North Korean Economy Watch

Kang: North Korean Trade Potential
Council on Foreign Relations
12/17/2007

Last December, David C. Kang, a professor of government at Dartmouth College and an adjunct professor at Tuck Business School, discussed the North Korean economy for the Council on Foreign Relations. I have excerpted some of his comments below.

His view on the new North-South cargo train service:

It doesn’t have huge economic significance in the overall GDP of North Korea. But it does have major economic significance in the fact that what North Korea had to do in order to let a train go through was an awful lot of adjustment[…]in terms of linking up the railroad, all the ministries had to prepare.  The old [Korean Energy Development Organization] had this problem as well. [W]hen they wanted Americans and South Koreans working in North Korea to build this light-water reactor, [they] had to set up protocols [Post offices, phone calls, where they were going to stay, etc]. It is pretty significant in terms of how much they had to adjust.

He quoted the following figures on North – South trade:

From $200 million in 1998, to now exceeding $1.7 billion in 2007.   South Korea’s total trade volume is $250 billion.

His opinion on the direction of the North Korean economy:

At this point what we’re seeing is very initial steps on the part of North Korea as they try to open up reform and yet maintain control. At the same time, they are being forced into a number of institutional changes and mind-set changes that are the first step forward in this process.

His view of North Korea’s comparative advantage:

Most of the companies that have gone in—the South Korean companies that have gone in—are assembly and light manufactures, such as or textiles and light consumer goods. This is the sort of obvious point of departure. It’s not hugely capital intensive in terms of building factories, and can take advantage of North Korean cheap labor and South Korean technological advantages.

There are a lot of potential mineral resources in North Korea, which would require a whole infrastructure of legal reforms to happen before anyone would take care of them. But at this point the safest bets are the ones that are on the order of assembly and light manufactures in the North and then exporting them out.

His view of South Korea’s long term goals:

If there’s unification, or even better relations, and South Korean companies can use cheap North Korean labor, instead of having to send those factories to China or Vietnam—not only do they speak Korean, they’re culturally similar, and the labor would be cheaper.

[I]f you could reconnect the railroads, from Japan, through Pusan [South Korea], up through North Korea, then out to China and Russia, you would be linking up all these economies in a much more efficient way than they are now. So everybody wants that. But obviously there’s the political problem. And even on the infrastructure side, the North Korean rail system is so old and so decrepit, that basically it would have to be rebuilt from zero. But the potential upsides are massive, in the long run.

His view of China’s engagement:

China has been essentially as deeply involved in economic engagement with North Korea as has South Korea—and by some measures, actually more so. Whereas South Koreans just do this assembling, some Chinese companies are moving in and building full factories in the North. There’s a lot of interest in Chinese-North Korean economic relations on both sides.

Last Friday, Yonhap reported that Kim Jong Il has ordered an anti-corruption investigation of two key agencies, both of which manage South Korean investments in the DPRK: the United Front Department (which Lankov claims is involved in clandestine operations) and the National Economic Cooperation Council.

North Korea is in the midst of a massive anti-corruption drive which has already resulted in the arrest of one of its top officials handling business with South Korea, informed sources in Seoul said Saturday.

The campaign, ordered by leader Kim Jong-il, was prompted by widespread allegations that some top party and administration officials took bribes as they pushed business projects with South Korean industrialists, said the sources well versed in North Korean affairs.

“The probe was launched as National Defense Commission Chairman Kim Jong-il said there was a lack of supervision over the United Front Department [a key party organization that supervises inter-Korean affairs], although lots of suspicions were raised over the department’s corruption,” one source told Yonhap News Agency.

According to the sources in Seoul, the North Korean leader was enraged after getting a report that some party and government officials allegedly pocketed bribes and diverted food and other aid from South Korea to black markets.

Also under investigation is the National Economic Cooperation Council, a government body that handles business with South Korean entrepreneurs, the sources said.

The Council’s chief, Jeong Woon-eop, remains under arrest pending investigation into allegations that he took “huge amounts” of bribes, said the sources, who wanted to remain anonymous. (Yonhap excerpted)

Frequently “anti-corruption campaigns” in developing countries have nothing to do with making the bureaucracy more accountable or responsive to public demands, but rather are political maneuvers to prevent “rents” or funds from being channeled to uses that lie outside the leadership’s control (or some faction of the leadership).  In other words, they are regime enhancing.  The announcement of this campaign demonstrates two important principles that deserve explicit mention:

1. Not all profits earned by North Korean joint ventures are channeled to the leadership, and in fact many of them are siphoned off by middlemen who actually control the financial machinery.  Once skimmed off the top, it is likely that these funds are used in illicit private commercial operations since they cannot be legally declared by the owner (unless there are domestic channels for laundering money in North Korea).

2.  If funds are being siphoned off of high-profile official joint venture operations, then the leadership is not in control of its internal fiscal affairs.  Indeed it is likely that, as in the Soviet Union, the people who keep the private economy running are the trusted mid- to senior-level officials who can skirt the rules and know how to actually get things done within the system.

Update 2/24/2008:

North Korean authorities have been investigating the chief of a North Korean committee in charge of inter-Korean economic cooperation for months after seizing $20 million from his house, a report said Friday.

The full article can be found here:
NK Official Suspected of Embezzling Funds From Seoul
Korea Times
Jung Sung-ki

Update 2/12/2008:

The chief of Daesung General Bureau, a division of the 39th Department which manages foreign transactions, was fired on suspicion of embezzling US$1.4 million last fall.” (Daily NK)

The full article can be found here:
North Korea launching massive anti-corruption drive
Yonhap
2/9/2008

Below are three video’s recently posted on YouTube which portray North Korea’s national mourning in 1994 when Kim Il Sung passed away.  Although we do not know what people really think of the deceased leader, we do know that the public displays of sadness and eternal loyalty were scripted for television (and probably planned out in advance): Large crowds were mobilized at politically symbolic locations throughout the country, people were lined up in formations, given black arm bands, and placed in front of well-positioned television cameras to make sure they gave their best performances (which were strangely identical). 

The cameramen were also composed enough to carry out their tasks: Not only would they have to be dispatchted from Pyogyang to record the mass sadness, but they would have to arrive early to the scene, plan out their shots, record each scene several times, conduct multiple interviews, travel back to Pyongyang, and finally edit the footage into the final product.  This would all take a fair amount of time because travel conditions between the different locations would have been less than stellar.

Click on the images below to see the three part video:

Part 1.  

Part 2.

Part 3. 

Daily NK
Jung Kwon Ho
2/8/2008

On the 23rd of last month, six households were expelled from Haesan City in Yangang Province for the reason of “their families having fled to South Korea” and 25 households were simultaneously expelled under the charges of illicit trade along the North Korea-Chinese border, a North Korean inside source relayed on the 5th.

The source said, “6 of the 152 who were arrested at the inspection which was carried out from August to October of last year by the ‘5 divisions combined Anti-Socialist Inspection Group’ received a long-term prison labor camp sentence for the reason of ‘having secret communication with family members who defected to South Korea. When their sentence was confirmed, the expulsion of the rest of the family members ensued.”

The “5 divisions combined Anti-Socialist Inspection Group” carries out the duty of regulating the inspection of anti-socialist elements by temporarily transferring people and organizing groups from five organizations, such as the Party, the Central Procurator’s Office, the Central Court, the National Security Agency, and the People’s Safety Agency.

During this inspection, 152 people who possessed cell phones and are related to crossing the border were rounded-up, 50 received a long-term prison labor camp sentence, and 100 received a labor training corps sentence. Also, 25 households with charges of illegal trade along the North Korean-Chinese border and owned foreign films were expelled, which made a total of 31 households who were forcibly expelled.

According to the source, the North Korean authorities who were surprised by the inspection results of the Anti-Socialist Group formed the second group on December 19th and unfolded a concentrated investigation of cell phone possessions and connections to families who defected to China and South Korea in Hyesan, after having considered the gravity of illicit acts of civilians in the Yangkang Province border region.

The 31 households who were expelled were those who were detained in the first inspections which began in August, 2007 and another mobilized expulsion took place in the dead of the night under the order of the second-round Anti-Socialist Group.

The source relayed, “Those who were detained in the first-round of inspections mostly owned cell phones and were people who smuggled with Korean-Chinese people in China. The 2nd Anti-Socialist Group newly cast suspicion on receiving money from South Korean National Intelligence Service and handing over North Korean internal information.”

The Party committee of Hyesan, with the expulsion approaching, mobilized a general meeting per each people’s unit and gave the following order to civilians, “The people who are expelled are all relatives of the traitors who betrayed the country and are traitors who have sold our national secret. We must not help or sympathize with those who have participated in treasonous acts.”

Those who were purged were driven to a farmland far away from the border region without any means of basic survival and were forcibly moved to abandoned homes of those who had starved to death during the “March of Tribulation” or had become beggars.

The Party committees of the farming village held a meeting of farmers before the arrival of the expelled families and gave the order of “Those who are expelled are family members of those who committed ‘treasonous acts,’ so we must not help them.”

The source added, “The 31 households who were expelled were a part of the first round of purges and after February 16th (Kim Jong Il’s birthday), the number of households who will be expelled will increase. The cadres and Chinese emigrants who were detained in the first round of inspections were excluded from this expulsion.”

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-2-5-1
2/5/2008

Kim Jong Il’s first visit of the year was reported on January 6 to have been to the Ryesonggnang hydro-electric power plant. Generally, the leader’s visits in the first months of the year, along with the New Year’s Joint Editorial, which focused on economic recovery, set the tone for the coming year’s policies. His second inspection of the year was to a military unit.

Defectors claim that prostitution is on the rise in North Korea, and on January 9, the aid group ‘Good Friends’ reported that the DPRK has begun to close massage parlors as part of a crackdown on prostitution. The agency reported that in the DPRK there was a “steady campaign to weed out decadent foreign culture,” and that in September, DPRK soldiers were ordered to avoid alcohol, sex, and money.

On January 16, it was reported that Kim Jong Il had instructed all DPRK institutions to reduce their bureaucracies, including senior staff, by thirty percent.

Figures released by North Korea’s Korean Central News Agency indicate that the DPRK’s population had increased to 23.6 million in 2004, the latest available figures. According to DPRK figures, the population has grown from 22.1 million in 1996.

North Korea announced the closure of its Australian embassy on January 22. While the DPRK will continue to maintain diplomatic relations with Australia, it apparently can no longer afford to maintain an embassy in Canberra.

According to a report released by the International Red Cross, North Korea has the largest number of people in the world killed by natural disasters over the past decade. The report states that 458 thousand North Koreans have died from natural disaster, 38 percent of the disaster-caused deaths in 220 countries from 1997-2006.

A U.S. Senate investigation reported that the DPRK funneled as much as 2.7 million USD through a bank account set up from UN development projects. The report stated that North Korea used the UN account due to fears that the United States would block its ability to transfer money internationally.

DPRK Nuclear Negotiations

2008 opened with the United States and Japan releasing statements expressing their disappointment at North Korea’s failure to meet its December 31 deadline to fully disclose the extent of its nuclear programs, while North Korea’s New Year’s Joint Editorial called for “stability on the Korean Peninsula and peace in the world” as well as an end to hostile U.S. policies. A U.S. White House spokesman stressed that there was still opportunity to move forward with negotiations, stating, “the important thing is that we get a declaration that…needs to be full and complete,” not whether the declaration is made by the deadline.

On January 4, North Korea claimed it had met its obligations to come clean on its nuclear programs, and that it had provided Washington with a list of its nuclear programs in November. Pyongyang also threatened to bolster its “war deterrent” because Washington had failed to provide promised aid following the declaration. Washington denied that any complete declaration had been made.

A senior Russian diplomat was quoted on January 11 as saying that while Russia regrets the slowed state of progress in talks on DPRK nuclear issues, Russia will fulfill its promise to provide the North with fuel oil. 50,000 tons of fuel oil were delivered on January 20~21.

According to a book of figures recently published by the National Statistical Office, ”Comparison of North and South Korean Socio-economic Circumstances”, the DPRK”s crude imports over the past several years bottomed out at 2,325,000 barrels in 1999, then rose to 4,244,000 barrels by 2001. Since 2001, imports have steadily fallen until only 3,841,000 barrels were imported in 2006, recording the least imports in the last five years.

North Korea opened its first online shopping mall in January. The site offers items from fourteen categories ranging from machinery and building materials to stamps and artworks. The site, www.dprk-economy.com/en/shop/index.php, is based in China.

Orascom Telecom, a Cairo-based phone operator, has been granted the first commercial license for provision of mobile phone services in North Korea. The license was granted to CHEO Technology, a subsidiary that is 25 percent-owned by the state-run Korea Post and Telecommunications Corporation.

DPRK Abduction Issue

The Cambodian Foreign Minister announced on January 16 that his country had been working behind the scenes to find a resolution to the DPRK-Japan abduction issue. The minister stated, “Cambodia is in a position where it can hold high-level meetings with North Korea, and it has the ability to persuade North Korea.”

Inter-Korean Affairs

The incoming Lee Myung-bak administration announced on January 4 a plan to develop an international cooperative fund to support North Korea’s economy. The plan is said to call for World Bank and the Asia Development Bank to help, and for South Korea to provide 40 billion USD.

On January 7, it was reported that Lee Myung-bak’s presidential transition team had asked the ROK Unification Ministry to slow the pace of inter-Korean economic projects and to link them to progress in the six-party talks. The incoming administration has promised not to link humanitarian projects such as rice and fertilizer aid to nuclear negotiations.

The Lee Myung-bak administration announced plans for downsizing the South Korean government, including disbanding of the Ministry of Unification. Opposition to the plan points out the role played by the ministry in improving inter-Korean relations, while proponents to the plan of relegating the ministry’s duties to the Ministry of Foreign Affairs and Trade applaud the move to align North Korea policy with standing foreign policy directives.

On January 14, it was reported that Lee Myung-bak had asked the United States to further engage in talks with DPRK military leaders, while presenting a balanced approach, stating that “our people don’t support the idea of giving lavish aid to the North nor do they want to irritate it too much, I believe.” He went on to add that the United States holds the key to easing DPRK fears of opening up.

The net worth of inter-Korean exchanges totaled 1,797,890,000 USD in 2007, up 33% from the 1.35 billion USD in the previous year. The almost 1.8 billion dollars in trade recorded in 2007 is the highest to date, and is equal to 65 percent of the DPRK”s non-Korean trade volume of 2.996 billion USD in 2006.

The Seoul-based International Vaccine Institute announced on January 14 that it will soon begin inoculating approximately six thousand North Korean children against bacterial meningitis and Japanese encephalitis.

The two Koreas began working-level military talks on January 25, marking the first talks of the year. During talks, the North proposed reducing the frequency of the inter-Korean rail services, citing a lack of cargo. The Southern delegation felt that the frequency was an important indication of inter-Korean cooperation. The two sides agreed to continue daily runs, but to reduce the number of empty carriages in the future.

North Korea is still not as attractive to businesses as other Asian neighbors. A survey released by the (South) Korea Chamber of Commerce and Industry on January 28 indicated that China and Vietnam are more attractive to ROK businesses. According to the survey, 80 percent of businesses have difficulties starting or operating businesses in North Korea.

An ROK special envoy returned on January 23 from Moscow after proposing a joint ROK-DPRK-Russian cooperative project in eastern Siberia. President-elect Lee Myung-bak sent a letter to Russian President Vladimir Putin pushing for cooperation of “North Korea’s workforce, Russia’s resources and capital, and [South] Korean technology.”

U.S.-DPRK Relations

On January 9, amidst reports concerning possible DPRK-Syria nuclear connections, it was reported that in 1991 Israel was posed to strike a ship suspected of delivering missiles from the DPRK to Syria, but was dissuaded by Washington.

A U.S. State Department official stated on January 22 that North Korea had met the legal criteria to be removed from the U.S. list of state sponsors of terrorism. This came just after reports of conflicting opinions within the Bush administration, with Secretary of State Condoleezza Rice sharply rebuking Special Envoy on North Korean Human Rights Lefkowitz, who stated that North Korea is not serious about nuclear disarmament. Rice went so far as to say that Lefkowitz “certainly has no say on what American policy will be in the six-party talks,” dismissing his negative position on the failure of North Korea to meet its obligations. The White House later stated that North Korea must make a full declaration of its nuclear activities before being removed from the list.

Five officials from the DPRK recently visited the United States in order to learn how to treat and prevent tuberculosis, a serious concern for the North that is “practically non-existent in most developed countries.” The officials were invited by The Korea Society, which is based in New York.

DPRK-PRC Relations

According to the PRC General Administration of Customs, China’s oil exports to North Korea were the same in 2007 as they were in 2006. China sent 523,160 tons of oil to North Korea in 2007.

A senior PRC Communist Party official traveled to Pyongyang for a meeting with Kim Jong Il on January 30. Wang Jiarui, director of the International Liaison Department of the Chinese communist party, was to convey a message to Kim, inviting him to the opening ceremony of the Beijing Olympics. While Kim reportedly told Wang that there would be no change in the DPRK stance on nuclear negotiations, he also assured the Chinese envoy that North Korea had no intention of harming DPRK-PRC relations.

Institute for Far Eastern Studies (IFES)
NK Bfrief No. 08-2-5-2
2/5/2008

It appears that from the end of last year through this January, North Korean Party, regional, cabinet and People’s Committee officials have been carrying out inspections of trading companies, ordering massive layoffs and closings of companies where mis-management or other abnormalities are found.

In Yonhap News, a North Korean insider in Beijing, China was quoted on the 31st as saying, “Since November of last year, North Korean authorities have carried out inspections on trading companies under the control of each organization, with layoffs at most trading firms with abnormalities, deficits, or other mismanagement.”

According to the source, over 100 trading companies are registered in Chungjin, South Hamkyung Province, but after the current housecleaning measures are enforced, only around 15 will remain in operation, with practically all problematic offices being closed down.

Another North Korean source in Shenyang, China reported, “These inspections include trading offices run by the Party, military, and other so-called ‘powerful institutions’, so across the board, there are no exceptions, and as to the growing intensity [of the inspections], they are much stronger and wider in scope than formal annual inspections that have been carried out in the past.” “The order handed down at the end of last year to greatly reduce staff in the Party, military and Cabinet happens every year, but this year massive lay-offs in the workforce at trading companies appears to related to a different kind of personnel liquidation.”

These inspections reportedly stem from an incident at the end of last July in which Oh Moon-hyuk, branch manager of the Ruengra 888 trading company in Yunsa, North Hamkyung Province, was executed after being implicated in the smuggling of timber. The trading company was responsible for the export of timber, and operates under the control of the Party’s accounting bureau. The inside contact stated that because of this incident, North Korean authorities carried out further inspections, leading in October of last year to the dismissal of one official receiving vice-minister pay, and the broadening of the inspections nationwide.

Through the inspection-broadening measures, trade officials under the North Pyungan Province trade office also received an inspection party from the central government, causing many problems for Chinese traders who could not travel in from Dandong. Through these inspections, North Korean authorities reportedly uncovered several cases of embezzlement and misappropriation of company finances while the trading companies were exporting marine products or coal, iron ore, and other mining materials.

The goal of these inspections appears to have been the restoration of public order, just as the recent measures preventing women under the age of 45 from working in markets was a reaction to diminishing public discipline. In the future, price controls, regulations on export goods, or other government regulations regarding international trade are likely to be strengthened.

Instutute for Far Eastern Studies (IFES)
NK Brief No. 08-1-24-1
1/24/2008

North Korean leader Kim Jong Il has started the new year by visiting a series of facilities and locations important to the economy in order to stimulate ‘Economic Revival’. DPRK media outlets reported on January 21 that Kim had examined the 18th national program performance and exhibition which opened last year, and that on the 6th, he visited the Ryesung Power Plant in North Hwanghae Province and dispensed on-location directives.

In North Korea, Kim’s new year’s traveling is indicative of the country’s national goals for the year, and Kim’s trip to economic facilities appears to indicate that DPRK authorities are focusing on rebuilding the economy this year.

On January 9, the Chosun Sinbo, a publication of the General Association of Korean Residents of Japan, reported, “In the changing face of the Northeast Asian political atmosphere emerging as the 6-Party agreement is implemented, [we] are preparing an advantageous atmosphere for the revival of the North Korean economy,” and called for “more active promotion of economic cooperation and exchange with each country in the world.” The article stressed promoting ‘21st century rehabilitation by one’s own effort’ by acquiring modern science and technology appropriate for the country.

Last year saw the beginning of improvement in U.S.-DPRK relations and resolution of nuclear issues, and the national strategy for this year seems to be economic expansion based on these developments. In particular, the symbolic significance of Kim Jong Il’s personal visits to two places of economic interest goes to show that North Korea is on a path intended for economic growth. In North Korea, on-location guidance by Kim Jong Il indicates national objectives and serves to focus national capabilities on that location.

According to North Korea’s New Year’s Joint Editorial, “The role of science and technology in the construction of an economically powerful nation must be decidedly elevated,” and went on to stress that, in line with the demands of the information industrial age, a revolution in education is necessary and a competent labor force that can participate in the creation of a strong and prosperous nation must be greatly promoted.

If Kim Jong Il’s inspection of the power plant is an indication of support for the construction of infrastructure and other electrical facilities necessary for economic development, the inspection program indicates what industrial sector the North will focus its energies on in the future. Through increased production in the light industrial and agricultural sectors, North Korea is expected to focus on improving the lives of the people first, and in the future, focus on development of the IT sector.

Unlike most other nations’ embassies, North Korean offices must not only self-finance their operations but they must also send money back home.  It looks like they were finding it hard to make a living in Canberra.  Though an enjoyable town, Canberra is so far from most of the economic action in Australia that they were probably unable to close any deals.  In the future, they should consider opening a consulate in Sydney–if they can afford the rent.

Joong Ang Daily
1/23/2008

North Korea can’t afford the bills anymore, so it will close its embassy here, Australia’s foreign ministry said yesterday.

North Korean diplomats informed Australian officials in November that the four-person embassy, located in a diplomatic quarter of Australia’s capital Canberra, would shut in February.

“The embassy advised that they plan to continue with non-resident diplomatic accreditation from Jakarta,” a foreign ministry spokesman told Reuters. The mission said in a letter it was closing due to “financial reasons.”

“The DPRK said it would consider reopening if its financial situation improves,” the spokesman said, referring to the North’s official name, the Democratic People’s Republic of Korea.

Australia is one of few Western countries to have diplomatic ties with the reclusive state. Pyongyang opened its embassy in May 2002.

In September 2006, Australia announced sanctions against 12 companies and one person connected with financing Pyongyang’s nuclear weapons program, including a visa ban on North Korean nationals and on North Korean shipping.

The 2008 Index of Economic Freedom published by the Heritage Foundation and the Wall Street Journal covers 162 countries across 10 specific freedoms such as trade freedom, business freedom, investment freedom, and property rights. Unlike the Freedom House rankings, this is an index, meaning there is a first place winner (who should be rewarded with lots of investment and business creation) and a last place “winner” (who should be shamed into moving up the list for the same prizes)

The bottom ten countries:
148. Venezuela
149. Bangladesh
150. Belarus
151. Iran
152. Turkmenistan
153. Burma (Myanmar)
154. Libya
155. Zimbabwe
156. Cuba
157. North Korea  (unchanged)

On January 16, Freedom House released the findings from the latest edition of Freedom in the World, the annual survey of global political rights and civil liberties.

The report surveyed 193 countries, 90 of which were rated “free,” 60 were labeled “partly free,” and the remaining 43 were labeled “not free.”

North Korea, rated “not free,” received the lowest rating of 7 in both political rights and civil liberties and remains one of the eight lowest rated countries along with Cuba, Turkmenistan, Uzbekistan, Libya, Sudan, Burma and Somalia.

Click here for the full report.