North Korean Economy Watch

Daily NK
Yang Jung A
1/18/2007

On the 9th, a Japanese broadcast “tv asahi” exposed footages of drug smuggling at a boarder station between North Korea and China.

The footage caught a North Korean dealer crossing the Tumen River via a tube. On meeting a female Chinese dealer, the North Korean dealer unraveled a pink package which contained an envelope written “Opium powder” in red.

The drug seems to have been manufactured at “Ranam pharmaceutical factory.” This factory is known for its manufacture of mediocre drugs. Although opium is normally supposed to be packaged as medication, it is common that the drug falls into the hands of smugglers.

The moment the Chinese dealer gets hold of the package, she confirms the quality of the drug and hands over Chinese currency. The North Korean dealer counts the money and scurries back over to North Korea. It was agreed that additional dealings would be made via the telephone.

The transaction that was made on this day was 8~9 bags, each containing 100g of opium. 

As the international community continues to enforce its regulations against drugs and counterfeit dollars, drugs dealings have taken effect in North Korea with increasing illegal trades occurring between China and North Korea, the broadcast claimed. In addition, the number of drug addicts in North Korea is also on the rise.

The footage also captured the North Korean drug dealers sniffing the drugs as well as the dealers talking about the transaction. Of the dealers, one person was a worker managing the level of humidity at a manufacturing factory and seemingly the intermediary supplier who obtained the drugs.

It seems that the 3~4 people sitting in a circle are personally testing the quality of the drugs before purchase. Although the dealer’s child has entered the room, the buyers continue to inhale the drugs.

The woman who seems to be buying the drugs in this footage, scrupulously inhales the drug as if her body was very accustomed to it.

The woman showed signs of drug addiction murmuring “I’m so used to it (taking drugs). My hardest moment was when I was in custody. If I can’t sniff any drugs, my nose is runny and my head spins.”

Also, she suggested that drug addiction had spread throughout North Korea “It has spread from the top, right to the bottom.”

As the dealers need to give bribes to the border guards, a deposit is first received then the balance paid after the goods given.

Comments were also made on the distribution of the latest drugs. The latest drug, blue in color is made naturally and is much more effective than the original, so is very popular amongst the rich.

Of the people there, one man was acting as the link to the boarder patrol, whereas the remaining people examined the issue of reliable Chinese buyers.

The first footage exclusive of North Koreans communally taking drugs was exposed in Korea by the DailyNK in October 2005.

Heritage 2007 Index of Economic Freedom

North Korea’s economy is 3% free, according to our 2007 assessment, which makes it the world’s least free economy, or 157th out of 157 countries. North Korea is ranked 30th out of 30 countries in the Asia–Pacific region, and its overall score is the lowest in the world.

North Korea does not score well in a single area of economic freedom, although it does score 10 percent in investment freedom and property rights. The opening of the Kaesong industrial venture in cooperation with South Korea has been a start in foreign investment.

Business freedom, investment freedom, trade freedom, financial freedom, freedom from corruption, and labor freedom are nonexistent. All aspects of business operations are totally controlled and dominated by the government. Normal foreign trade is almost zero. No courts are independent of political interference, and private property (particularly land) is strictly regulated by the state. Corruption is virtually immeasurable and, in the case of North Korea, hard to distinguish from necessity. Much of North Korea’s economy cannot be measured, and world bodies like the International Monetary Fund and World Bank are not permitted to gather information. Our policy is to give countries low marks for specific freedoms when it is country policy to restrict measurement of those freedoms.

Background:
The Democratic People’s Republic of Korea has maintained its Communist system since its founding in 1948. A serious economic decline began in the early 1990s with the end of economic support from the Soviet Union and other Communist-bloc countries, including China. Floods and droughts all but destroyed the agricultural infrastructure and led to severe famine and dislocation of the population during the 1990s. South Korean and Chinese investments in the economy have alleviated dire conditions. The government continues to rely on counterfeiting foreign currency and sales of missiles for money. That and the nuclear ambitions and isolationism of Kim Jong Il reinforce North Korea’s status as the hermit kingdom.

Business Freedom – 0.0%
The state regulates the economy heavily through central planning. The economic reforms implemented in 2002 allegedly brought some changes at the enterprise and industrial level, but government regulations make the creation of any entrepreneurial activities virtually impossible. The overall freedom to start, operate, and close a business is extremely restricted by the national regulatory environment.

Trade Freedom – 0.0%
The government controls all imports and exports, and formal trade is minimal. Data on North Korean trade are limited and compiled from trading partners’ statistics. Most North Korean trade is de facto aid, mainly from North Korea’s two main trading partners, China and South Korea. Non-tariff barriers are significant. Inter-Korean trade remains constrained in scope by North Korea’s difficulties with implementing needed reform. Given the lack of necessary tariff data, a score of zero is assigned.

Fiscal Freedom – 0.0%
No data on income or corporate tax rates are available. Given the absence of published official macroeconomic data, such figures as are available with respect to North Korea’s government expenditures are highly suspect and outdated.

Freedom from Government – 0.0%
The government owns all property and sets production levels for most products, and state-owned industries account for nearly all GDP. The state directs all significant economic activity. The government implemented limited economic reforms, such as changes in foreign investment codes and restructuring in industry and management, in 2002.

Monetary Freedom – 0.0%
In July 2002, North Korea introduced price and wage reforms that consisted of reducing government subsidies and telling producers to charge prices that more closely reflect costs. However, without matching supply-side measures to boost output, the result of these measures has been rampant inflation for many staple goods. With the ongoing crisis in agriculture, the government has banned sales of grain at markets and returned to a rationing system. Given the lack of necessary inflation data, a score of zero is assigned.

Investment Freedom – 10.0%
North Korea does not welcome foreign investment. One attempt to open the economy to foreigners was its first special economic zone, located at Rajin-Sonbong in the northeast. However, Rajin-Sonbong is remote and still lacks basic infrastructure. Wage rates in the special zone are unrealistically high, as the state controls the labor supply and insists on taking its share. More recent special zones at Mt. Kumgang and Kaesong are more enticing. Aside from these few economic zones where investment is approved on a case-by-case basis, foreign investment is prohibited.

Financial Freedom – 0.0%
North Korea is a Communist command economy and lacks a private financial sector. The central bank also serves as a commercial bank with a network of local branches. The government provides most funding for industries and takes a percentage from enterprises. There is an increasing preference for foreign currency. Foreign aid agencies have set up microcredit schemes to lend to farmers and small businesses. A rumored overhaul of the financial system to permit firms to borrow from banks has not materialized. Because of debts dating back to the 1970s, most foreign banks will not consider entering North Korea. A South Korean bank has opened a branch in the Kaesong zone. The state holds a monopoly on insurance, and there are no equity markets.

Property Rights – 10.0%
Property rights are not guaranteed in North Korea. Almost all property belongs to the state, and the judiciary is not independent.

Freedom from Corruption – 10.0%
North Korea’s informal market is immense, especially in agricultural goods, as a result of famines and oppressive government policies. There is also an active informal market in currency and in trade with China.

Labor Freedom – 0.0%
The government controls and determines all wages. Since the 2002 economic reforms, factory managers have had more autonomy to set wages and offer incentives, but the labor market still operates under highly restrictive employment regulations that seriously hinder employment and productivity growth.

Kyodo News
1/3/2007

Singapore has banned the export of luxury items and military equipment to North Korea as of the beginning of this year in line with U.N. Security Council sanctions, Singapore Customs said Wednesday on its website.

In addition, it has also curbed the use of the city-state as a transhipment hub in Asia for such exports.

The notice said the government has banned the export of 14 luxury items to North Korea, including cigars, wines, luxury cars, perfume, plasma televisions, personal digital music players and musical instruments.

It said the export and transit of military equipment and goods and technology related to nuclear programs, ballistic missiles and other weapons of mass destruction have also been prohibited.

Traders here have been ordered to declare to the agency details of their exports to North Korea at least three working days before shipment.

The agency has warned that those who breach the rule could be slapped with hefty fines of up to S$100,000 (about $65,000) or three times the value of the goods, whichever is greater, or sent to jail for up to two years, or both.

Multiple offenders could be fined up to S$200,000 or four times the value of goods, whichever is greater, or jailed up to three years or both.

The U.N. Security Council in October imposed weapons and financial sanctions on North Korea under resolution 1718, which was adopted after the North’s claimed nuclear tests.

Joong Ang Daily
12/21/2006
Choi Hyung-kyu, Kwon Hyuk-joo

Half of the $24 million in North Korean assets held in the frozen Banco Delta Asia accounts came from the Hyundai Group of South Korea, sources here told the JoongAng Ilbo yesterday. Other sources said North Korea will be able to access some of the frozen holdings next week, because the money had been proven “legitimate.”

The Macao-based bank froze the North Korean holdings last year after the U.S. government accused Pyongyang of financial crimes, such as money laundering and counterfeiting U.S. dollars. Since then, the North has made the unfreezing of those assets a precondition for the nuclear disarmament negotiations.

A U.S. source who requested anonymity said yesterday the $12 million was a part of Hyundai Group’s payments to North Korea for inter-Korean businesses. The money was wired in several payments, the source said. The payments were initially sent to other bank accounts that deal with North Korea, the source said, and then forwarded to the Banco Delta Asia accounts from there.

To deposit a large sum, an account holder must inform the bank in Macao about the source of the money and its purpose. The source showed North Korean account holders’ statements which claimed the deposits came from Hyundai.

Another source well informed about Banco Delta Asia affairs also said the money came from Hyundai.

“It is not easy to distinguish how much of the North Korean assets was earned from legitimate economic activities,” a senior South Korean government official said. “To sort the matter out, the United States and North Korea should meet and discuss the issue.”

In Beijing, O Kwang-chol, the president of the Foreign Trade Bank of Korea, has been meeting with U.S. Deputy Assistant Treasury Secretary Daniel Glaser since Tuesday.

Signs also pointed to a thawing of the freeze on the accounts in the near future. Other sources said Pyongyang has dispatched officials to the city of Zhuhai in China with papers necessary to withdraw the $12 million from the bank in Macao. They said access will likely be granted Tuesday or Wednesday of next week.

Hyundai Asan, Hyundai Group’s North Korea business arm, said yesterday it has not sent any money to a Banco Delta Asia account. The Mount Kumgang tour program began in 1998.

The company said it has wired $1 million a month to an overseas bank account designated by North Korea.

A senior official with Hyundai Asan said North Korea frequently changed the account. “I don’t know if our payment was later wired to BDA accounts or not, but I think that could be possible,” he said.

Hyundai Group provided $500 million to North Korea on the eve of the 2000 inter-Korean summit by wiring the money to a North Korean account with a foreign bank, but the sum currently frozen at the Banco Delta Asia accounts is not connected to that, the sources said.

Bloomberg (Hat Tip DPRK Studies)
12/11/2006
Stuart Biggs

Banco Delta Asia S.A.R.L., the Macau, China-based bank accused by the U.S. of money laundering for North Korea, said it bought gold from the communist state in a filing to the U.S. Treasury.

North Korea has made the unfreezing of about $24 million in assets held at Banco Delta Asia a pre-condition to returning to six-nation talks over its nuclear weapons program that broke off in September 2005. The U.S. alleged that the bank helped North Korean officials accept “surreptitious” multi-million dollar transactions, some linked to drug trafficking.

Banco Delta Asia, in an Oct. 18 letter to the U.S. Treasury Department by law firm Heller Ehrman LLP, said the bank “purchased a large share of the gold bullion produced by North Korea” prior to the allegations and no longer does so.

“Money could have been laundered, but there is no specific evidence that the bank was aware that it was being used for this purpose, nor that it facilitated any criminal activities,” the letter said. The bank “paid insufficient attention to maintaining its own books.”

Banco Delta Asia also said North Korea’s Tanchon Commercial Bank, described by the U.S. as the Pyongyang government’s main financial agent for sales of arms and ballistic missiles, remained a customer for three months after Tanchon was blacklisted by the U.S. in June 2005 “due to shortcomings in the information technology systems.”

The bank said it put in place new managers after the U.S. action and closed North Korean-related accounts, hired an outside firm to set up procedures against money laundering and asked the Treasury to reconsider its ruling.

“The Bank has not done any business with North Korean or North Korean-related entities for over a year and pledged not to do any in the future,” the letter said.

The six-party negotiations may resume on Dec. 18 or 19, Yonhap News Agency reported, citing unidentified South Korean government sources.

Yonhap
12/6/2006

South Korea is set to announce its participation in a U.S.-led campaign to stop container-borne radioactive materials after refusing to help interdict North Korean ships suspected of carrying weapons of mass destruction.

A Foreign Ministry official confirmed Wednesday that Seoul decided to join the International Container Scanning Network, or ICSN.

“The government plans to formally announce the decision later this week,” the official said, asking not to be identified.

The ICSN calls for its members to install state-of-the-art radioactivity detectors at their major ports so customs officials can screen the contents of containers without opening them.

International efforts to curb the flow of nuclear materials have gained more urgency since North Korea conducted a nuclear test in October.

Seoul’s decision to join the ICSN was widely interpreted as designed to offset its limited participation in the Proliferation Security Initiative (PSI).

South Korea said last month that it would stay away from any PSI-related activity in the vicinity of the Korean Peninsula, citing its unique geopolitical situation. South Korea remains technically at war with the communist North and the two sides are vulnerable to military clashes especially in the poorly-demarcated West Sea.

South Korea described its position in the PSI as “special status,” as it kept the door open for PSI activities in remote areas.

Government officials, however, said the PSI was not considered when it made the decision to join the ICSN, a project still being tested.

Korea Times:
11/13/2006
Andrei Lankov

For the last few decades a visitor to Eastern Siberia would sometimes come across unusual logging camps: fenced off with barbed wire, they sported the telltale portraits of Kim Ilsung and Kim Jong-il. These are North Korean camps: from the late 1960s, North Korean loggers have been working in Russia’s Far East.

In the 1960s the timber shortage was felt both in North Korea and the USSR, but the reasons for the shortages were different.

The Russians had plenty of forest, but lacked labor. When the gulags were emptied after Stalin’s death, few people were willing to up and fell trees in remote corners of Siberia.

The North Koreans had an abundance of cheap labor, but almost no good timber. Thus, the two Communist states had a potential match made in heaven.

In March 1967, when the relations between the two countries began to recover after a serious chill, the logging agreement was signed.

According to the agreement North Korean loggers were allowed to work in designated areas of the Russian Far East.

They were housed in special labor camps, run by the North Korean administration. The timber was to be divided between the two sides: the Russians 60 percent and the North Koreans 40 percent.

At their peak in the mid-1980s the Far East joint logging projects employed over 20,000 North Korean workers. This means that some 0.5 percent of all North Korean able-bodied men labored there. Nowadays, the operations are smaller in scale, with some 8,000 workers employed. An additional 3,000 North Korean workers are employed in other joint projects in Russia (construction industry, vegetable gardening etc.). Since the workers were rotated every three years, it is likely that up to a quarter of a million North Koreans have taken part in this project over the decades.

Politically, this was not as dangerous as it might seem. Even in the 1960s, the Soviet Union had far higher standards of living and was much more liberal and permissive society than the North.

However, the North Korean workers were in the middle of nowhere, and kept under the watchful eyes of their supervisors in the nearly isolated camps. People who broke the rules were arrested and sent back to the North. If it was deemed too difficult or impractical, they could be killed on the spot _ the Siberian forests provided more than enough space for unknown burials.

The Soviets usually turned a blind eye to everything the North Korean administrators did. In the early 1990s the situation changed. During the heyday of perestroika, investigative journalists began to report on the conditions of the North Korean workers.

An expose of the prison maintained by the North Korean security police in one of the logging camps led to a particular public outcry. In those days the Russians felt a nearly universal enthusiasm for democracy and believed that Kim Il-sung’s regime would soon collapse.

There were also publications about the secret opium plantations and illegal harvesting of protected species of plants and animals _ both, frankly, long established pillars of North Korea’s foreign currency earning programs.

On top of that, some loggers used the change in the international situation to defect to the South. In those days, defectors were still rare and thus welcomed in Seoul.

In 1992-1994 it appeared that the entire timber project would be discontinued owing to political considerations. However, the situation changed. The events of 1992-2005 made Russians quite skeptical about democracy, and very suspicious of idealistic crusades of any kind.

Thus, the North Korean camps were left alone to the great relief of the local Russian administrators and businessmen who make good money out of these projects.

For them, the North Koreans were but a source of cheap labor, and they did not care how these “Orientals” were treated by their supervisors.

When the initial Russian enthusiasm for a free press died out, the local politicians learned how to keep journalists away.

By the late 1990s, it also became clear that South Korea was not going to encourage the defection of the loggers. On the contrary, anecdotal evidence indicates that loggers who approach the local South Korean consulate are unceremoniously turned away.

Seoul does not need these impoverished and potentially troublesome brethren in our sunshiny days! Of course, some loggers run away, but largely in order to find better job opportunities in Russia’s black economy.

There are about a thousand such runaways hiding in Russia now, but the authorities tend to ignore their presence.

But what was the incentive for the North Koreans workers? The short answer is: money.

Really good money _ at least, by North Korean standards.

From the Korea Times
10/30/2006

North May Have Been Selling Missiles

North Korea was selling its missiles to the Near East as recently as 2003-2004, according to inferences made in the latest report by the U.S. Congressional Research Service (CRS).

The annual report, titled “ Conventional Arms Transfers to Developing Nations,” says 40 surface-to-surface missiles were sold to the Near East by “other suppliers” that exclude the United States, Russia, China, and European countries.

The New York Times, quoting Pentagon and other U.S. administration officials, said North Korea is the unnamed supplier.

CRS reports are written for congressmen and their aides.

Dated Oct. 20, the report tallies and analyzes general weapons transfers between 1998-2005. The missile sales figures were for 2001-2005.

The number of missiles sold by “other suppliers” is the same as that of the previous report that covered the period between 2001-2004, suggesting North Korea did not export more missiles in 2005.

But in a report for the 2000- 2003 period, the other suppliers were believed to have sold 20 surface-to-surface missiles to the Near East, indicating there were additional exports of the weapons to the region between 2003 and 2004.

The year 2004 was when the U.S.-led Proliferation Security Initiative (PSI) got under way to interdict shipments of weapons of mass destruction.

From the US Treasury, Federal Reserve and Secret Service:

From the report:  p. 66

Since 1989, the U.S. Secret Service has led a counterfeit investigation involving the trafficking and production of highly deceptive counterfeit notes known as supernotes. The supernote investigation has been an ongoing strategic case with national security implications for the U.S. Secret Service since the note’s first detection in 1989. The U.S. Secret Service has determined through investigative and forensic analysis that these highly deceptive counterfeit notes are linked to the Democratic People’s Republic of Korea (DPRK) and are produced and distributed with the full consent and control of the North Korean government.

In March 2005 and again in June 2006, Interpol issued an “Orange Alert” regarding the DPRK and its continued quest to obtain or purchase printing supplies that would facilitate the counterfeiting of U.S. currency. The U.S. Secret Service is working very closely with the intelligence community in analyzing supernote distribution activity and monitoring the broader illicit affairs of the DPRK. Over the course of this sixteen-year investigation, approximately $22 million in supernotes has been passed to the public (table 6.5), and approximately $50 million in supernotes has been seized by the U.S. Secret Service.

From the Joong Ang Daily:
Bank sees North pain if sanctions take hold
10/24/2006
Choi Hyung-kyu, Ser Myo-ja

The Bank of Korea said yesterday, in a report prepared for a legislator, that international financial sanctions on North Korea could deal a heavy blow to the North’s shaky economy.

In an assessment for Representative Yim Tae-hee of the Grand National Party, the central bank said a 30-percent reduction in foreign currency inflows to North Korea would lower economic activity by three-quarters of a percentage point. A halving of North Korea’s external trade, the paper said, would reduce economic growth by nearly 5.5 percentage points; a 70-percent falloff in trade would drop economic output by 8.25 points.

Estimates of economic activity in centrally planned economies are difficult at best, however, and North Korea’s secrecy makes such estimates even more tenuous.

“When international financial institutions join in the sanctions and cut the influx of the annual $800 million in foreign currency to the North, Pyongyang will face serious trouble,” Mr. Yim said.

He added, without citing sources, that the North earns about $300 million through legitimate activities, such as inter-Korean economic cooperation deals and remittances from North Koreans abroad, adding that counterfeiting and drug trafficking bring in about $500 million more annually.

Christopher Hill, the U.S. assistant secretary of state for Asia, arrived in Hong Kong on Saturday to meet, among others, William Ryback, the deputy chief executive of the Hong Kong Monetary Authority.

“The U.S. team asked the Hong Kong authorities to cooperate in its effort to freeze North Korean assets in Hong Kong and Macao,” a Hong Kong source said yesterday. “Hong Kong gave a positive answer.”

Another Hong Kong government source said Mr. Hill also asked the government there to help inspect suspect North Korean ships.

“A North Korean ship under a U.S. intelligence watch is on its way to Hong Kong,” the official said. “Mr. Hill asked the authorities to inspect the boat thoroughly when it enters port here.”