North Korean Economy Watch

This week the Cato Institute hosted a panel on North Korea.  Participants include:

Stephen Linton, Chairman and Founder, Eugene Bell Foundation
Karin J. Lee, Executive Director, The National Committee on North Korea
Doug Bandow, Senior Fellow, Cato Institute
Ted Galen Carpenter (Moderator), Vice President for Defense and Foreign Policy Studies, Cato Institute

You can see a video of the panel discussion here.  It includes an interesting fundraising video by the Eugene Bell Foundation.

UPDATE: Tad at NKnews.org has a write up of the panel here.

Institute for Far Eastern Studies (IFES)
NK Brief No.10-07-08-2
7-8-2010

As inter-Korean commerce has all but dried up in the wake of the Cheonan incident, trade between North Korea and China appears to have continued to grow. According to Chinese customs statistics released on July 6, trade with North Korea from January to May amounted to 983.63 million USD; 18.1 percent more than the 833.07 million USD reported for the same period last year.

North Korea imported 727.192 million USD-worth of Chinese goods (29 percent increase over the same period last year), but exports dropped by 4.9 percent, amounting to only 256.438 million USD. This indicates a 60 percent increase in North Korea’s trade deficit with China, which was 470.757 million USD in the first part of 2009. With South Korean sanctions against the North halting all inter-Korean trade outside of the Kaesong Industrial Complex following the sinking of the Cheonan, it is expected that Pyongyang will become even more economically dependent on Beijing.

During this period, crude oil accounted for most of North Korea’s imports from China, as Pyongyang bought 254,000 tons (slightly more than the 247,000 tons in early 2009). However, due to rising international fuel prices, this oil cost the North 157.097 million USD, a 76 percent increase over what Pyongyang spent during this period last year.

In addition, rice (24,400 tons), corn (31,400 tons), beans (20,500 tons), flour (34,000 tons) and other necessary food imports totaling 11,300 tons reflected a 41 percent increase over the same period in 2009. The cost of fertilizer imports also jumped sharply, amounting to 81,943 tons, or 115.6 percent more than the 38,004 tons imported from January to May 2009. Increasing imports of food and fertilizer are a result of the growing agricultural difficulties being faced in the North. Based on current prices, aviation fuel imports also grew by 46.8 percent, freight trucks by 98.7 percent, automobile fuel by 47.4 percent, and bituminous coal by 137 percent.

The top ten official imports of Chinese goods by North Korea were as follows: crude oil (21.6 percent); aviation fuel (3.1 percent); freight trucks (2.9 percent); automobile fuel (2 percent); bituminous coal (1.9 percent); fertilizer (1.8 percent); beans (1.6 percent); flour (1.6 percent); rice (1.5 percent); and corn (1.1 percent).

North Korea’s exports to China were mainly underground natural resources. The top ten exported goods were: iron ore (17.1 percent); anthracite (16 percent); pig iron (9.6 percent); zinc (5 percent); Magnesite (3.6 percent); lead (2.4 percent); silicon (2.3 percent); men’s clothing (2.2 percent); frozen squid (2.1 percent); and aluminum (1.9 percent).

Several reports on various foreign assistance programs in the DPRK have been piling up on my desktop so I thought I would go ahead and post them for you.  They are not particularly timely, but they are full of interesting information.

U.S. Bilateral Food Assistance to North Korea Had Mixed Results (PDF)
US GAO
June 2000

DPRK: Water and sanitation in three counties of Kangwonin three counties of Kangwon Province (Thongchon, Chonnae, Popdong)
Reliefweb Mission Report
March 2002

Rehabilitation of Thongchon, Popdong and Chonnae Water Supply systems (Kangwon Province, DPR of Korea)
Reliefweb Mission Report
June 2002

Democratic People’s Republic of Korea: Operations Report
International Federation of Red Cross and Red Crescent Societies
Appeal no. MDRKP001
November 15, 2007

The IFRC contains the below photo of a flooded clinic:

This clinic is in Nyongwon at 39°50’3.51″N, 126°32’18.64″E.  Here is a satellite image:

The sad part is that the damage caused by flooding is in large part an unintended consequence of agriculture, deforestation, and hydro-power policies.  This clinic lies behind the Taedonggang Dam in Tokchon (satellite image here).

Accroding to the Daily NK:

The 8th issue of Rimjingang, the periodical written by North Korean underground journalists, sheds light on North Korea’s private livestock industry.

One article, “Livestock Industry Developing from Private Means of Living into Private Enterprise,” describes how pig farming has developed during and since the famine period. It explains how, under the functioning planned economy, the “livestock industry” amounted to each household unit raising pigs to sell on the side, but now the planned economy is little more than a distant memory and the livestock sector has been specialized and systematized into sectors; breeding, butchery, distribution and sale.

That is why in North Korean markets 90% of goods are Chinese, but 100% of pigs and pork is North Korean.

Under the planned economy, roughly 20% of people in rural areas privately raised pigs and sold them to state meat procurement stores for two kilograms of corn per kilo of meat, the report notes. But from the mid 1980s, procurement stores bought them for cash, so competition grew and eventually the stores had to close due to increasing prices and their own lack of ready cash. Since the 1990s, distribution has stopped and more than 50% of people have started raising pigs in more specialized ways, it adds.

The report goes on to explain that during the March of Tribulation people figured out that their salaries, even when received, represented a mere tiny fraction of the labor value they could realize by trading illegally in the jangmadang. Many were unwilling to put up with it.

“Going through the March of Tribulation, the profit motive through the market has opened the door to new food lives which the Leader cannot open with his slogan, ‘reform food lives with meat,’” the report asserts. “Now, since a powerful supply and demand system has been spontaneously established, anybody can afford to eat meat as long as they can earn money.”

“’Leave us alone!’ is the real voice of the people of Chosun,” the report concludes, adding that the phenomenon of the Chosun pig farming industry implies the clear potential to develop modern industry in North Korea.

The 8th edition of Rimjingang was published in Korean on June 30th.

Read the full story here:
The All-North Korean Pig Farming Sector
Daily NK
Yoo Gwan Hee
7/10/2010

Long time DPRK watcher Paul White has published the latest issue of DPRK Business Monthly. 

You can download the PDF here.

Here are the topics covered:
Offshore NK Oil Probe On Track
China to Boost Cooperation with NK
DPRK Has IT Outsourcing Potential
Introduction to Nosotek
Choson Exchange Students to Visit DPRK
UNICEF Plans US$130 Million for NK
ROK Aid Groups Urge Seoul to Lift Ban
Inter-Korean Trade Shrinks in May
Some ROK Companies Allowed to Send Money to NK
NK Embracing CNC Machine Tool Era
DPRK Economy Contracts 0.9%: BOK
North Korea Moving Into Internet World
Environmental Protection High Priority: KCNA
More Efficient Sterilizer for Seeds
Pyongyang Has Over 150 Pubs
New Beverage Multiplies Brain Cells
NK Promoting Rice Wine Exports
NK Researchers Develop “Stone Paper”

According to the AFP:

North Korea’s economy is expected to continue shrinking this year after South Korea cut off most trade in protest at the sinking of a warship, a report said Tuesday.

“The North is very likely to see its economy shrink this year,” said the report from South Korea’s state-run Korea Development Institute (KDI), without estimating a figure.

“Our outlook is based on a forecast that its external trade will likely post a setback.”

The communist state’s economy contracted 0.9 percent in 2009, according to an earlier report from the South’s central bank.

The South in May announced a ban on most trade after a multinational investigation concluded that a North Korean torpedo sank the warship in March with the loss of 46 lives.

The KDI said at the time the ban would cost the impoverished North hundreds of millions of dollars a year, noting that Pyongyang posted a 333 million dollar trade surplus with its neighbour last year.

The South’s central bank says the North’s economy shrank 1.1 percent in 2006 and contracted by 2.3 percent in 2007, but grew 3.1 percent in 2008 until contracting again last year.

A further shrinkage this year could spark an economic crisis, Tuesday’s report said.

“North Korea’s economy could be hurled into a very precarious situation,” it said.

“As experienced by the nation in the mid-1990s, a crisis could more likely be prompted by consecutive contractions for a relatively long period of time, rather than a one-off steep economic downturn.”

The North’s economy fell deep into trouble in the 1990s after the break-up of the Soviet Union and the loss of its crucial aid.

The country suffered famine in the 1990s which killed hundreds of thousands and it still grapples with severe food shortages.

Since 2005 the regime has been reasserting its grip on the economy, with controls or outright bans on private markets.

A currency revaluation last November, designed to flush out entrepreneurs’ savings, backfired disastrously. It fuelled food shortages as market trading dried up and sparked rare outbreaks of unrest.

The North was forced to suspend its campaign against free markets.

The United Nations in June last year tightened sanctions following the North’s missile launches and nuclear test earlier in the year.

Read the full story here:
N.Korea economy to shrink on trade cutoff: report
AFP
7/5/2010

According to Kang Hyun-kyong in the Korea Times:

As a veteran aid worker, Wolfgang Gerstner was weary of a vicious circle of escalating tensions between South and North Korea after the latter was found to be responsible for the sinking of the warship Cheonan on March 26.

According to the German consultant working for international aid group Caritas Germany, North Korea’s bellicose acts have led those outside the country who have tried to help it to harden their attitudes.

This has resulted in a decrease of donations, causing children there to live without vaccinations for example.

Gerstner, 53, went on to say that children and ordinary people living in the impoverished North, whose living standards couldn’t be worse, suffer the unintended consequences of the regime-led provocations.

“It is difficult for people living outside North Korea to separate ordinary people living in the North from the regime,” Gerstner, who oversees Caritas’s humanitarian aid program to North Korea (the CI-DPRK program), said last Thursday in an interview with The Korea Times at a hotel in Seoul.

Caritas relies on donations from individual and corporate members to sustain their humanitarian aid to less developed nations in Africa, Asia, and Latin America.

The aid organization also receives funds from the German government and Catholic churches here in Korea for the vaccination campaign for North Korean children.

North Korea is one of the nations where the rate of child mortality is alarmingly high.

According to United Nations Children’s Fund (UNICEF), 55 of every 1,000 children in North Korea die before they turn five.

Child mortality can be largely preventable if young children are vaccinated.

The North issuing a threat, however, is a stumbling block to the international effort to save children there.

When recipient governments make threats, it is natural for people living outside those nations to harden their view toward them, making donors or potential donors rethink their contribution.

“I don’t have the exact figure regarding the loss in donations after the provocation, but it certainly does have an effect on the amount,” Gerstner said.

“Escalating tensions make it difficult for aid workers like me to convince our donors to contribute to humanitarian assistance for the people there.”

Catastrophic security

The German aid worker sat down with the reporter days after wrapping up his recent visit to North Korea from June 8 to 12 this year for the regular vaccination program.

During the four-day field trip, Gerstner and August Stich, a medical advisor working with the Medical Mission Hospital Wuerzberg in Germany, visited the Sadong Tuberculosis Center, the new national laboratory at the Pyongyang Tuberculosis Hospital.

The two-man delegation also met with officials from the North Korean Ministry of Public Health and experts in medical institutes in Pyongyang and in the neighborhood of the North’s capital.

They made the June visit after about 500,000 North Korean children aged from seven to 16 years old were vaccinated in three rounds from February to April, thanks to the Caritas program.

Since March 2007 when he was first called upon to handle the CI-DPRK program, Gerstner has been to the North approximately 20 times for talks with his North Korean counterpart — the Ministry of Public Health.

His most recent trip came at a time when tension on the Korean Peninsula has shown little sign of subsiding after a multinational investigation team concluded last month that a North Korean torpedo was responsible for taking the lives of 46 sailors.

The North has denied it.

In an attempt to teach North Korea a lesson that any criminal acts will invite punishment, South Korea referred the Cheonan case to the U.N. Security Council (UNSC) in early June, calling for retaliatory measures against the North for the unacceptable act.

North Korea has claiming it is “innocent” and further threatened to take “counter-measures” if the UNSC sides with the multinational team over the probe results and comes up with punitive measures against it.

The two Koreas’ engaging in a game of chicken in the wake of the sinking of the ship has led to international media headlines featuring the peninsula on the verge of a war.

A vicious circle

The security standoff has spillover effect on humanitarian assistance to the North.

Disappointed, individual and corporate donors have become skeptical about contributing money or goods for the improvement of living conditions in the North.

Lesley-Anne Knight, secretary general of Caritas, expressed her concern over the unintended consequences of rising tensions last Tuesday during a news conference held in Seoul.

“This tension, of course, makes it much more difficult for us as humanitarian actors to maintain a neutral and impartial interest at the international level for North Korea,” Knight said.

“When there is a bellicose act, when people start to feel concerned about conflict escalating, international attention and the sympathy perhaps of the international humanitarian community for the plights of the (North) Korean people tends to diminish, tends to wane.”

Knight went on to say that “that is the extreme concern for us.”

Caritas, which has spent a total of $33 million on humanitarian aid and development in North Korea since 1995, called for a continuation of assistance.

The reaction came weeks after the South Korean government’s halt of assistance to the North in retaliation for its torpedo attack on the ship.

“(Humanitarian assistance) is absolutely essential for us. The situation of the majority of the North Korean people is that most of them are struggling to get their daily basic needs. Most specifically, food and health,” Knight said.

‘N. Korean kids are brave’

In his previous visits to the North in March, Gerstner had opportunities of taking a closer look at the facilities of clinics, institutes, and primary and secondary schools, while monitoring the North’s implementation of Caritas’s vaccination programs.

“Compared with South Korean hospitals and their amenities, hospitals in the North are less modern. Doctors there have to rely more on traditional medicine as they don’t have necessary facilities and medicine,” he said.

He called North Korean children “very brave.”

“It happens in other countries that school age children cry when they wait for their turns in line for taking vaccination shots. But North Korean children never cried even when they took the shots,” he said.

Previously, Gerstner was involved in several emergency relief programs in Africa, Latin America and the former East Germany. He helped organize rehabilitation programs in the local community.

Gerstner said North Korean teachers and children were “friendly and open-minded” when meeting with him, although they never spoke.

He said the most difficult part when implementing the aid program to North Korea was access to information and communication.

“For planning, we need information and have to communicate with our counterpart. The ministry has no email account, making it more difficult for us to execute the program,” he said.

Read the full article here:
Donors turn their back on N. Korea for provocation, putting kids at risk
Korea Times
Kang Hyun-kyung
6/28/2010

According to the Daily NK:

A report by aid organization Good Friends stating that widespread starvation is happening again in North Korea has been vehemently denied by inside sources.

In the June report, Good Friends, citing its own sources, asserted that the Chosun Workers’ Party had dispatched an investigation team to each area of the country following the June 7th Supreme People’s Assembly meeting, and that the teams had found up to two hundred people dead in each district of South Hamkyong Province.

According to Good Friends, “The first report from South Hamkyong reached the central party on June 18th, saying that for the four months from March to June in Hamheung, Heungnam and Sinpo, 100 or so people had died of starvation.”

However, a Daily NK source from Hoiryeong who recently visited Chongjin in North Hamkyong Province was incredulous when informed of the report, saying, “Who told you that? I have heard nothing about so many people dying of starvation in either Hoiryeong or Chongjin.”

Another source from Yangkang Province who said he visits Heochon County in South Hamkyong regularly said, “Although it is hard to live in South Hamkyong, people who made it through the ‘March of Tribulation’ know very well how to survive. There are newly harvested potatoes, and if you are really struggling then you can always eat herbs.”

NK Intellectuals Society (NKIS), a leading defector organization, agrees that the report is false, saying, “We have checked the report of widespread starvation in South Hamkyong with a resident of Danchon, and he has confirmed that no such thing has happened. Some elderly people with immune systems weakened by spring food shortages have died of disease, but that number is not more than ten or twenty in Danchon.”

Good Friends has tended to warn of impending mass starvation almost every year, but inside informants and the South Korean authorities often assert otherwise.

In a separate report, Good Friends also recently claimed that there was to be no more public distribution as of late last month, and that market transactions had been fully liberalized to allow the people to look after themselves.

The so-called “May 26th Measure”, Rev. Bomryun of Good Friends said at the time, was “reluctantly done as a result of a lack of the anticipated food aid from China after Kim Jong Il’s visit,” and claimed, “This time, the starvation cannot be dealt with over a short period of time, and might result in a larger number of deaths like in the mid-1990s.”

However, the actual existence of the May 26th Measure has not been proven, and markets in Sinuiju, Pyongyang, Hyesan and other main cities remain open from 10 AM to 6 PM as normal.

Won Sae Hoon, South Korea’s National Intelligence Service chief, also testified before the National Assembly’s Intelligence Committee last Thursday that North Korea probably has enough food overall to survive, saying, “This year, North Korea seems to have more than 4.3 million tons of grain, including its own production and imports, and food supply difficulties can be managed.”

Read the full story here:
Starvation Report Rejected by Sources
Daily NK
Shin Joo Hyun
7/2/2010

Bradley Martin, author of Under the Loving Care of the Fatherly Leader, writes in the Global Post:

Now that food shortages reportedly have forced North Korea to reverse its crackdown on capitalist-style markets, more systematic reforms for its collapsed economy may not be far behind.

The markets policy reversal came May 26 in directives issued by the cabinet and the ruling Workers’ Party to subordinate organizations, according to a report by the Seoul-based newsletter North Korea Today, which gets its information from officials and ordinary citizens inside the North. “The government cannot take any immediate measures” to relieve a food shortage that is “worse than expected,” the newsletter quoted one of the directives as saying in explanation for the policy change.

The same authorities only late last year decreed a sudden currency revaluation that crippled the “anti-socialist” markets, where stallholders had been trading for individual profit, by confiscating the traders’ wealth. The new decrees bless and deregulate what’s left of the markets, which have shrunk and in some cases closed completely in the interim, in the hope that market trading will keep people from starving. And the directives instruct managers of state-run enterprises to pursue lucrative deals — especially in foreign trade — that could help feed their employees.

This could all turn out to be the big event that finally pushes the very reluctant leadership into a multi-year campaign of serious reforms of the sort that began decades ago in Vietnam and China, according to Felix Abt, a Swiss involved in North Korean joint ventures in pharmaceutical manufacturing and computer software.

“Given an industrial stock and an infrastructure beyond repair, and the impossible task of maintaining a huge army, economic reforms appear unavoidable in the very near future,” Abt, a former president of Pyongyang’s European Business Association, wrote in an email exchange.

“It looks intriguing and it reminds me of Vietnam’s history of reforms,” said Abt, who did business for years in Vietnam before going to Pyongyang and recently has moved back to Vietnam while maintaining his involvement in North Korea.

“The Vietnamese economic situation looked dire at the beginning of the 1980s,” he explained. “Nguyen Van Linh, party secretary in Ho Chi Minh City, favored moderate economic reforms. He tried too early, lost his job and left the political bureau in 1982.

“Le Duan, secretary general of the Communist Party, was categorically against any economic reforms. He died in 1986, the year of the five-year party congress which brought Nguyen Van Linh back and elected him as his successor. The new party secretary general immediately launched the Doi Moi policy — ‘reforms.’”

Abt ventured the lesson that triggering reforms “takes something big like the death of a leading politician” in Vietnam — or, in North Korea, a “ruinous” currency revaluation.

Not every foreigner who has had firsthand economic dealings with North Korea is convinced the recent events constitute that trigger. Some worry that U.S.-led sanctions could nip any flowering of capitalism in the bud.

“The problem is still U.S. Treasury’s attitude,” said one such foreigner, who asked not to be identified further. Treasury Department officials began working several years ago to take North Korea “out of the international banking system,” discouraging trade, he noted.

Some U.S.-sponsored sanctions subsequently were eased in an effort to persuade Kim Jong Il to negotiate away his nuclear weapons capability, but after those talks went nowhere — and especially after North Korea allegedly torpedoed a South Korean warship earlier this year — enthusiasm for compromise cooled. Recent reports say Washington is moving toward aggressively strangling cash flow into the country.

There is also the argument that Kim believes he cannot afford to reform the economy because it would let in information and influences that would undermine his family’s rule by letting his isolated subjects learn that the rival South Korean system works much better.

According to Abt, one answer to both concerns could be China, which “will provide all the support necessary to the DPRK party and government to enable economic reforms without regime change.” He used the abbreviation of Democratic People’s Republic of Korea, the country’s official name. “The DPRK may expect support from other quarters, for example, the European Union, too,” he said.

“I think the dilemma of the leadership — economic upsurge versus the inflow of ‘subversive’ system-destabilizing information and ideas, particularly regarding the South — can be overcome with the necessary Chinese support,” Abt said. “Though the division of Korea can only be compared with that of Germany before 1990, China’s division — capitalist Hong Kong, capitalist Taiwan — was a sort of challenge to Deng Xiaoping and successors, too, but they learnt to manage that quite well.”

Read the full the story here:
Analysis: Kim Jong Il, the reformer?
Global Post
Bradley Martin
6/24/2010

Institute for Far Eastern Studies (IFES)
NK Brief No. 10-6-23-2
6/23/2010

Kim Jong Il visited Sinuiju on June 17, spending three days inspecting industrial facilities with third son and possible successor Kim Jong Eun. One visit was to a shoe factory, at which Kim Jong Il observed modernized technology and production equipment. On another stop, at the Sinuiju Cosmetics Factory, Kim Jong Il met with the factory manager and foremen, providing them and the laborers with encouragement. Kim Jong Eun also made an appearance at the meeting, indicating that the effort to install him as the next North Korean leader has progressed to the point at which he is being directly introduced to the people.

According to a Daily NK report quoting a source in Sinuiju, Kim Jong Il’s automobile procession to Sinuiju was “impressive”, and was “about twice as large” as previous processions. The report also noted that Kim Jong Eun exited a care and met directly with workers at the cosmetics factor and at Rakwon Machine Complex, and that “Kim Jong Eun took most of the responsibility for [Kim Jong Il’s] protection entourage and for the on-site guidance.”

That on-site guidance parties have grown considerably larger than in other years is partly due to the fact that Kim Jong Eun is accompanying his father, but also because many more other officials are also traveling with Kim Jong Il. On-site guidance has transformed from that of giving business advice to actively promoting succession by Kim Jong Eun. According to one source, Kim Jong Eun took the lead on everything from succession issues to on-site guidance during this latest visit. In addition, central authorities were said to have encouraged business and city officials to follow Kim Jong Eun.

Last December, documents for indoctrinating cadres were distributed by Party officials. The propaganda praised Kim Jong Eun, calling him ‘the number-one guard of [Kim Jong Il], stepping first to the General’s on-site guidance visits to every site without regard to any conditions; in all weather, any temperature or wind and any landscape.’ In the documents, Kim Jong Il is quoted as saying, “The Captain has been assisting me with lots of my work,’ noting that Kim Jong Eun is taking part not only in his father’s security, but also in on-site guidance.

Kim Jong Eun’s actions during the latest visit to Sinuiju show that he has gained enough power in the protection bureau to be directing the bodyguard contingent assigned to his father, and his influence and authority is evident through his on-site guidance. Kim Jong Il’s visit to Sinuiju, which serves as a gateway for trade with China, could be part of preparations for large-scale economic cooperation with the PRC. Last December, Kim Jong Il visited Rason City, the site of the country’s first free trade zone, and declared Rason a ‘Special City’ in an effort to attract foreign investment from Beijing and abroad. Sinuiju and Rason will serve as conduits for economic cooperation and trade with China.