North Korean Economy Watch

According to a press release from Koryo Tours:

Koryo Tours has been informed that a more general opening of the DPRK (North Korea) to US tourists is likely to take effect in 2010. It is expected that American citizens, who had previously been restricted to visiting North Korea only during the annual Arirang Mass Games festival which runs from August to October may now be permitted to enter the country year-round. Normal restrictions on American tourists also include staying in North Korea a maximum of 4 nights and only being permitted to enter and exit the country by plane from China, there is also a 4 times weekly train that runs from Pyongyang to Beijing, as yet it is unclear whether these restrictions will also be dropped but a decision is expected before too long.

Koryo Tours has been operating trips to North Korea since 1993 and is universally recognised as the only specialist/expert in this unique area. Unlike the competition, we are also regular visitors; rather than ship our clients off and hope for the best, we work in conjunction with the Korean tour guides as cultural conduits. ensuring everyone has the optimum experience from this journey of a lifetime. Recommended by all the North Korean guidebooks, we consult with international media regarding information and analysis on DPRK tourism and have produced three award winning documentaries on North Korea in association with the BBC (www.koryogroupcom). There’s more to see in North Korea than most people imagine, and with this new policy it seems likely that Americans will now have the opportunity to see more than ever.

I have visited the DPRK twice (though not wth Koryo Tours) and I recommend the trip. Koryo’s tour dates can be found here—although the dates for American tourists will likely be expanded.

Institute for Far Eastern Studies (IFES)
(NK Brief No.10-01-06-1)
2010-01-06

On January 1, North Korea published its annual New Year’s Joint Editorial in the Rodong Sinmun (official newspaper of the Central Committee of the Workers’ Party of Korea), Josonimmingun (newspaper of the Korean People’s Army), and the Chongnyonjonwi (newspaper of the Central Committee of the Kim Il Sung Socialist Youth League).

The editorial introduces North Korea’s general policy direction for 2010. In the international realm, the editorial highlights the establishment of a peace regime between Pyongyang and Washington, as well as improving inter-Korean relations. Domestically, the editorial focused on improving the standard of living for the people by improving agriculture and light industries. It appears that the North has decided to focus on domestic and international stability.

This policy approach appears to be an attempt to strengthen the basis for the North’s drive to build a ‘Strong and Prosperous Nation’ by 2012, but in the mid- to long-term, it also seems to have been adopted with Kim Jong-eun’s succession in mind.

This year’s joint editorial focused primarily on the North’s economy. More than anything, it centered on improving the lives of the people by boosting light-industrial and agricultural output. This was highlighted in the editorial’s title, “Bring about a radical turn in the people’s standard of living by accelerating the development of light industry and agriculture once again this year that marks the 65th anniversary of the founding of the Workers’ Party of Korea,” and was a consistent theme throughout the article.

Focusing on increased economic output specifically in light industry and agriculture, it is clear that the Kim Jong Il regime is seeking to boost public support by solving food and clothing shortages.

It is also noteworthy that in the editorial’s section on the economy, there is absolutely no mention of the ‘national defense industry’ that has been prominent in previous New Year’s Joint Editorials. National defense has been prioritized in previous joint editorials, with one article emphasizing that “everything necessary for the national defense industry must first be ensured in order to meet the economic line of the Military-First Era.” The defense industry was briefly mentioned, however, in the editorial’s section emphasizing the importance of scientific and technological development.

Substantial points of the economic portion of the editorial include the following:

– The need to “bring about a radical turn in the people’s standard of living by accelerating the development of light industry and agriculture once again this year that marks the 65th anniversary of the founding of the Workers’ Party of Korea.”

-“Light industry and agriculture are the major fronts in the efforts for the improving of the peoples’ standard of living. . . . an all-Party, nationwide effort should be directed to mass-producing consumer goods.”

-“The agricultural sector should sharply increase grain output by thoroughly applying the Party’s policy of agricultural revolution, like improving seeds, double cropping and improving potato and soybean farming.”

-“We should radically increase state investment in fields related to the people’s lives, and all sectors and units should supply fully and in time the raw and other materials needed for the production of light-industrial goods.”

-“We should gain access to more foreign markets, and undertake foreign trade in a brisk way to contribute to economic construction and the improvement of the people’s standard of living.”

-“Socialist principles should be maintained in commodity circulation, and the quality of welfare services should be decisively improved.”

-“The fundamental secret of making a new leap in this year’s general offensive is in launching a campaign to push back the frontiers of science and technology in all sectors.”

-“The defense industry sector, a major front in pushing back the frontiers of science and technology, should continue to lead the efforts to open the gate to a great, prosperous and powerful country.”

Peterson Institute Policy Brief
Stephan Haggard, Marcus Noland
Number PB10-1
January 2010

On November 30, 2009, North Korea announced a reform to replace all currency in circulation with new bills and coins. North Korean officials have made no bones about their motivations: The “reform” constitutes a direct attack on the emerging market economy and the independence from state control that it represents. In an interview following the conversion, an official of the North Korean central bank noted that the reform was aimed at curbing private trade and underlined that North Korea is “not moving toward a free market economy but will further strengthen the principle and order of socialist economic management.”

Without doubt the currency reform will reduce the well-being of the North Korean population at a time when the country is already struggling with economic stagnation, spiraling prices, and a return of chronic food shortages. The open questions are two: Will the government ultimately be forced to adjust its strategy or will it persist in enforcing the new antimarket course of action? The New Year’s joint editorial of prominent official news organs, an important statement of the government’s policy intentions, conveys a mixed message consisting largely of blather about revolutionary upswing; it does not even mention the currency reform—potentially signaling a lack of resolve in carrying it out. The second question is whether the discontent this new government action has sown will have implications for the country’s political stability. Preliminary signs suggest the regime is leaving nothing to chance and that heightened repression is a central feature of the new economic controls.

Read the full report here (PDF)…

According to the Joong Ang Ilbo:

North Korea has reused equipment and materials left from the halted construction work on light-water reactors, breaking a prior agreement with a multinational organization that oversaw the botched construction project.

According to the Unification Ministry and other sources, North Korea has taken 190 vehicles from the site in Kumho, South Hamgyong Province, and 93 pieces of heavy equipment, including cranes and excavators, and is likely using them for military purposes.

Sources said thousands of tons of steel bars and cement and communication devices are also being used by the North.

In late 2005, the Korean Peninsula Energy Development Organization, also known as KEDO, stopped construction of non-military nuclear reactors in the North. The work had begun in August 1997 as part of the 1994 Agreed Framework between the United States and North Korea. Under the terms of the agreement, Washington said it would build two reactors in the North in exchange for Pyongyang’s agreement to freeze all nuclear weapons activities.

But in October 2002, the United States said it had obtained intelligence that the North had been operating a clandestine program to produce highly enriched uranium to develop weapons and the U.S. State Department said North Korea admitted to doing so. By January 2003, the North withdrew from the Nuclear Non-proliferation Treaty. KEDO suspended its construction in November 2003.

Two years later, the KEDO’s board decided to terminate the construction project, which was about 30 percent complete. In December 2005, North Korea asked KEDO workers to leave the country and said they would not be allowed to repatriate equipment and construction materials.

At the time, KEDO and North Korea had agreed to leave materials at the site. Most belonged to South Korean subcontractors, and they had planned to sell off some of it to make up for financial losses stemming from the halted work.

In 2003, after the KEDO first suspended construction, the North said it would not allow the transfer of equipment unless it received compensation. A government official here said, “The North moved the equipment before we could even address the compensation issue, and that’s clearly in violation of our agreement. It can even be regarded as stealing.”

In January 2006, the Roh Moo-hyun administration in Seoul said the North had pledged to store the materials and that it expected the North to honor its word. Despite suspicions that the North had used some of the equipment in preparation for their second nuclear test this year, the current Lee Myung-bak administration has also remained silent.

But intelligence sources tell a different story.

They said the North started using equipment almost immediately after KEDO’s withdrawal and that the North Korean military was involved.

“North Korea is trying to keep South Koreans or KEDO officials from going near the construction base,” one source said. “Recent satellite photos of the site show that hundreds of the black covers that were used to conceal materials are mostly gone.”

Sources estimate equipment and materials are worth about 46 billion won ($39 million). South Korea, one of the founding members of the KEDO, spent $1.1 billion on the construction project.

Here is a satellite image of the KEDO reactors.  Here is an image of the KEDO residential compound.

UPDATE:  Culture clash when North Koreans want to talk business and US general has other ideas
By Michael Rank

It was a clash of cultures, an accident waiting to happen, when the four-star United States general and his entourage of American business leaders came to Pyongyang to discuss security issues and the North Koreans wanted to talk business.

The North Koreans had assumed the general and his colleagues wanted to talk about investing in their isolated country, and were dumbfounded to discover that was one thing the visitors had absolutely no intention of discussing.

It wasn’t entirely the North Koreans’ fault – retired Air Force General Charles “Chuck” Boyd and his pals were from a high-powered Washington-based think tank called Business Executives for National Security (BENS), so business is definitely part of their brief – but not when it comes to North Korea.

The North Korean ministers whom Boyd met made no attempt to hide their shock when they discovered that the visitors had not come with thoughts of investing a handful of dollars at least in their country, even if it is under international sanctions, and that they were there to discuss the nuclear issue instead.

“I think they had a little bit of a misunderstanding about the nature of our objective, ” Boyd told North Korean Economy Watch in a telephone interview.

“I think they believed that we came with business leaders who were interested in investing in North Korea, and of course that we had to make that clear to them right from the outset that nobody [in the BENS delegation] had any intention whatsoever of making any investments in North Korea and in fact could not” due to international sanctions.

“They were not particularly pleased to hear that. They wanted to talk about investments, they didn’t want to talk about the linkage of those investments to a resolution of the nuclear issue,” said Boyd, who has been president and chief executive officer of BENS since 2002 and steps down at the end of the year.

“There were some tense moments as we worked our way through that, but i think there was clarity in everybody’s minds when we left” that the group had come not to discuss investment but “in a larger context of trying to talk about the benefits of leaving their isolation and entering into the globalised world.”

Boyd said the tone of the conversations he held with North Korean officials “varied a bit…some were softer in their argumentation, some were harsher. I suppose the tone of the meeting with the Minister of Foreign Affairs [Pak Ui-chun] was really quite warm.”

Kim Yong-nam, president of the Supreme People’s Assembly, told him how threatened North Korea felt by its neighbours. “To the extent that I could I think I tried to relieve him of some of his anxiety about the external threats to the country,” Boyd said. He told Kim that the division of the Korean peninsula was the fault of the Soviet Union, not the United States, and he hoped a Russian would attend their next meeting in order to underline this fact. “I think  at the end of it we parted on pretty good terms,” Boyd said of his meeting with Kim, who is often reckoned to rank number two in the North Korean hierarchy after Kim Jung Il.

The delegation also included Ross Perot Jr, chairman of the board, Perot Systems Corp, Maurice Greenberg, chairman and CEO, C.V. Starr & Co, Inc, and Boyd’s wife Dr Jessica Mathews, president of the Carnegie Endowment for International Peace.

Boyd said BENS had tried to arrange a visit to North Korea for several years,  and after being rebuffed numerous times “almost out of the blue they contacted us and issued an invitation.”

He acknowledged that his visit last week had not achieved any meeting of minds between the US and North Korea, but noted: “Progress comes about in tiny little steps from a broad front, and it may be that we had some tiny bit of influence. And if we didn’t is the world worse off for having gone there? I don’t think so.”

The North Koreans were “certainly left with [an impression of] the firmness with which the private sector is in support of the need for resolving the nuclear issue,” he added.

Boyd was a combat pilot in Vietnam and survived 2,488 days as a prisoner of war. He is the only POW from the Vietnam war to become a four-star general. He will be succeeded at BENS from January 1 by former US Army General Montgomery C. Meigs.

The official North Korean news agency KCNA, which rarely lets the facts get in the way of a good story, reported that the BENS group “had an exhaustive discussion with officials in the economic field of the DPRK on the issues arising in creating environment for investment.”

See group photo here.

ORIGINAL POST: According to Yonhap:

The six-member delegation from the American Association for Advancement of Science (AAAS), led by Peter Agre, a Nobel laureate in chemistry, had traveled to Pyongyang on a mission to explore future opportunities for collaborative research activities in various fields.

The U.S. team “left here for home by air on Tuesday after discussing the matter of cooperation and exchange in the field of scientific research,” the Korean Central News Agency said. It gave no further information.

Agre, director of the Johns Hopkins Malaria Research Institute and president of the AAAS, said earlier that his delegation would meet with scientists, university and science policy officials in the North. He also planned to give a lecture for North Korean officials and students at the Kim Chaek University of Technology in Pyongyang.

While in Pongyang Agre suppsedly gave a lecture at Kimchaek University of Technology.  According to Yonhap:

The broadcast aired by the non-profit corporation said Agre and other U.S. scientists will visit the Kimchaek University of Technology to give his lecture and hold talks with representatives from North Korean academia to discuss ways to advance bilateral scientific cooperation

Agre is a medical doctor and molecular biologist who was awarded the 2003 Nobel Prize in Chemistry for his discovery of aquaporins. He is currently the chairman of the American Association for the Advancement of Science.

Also in the Yonhap story:

Another U.S. delegation visiting North Korea, consisting of businessmen, met with the North’s Vice Premier Ro Tu-chol on Tuesday, state media said in a one-sentence dispatch. The team from the Business Executives for National Security (BENS), a non-partisan Washington-based organization led by Charles Boyd, a retired U.S. Air Force four-star general, arrived in Pyongyang a day earlier.

Michael Rank contacted BENS and received the following statement:

Regarding the North Korea trip: Following initial contact several years ago, the North Korean government recently invited a small group from Business Executives for National Security (BENS) to visit North Korea.  BENS is a not-for-profit group of business executives with an interest in national security and foreign policy issues.  BENS is not a trade organization.

The group hopes to learn first-hand the views of government officials in North Korea.  The trip is solely for educational purposes and was coordinated with appropriate U.S. government agencies.  The traveling party is now in North Korea.  The travelers are: BENS President and Chief Executives Charles Boyd, Maurice Greenberg (Chairman and CEO, C.V. Starr & Co., Inc.) Corinne Greenberg, Ross Perot Jr. (Chairman of the Board, Perot Systems Corp.) Mark Newman (Chairman and CEO, DRS Technologies, Inc.), BENS Board Chairman Joe Robert and Dr. Jessica Mathews.  Greenberg, Perot, and Newman are also board members of BENS.  Ms. Mathews is President of the Carnegie Endowment for International Peace and Charles Boyd’s wife.  Reggie Gibbs, a BENS staff member is accompanying the group.  Further details about the trip will be available when the group returns next week.

UPDATE 1: According to the Joong Ang Daily:

[Stuart Thorson, professor of political science and international relations at Syracuse University] spent five days in the North Korean capital, meeting with faculty members at the Kim Chaek University of Technology and the Pyongyang University of Science and Technology, and officials from the State Academy of Sciences. Kim Chaek University is the school that has maintained cooperation with Syracuse since 2001. The delegation included Peter C. Agre, the 2003 Nobel Prize winner in chemistry. […]

Thorson said the Americans talked with North Korean scientists on issues such as developing young scientists and bringing more women into the field. The faculty at the Pyongyang University of Science and Technology gave presentations on their research work. “We were quite impressed by it, especially since the level of their physical equipment is below what we have [in South Korea] and in the United States,” Thorson said.

The faculty “responded very well” to the Americans’ presence, he said.

“We were all delighted to have the young scientists [in North Korea] talking with us about their research,” he said. “A lot of [science] has been just kind of old people talking to old people about what they’d like to have happened. There were actually young people talking about what they’re really doing.”

The unlikely science partnership between the United States and North Korea dates back to 2001. With the help of Donald Gregg, former U.S. ambassador to South Korea serving then as head of Korea Society, Syracuse University contacted the North Korean mission to the United Nations in New York. Often called the “New York channel,” the North Korean UN mission links the United States and North Korea.

Thorson said his previous experience in dealing with China helped him get started with North Korea.

“I had worked on a similar collaboration with China in the 1990s, so we were comfortable working with countries whose political system was very different than our own,” the professor said.

Thorson added that in working with China, he learned that science and technology are “very much based on shared protocols.”

“That helps us build trust,” he said. “As we share things in common, then I think we can begin to talk about other things sometimes, or perhaps even more importantly, people who talk to us can learn and begin to be more comfortable.

“This is especially important, in my view, to political science regarding North Korea and the United States, where in both countries, the other has been demonized and viewed as something other than a real place with real people,” Thorson added.

Syracuse found its partner in the Kim Chaek University of Technology. They’ve since cooperated in building a digital library at Kim Chaek in 2006, and Syracuse has helped North Korean students at the International Collegiate Programming Contest, run by the Association for Computing Machinery.

Their partnership led to the founding of the U.S.-DPRK [North Korea] Scientific Engagement Consortium in 2007. It’s made up of the U.S. Civilian Research & Development Foundation, the American Association for the Advancement of Science, Syracuse University and the Korea Society.

Thorson pointed to the digital library as an example of a positive outcome for the U.S.-North Korea science exchange. When the New York Philharmonic visited Pyongyang in 2008, some accompanying journalists went to the library and even accessed their Facebook pages from computers there.

Though Thorson realizes U.S.-North Korea relations do have an impact on science exchanges, he also thinks the worse the situation, the more such non-traditional diplomacy becomes necessary.

“My impression is that as relations get worse between the two countries, both countries realize that these informal channels are all the more important,” Thorson said. “It’s all the more reason to keep at science diplomacy with North Korea. The more difficult the problem, the more effort it takes to try to resolve that.

“If it were easy, it wouldn’t be much fun,” he said. “It’s frustrating sometimes. It’s also rewarding.”

UPDATE 2: According to the Joong Ang Daily:

The Business Executives for National Security (BENS) is an American nonprofit organization established in 1982 by American entrepreneurs whose top concern is national security. Eight BENS members recently visited North Korea, led by the organization’s current president, former Air Force Gen. Charles G. Boyd. The U.S. delegation included AIG’s former CEO Maurice Greenberg, Chairman of DRS Technologies Mark Newman and Chairman of the Board of Perot Systems Henry Ross Perot, Jr.

They are said to have visited the North at the invitation of North Korean authorities, which have been in contact with BENS for several years. It is likely a coincidence that they visited Pyongyang after U.S. Special Representative for North Korea Policy Stephen Bosworth’s visit to the North two weeks ago.

Nevertheless, we are paying special attention to their behavior because BENS helped abolish nuclear weapons in the Commonwealth of Independent States (CIS) after the collapse of the Soviet Union. At that time, the U.S. removed more than 7,000 nuclear weapons in Ukraine, Kazakhstan and Belarus. In return, the CIS countries were promised safety, economic incentives and incorporation into Western society, in accordance with the Nunn-Lugar Cooperative Threat Reduction Program (CRT) in 1991.

Companies under the control of BENS were responsible for removing and destroying the weapons and other nuclear materials, after securing a commercial contract with the U.S. government.

The resumption of the six-party talks is still clouded with difficulties, but if North Korea decides to give up its nuclear weapons, there is a high possibility that the U.S. companies will spearhead their removal.

Institute for Far Eastern Studies (IFES)
NK Brief No.09-12-21-1
12/21/2009

The Korean Central Broadcasting Station (KCBS) announced on December 16 that the North Korean Supreme People’s Assembly Standing Committee has revised the North’s Real Estate Management Law, the Commodities Consumption Level Law, the General Equipment Import Law, and other laws related to economic management. This on the heels of the November 30th announcement, when authorities announced across-the-board currency reform measures, apparently in an attempt to regain control of the country’s market economy.

The KCBS reported that the Real Estate Management Law “regulates fundamental issues of real estate registration and inspection, use, and payment of user fees,” but offered no further details.

Since 2006, North Korean authorities established new offices in each city, county, and region throughout the country. These offices were responsible for surveying property, occupied and vacant, claimed by organizations and businesses, as well as recording the size of each structure on these lands.

In the mid-1990s, with the onset of serious food shortages, food rations to workers were halted and North Korean authorities from every branch and level (including the military, railway, business enterprises) were encouraged to distribute foodstuffs in ways more beneficial to themselves. These authorities planned to resolve food distribution issues through agricultural moves.

The new Real Estate Management Law appears to be aimed at labeling land used for private purposes as strategic nationalized land and strengthening the state’s ability to collect real estate taxes. However, the broadcaster failed to explain in detail how this restructuring would occur.

By enacting the Commodities Consumption Level Law, North Korean authorities can control the basis at which goods are injected into each production sector. This appears to be in preparation for taking cost-reduction measures for enterprises related to production in each region. The broadcaster explained that there were legal demands for the enactment and enforcement of regulations on the level of consumption.

The General Equipment Import Law newly regulates import plans, contracts, and the use of goods by factories, schools, hospitals, ships and broadcasters in an effort to control quality. In each sector, the measure prevents double-investment and controls consumption competition.

As these economic control measures are focused on factories and other bases of production along with importers, it appears that, in conjunction with the recent currency reform, North Korean authorities are attempting to control production quality on all levels. For example, as the North is suffering ongoing supply difficulties due to a lack of materials, the law on consumption levels is an attempt to restrict goods by forcefully managing demand. The law on imports appears to be in an effort to regulate general-use goods in light of the increased reliance on foreign equipment.

Institute for Far Eastern Studies (IFES)
NK Brief No.09-12-16-1
12/16/2009

In accordance with the recent currency reform in North Korea, new state-controlled prices were officially announced on December 9. South Korean NGO ‘Good Friends’ announced on December 13th that rice is now selling for 23 won per Kg, corn at 8 won per Kg, flour at 22 won per Kg, pork at 45 won per Kg and ‘matnaegi’, a common flavor-enhancing food additive, is selling for 45 won per bag. Other prices were also listed per kilogram, including crushed maize at 12 won, corn noodles for 10 won, soybeans from 9-13 won, soybean oil for 50 won, radishes at 5 won, artificial meat for 15 won, and cowpeas for 10 won.

On December 4, the Choson Sinbo, a newspaper printed by the pro-North Korean General Association of Korean Residents in Japan (Jochongryeon), reported that North Korean authorities were planning to lower prices to the same level as was seen when the July 1, 2002 Economic Management Reform Measure was enacted.

At the end of November, prior to the currency reform, rice was selling for 1,850 won in Hamheung, 2,000 won in Cheongjin, and 1,700 won in Pyongyang and Sariwon.

In the markets of these four major cities, corn averaged 737.5 won/Kg, flour was sold for 1,687 won/Kg, and pork was 5,450 won/Kg. Pork is the only item now being sold more cheaply, while the price of all other goods went up with the currency reform.

A source inside North Korea has reported that most market traders are not following government pricing guidelines, however, and that the majority of goods are being sold at even higher prices than Pyongyang has set. In the market in Cheongjin, North Hamgyeong Province, rice was being sold for 50 won/Kg, and corn went for 18 won/Kg, more than double government prices. These high prices appear to reflect supply shortages and hoarding.

After the currency reform was announced, North Korean miners received raises, from a basic monthly wage of 6,000 won to the equivalent of 8,000 (pre-reform) won. Miners in North Hamgyeong Province can now put enough food on the table without needing second jobs. On December 4, the Choson Sinbo also reported that the government has guaranteed that living expenses distributed by factories will be distributed in the new currency.

Choson Ilbo
12/10/2009

Even as North Korea struggles under UN sanctions and is in the midst of a controversial currency reform aimed at breaking the back of a nascent free market, the reclusive country is apparently in the process of changing laws in order to attract more foreign investment, an expert said Wednesday. It is even offering foreign companies wages cheaper than those paid to North Korean workers at the joint-Korean Kaesong Industrial Complex, according to Jack Pritchard, president of the Korea Economic Institute in Washington D.C.

Pritchard, who visited Pyongyang last month along with Scott Snyder, director of the Center for U.S.-Korea Policy at the Asia Foundation, told reporters in Washington. The North Korean trade department official they met there told them there are no strikes among North Korea’s skilled workers and were very aggressive in luring foreign investment. He added North Korean officials offered wages of 30 euros a month (around US$44), which was lower than the average $57 paid to workers at the Kaesong Industrial Complex. The officials said they were also willing to offer various incentives to foreign companies interested in taking part in the construction of 100,000 homes in Pyongyang. North Korea appeared to be changing its attitude toward foreign countries as part of its goal to become a strong and powerful nation by 2012, he said.

In an article for Global Security [Posted below], the Internet-based provider of military and intelligence information, Snyder wrote, “North Korean colleagues at the Ministry of Trade appeared genuinely surprised and dismayed when we mentioned that UN Security Council Resolution 1874… contains provisions prohibiting companies from making new investments in North Korea.”

Snyder said North Korea’s interest in foreign investment as part of its goal to become a “strong and powerful nation” by 2012 is a new development and one that could play a role in resolving the nuclear stalemate.

But efforts to attract foreign investment and capital over the past 25 years have been a disaster. North Korea announced new regulations in September of 1984 to allow businesses from capitalist countries to operate there. It set up special economic zones in Rajin-Songbong in 1991 and in Sinuiju in 2002. But the Sinuiju project never got beyond the ground-breaking stage due to conflict with China, while empty factories litter Rajin-Sonbong.

North Korea aimed to attract $7 billion worth of foreign investment into Rajin-Sonbong, but actual investment amounted to only $140 million. According to the South Korean government and other sources, there are an estimated 400 foreign businesses operating in North Korea. Most of them are small businesses run by Chinese or North Korean residents in Japan. The shining exception is the Egyptian telecom company Orascom, which offers mobile phone services in the North. “It’s more accurate to say that there are no major foreign businesses operating in North Korea,” said Cho Dong-ho, a professor at Ewha Woman’s University.

North Korea forged its first pact guaranteeing foreign investment with Denmark in September 1996 and signed similar pacts with around 20 countries, including China, Russia, Singapore and Switzerland, as of 2008. There have been consistent reports that businesses in Europe and Southeast Asia were interested in doing business in the North, but hardly any made the move.

Cho Myung-chul, a professor at the Korea Institute for International Economic Policy, who taught economics at Kim Il Sung University in North Korea, said, “The reason why no listed foreign companies are operating in North Korea is because they may end up on the list of businesses subject to U.S. sanctions.” This is one of the reasons why North Korea has tried so desperately to be removed from the U.S. list of terrorism-sponsoring countries.

And even if foreign businesses are interested in investing in North Korea, its lack of infrastructure, including steady power supply and adequate roads and ports, make it impossible to operate factories there. Cho Young-ki, a professor at Korea University, said, “You have to build a power plant if you want to build a factory in North Korea. Cheap labor does not mean businesses will profit there.” The electricity used by the Kaesong Industrial Complex is provided by South Korea, while Hyundai Asan operates its own generator at the North Korean resort in Mt. Kumgang.

Dispatch from Pyongyang: An Offer You Can’t Refuse!
Global Security
Scott Snyder
12/07/2009

Every North Korean seems to have been mobilized for an all-out push to mark their country’s arrival as a “strong and powerful nation” in 2012, which marks the 100th anniversary of Kim Il Sung’s birth, Kim Jong Il’s seventieth birthday, and the thirtieth birthday of Kim Jong Il’s third son and reported successor, Kim Jong-Eun. Pyongyang citizens have cleaned up the city during a 150-day labor campaign, followed by a second 100-day campaign now underway. The Ryugyong Hotel in the middle of Pyongyang, unfinished for over two decades, has been given a facelift courtesy of the Egyptian telecommunications firm Orascom, which expects to have 100,000 mobile phone customers in Pyongyang by the end of the year. But it is still difficult to shake the feeling in Pyongyang that one has walked onto a movie set in between takes. Or that the used car looks good on the outside, but you really don’t know what you might find if you were able to look under the hood or give it a test-drive.

North Korean foreign ministry officials saw United Nations condemnation of their April missile launch as an affront to their sovereignty. This is the ostensible reason the North Koreans have walked away from six party talks. Having conducted a second nuclear test, North Korean officials want to be considered as a nuclear power, choosing instead to “magnanimously” set aside nuclear differences in order to focus on the need to eliminate U.S. “hostile policy” by replacing the armistice with a permanent peace settlement. Essentially, Pyongyang’s new offer–as a “nuclear weapons state”–has shifted from the denuclearization for normalization deal at the core of the 2005 Six Party Joint Statement to “peace first; denuclearization, maybe later.” There was no mention of “action for action” by our North Korean interlocutors.

But the North Koreans are likely to find when Ambassador Stephen Bosworth arrives in Pyongyang next week that the United States will not accept North Korea as a nuclear weapons state. There is virtually no area of agreement between the two governments on the nuclear issue based on public statements made by the two sides thus far, suggesting the likelihood that both sides will face a difficult conversation.

A new component of North Korea’s strategy for achieving its economic and infrastructure goals in the run-up to 2012 is its effort to attract investment from overseas. The Director of North Korea’s newly established Foreign Investment Board unveiled a new plan for attracting equity, contractual, and 100% foreign owned joint venture investments. On paper, the rules incorporate provisions for repatriation of profit, generous tax incentives, and a labor rate of thirty Euros per month. This rate undercuts the compensation of $57.50 per month currently offered at the South Korean-invested Kaesong Industrial Zone. Even more generous was the offer of special concessions in North Korea’s natural resources sector for companies willing to build 100,000 units of new housing in Pyongyang that have already been promised in the run-up to 2012.

North Korean colleagues at the Ministry of Trade appeared genuinely surprised and dismayed when we mentioned that UN Security Council Resolution 1874, which condemned North Korea’s May 25, 2009, nuclear test, contains provisions prohibiting companies from making new investments in the DPRK. This is all the more unfortunate because on paper, North Korean efforts to open its economy through foreign investment are exactly the course that should be encouraged, and North Korea’s goals for 2012 could be advanced significantly with inward investment from companies that might be willing to take the risk, but the nuclear issue stands in the way. This is not to mention that North Korea’s own economic retrenchment and anti-market policies, including the “currency reforms” announced earlier this week, stretch the credibility of the North Korean government to back up these laws. Recent surveys of Chinese investors suggest few demonstration projects for successful investment in North Korea and a high probability of getting scammed or fleeced on the ground.

But the North Korean plea for foreign investment does suggest a potential point of leverage that deserves careful consideration, and that is the possibility of an investment in a strategic commodity that is of special interest to the United States: North Korea’s plutonium stock. During the Clinton administration, former Defense Secretary William Perry led efforts to make similar purchases of nuclear materials from the Ukraine and Kazakhstan, which had inherited stocks of nuclear materials from the breakup of the Soviet Union. These transactions advanced the cause of nuclear non-proliferation by ensuring that these countries would not become nuclear states. A 2004 report of a Task Force on U.S.-Korea Policy co-sponsored by the Center for International Policy and the University of Chicago, also suggested a plutonium “buy-out” proposal for North Korea, despite the obvious moral hazard of appearing to reward North Korea’s bad behavior. Any transaction with North Korea involves moral hazard, and North Korea has already proven that it will sell or sub-contract nuclear materials to the highest bidder. One positive of this approach is that any transaction involving removal of nuclear materials or capabilities from the North would be irreversible, in contrast to past practice of offering irreversible food-aid benefits to North Korea in exchange for participation in multilateral dialogue, but not for irreversible steps toward denuclearization.

In a post-9/11, post-North Korean nuclear test world, the Obama administration must find a formula that facilitates North Korea’s irreversible actions on the path toward denuclearization rather than agreeing to half-measures: North Korea’s immediate focus is on gaining the resources necessary to mark 2012 as a year of accomplishment, yet the North has been highly critical of Lee Myung-bak’s “grand bargain” Proposal. Denuclearization needs to be placed on the North Korean agenda as an accomplishment that North Korea will be able to justify as part of its broader 2012 objective of becoming a “strong and prosperous state.” Unless a new formula can be found by which to bring these two objectives into line with each other, it is likely that the United States and North Korea will continue to talk past each other.

From the Korea Herald:

The North Korean economy’s dependency on international trade is nearing 40 percent, a think tank reported yesterday.

According to the Korea Development Institute’s report on North Korea’s economy in the 2000s, North Korea carried out international trade worth $5.64 billion last year.

The cross border trade figure of $5.64 billion recorded last year is equivalent to about 40 percent of the North’s gross domestic product, which is estimated to be about $15 billion.

In the report, the KDI said that the figures show that North Korea’s economy, which the regime boasted as having the most independent structure in the world, is taking a form increasingly dependent on the outside world.

The report said that North Korea’s cross border trade volume has risen rapidly, mainly due to increasing imports, and that such developments have been essential to the country’s economic recovery.

Since 2000, North Korea has managed to post positive growth rates.

However, North Korea’s GDP per capita is thought to be hovering below figures recorded in the late 1980s and the early 1990s, before the country’s economic crisis began.

According to United Nation’s statistics, North Korea’s GDP per capita was between $600 and $700 for the 2007 to 2008 period.

In comparison, the country’s GDP per capita was ranged between $900 and $1,000 in the late ’80s and the early ’90s.

The KDI estimated that applying the rate at which the North’s GDP per capita has been increasing since 2000, the country’s GDP per capita is likely to be between $700 and $1,300 in 2012.

The report also said that although the North Korean authorities are moving back toward a more tightly controlled economy, the country’s is unlikely to meet the targets set for 2012.

In addition, the report said that recording a trade deficit of $1.5 billion last year — equivalent to about 10 percent of its gross domestic product — makes it appear that the country is going to have a hard time digging itself out of trouble by itself.

Of last year’s $5.64 billion trade figure, exports accounted for about $2.06 billion, while imports came in at more $3.57 billion. According to the KDI’s figures, the North’s cross border trading has been increasing at an average rate of 11 percent each year since 2000, when the figure was recorded at about $2.39 billion.

Along with the increase in trade volume, North Korea’s trade deficit has also increased rapidly since 2000.

Between 2000 and 2004, North Korea’s trade deficits were maintained below or just above $1 billion. However the figure rose sharply in 2005 to reach $1.38 billion in 2005.

The KDI said that the North’s authorities have been able to offset trade deficits through the large amount of overseas capital that has flown into the country since 2000.

So where is that capital account surplus coming from to finance the trade deficit? It is NOT coming from South Korea.

Read the full story here:
N. Korea trade dependency hits 40%
Korea Herald
Choi He-suk
12/7/2009

UPDATE: In 2004 Germany’s Goethe Institut opened a reading room in Pyongyang (see Choson Sinbo article below). This week it was closed. According to Deutsch Welle:

After five and a half years in operation, the Goethe-Institut in North Korea has said it will close its reading room in the capital city of Pyongyang due to censorship concerns.

The institute, a non-profit organization that promotes the study of German language and culture in 91 countries, opened the reading room in June 2004. It was the first and only Western cultural institution to establish itself in the communist country.

Raimund Woerdemann, director of the Goethe-Institut in Seoul, told Deutsche Welle that, contrary to an agreement made with the North Korean government, access to the center was often hindered.

“The building in which the reading room was located was often locked from the front,” he said. “There was a permanent construction site in front of the back entrance: not a welcoming situation.”

To his knowledge, there has never been an Internet connection in the Pyongyang center, said Woerdemann, and attempts to establish an Intranet connection with other North Korean educational institutions were interrupted on multiple occasions.

The reading room is slated to close in summer 2010. Woerdemann added, however, the Goethe-Institut would make an effort to maintain positive relations with North Korea through participation in the North Korean-German Friendship Society, the Committee for Cultural Relations Abroad and other partnerships.

Criticism from Berlin

The decision to close the reading room has met with strong criticism from the German parliament. Phillip Missfelder, parliamentary foreign policy spokesman for Chancellor Angela Merkel’s CDU issued a statement Wednesday, calling the closure “a bitter experience and a big disappointment for everyone who has stood up against resistance to cultural exchange and for the gradual opening of communist North Korea.”

The move represented “the end of an important aspect of German foreign policy in the areas of culture and education, which was a ray of light in the darkness of the repressive, totalitarian government in North Korea.”

In the statement, Missfelder said the CDU parliamentary group takes the closure “very seriously” and would make every effort to reverse the decision.

The center in Pyongyang was founded with the aim of reducing the information deficit in the country, offering unrestricted access to the Internet and free press, networking with South Korea and other countries, and promoting literature.

The Pyongyang reading room has been removed from the Goethe Institute’s web page, although not all of the links have been removed.

The reading room was located near Tae Mun and the DPRK’s Ministry of Culture in Pyongyang here.

UPDATE 1: According to Korea.net, the Goethe Institut plans to expand Pyongyang reading room:

On the sidelines of the International Federation of Library Associations and Institutions (IFLA) conference last week, a German cultural institution reaffirmed its commitment to promote freedom and democracy in North Korea.

The Goethe Institute, an NGO sponsoring German language and culture worldwide, said it is ready to expand its collection of media resources in North Korea.

The institute opened a reading room in Pyongyang in 2004 where North Koreans can freely access a variety of German media, including books, newspapers, and music. The content is completely uncensored and accessible to all North Koreans. That was the condition under which Goethe Institute agreed to open the reading room, said Jurgen Keil, director of the Goethe Institute in Seoul.

“The reading room has been received very positively by North Koreans. We hope that it can contribute to normalizing North Korea’s relations to the outside world,” Keil said.

The efforts mirror a similar German diplomatic strategy in the 1970s when then West German Chancellor Willy Brandt pursued a policy of “Change through Rapprochement” of easing ties with East Germany through a series of reconciliatory measures.

Former President Kim Dae-jung made reference to this strategy when he formulated the South Korean “Sunshine Policy.”

Claudia Lux, IFLA president-elect, stressed that “knowledge is always a step toward freedom.”

Keil added that many North Koreans can speak German. Until German reunification in 1989, a great number of North Koreans were living and working in East Germany.

North Korea was eager to establish the reading room in order to boost its international diplomatic profile, even though the content available there undercuts the strict censorship imposed by the country.

The reading room in Pyongyang currently holds 4,000 items. Keil said it plans to gradually increase the number to 8,000 in the coming years.

ORIGINAL POST: From the Choson Sinbo (August 14, 2004):

A library of German science books was opened in central Pyongyang on June 2, as the first institution where people can freely read foreign books.

The library was opened in cooperation between Pyongyang’s DPRK-Germany Friendship Association and Germany’s Goethe Institute.

The library has 4,000 scientific books in natural and social sciences and leading German newspapers and magazines. In addition, the library has various kinds of movie tapes, music CDs and cassette tapes and audiovisual education aids for German language study.

It is the first time that the DPRK has opened a library of scientific books of a specific Western country.

An official concerned with the library said that the institute aims at introducing advanced science and technology of Western countries and at promoting mutual understanding between the DPRK and Germany by spreading Germany’s scientific books in the DPRK.

The library introduces German books to libraries of domestic universities and research institutes while allowing people to freely read German books, newspapers and magazines. It lends books to users.

Accepting users’ requests the library orders books from the Goethe Institute, a nongovernmental cultural organization of Germany. Pyongyang’s counterpart offers requested books to the library free of charge.

The library has plenty of natural science books, such as books of medical science, information technology, geology, physics, architecture, chemistry and biology. In addition to natural science books, there are books of German literature, art, philosophy and books of social science including law and history.

According to an official concerned, main users of the library are university students, researchers and scholars.

Officials said that a delegation of the Goethe Institute plans to visit Pyongyang in September to provide 4,000 more books to the library. The Goethe Institute also plans a training course for librarians to staff the library.

Kim Mun Ik, 57, an official of the Association of External Cultural Liaison, said, “The DPRK is not an ‘exclusive country.’ The library is a clear indication that we have been open to the outside, receiving foreign things as far as these are useful for us and now we are making every effort to develop relations with foreign countries, even with Western countries.”