North Korean Economy Watch

Stephan Haggard and Marcus Noland
East-West Center Working Papers
Economics Series, No. 104
Download paper here (PDF)

Abstract:
Despite North Korea’s turn away from economic reform and the constraints of the second nuclear crisis, the country has in fact become more economically open. But it has emphasized closer economic relations with China and other trading partners that show little interest in political quid-pro-quos, let alone sanctions. Yet the U.S. can still exercise economic leverage by going aggressively after third-party financial intermediaries. This particular form of sanction does not require multilateral coordination, since foreign banking institutions that conduct significant business in the United States have a strong interest in avoiding institutions that the United States Treasury has identified as money laundering or proliferation concerns.

There is some evidence that North Korea moderated its missile proliferation activities during periods when rapprochement with the United States, and to a lesser extent Japan, was a priority, but in the absence of such interest and as legitimate trade, investment, and aid dry up, the incentives to intensify proliferation activities increase.

The internal organization of the North Korean economy has important implications for any policy seeking transformation via engagement. The economy is structured in such a way that outside economic ties are still largely monopolized by stateowned enterprises and other gatekeepers, such as the military. Under such circumstances, the precise design of engagement policies requires very close scrutiny. Even nominally commercial relations can be exploited if the North Korean counterparties believe that they are ultimately political in nature, subsidized and thus vulnerable to blackmail. If economic ties are truly commercial in nature, those choosing to trade and invest with North Korea do so at their own risk. Under these circumstances, private actors will make economic decisions fully factoring in political risk, and North Korea will bear the costs if it chooses to renege on commitments or fails to provide a supportive policy environment.

Paper prepared for the conference on “North Korean Nuclear Politics: Constructing a New Northeast Asian Order in the 21st Century,” University of Washington, June 4-5, 2009. We would like to thank the Smith Richardson, MacArthur, and Korea Foundations for financial support and Jennifer Lee for research assistance.

UPDATE: A shorter version of this paper can be found here.

Writing for the Brookings Institution’s Center for Northeast Asian Policy Studies, Yeongseop Rhee, Nonresident Fellow in Foreign Policy, takes on the topic of eventual currency union between North and South Korea, assuming that the two Koreas will eventually be unified and that the unification will follow a rapid process rather than a gradual one.

Under these conditions, Rhee discusses the complications of determining a proper conversion rate for the DPRK won, rejecting the official and black market rates, ultimately determining that an undervlued DPRK won conversion rate is preferable to a situation in which the DPRK won is converted at a rate above its true exchange value (a la German reunification). Quoting from the article:

The decision on a conversion rate will depend upon which policy objective is the most important. Considering their relative impacts and past experiences, I suggest that price/macroeconomic stability and competitiveness of North Korean industries should have the high priority: undervaluation of North Korean currency is therefore more desirable.[3] The experiences of other socialist countries show that inflation was one of the most difficult problems at the beginning of economic reforms. Even though the details of each country’s reform path depend upon the state of the economy, price/macroeconomic stabilization has to be the initial priority. Once price/macroeconomic stability is guaranteed, foreign capital – which North Korea eagerly needs for its successful transformation and development – can be attracted.

The undervaluation of North Korean currency is also desirable in terms of labor migration. According to studies on German unification,[4] the most important reason for migration from East to West was not the high incomes in West Germany, but the lack of job opportunities in East Germany. This implies that the overvaluation of North Korean currency to improve the standard of living of the North Korean people would cause more migration because of suffering competitiveness of North Korean firms and job opportunity, and would further place a higher burden on the government budget.

The author then goes on to address the timing of monetary unification (rapid vs. delayed conversion), prefering to emulate the German model of early conversion. Quoting from the article:

First, most proponents of a late currency union argue that currency unification needs to be delayed for a few years until North Korean economy is stabilized and improves to a certain level. However, a temporary delay of a few years will not guarantee the improvement of the North Korean economy to a certain level but is more likely to lead to its deterioration. Even though the North Korean economy may improve, it actually must grow much faster than South Korean economy for a long time to reach a certain compatible level. For example, even assuming North Korean economic growth of 10 percent per year – which would be extremely difficult – it will still take nearly one generation for North Korean per capita income to reach one half of the South Korean level. This suggests that it is impossible to improve the North Korean economy to a certain level compatible with South Korea’s within a few years. Thus, in terms of feasibility, an early union is better.

Second, a gradual strategy for economic reform and opening, such as China has chosen, would not be applicable to North Korea. In comparison with China, North Korea is over-industrialized like Eastern European countries. In this type of economy where the state sector is dominant, there is little reserve of labor outside the state sector that can provide the engine for growth for a new non-state sector, and gradualism cannot work in that context. A sharp downturn in industrial production upon the outset of market reforms is inevitable, and a significant loss of employment in the industrial sector should be expected and accepted as a structural adjustment in North Korea. Thus, the unified fiscal and monetary policy framework to promote structural reforms should be prepared as soon as possible through an early currency union.

Third, according to the theory of optimum currency area, if there exists an adjustment mechanism such as flexible prices and wages or other measures to absorb asymmetric shocks, it is more likely for two countries to form an optimum currency area. When the two Koreas are unified, large fiscal transfers from South Korea to North Korea can play that role of adjustment mechanism because asymmetric shocks to North Korea can be compensated by these fiscal transfers. The two Germanys could form an optimum currency area after the unification because of the centralization of the fiscal system. Thus, as long as fiscal transfers are guaranteed, which will be a sure fact in the case of Korean unification, the loss of the exchange rate policy instrument would not matter much in terms of absorbing asymmetric shocks, and an early monetary union is preferable.

Read the full article on the Brookings web page here.

(more…)

North Korea Uncovered v.16
Download it here

The most recent version of North Korea Uncovered (North Korea Google Earth) has been published.  Since being launched, this project has been continuously expanded and to date has been downloaded over 32,000 times.

Pictured to the left is a statue of Laurent Kabila of the Democratic Republic of Congo.  This statue, as well as many others identified in this version of the project, was built by the North Koreans. According to a visitor:

From the neck down, the Kabila monument looks strangely like Kim Jong Il: baggy uniform, creased pants, the raised arm, a little book in his left hand. From the neck up, the statue is the thick, grim bald mug of Laurent Kabila (his son Joseph is the current president). “The body was made in North Korea,” explains my driver Felix. In other words, the body is Kim Jong Il’s, but with a fat, scowling Kabila head simply welded on.

This is particularly interesting because there are no known pictures of a Kim Jong il statue.  The only KJI statue that is reported to exist is in front of the National Security Agency in Pyongyang.  If a Kim Jong il statue does in fact exist, it might look something like this.

Thanks again to the anonymous contributors, readers, and fans of this project for your helpful advice and location information. This project would not be successful without your contributions.

Version 16 contains the following additions: Rakwon Machine Complex, Sinuiju Cosmetics Factory, Manpo Restaurant, Worker’s Party No. 3 Building (including Central Committee and Guidance Dept.), Pukchang Aluminum Factory, Pusan-ri Aluminum Factory, Pukchung Machine Complex, Mirim Block Factory, Pyongyang General Textile Factory, Chonnae Cement Factory, Pyongsu Rx Joint Venture, Tongbong Cooperative Farm, Chusang Cooperative Farm, Hoeryong Essential Foodstuff Factory, Kim Ki-song Hoeryong First Middle School , Mirim War University, electricity grid expansion, Tonghae Satellite Launching Ground (TSLG)” is also known as the “Musudan-ri Launching Station,” rebuilt electricity grid, Kumchang-ri suspected underground nuclear site, Wangjaesan Grand Monument, Phothae Revolutionary Site, Naedong Revolutionary Site, Kunja Revolutionary Site, Junggang Revolutionary Site, Phophyong Revolutionary Site, Samdung Revolutionary Site, Phyongsan Granite Mine, Songjin Iron and Steel Complex (Kimchaek), Swedish, German and British embassy building, Taehongdan Potato Processing Factory, Pyongyang Muyseum of Film and Theatrical Arts, Overseas Monuments built by DPRK: Rice Museum (Muzium Padi) in Malaysia, Statue de Patrice Lumumba (Kinshasa, DR Congo), National Heroes Acre (Windhoek, Namibia), Derg Monument (Addis Ababa, Ethiopia), National Heroes Acre (Harare, Zimbabwe), New State House (Windhoek, Namibia), Three Dikgosi (Chiefs) Monument (Gaborone, Botswana), 1st of May Square Statue of Agostinho Neto (Luanda, Angola), Momunment Heroinas Angolas (Luanda, Angola), Monument to the Martyrs of Kifangondo Battle (Luanda, Angola), Place de l’étoile rouge, (Porto Novo, Benin), Statue of King Béhanzin (Abomey, Benin), Monument to the African Renaissance (Dakar, Senegal), Monument to Laurent Kabila [pictured above] (Kinshasa, DR Congo).

The Institute for Far Eastern Studies (IFES) published an interesting paper (with the above title) on legal reform in the DPRK.  Below are some highlights.  Links to the entire paper at the bottom.

As citizens have been left without state provisions for subsistence since the state did not have the material resources to supply the people through its central rationing system, the vast majority of individuals and organizations had to support themselves. Legitimizing commercial and market activity and expanding the scope of private ownership were a part of this effort. One of the most important laws reflecting this transformation is the Damage Compensation Law (sonhae bosang-beop), which is the North Korean version of a general torts law. This law holds an individual or any legal entity liable for its tort when damage is inflicted. Monetary compensation is the rule, while restoration is allowed when possible.

Under the socialist system, where the state is responsible for the provision of a citizen’s livelihood, tort law was of little use. Even in the case of death, one’s family would not suffer economically since the state provided sustenance rations. However, with the collapse of the public distribution system, the North Korean authorities could no longer maintain their socialist system. Since an individual now has to rely on his or her own devices, the loss of the employment, for example, directly inflicts a financial burden on the individual or family. Therefore, damage to property or person should be compensated for by the responsible party. Therefore, the new damage compensation law acts as a new mechanism for the protection of private property, and strengthens individual responsibility for negligent acts that inflict damage on others.

and…

Relaxation of law and order, along with the laxity of organizational control due to economic difficulties, changed individual attitudes toward government authorities and organizations in which these individuals were members. Individuals became more independent from the state and its organizations, since both the state and more directly engaged organizations lost important means of control over individuals in society due to the lack of resources and the inability to provide basic necessities to the people.

Under these circumstances, individual victims had no appropriate method to seek compensation for damage through an official dispute resolution process. This has led to an environment in which self-remedy has become the rule, rather than the exception. Although new criminal law punishes those who have used force in asserting their rights, there is no effective means of dispute resolution outside of taking advantage of officials willing to look the other way in exchange for favors, or hiring thugs to more directly resolve disagreements. Citizens can buy justice through bribes, and law enforcement officials are especially helpful in these endeavors when their palms are greased. This is much more economical as well as effective than bringing a case to the relevant official agency, which is generally incapable of resolving problems and instead further exploits the situation.

On courts and lawyers…

For example, the most prominent role of the court in North Korea, where other types of lawsuit are very unusual, was to handle divorce settlements, since divorce through simple agreement of the two parties was not allowed. Ordinary citizens went so far as to perceive settlement of divorce to be the most important role of the court. Criminal cases were also unusual. Political crime is handled through a non-judicial process, while many deviances are resolved through unofficial processes within more local organizations. The role of the court in resolving disputes was negligible, aside from divorce. Since the role of law enforcement agencies is to protect the state and secure the socialist system, the most important qualification for them is not legal expertise, but rather, loyalty and devotion to the North Korean ideology and system.

On the other hand, the Lawyer’s Act of 1993 prescribes the required qualifications of a lawyer. Those who are eligible to work as lawyers are those who are certified legal professionals, those who have working experience of no less than 5 years in legal affairs, or those who have a professional license in a certain area and have passed the bar examination after a short-term course in legal education. This qualification for working as a lawyer signifies that the state wants to equip the judicial system with legal professionals. Although there is no explicit professional qualification for a judge or prosecutor, we may assume that legal professionals have been elected or recruited in practice. This trend is likely to be reinforced as these social changes continue to unfold.

New provisions were also introduced to reinforce the judicial system. For example, interference with a law enforcement official’s performance of duties is now a punishable offence ; Threatening a witness or exacting revenge has been criminalized ; Non-execution of judgment will now be punished. Although the introduction of these provisions was an expression of the government’s effort to bring in a more effective judicial system, it would not be an easy task under the vague status of transformation. The state is very cautious and reluctant to undertake bold or fundamental changes due to concerns about political instability. Therefore, it takes time for various coherent mechanisms to fully support a market system.

You can download the entire paper in PDF format here.

You can read it on the IFES web page here.

From the Choson Ilbo:

The number of North Korean refugees who remit money to their families in the North is rising. “Some 15,000 North Korean refugees have settled in the country, and over 6,000 of them are remitting money to North Korea,” a government official said. “We understand the size of the remittances is also growing.” An official with a refugee organization said there must be more than 10,000 who remit money to their families in the North.

If some 6,000 North Korean refugees here send money North, and a refugee remits US$1,000 a year, some $6 million is sent to North Korea per year. To that should be added 20,000-30,000 of the 100,000 North Koreans estimated to live in China.

Remittance routes are clandestine. Money is remitted to a Chinese broker, who contacts another in North Korea, who pays the recipient with his own money and settles the account with the Chinese broker later, leaving no documentary trail.

Currencies are usually American dollars and Chinese yuan. Commissions range between 15 and 20 percent, according to sources. “Remittances through brokers designated by North Koreans generally reach the recipient without a hitch, but Chinese brokers contacted in China are liable to steal the money,” a refugee said. The brokers handle tens of millions of dollars and are linked to organized gangs.

In the past, remittances required enormous bribes. First a man had to be sent to North Korea to bribe guards, with commissions exceeding 40 percent. But with the emergence of remittance brokers and the establishment of an organized system, the amount of money that reaches North Korean families has increased substantially.

The North Korean won is practically worthless in international exchange. A North Korean workers’ average salary was between W2,500 and 3,000 as of the end of 2008. Given that US$1 is traded at W3,200, $1,000 is the equivalent of 100 years’ worth of earnings and buys two apartments in places like Chongjin, North Hamgyeong Province, or Hamhung, South Hamgyeong Province.

In the past, the DPRK has promoted remittances—particularly to Koreans repatriated from Japan and their families.  The DPRK government then extracted its share of these funds by offering western goods for sale in hard currency shops at inflated prices.

The DPRK could do worse at promoting its legitimacy than to adopt the same policy in regards to remittances from every other country.  If the DPRK allowed remittances to flow through official channels, the government could simply extract a service fee equal to or slightly below the black market rate.  That is a win-win (except for the smugglers).

UPDATE: Japanese goods were (are?) historically sold at the Ragwan Deaprtment Store next to the Changwang Hotel (North-West of the Central District).

Another point to consider is the unfortunate role of politics in preventing the adoption of efficiency-enhancing economic reforms.  In the case of remittances, the DPRK would certainly have political problems with letting defectors send money to their relatives back home.  Under this particular constraint smuggling might be the next best option.  Since the operation is clandestine, the government does not have to acknowledge it exists, yet at the same time people can receive their remittancs and (some part of) the governance structure collects “taxes”.  

What “taxes”? The few people who are carrying out the financial transactions will have pay decent protection money to a sponsor high in the food chain.  The work is risky for numerous reasons, but we know some important people are behind it becuase the operation requires managers to keep enough hard currency on hand to cover the monthy/anual remittance payments from 6,000+ defectors. 

Read the full article here:
Refugees’ Remittances to N.Korea ‘Growing’
Choson Ilbo
2/10/2009

(Hat tip to One Free Korea)—According to Open Radio for North Korea, the DPRK won experienced a significant devaluation against to the dollar in the latter half of 2008:

According to the table and the article:

In 2008, North Korea’s exchange rate has shown relative stability of 3200 Won per Dollar and 460 Won per Chinese Yuan.

However, in December 2008, the exchange rate started to skyrocket.  The exchange rate in December was 3630 won per Dollar and 530 Won per Chinese Yuan- which was approximately 13 to 15 percent increase from the month before.  The exchange rate fell slightly to 3540 Won per Dollar and 530 Won per Yuan in January.  Nonetheless, the exchange rate isn’t likely to decrease further.

The sudden rise in foreign currency exchange rate in December seems to have correlation with the Chinese restriction on North Korean imports.  According to Chinese and North Korean traders, the sub par quality of imported products from China (speculated to be food products with melamine) was the origin of the Chinese restriction.  Sporadic breakout of illnesses in various regions of North Korea caused general distrust over Chinese imports, and the North Korean government relayed the complaints to Chinese authorities.  China in turn took a chauvinistic approach and unilaterally regulated trade between China and North Korea to teach North Korea a “lesson”

Nearly 50% of North Korean trade is with China.  Therefore, regulation on trade between North Korea and China, especially on North Korean exports to China inevitably has a severe impact on foreign currency market in North Korea.

For comparison I put together a table of the US$-RMB exchange rate during 2008 (interbank spot rate) using FX history:

So now we can conclude that in 2008 the Yuan appreciated against both the DPRK won and the and the US dollar, and that the US dollar appreciated against the DPRK won. 

So the next question is: how efficient are the currency markets which trade DPRK won? Doing some back of the napkin calculations using data from these two different sources (the story and FX History), I seem to have reached the conclusion that the DPRK won is traded rather efficiently.

The average RMB/USD exchange rate (interbank spot) in December 2008 was 6.86 RMB/USD (from FX history).  If you converted 686 RMB into USD, you would receive $100.  If you converted US$100 into DPRK won at the 3,630 rate in the story quoted above, you would receive w 363,000.  If you exchanged those won for Chinese RMB at the 530 rate quoted in the story, you would receive 684.90 RMB.  684.90 is 99.83% of 686. 

That seems too good to be true.

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-1-15-1
2009-01-15   

The exchange rate for the North Korean won shot up approximately 13-15 percent at the end of last year, and has maintained this high rate into January, according to an article in the on-line newsletter, “Open News for North Korea,” on January 12.

According to the inaugural edition of the newsletter, the exchange rate last year was around 3,200 won per USD, or 460 won per Yuan, with only slight fluctuations, but shot up to 3,630 won per USD and 530 won per Yuan in December. In the first weeks of the new year, it has fallen only slightly, to 3,540 won per USD, and 530 won per Yuan.

According to traders who import and export between North Korea and China, “The sudden rise in the exchange rate appears to be related to trade regulations on goods imported from the North,” and they stressed, “After North Korea protested to China about inferior Chinese goods leading to accidents around the country, China decided to set an example, and unilaterally imposed [trade] restrictions.”

Because business with China makes up almost 50 percent of North Korea’s trade, if DPRK-PRC trade, and in particular, North Korea’s exports to China, are restricted, this would cause a large shock to the foreign currency market,” and, “China’s regulatory measures were eased as January come around,” but, “this year, North Korea is strengthening crackdowns on domestic markets, making it difficult to expect the exchange rate to return” to last year’s lower numbers. According to the article, “There is a foreign currency crisis in North Korea, as well, the scale of which is so great it can’t even be compared to what is happening in the South.”

The black market price for U.S. dollars has shot up from a low of 200 won, in July 2002, to 3,200 won in July of last year, and has continued to rise, peaking at 3.500 won currently. This is a sixteen-fold increase in just over six years. The newsletter put this in perspective by explaining, “North Korea has experienced a foreign currency crisis like that seen in South Korea in 1998 every year since 2002.”

North Korea’s haphazard currency distribution and chronic trade deficit has led to a reduction in the country’s foreign currency reserves, while the failure of the authorities’ currency stabilization policies combined with the growing demand for U.S. dollars by North Korean residents seeking imported goods have led to the sharp growth in the exchange rate.

In September 2006 the first questions about North Korean reinsurance contracts hit the media (Joong Ang Daily, Sept. 20).  North Korea’s Minjok Insurance General Company filed claims in London and Moscow for two railway crashes, a ferry sinking, and a helicopter crash.  The Joong Ang Daily reported that that the accident sites were examined by industry representatives—though the checks had not been cut.  At the time the filings were interpreted in the west as a sign of tough financial times in the DPRK. Others suggested Pyongyang was learning how to manipulate global financial systems.

By December 2006, many underwriters began to (publicly) suspect fraud in these cases.  

North Korea Suspected of Collecting Millions in Reinsurance Fraud
Monday , December 04, 2006
By George Russell

[Excerpt] The central focus of concern is the absolute control of ownership and information in North Korea by Kim Jong-Il and his regime. All North Korean insurance is controlled by one state-owned firm, the Korea National Insurance Corporation (KNIC), formerly known as the Korea Foreign Insurance Company, which in turn purchases reinsurance coverage abroad for risks that it has assumed in its domestic market.

The alleged fraud involves a wide variety of North Korean industrial and personal calamities where insurers have been presented with perfect government-controlled documentation of accidents, including deaths, along with carefully gathered photographic evidence, all compiled in a startlingly brief time.

That paperwork is coupled with a resistance to letting foreign insurance adjusters examine some of the most crucial physical evidence, except after long delays and under a watchful eye, if at all.

The growing concern in the reinsurance industry is that the property damage being claimed is vastly overstated, and the circumstances of some alleged accidents may have been altered, or that deaths for which insurance payment is claimed may have had nothing to do with the accidents.

The number of apparently ordinary people in the dictatorship who have suddenly been found to have foreign-backed life insurance is raising insurers’ eyebrows.  The chief concern is that only the Kim Jong-Il regime controls the information required to trigger the payments.

So what specifically looked suspicious?

Suspicions in London began to gel in July 2005, when North Korea reported that a medical rescue helicopter had crashed into a government-owned warehouse that authorities said was crammed with disaster relief supplies.

The entire contents of the warehouse, which ran to hundreds of thousands of items, were destroyed, KNIC said, submitting within 10 days a list compiled by the relief center of every single commodity that it said had been lost.

Along with the lengthy list came a reinsurance claim for more than 40 million euros, or almost $50 million at then-current rates, for 95 percent of the damages. The reinsurance was placed through London, but the risk was spread among reinsurers worldwide.

“They provided details including tens of thousands of children’s gloves, handkerchiefs, leather gloves, toilet soap and washing soap, within 10 days,” Payton said. “In the chaos which follows an accident of this kind, that is unheard of.

“A similar loss report in Britain might take months to compile.”

The North Koreans also supplied photos of the devastation, which insurers turned over to leading experts at photographic estimates of fire damage. The experts concluded that the volume of debris remaining within the warehouse, as assessed from the photographs, did not support the high volumes of relief supplies that were claimed to be there before the fire.

“The North Korean claims are supported by meticulous paperwork, something at which the North Koreans excel,” Payton (senior partner in the London-based international law firm of Clyde & Co.) said.

“For example, where death certificates and hospital reports are required, the regime’s attitude is ‘tell us what you want, we’ll give it to you.’”

In the case of a ferry accident that allegedly took place last April, near the coastal city of Wonsan, North Korean authorities declared that 129 people had died aboard the vessel after it struck a rock about 1,000 yards off the Korean coast, and only about 100 yards from an island. All of them, the Koreans claim, had been automatically covered with life insurance when they bought their ferry ticket, and that insurance risk had been passed on to the London market through a common reinsurance product known as “excess loss personal accident reinsurance.” Here the claims from reinsurers totaled about 5 million euros, or roughly $6 million.

The North Koreans claimed that most of the victims had died of hypothermia in the freezing water. Industry sources say that when insurance investigators discovered that weather conditions were warmer than claimed at that time, the North Koreans responded that severe winds were blowing from Siberia in the spring, making the water unusually frigid.

When insurers asked for permission to send an independent diver to inspect the ferry wreck, they were refused.

Britain’s Foreign Office says the lack of firm proof of fraud is why it hasn’t taken action on the reinsurance issue, although British diplomats say they are aware of it.

Apparently, these circumstances led the insurers to refuse payment, and the North Koreans took them to court in London. Quoting from the Times of London (January 2007): 

The state-owned Korea National Insurance Corporation (KNIC) is demanding €44 million in a London court from a group of reinsurers, including Lloyd’s syndicates, for damage caused in a catastrophic helicopter crash in 2005.

The North Koreans have supplied exhaustive documentation and their claims have been authenticated by independent loss adjusters and upheld in a North Korean court. But the reinsurers argue that the nature of the regime makes it impossible to trust and that the claim is a fraudulent one intended to bring in desperately needed foreign exchange.

The accident took place in April 2005 when, it is claimed, a helicopter owned by Air Koryo, the North Korean state airline, was dispatched from Pyongyang, the capital, to collect a woman who was in labour with triplets from a remote island. On the return flight it crashed into a warehouse on the outskirts of the city, causing a fire that destroyed a large amount of humanitarian relief goods.

The KNIC settled an insurance claim by the airline, which had compensated the owner of the warehouse, and claimed this back from its London reinsurers. According to the contract, disputes were to be settled under North Korean law and last month a court in Pyongyang ordered the reinsurers to pay the North Korean company the €44 million. They refuse to do so.

Lawyers for the KNIC say that, having pocketed premiums for the previous nine years without any claims, the reinsurers are simply reluctant to pay out such a large sum.

“There is no evidence at all to suggest that the helicopter claim is fraudulent,” says Tim Akeroyd, of the law firm Elborne Mitchell, which is acting for the KNIC. “All the evidence available, including the reports of loss adjusters appointed by Mr Payton’s clients, clearly established that this was a bona fide claim.”

The contract also states that claims in North Korean won will be converted at a rate of 160 won to the euro, close to the Government’s exchange rate. But the black market rate, which is used for all practical purposes in North Korea, is closer to 2,000 won to the euro. If this were applied it would reduce the reinsurers’ bill from €44 million to €3.5 million.

This month the European reinsurers settled the case–delivering the DPRK’s KNIC nearly totoal victory in the suit pertaining to the helicopter crash. Quoting from the Financial Times:

Court proceedings in London have ended after a group of re­insurers, including Allianz of Germany, Generali of Italy, [Misr Insurance of Egypt], and three Lloyd’s of London syndicates, agreed to pay 95 per cent of the reinsurance claim, or €39.2m ($58.2m).

[One member of the reinsurance consortium, Aviabel of Belgium, has refused to accept the settlement and legal proceedings are continuing.]

The reinsurers also agreed to retract and withdraw all allegations of fraud and impropriety made against the Korea National Insurance Company.

It is not unusual for reinsurers robustly to contest claims. But it is thought this is the first victory of its kind in an overseas court for [North Korea’s monopoly insurance provider].

Apparently the other cases (particularly the ferry sinking) are still pending. Quoting from Reuters:

The lawsuit is one of several which North Korea is pursuing, with claims exceeding $150 million dollar according to some estimates, involving several calamities.

Why did the European insurers settle the case?

[L]awyers representing the North Koreans argued that the insurance claim was a legitimate commercial debt owed to KNIC by reinsurers who were fully aware of the nature of the contract when they signed it, and had even agreed to let a North Korean tribunal adjudicate the claim.

English judges evidently agreed. The reinsurer’s position was first rejected in England’s High Court of Justice in August, 2007, and again on appeal two months later. Another trial began on November 12, 2008 before the Commercial Court in London before the two sides came to their agreement.

The settlement amounts to roughly 95 percent of what KNIC had originally demanded. It includes a specific confirmation that the reinsurers “have retracted and withdrawn all allegations of fraud and impropriety against KNIC.”

Settlement here (via Fox News): dprk_settlement_agreement.pdf

UPDATE: Aidan Foster-Carter issued a personal comment on the case.  You can read a PDF of it here.

Read articles here:
North finds reinsurance a source of hard cash
Joong Ang Daily
Lee Young-jong, Shin Eun-jin, Sohn Hae-yong
9/20/2006

North Korea Suspected of Collecting Millions in Reinsurance Fraud
Fox News
By George Russell
12/4/2006

North Korea ‘trying £30m insurance scam’
Times of London
Richard Lloyd Parry
1/26/2007

N Korea state insurance group wins case
Financial Times
Sundeep Tucker
12/10/2008

Reinsurers pay North Korea claim, drop fraud case
Reuters
Nadine Jakobs
12/10/2008

UPDATE: Here is an older paper by Stacey Banks which I have not read: North Korean Telecommunication: On Hold.

ORIGINAL POST: On Monday the Orascom 3G mobile network launched in North Korea.  Just about everyone covered this story…so here are the highlights:

Telecommunications in North Korea: Has Orascom Made the Connection?
Working Paper: Marcus Noland

The topicality of the second paper, on the Egyptian firm Orascom’s role in North Korea’s telecommunications modernization, received a boost this week with the announcement in Pyongyang that Orascom was finally rolling out its cell phone service and creating a joint venture bank with a North Korean partner.  The planned Orascom investments are large: if actualized, they would be the largest non-Chinese or non-South Korean investments in North Korea, and would exceed total private investment in the Kaesong Industrial Complex to date

Financial Times

Orascom is confident North Korea is opening up its economy and says it has been assured by the ­government that everyone will be allowed to buy a mobile. However, experts think that such a volte-face is highly unlikely and reckon only senior military and government officials will be allowed access, and then only to a closed network.

When asked how many people would ultimately use the service, Orascom’s chairman Naguib Sawiris said: “We have a modest target of 5 to 10 per cent of the population.” The population is about 23m. Mr Sawiris expects 50,000 subscriptions in the first three-to-six months.

Jim Hoare, Britain’s former chargé d’affaires to Pyongyang, says the new network is bound to have severe restrictions.

“It’s unlikely that a country that doesn’t allow you to have a radio unless it’s set to the state frequency will suddenly allow everyone to have mobile phones. It’s more credible that there will be a limited network for officials in Pyongyang and Nampo.”

Dong Yong-sung, chief of the economic security team at the Samsung Economic Research Institute in Seoul, believes another obstacle to ordinary North Koreans owning phones will be the cost. “As far as I know, mobile phone registration costs about $1,000,” he said, a sum equivalent to the average annual income.

(NKeconWatch: Others put the price at $700…and there are many problems with asserting that the DPRK’s per capita income is $1,000 per year.)

Bloomberg

The inauguration of Koryolink took place today in North Korea, Orascom Telecom said in an e-mailed statement. Orascom Telecom Chief Executive Officer and Chairman Sawiris attended the event, a company official said, requesting anonymity. The Cairo- based company got a 25-year license and exclusive access for four years in January. It plans to spend as much as $400 million on a high-speed network and the license for the first three years.

The North Korean venture is “in line with our strategy to penetrate countries with high population and low penetration by providing the first mobile telephony services,” Sawiris said in a statement earlier this year.

CHEO Technology JV Company, the North Korean unit that will operate under the Koryolink name, is 75 percent owned by Orascom Telecom and 25 percent by the state-owned Korea Post and Telecommunications Corporation.

The unit will see average revenue per user of $12 to $15 this year as Orascom Telecom targets three of the country’s biggest cities, according to company forecasts.

Koryolink has rolled out its so-called third-generation grid to initially cover Pyongyang, with a population of 2 million.

Orascom is counting on four potential markets in the Stalinist nation, according to a study by Marcus Noland of the Peterson Institute for International Economics.

The military and government officials are the top targets, followed by foreigners working for UN organizations and diplomats. The others are customers from South Korea, which has several economic projects with its neighbor, and local demand from rich North Koreans.

To protect its investment, Orascom “hedged its bet, committing only half of its investment at the outset and making additional investment conditional on its assessment of conditions going forward,” Noland said.

If the deal is threatened, Orascom may withdraw specialized equipment or technicians, reducing the value of the network to Pyongyang, Noland said in his study.

“Orascom may have spread the wealth informally, creating beneficiaries within the decision-making apparatus who would stand to lose if the agreement failed,” according to the study.

Bloomberg

Orascom Telecom, the Middle East’s biggest wireless company, opened Ora Bank in Pyongyang in the presence of Chairman and Chief Executive Officer Naguib Sawiris, a company official said on condition of anonymity. Ezzeldine Heikal, who is also head of Koryolink, Orascom’s North Korean mobile-phone network, was appointed president of the bank, the official said without providing further details.

“This is a big deal, especially as far as North Korea is concerned, because the current banking system is virtually non- existent,” Marcus Noland of the Peterson Institute for International Economics said in a telephone interview from Washington, D.C. “It’s a ground that others have feared to tread and is perhaps an endorsement for North Korea that says ‘we’re open for business.’”

Ora Bank is a joint venture between Orascom Telecom and North Korea’s state-owned Foreign Trade Bank, North Korea’s official news agency reported today. The director of North Korea’s central bank Kim Chon Gyun and Egypt’s ambassador to Pyongyang Ismail Abdelrahman Ghoneim Hussein, were also present at the opening ceremony, the news agency said.

Radio Free Asia

Chinese traders who regularly travel back and forth to North Korea said local residents showed little enthusiasm for the new service, which cost more than U.S. $900 to set up before the Ryongchun explosion.

North Korean defector Kim Kwang-jin, a senior researcher at the Institute for National Security Strategy in Seoul, said the fact that the government had once pulled the plug on North Korean cell phones meant that it could easily do so again.

“In the beginning, people will be hesitant, because a few years ago many of them made a big investment in cell phones. But service was suspended abruptly, so they are still very concerned that might happen again,” Kim said.

“People are also worried that the ability to pay such a high amount of money for a cell phone may raise a red flag and bring them under scrutiny by the North Korean authorities.”

Most foreigners are banned from using cell phones while in North Korea, although a network for government officials is believed to exist in the capital, Pyongyang.

(NKeconWatch: I personally saw elite North Koreans use mobile phones and even some western journalists in 2005.)

The Guardan

North Korea first experimented with mobile phones in 2002, but recalled the handsets 18 months later after a mysterious train explosion that killed an estimated 160 people. Some experts argue that officials feared the incident was an attempt to assassinate the regime’s “dear leader”, Kim Jong-il, and that mobile phones were involved.

BBC

Some reports suggest that handsets for the new network will cost around $700 each, putting them far beyond the reach of the vast majority of people in the impoverished country.

Choson Ilbo

Although the technology would enable users to send and receive text messages and video content, North Korean customers will only be allowed to speak over their phones.

BMI Political Risk Analysis, Dec 16, 2008 (h/t Oliver)

BMI View: North Korea has officially begun third-generation (3G) mobile phone services, thanks to Egypt’s Orascom Telecom (OT). However, the growth of the network could be limited by the regime’s fear that mobile phones will increase the scope for anti-regime activities.

North Korea has officially commenced third-generation (3G) mobile phone services, thanks to an investment by Egypt’s Orascom Telecom (OT). The firm’s initial target is 100,000 subscribers in three major cities, including Pyongyang, and it eventually hopes to develop a nation-wide network connecting North Korea’s 23mn citizens. OT has promised to invest US$400mn in network infrastructure over the next four years. It has signed a 25-year contract with the North Korean government, and owns 75% of their joint-venture (known as Korealink). OT’s exclusivity rights will last for four years. Orascom’s foray is something of a coup, given that North Korea’s communications network is so rudimentary (for further background see December 8 2008, Industry Trend Analysis – North Korea Prepares For Mobile Network Launch).

Why Pyongyang Fears Mobile Phones
North Korea launched a mobile phone service operated by a Thai subsidiary firm in 2002, but reversed course in 2004, apparently because of a devastating bomb blast on a train in Ryongchon in April of that year. Given that North Korean leader Kim Jong Il’s personal train had passed through the area only a few hours earlier, there was speculation that the explosion had been an assassination attempt, possibly triggered by mobile phone. Since then, only those living in areas close to the border with China have had access to mobile phones, thanks to the proximity of the Chinese network.

Aside from the notion of mobile phones as bomb triggers, they can also make it easier for citizens to communicate with one another. This would increase citizens’ ability to organise anti-government activities – such as protests or sabotage. For example, the popular uprising that led to the overthrow of Philippine president Joseph Estrada in 2001 was dubbed the ‘text message revolution’, because that is how the marches were announced and coordinated. Admittedly, the Philippines is a far more open society than North Korea, but the subversive aspect has not been lost on the regime.

Mobile phones would also make it easier for North Koreans to communicate with the outside world, and thus allow the real-time transmission of information or intelligence to foreign media or spy agencies, and vice versa. They would also allow the North Korean elite to communicate more efficiently, allowing dissident elements to plot against the regime.

Thus, even something as basic as mobile phones are seen as potentially regime threatening.

Mobile Service Difficult To Spread
Consequently, Orascom will surely find it difficult to spread its mobile service across the country. For a start, registration will be tightly watched. Secondly, the cost of the handsets, at several hundred dollars, will mean that only the political and moneyed elites will be able to afford mobiles. Of course, elements of the elite can ‘misuse’ their phones to arrange subversive actions if they deem it worthy, but it seems that the regime are counting on loyalty. Indeed, depending on the sophistication of their equipment, the regime will probably be able to snoop in on the elite’s conversations and movements, giving them an additional layer of security.

Read the full articles below:
Orascom eyes North Korean network
Financial Times
Christian Oliver
12/14/2008

Orascom Telecom’s Sawiris Signs North Korean Deal
Bloomberg
Tarek Al-Issawi
12/15/2008

Orascom Telecom of Egypt Opens Bank in North Korea
Bloomberg
Tarek Al-Issawi
12/16/2008

North Korea Brings Back Cell Phones
Radio Free Asia
Jung Young
12/16/2008

Secretive North Korea launches restricted mobile phone service
The Guardian
Tania Branigan
12/16/2008

N Korea launches 3G phone network
BBC
Steve Jackson
12/15/2008

N.Korea Restarts Cell Phone Service
Choson Ilbo
12/17/2008

The Singaporean government is insuring investment in the DPRK…

Quoting from the article:

Singapore firms keen to expand into the largely untapped market of North Korea now have a foot in the door, thanks to two new agreements inked on Tuesday.

The Ministry of Trade and Industry (MTI) said that Singapore signed an Investment Guarantee Agreement (IGA) with the country on Tuesday.

Trade and Industry Minister Lim Hng Kiang and his North Korean counterpart, Mr Ri Ryong Nam, signed the IGA during the North Korean Foreign Trade Minister’s official visit to Singapore.

MTI said the IGA will help promote bilateral investment flows by protecting investors and their investments.

Under the agreement, investors will be accorded non-discriminatory treatment, compensation in the event of expropriation or nationalisation of their investments, and free transfer of capital and returns from investment – perennial ‘banana peels’ for businesses entering a less-developed and unexplored market.

Separately, the Singapore Business Federation (SBF) also signed a Memorandum of Understanding with the North Korean Chamber of Commerce.

According to the SBF, North Korea remains an unexplored market for many Singapore firms but there exists many opportunities for local businesses to tap into such as its high-quality yet affordable workforce and the abundance of natural resources.

Read the full article below:
S’pore, N.Korea ink trade deals
The Straights Times
Francis Chan
12/2/2008