tuesday, November 8th, 2005

Here are the highlights:

1. In June 2005, Hyundai conformed its 1 millionth visitor to Kumgang.
2. January 1999, soon after the launch of the project, Hyundai Asan leaders stated that by the end 2004 there would be an accumulated 4.9 million visits to the North.
3. Managers predicted that in 2004 alone some 1.2 million tourists would visit the Kumgang Mountain Project. The actual number of the visits in 2004 was 273,000
4. The project was first conceived in 1989, when Chung Ju-yung, the founder of the Hyundai Group, became the first South Korean industrialist to visit the North.
5. Financially, the North Koreans have been doing very well. According to the initial agreement, the Hyundai Group would build all the infrastructure in the zone (presumably including the fences to keep the South Korean visitors under control), and pay $12 million every month as fee for the use of the area. Some additional income was earned by the North through the sale of grossly overpriced local products and souvenirs.
6. Contrary to initial expectations, South Koreans were not too eager to spend their short vacations behind barbed wire.
7. in the late 1990s a cheapest three night package cost about 700,000 won
8. In April 2001 the Hyundai Merchandise Marine Company halved the number of trips available. It was also having trouble making payments to the North Korean partners, too.
9. However, the government simply could not allow it to collapse: by that time the Kumgang Project had acquired a huge symbolic importance. It was salvaged by a massive government intervention, and stayed afloat largely because the Blue House (and also a large part of the public) needed a symbol of cooperation, at whatever cost to the taxpayers.

Posted in Mt. Kumgang Tourist Special Zone | Comments Closed

North Koreans Are Changing

Friday, October 28th, 2005

Korea Times
Andrei Lankov
10/28/2005

North Korea of 2005 is on a crossroad. Its people are not sure where to go, and its government tries hard to stay in control. But things are changing, the 50-odd years of Juche-style Stalinism are over or almost over. The long decease is not over yet, but there are clear signs of recovery. It has a future. This future is unlikely to be easy, but the country began its slow move forward.

It was a perfect sunny October day here. It was my first visit in two decades. I stood on the city’s main street, not far away from Kim Il Sung University which I attended 20 years ago, and was looking around.

A small crowd near the Chinese Embassy wall attracted my attention. People were carefully studying something inside a large window on the wall: some finished and went away, only to be replaced by others. Of course, I came closer.

The people’s attention was attracted by the pictures which were put into the Chinese Embassy’s “information window”. The pictures were large and colorful, but otherwise absolutely unremarkable. The photos and captions were no different from the stuff the cultural attaches across the globe put on the walls of their embassies – the usual boring fare about growth of shrimp production, new computer classes and state-of-the-art chicken farms. However, in North Korea of 2005 such mundane matters would attract a crowd. Those pictures gave a glimpse of the overseas life.

This small episode was a sign of what was in the air in North Korea of 2005: people are eager to learn more about the outside world. They are less afraid to show their interest in what once was forbidden knowledge, and they are increasingly uncertain about the future.

At a superficial glance, it feels as if the entire city has remained frozen in time since the mid-1980s. On my first day, I walked some 5-7 km across the downtown, and had no reason to worry that I might loose my way. All old buildings were still there, and very few structures appeared over those two decades.

The North Korean capital is still the same city of somewhat dilapidated Soviet-style apartment projects (with traditional huts hidden inside the blocks), nearly absent traffic, uniformed police girls on the crossroads, and crowds dressed in the old good “Mao suits”.

As a matter of fact, “crowds” might be an exaggeration. The city felt empty, and at all probability it was half-empty in those days. As part of the regular mobilization program, most of its population was sent to the countryside to work at the fields or to join the “battle for harvest” as this rather mundane operation is known in North Korea.

Like other socialist economies, North Korea has serious troubles with agriculture, and the townsfolk is required to provide manpower for the farms twice a year, during planting and harvesting.

However, this impression of unchanged city is misleading. The conversations with people clearly demonstrate that over those decades Pyongyang has changed – or rather its people has changed. It was the same city, but a different society.

People were frank – not as frank as they would probably be in most other countries, of course, but still much franker than in past.

When none of our supervisors was hanging around, it was possible to strike a meaningful conversation with a North Korean. And in a matter of minutes the conversation would slide to issues nobody was insane enough to approach 20 years ago.

People wanted to know how the life overseas looks like. They asked about salaries and prices, travel and housing. Well, these questions might sound a bit too materialistic for some of our readers.

Perhaps, but the North Korean government has always insisted that it is second to none when it comes to meeting material demands of the populace. And it seems that the North Koreans are beginning to feel doubts about truthfulness of these long-standing claims.

There are good reasons for such doubts. Even grossly privileged Pyongyang does not look like a rich city, to put it mildly. Of course, statistics about the large and growing gap between two Koreas (approximately 20-fold if per capita GDP is used) is widely known, but it is altogether different matter to see this disparity with one’s own eyes.

However, one cannot see Pyongyang as really impoverished. The serious poverty could be encountered in the countryside.

We could catch a glimpse of it on our way to the city of Kaesong. Compared to destitute north-eastern provinces, this is still the privileged part of the country, but the picture was disturbing.

The Pyongyang-Kaesong highway is a road of reasonable quality (albeit with bad paving), but it was completely empty, with hardly a dozen vehicles encountered over hundred kilometers.

There were almost no signs of agricultural machines in the fields, with harvesting made by bare hands of farmers and city dwellers who are mobilized to join the “battle for the harvest”.

The landscape was free from all those intrusive details of modern civilization which so often annoy tourists (of course, the tourists assume that they would have access to such amenities back home).

No mobile phone antennas, few motor vehicles, very few powerlines. Sometimes it was easy to imagine oneself transported back to the times of Tang Empire when the kings of Silla dynasty ruled the Korean peninsula.

This might be a good feeling, of course – as long as one does not think too much about people who have to live in this “romantic” area under nearly medieval conditions.

And these people looked bad – worse, actually, than 20 years ago when a motor harvester was still a usual sight in a North Korean paddy field. People in the countryside were undernourished, badly dressed, their brown seemed faces covered with deep wrinkles.

Kaesong was clearly one large step down the North Korean hierarchy of prosperity (or lack thereof). It was strange to think that we were merely two hours drive from the hyper-modern and affluent Seoul – and the sight of Kaesong makes one think about the likely impact which the unavoidable “discovery” of South Korean affluence will have on those destitute people.

It also makes to have second thoughts about unification – it is difficult to imagine how those destitute farmers will find the common ground with their brethren from another side of the border. They will do it somehow, no doubt, but adjustment is bound to be painful.

However, in spite of all destitution there are many reasons for hope. Within those days we managed to meet quite a few Western businessmen quietly operating in North Korea. In order to succeed in this strange and often treacherous environment, one should remain silent and as press-shy as possible, but there is a number of the foreign businesses operating there.

The businesspeople are surprisingly optimistic about ongoing changes and about the country’s future: they talk about great transformation they witnessed over the last few years. The private economy is growing fast and the local people are hard-working and full of initiative.

The officials are increasingly corrupt, of course, but this is not necessarily bad: if they are willing to accept kickbacks, they do not care that much about following the official regulations which often are remarkably unreasonable.

Of course, the growth of market economy does not mean only good things. One of few visual changes easily noticeable in Pyongyang was an increase in social inequality. Back in the 1980s, it was not that difficult to tell an official from a humble commoner. Officials were dressed better, and sported leather shoes while the commoner had the cloth-and-plastic footwear. However, the difference was not as pronounced as it is now when on the Pyongyang street there is a small minority (few percent, perhaps) of people whose dress would not be out of place somewhere in downtown Seoul.

Sometimes, things old and things new go hand in hand. In one of the companies we visited, I spotted what is probably the worst example of comically exaggerated propaganda I’ve ever seen (and somebody dealing with North Korea for 20-odd years has seen a lot of comically exaggerated propaganda).

The hand-written poster explained why Kim Jong-il was superior to all other great minds of the humanity: “Marx was 28 years old when he founded The Communists’ Union; Lenin was 25 years old when he founded The Working Class Liberation Union; but the Dear Leader was 11 years old when he founded the Group to study the strategy of General Kim Il Sung!”

The same place also had a floor plan which demonstrated what the Great Leader did when he visited the company back in the 1980s – the plan signs indicated where the great man stood for a minute and which path he followed while moving from one desk to another. However, the same factory was also a place where we saw the most rational manager, whose speech was remarkably free from all kinds of usual demagogy. This lady in her 50s spoke like any manager, from Alaska to Madagascar would probably talk to visitors.

Posted in Agriculture, Civil society, Economic reform | Comments Closed

Markets on the rise in North Korea

Tuesday, October 25th, 2005

Andrei Lankov is a bottomless pit of information:

Until around 1990 markets and private trade played a moderate role in North Korean society. Most people were content with what they were officially allocated through the public distribution system, and did not want to look for other opportunities. The government also did its best to suppress the capitalist spirit. The rations were not too generous, but they were sufficient for survival.

The collapse of the USSR brought a sudden end to the flow of the Soviet aid. But men still felt bound to their jobs by their obligations and rations (distributed through work places). Being used to the stability of the previous decades, the North Koreans saw the situation as a temporary crisis that soon would be overcome, somehow. No doubt, they reasoned, one day everything will go back to the “normal” (that is, Stalinist) state of affairs. So men are better off in keeping their jobs, that way they will be able to continue their careers after the eventual “normalization” of the situation. The ubiquitous “organizational life” also played its role: a North Korean adult is required to attend endless indoctrination sessions and meetings, and these requirements are harsher for males.

Women had enjoyed much more freedom. By the standard of Communist countries North Korea has always had an unusually high percentage of housewives among married women. While in most other Communist countries married women were required and pressed to continue work after marriage, in North Korea the government did not really mind when married women quit their jobs to become full-time housewives.

Thus, when the economic crisis began, women were the first to take up market activities of all kinds. In some cases they began selling household items they could do without, or selling homemade food. Eventually, these activities developed into larger businesses. While men went to their plants (which by the mid-1990s had usually ceased operation) women plunged into the market activity.

This tendency was especially pronounced among low- and middle-income families. The elite received rations even through the famine years of 1996-1999, so women of North Korea’s “top 5 percent” usually continued with their old lifestyle. Nonetheless, some of them began to use their ability to get goods cheaply. Quite often wives of high-level cadres are involved in the resale of merchandise first purchased from their husbands’ factories at the cheap official prices. But for them this was a way to move from being well-off to being rich. The lesser folks had to do something just to stay alive.

Indeed, the change in gender roles during the famine years is only a part of the gradual changes in the Korean family, and these changes are surprisingly similar in the North and South. But that is another story…

Posted in Economic reform | Comments Closed

In North Korea’s isolated tourist zone, a temple rises

Tuesday, October 4th, 2005

Christian Science Monitor
Donald Kirk
10/4/2005

Its South Korean funders say it offers potential for cultural exchange. But the monk who oversees it readily admits no North Koreans may visit.

As they lead visitors along a trail below craggy rocks inscribed with praise for the late “Great Leader” Kim Il Sung, young North Korean guides offer a carefully crafted narrative.

They criticize President Bush. They take on US policy. And last weekend, they appeared eager to denounce the dismissal of Kim Yoon Kyu, who is currently under investigation for fraud. The South Korean executive worked for more than 10 years to develop this unusual tourist zone on the east coast several miles above the demilitarized zone that separates North and South Korea.

“We are willing to reduce the number of tourists coming here as an expression of our confidence in him,” says Koo Eun Hyun, a smiling 20-year-old, repeating the North’s demand for reinstatement of Mr. Kim as president of Hyundai Asan, part of the Hyundai group, which is investing $1 billion in building the complex.

Mr. Kim led the project, now subsidized by the South Korean government, from the time the first shiploads of visitors sailed from South Korea seven years ago. Tourists now travel by newly paved road, and Hyundai Asan in June announced the millionth visitor – far short of the 5 million it had hoped for.

Indeed, the project loses vast amounts of money, and is likely to lose still more. The standoff over Kim’s dismissal is escalating amid a South Korean investigation into alleged fraud in economic projects in the North – including whether some funds wound up in the hands of North Korean officials – prompting the North to cut the quota of tourists from 1,200 to 600 a day.

Perhaps as a result, Kim Young Hyun, a Hyundai Asan vice president, prefers to talk about a $10 million project, largely funded by South Korea and Hyundai Asan, to rebuild a Buddhist temple complex inside the zone that was largely destroyed in the Korean War. “Buddhism is traditionally the religion for Koreans,” he says. “Cultural exchange can be the foundation of economic exchange.”

The Venerable Jejeong, the scholarly South Korean monk who oversees the complex readily admits that North Koreans are banned from the complex, just as they are from the rest of the zone, except when they come to work. Those few North Koreans on the site, he says, “ask questions about history but do not ask other questions.”

In fact, he says, he’s never talked to North Koreans outside the zone and has no idea how freely – or if – they can practice their religion. Still, he shares the optimism of South Korean authorities about the future.

“We can minimize the differences and find common ground,” says Mr. Jejeong, who has practiced Buddhism in Thailand and San Francisco. “Currently our educational systems are completely different. North Koreans are not interested in religion.”

Jejeong places his hopes for opening the temple to worship “after unification.” He cites an easing of religious restraints in China. “The North Koreans may be influenced by China indirectly,” he muses.

In the meantime, the temple serves as a monument to North Korean propaganda. A plaque in front of the skeletal outlines of new buildings says that Kim Il Sung and his wife, the mother of current leader Kim Jong Il, visited on Sept. 28, 1947. The plaque blames the leveling of the complex on US bombing.

But for now, North Koreans would rather prove their authority over Hyundai Asan than hark back to the war. Tourists who visit traipse along a few familiar trails, attend an acrobatic performance, dip into baths fed by hot springs and dine in modern restaurants, all closed to North Koreans seen toiling with ancient implements in the fields beyond the wire.

They listen as guides extol the beauties of the region, all under the watchful gaze of North Koreans as anxious to parrot policy as to impose fines for littering.

“We regard [Hyundai Asan’s] Kim Yoon Kyu as a pioneer,” says Miss Koo. “We sacrifice profits for the sake of friendship.”

Posted in Civil society, Economic reform, Foreign direct investment, Mt. Kumgang Tourist Special Zone, Religion, Special Economic Zones (Established before 2013), Tourism | Comments Closed

North Korea Reinstates Controls on Grain Sales

Monday, October 3rd, 2005

Los Angeles Times
Barbara Demick
10/3/2005

North Korea Reinstates Controls on Grain Sales Rice and other foods will be distributed by the government and banned at markets.

Rolling back some of its economic reforms, North Korea is banning the sale of rice and other grains at private markets and strengthening its old communist-style public distribution system under which all citizens are supposed to get rations, aid groups and North Korea experts say.

The changes were supposed to be implemented Oct. 10, a holiday in North Korea marking the 60th anniversary of the ruling Workers’ Party. But reports from the World Food Program office in Pyongyang, the capital, indicate that merchants have been told already that they can no longer sell grain.

The United Nations agency said in a statement on its website that “as of Oct. 1, reports are that cereal sales in the markets will cease and public distribution centers will take over countrywide distribution.”

North Korea experts say the moves do not necessarily indicate an abrupt U-turn in the impoverished country’s economic policies, so much as concern that change was taking place too quickly.

“I think it is a transitional necessity. You can’t move too fast into free—market economics without softening the blow for people who have grown up in a planned economy,” Richard Ragan, who heads the World Food Program office in Pyongyang, said in a recent telephone interview. “This is not that different from what you saw happening in China in the 1990s.”

Lee Young Hwa, a Japan—based human rights worker who has close contacts with traders at the Chinese—North Korean border, believes the new restrictions on markets are designed to boost the power of the Workers’ Party and curb the role of the military in the economy.

“The military people control the food sold at the market. Nobody else has the trucks or the access to gasoline to move food around the country. The leadership fears that their economic reforms aren’t working because everything is controlled by the military, and they want to take back control,” Lee said.

For years, there have been accusations that the military was pilfering humanitarian shipments of rice and other aid, keeping the best for its own and selling the rest at markets. Secretly taped video footage obtained last year by human rights workers shows apparently unopened sacks of rice given by the U.S. and other donors being sold illegally at a market in the northern city of Chongjin.

On the open market, a pound of rice costs 15 to 25 cents — an impossible sum for many North Koreans, whose average salary of $1 per month keeps them on the verge of starvation.

Under the new rules, rice, as well as other staples such as corn, is to be sold at public distribution centers at subsidized prices and in rationed quantities. Markets, which have been gradually legalized since 2002, will still be permitted to sell vegetables, produce, clothing and other goods.

Cho Myong Chol, a former North Korean economist who lives in Seoul, said he believed North Korea would continue with market reforms but at a slower pace. “Since the economic reforms in 2002, the gap between the haves and the have—nots has become so extreme that there is an imbalance that is causing social unrest and dissatisfaction. I think they needed to do something about food to keep control.”

It remains to be seen whether the changes will help ordinary North Koreans. The government recently informed U.N. aid officials that it was cutting back their operations and no longer needed large donations of rice and other foodstuffs. Experts believe North Korea is concerned about the U.N. ‘s monitoring requirements and prefers direct aid from countries such as South Korea and China, which place fewer restrictions on donations.

Until the 1990s, the public distribution system introduced by North Korean founder Kim Ii Sung was the hallmark of a nation that claimed to provide its people with everything from rice to shoes. But the system collapsed in the early l990s, exacerbating a famine that killed an estimated 2 million people — about 10% of the population. The public distribution system still operates, but at reduced capacity.

Although North Koreans today buy much of what they need at markets, the government doesn’t like to admit it and insists that the cradle—to—grave system of social welfare remains.

“We are still a communist country. Nothing has changed. I get everything I need through the public distribution system,” said Yoon So Jung, 25, a guide interviewed last week at Mt. Kumgang, one of the few areas of the country open for tourism.

But pressed about her pink windbreaker, Yoon admitted hesitantly, “Well that, I bought at the market.”

Posted in Black markets, Economic reform, General markets (FMR: Farmers Market), Military, Political economy, Price liberalization, Public Distribiution System (PDS), UN World Food Program, Worker's Party | Comments Closed

Chinese takeover of Raijin-Sonbong

Friday, September 23rd, 2005

From NK zone:

China and North Korea have signed a 50-year agreement that will give the Chinese border city of Hunchun exclusive rights over the North Korean port of Rajin, according to Chinese and South Korean reports.

The deal is seen as a boost to this underdeveloped region of China and to Hunchun in particular which is about 80 km inland on the Tumen river. It also envisages that Hunchun will establish a 5-10 sq km industrial zone in Rajin and for a highway to be built between the two cities.

A Chinese-language report posted last month describes how Hunchun, although it was given border trade rights with North Korea as long ago as 1986 and was made an “open city” in 1992, has seen little benefit from these privileges, despite national, provincial and local level investment totalling five billion yuan ($600 mln) as part of the Tumen River Development Zone. The report says this resulted in an economic bubble in the early 90s, with vast numbers of half-built factories, offices and roads and a border bridge that was never completed.

The aim has long been for Hunchun to have access to a nearby port in North Korea or Russia and to dredge the Tumen river, but the report says that while it has reached a navigation agreement with Russia it had failed to reach agreement with the DPRK. It also notes that dredging would have serious environmental implications (doesn’t enlarge on this but see below). It adds that plenty of landlocked countries are economically highly successful and that there are plenty of other cases “leasing ports to reach the sea”.

Thus even before the Rajin deal was signed there were hopes that Hunchun would in the next 10 years become the most advanced city in the Yanbian region after the capital, Yanji and eventually become the “Rotterdam of the north[east?!].”

Anyhow the agreement with Rajin has of course been greeted as a great victory and comes as the Tumen River Area Development Programme agreed to extend its 1995 Agreement on the establishment of a Consultative Commission for a further ten years and to expand its geographical reach to include the three Northeastern provinces and Inner Mongolia in China, the Rason Economic and Trade Zone of DPRK, eastern provinces of Mongolia, eastern port cities in South Korea and part of the Primorsky territory of Russia.
However, another Chinese report is sceptical about the deal which it says also involves construction of a 67-km highway and plans for the Rajin area to become a processing zone for Chinese goods which will then be reexported to southeast China.

It quotes a Jilin province commerce bureau official as saying as saying only time will tell whether it will achieve its aims, and also cites an unnamed professor from the Jilin Academy of Social Sciences as saying that North Korea’s ports, railways, roads, power and water networks and communications are extremely backward and badly maintained and development has also suffered from the “instability of [North Korean] government policy.”

The deal with North Korea follows failure to reach a similar agreement with a Russian port. The People’s Daily reported in 2003 that the Russian Ministry of Communications was opposed to a proposed 49-year deal with either the port of Zarubino or Posyet, both just over the Chinese border, because it viewed the Chinese as having territorial designs on the region, which China of course denies.

The Chinese article about the Rajin deal also gives some figures for Jilin’s border trade. It says this totalled $250 mln last year, consisting of $80.07 mln worth of exports to North Korea and $114.5 mln in imports (presumably the rest consists of trade with Russia, etc). Main exports consisted of machinery, grain and flour, textiles, steel, cars and coal. “Because the railways and other means of transport are poor and there are long delays, this was bad for our province’s exports of coal, grain and other bulk items,” the Jilin commerce bureau official said, adding that transport was the main factor impeding the province’s foreign trade.

A Chinese report posted last December says Hunchun officials had visited Pyongyang several times in the last year and had found North Korean officials eager to improve road and sea communications in order to create a “northeastern golden triangle.” It says leasing a nearby port across the border is the best option, and mentions a South Korean clothing company which saved much money and time by switching to Zarubino port in Russia (only 70 km from the border) from far away Dalian in China.

It adds that there are plans for an export-oriented abattoir at Hunchun with a capacity of 200,000 cattle and sheep per year. It also says Hunchun expected to handle $220 mln worth of foreign trade last year and in January-October 2004 it handled 172,300 tonnes of imports and exports, up 7.9% over 2003. A North Korean trade official gave the Rajin zone his blessing in 1999, as did a professor of economics from Kim Il Sung University.

Development of the area would no doubt improve living standards, but it would also have serious environmental implications. the Tumen Development Programme notes that the Hunchun Border Economic Cooperation Zone was established in 1992 without an environmental impact assessment (EIA). “Since then, considerable investment has taken place and Hunchun’s population has multiplied many-fold, with serious implications for nearby wetlands and other ecosystems.” It adds that “in 1999, the Tumen Programme undertook a long-overdue EIA of the Zone to meet international (World Bank) standard and serve as a model for other development areas in the Tumen Region.”

Eastern Siberia and the Chinese border are is the last remaining stronghold of the Siberian (or Manchurian) tiger and it is also has crucial sites for a large number of bird species including about 50 species listed in the international red book of endangered species.

The Hunchun area is where most NK refugees cross into China, so economic development would presumably make North Koreans less likely to flee their miserably poor country, though improved communications may make it easier for them to do so…

The famous or infamous Emperor casino is also not far away. As NKZ readers will doubtless recall it was closed in January after a Chinese crackdown against gambling as its clientele was entirely Chinese. Little has been heard about it since though the management are apparently hoping to attract Europeans to replace the Chinese, not sure that habitués of London casinos are likely to be greatly tempted… Am also told that the Emperor isn’t totally closed but it does have extremely few customers.

Anyhow its two websites are still up, click here for the Chinese one and here for the Hong Kong one.

According to a Chinese report, Chinese gamblers are now flooding into Vladivostok following the closure of the Emperor (so much for the crackdown against gambling in border casinos…)

Posted in China, Foreign direct investment, International trade, Rason Economic and Trade Zone (Rajin-Sonbong) | 1 Comment »

North Korea’s capitalist manifesto

Thursday, September 22nd, 2005

Christian Science Monitor
9/22/2005

A predictable master of surprise, North Korea stunned the world Monday by agreeing to give up its nuclear weapons program. But to seal the deal by pinning down the difficult details, it’s necessary to ask what’s really motivating the hermit nation.

North Korea won’t make it easy for itself in fulfilling this pact. Within 24 hours after the “consensus statement” was inked by North Korea and five other governments (US, China, Japan, Russia, South Korea), the North – contrary to the agreement – proclaimed it would abandon its nuclear program only after it’s been given a new light-water reactor for producing electricity. That could mean it would be able to keep producing nuclear weapons for years. The North will also probably resist on-the-ground verification of its nuclear program – and the few bombs presumably already produced; the regime of Kim Jong Il hardly lets foreigners run around freely.

The US and China, as erstwhile partners in trying to denuke North Korea, must keep reminding Mr. Kim why he needs – and probably wants – to live up to this agreement, and quickly: His Stalinist command economy, which has been closed to the world for half a century, faces collapse and possibly another famine like the one in the mid-1990s, when some 2 million people died.

Kim, who titles himself Dear Leader, appears to know his own political survival is on the line. In 2001, he was invited to China and saw how that communist regime has been able to stay in power while allowing a market economy to thrive. The next year he freed up prices and wages, and loosened many government controls over businesses and individuals.

Local farmers markets have since sprung up, and small service shops are appearing in cities. Last year, a new dictionary was issued, and for the first time it contained the phrase “market economy” (which is a communist way of saying capitalism).

But the reforms were done badly. The nation now has spiraling inflation. Its economy has contracted for the past three years. Great gaps in wealth are appearing, even as North Korea’s economy remains a fraction of the size of South Korea’s. The 70 percent of the population that still relies on government food has seen their rations greatly reduced.

Last spring, the reform-minded prime minister, Pak Pong-ju, visited China and was spirited to Shanghai, where he saw the missing element for North Korea’s economy: foreign investment and an influx of hard currency. He went back and told bureaucracy to learn about foreign markets and trade. The universities began to teach market basics, such as supply and demand.

But to improve its shaky experiment in capitalism, North Korea needs to stop scaring away potential foreign investors with its nuclear belligerence and abandon its long-held ideology of juche, or self-reliance. Both steps are risky for a dictator who has blinded his people to the world around them.

The Bush administration has probably bought into China’s strategy of dangling economic benefits before Kim to get him to denuclearize. Withholding those benefits will be necessary if further talks falter.

Once bitten, though, the capitalist apple may be too tempting for Dear Leader.

Posted in 2002 Economic reforms, Economic reform, Education, Energy, General markets (FMR: Farmers Market), Nuclear | Comments Closed

North Korean Economy Watch