Money, Money, Money

The China-led $100 billion Asian Infrastructure Investment Bank (AIIB) has nearly come into existence just a year after Xi Jinping proposed it. Twenty one countries signed a memorandum of understanding Friday on establishing the new multilateral bank. China will have a stake of up to 50% in the AIIB, compared to just 6.5% in the Asian Development Bank (ADB). This has implications reaching far and wide, and has generally been viewed as a challenge to the US-dominated IMF/world bank complex and the Japan-led ADB.

It has caused some debate among US allies in the region, with Australia and South Korea notably prevaricating on joining and probably just delaying the inevitable. Less noted is that it has also added a carrot to China’s toolbox of vegetable inducement metaphors in dealing with North Korea.

North Korea is cut off from World Bank and ADB development funds and it is difficult to see anything other than a full denuclearization and a serious human-rights review leading to cooperation between the DPRK and those financial institutions, which are largely controlled by the US and its allies. China’s baseline for “good behavior” from North Korea is significantly lower than that of the US: it is not difficult to imagine a scenario in which North Korea could be rewarded for progress on the nuclear issue with AIIB loans for development. It certainly could be part of a package deal. Major development projects could help underwrite systemic legitimacy in some ways; that might very well be a pitch that the Chinese will make to the Korean side at some point.

Note, however, that the AIIB MOU is happening at the same time as the DPRK is making a curious choice regarding borders and ebola, while the nuclear issue remains a stagnant, long term problem. So let’s not assume that an AIIB-Pyongyang project will happen anytime soon.

What will be happening more immediately is that Russia’s role in North Korean financing is going to increase: Russia has started interbank transactions with North Korea in the ruble. This little-noted news item comes at a time when Russia is looking for friends, its banks are increasingly squeezed by sanctions and the DPRK is looking for additional channels to move funds in and out of the country. After all, North Koreans increasingly complain that Chinese banks won’t do business with them.

This is therefore potentially a lifeline for DPRK businesses. Even though the vast majority of trade will still have to go through China, the banking deal, Russia’s investment in Rason and the massive 2012 debt forgiveness of $11bln USD and now direct trade in rubles means that North Koreans will increasingly try to move funds through Russia to elsewhere. They will also see businesses in Russia’s Far East as increasingly easy trading partners. We will probably even start to see Russian middlemen selling Chinese goods to Koreans through Primosky Krai*.

For the DPRK, Russia can never balance China the way it could during the Cold War, but this will help. 

 

 

*Author would like to know if it is racist that he thinks “Primorsky Krai” sounds Klingon.

North Korea's Ebola Shutdown Widens

Is it just us or every fall is there some drama that shakes up North Korea’s relationships with its business partners? Last year, it was Jang Sung Taek’s sudden purge.  This year it’s the border shutdown due to Ebola. Last week, we found out that that tourists would not be able to enter the DPRK. Now it also seems that North Koreans are apparently not allowed abroad, at least to Singapore (and probably other countries), for training purposes.

We are still trying to find out more about these latest measures and when they will be reverted so that our programs can continue. But at least we now know that hyping up Ebola in the media is much more effective as a tool to isolate North Korea than anything else in the sanctions arsenal. Is this a misreading of the Ebola threat? Is it a genuine fear that they could not deal with a single case of Ebola? Is it a message for the domestic audience? Is it that North Korea’s underlying “fear of the foreign” is greater than their desire to be part of international society? As far as we're aware, at this point in time, North Korea is the only country to completely shut its border to all tourists, regardless of their travel history.

Expert Hyungchol Choi has this to say:  "No country was better prepared to repel the infestation than North Korea…" OK, so Cho may be the fictional director of the South Korean intelligence service in Max Brooks’s 2006 dystopian novel World War Z. And he was of course commenting on a zombie apocalypse outbreak, not Ebola. Foreshadowing real life, though, in the novel North Korea shuts its borders decisively when the outbreak happens*. 

While a complete shutdown of the borders to all travel, even to places with no record of Ebola or Zombieism, is completely within North Korea’s rights, the manner in which these measures were rolled out leaves much to be desired. For a start, it was poorly communicated. News came out of it not through official KCNA channels, but through North Korean tour guides in North Korea to their foreign counterparts. There was little information on what groups (e.g. tourists, business people, diplomats, NGOs) would be affected, whether outbound North Korean travel would be curtailed, how the shutdown would be rolled out, or under what conditions the shutdown would be relaxed.

In the run-up to the shutdown, there was also little communication that such measures were being considered. This didn’t allow stakeholders time to prepare for it. For Choson Exchange, we could be seeing potentially tens of thousands of dollars of losses as we delay training programs, and possibly even more as this drags on. For businesspeople, a shutdown will likely hurt their investment plans or transactions. Given the limited international telecommunications in North Korea and the lack of alternatives made available to locals to contact their counterparts, this shutdown seals North Koreans off more than it would any other country faced with a similar decision. 

Overall, this episode seems to reflect two things. First, a callous attitude towards stakeholders in the country’s development stemming from poor communications or the lack of will to communicate. Second, that North Korea’s “fear of the foreign” outweighs their interest in whatever benefits foreign investment brings. It is hard to blame ones’ partners, business or educational, as people who made this decision are important and adequately buffered enough that they can avoid the consequences of such disruptions.

 

 

*In the film version, Brad Pitt runs around while the Zombies prevent the screenwriters from finding a narrative

Sojunification

No doubt many perusers of this blog will have noted that one of the writers is into his coffee and beer. And indeed, the former beverage kicks tea's ass all over the place, while the latter is literally the bedrock of civilization.

Many readers may also have tasted mass produced South Korean sojus as has this same author. He would generally describe them as having notes of industrial cleaner, anti-freeze or grout. Often with a nose reminiscent of molotov cocktails, rat-poison or those urinal pucks. 

We're not great fans of most soju.

It was with typical trepidation that we were coaxed into a 'solidarity shot' recently. (Note that as a male in Asia, this happens.) Surprisingly, it was...pretty dang tasty. Dansamsul turns out to literally have a smooth, buttery taste with afternotes of vanilla and potpourri. Seriously. It's ingredients are just rice and ginseng, but the ginseng doesn't give that earthy bitterness that it often can.

Shot taken by Geoffrey (multiple meanings intended). Stopped for dinner at the highway back to Hanoi. North Koreans pulled out NK soju, Vietnamese waitress pulls out South Korea soju cups. Sojunification!

Shot taken by Geoffrey (multiple meanings intended). Stopped for dinner at the highway back to Hanoi. North Koreans pulled out NK soju, Vietnamese waitress pulls out South Korea soju cups. Sojunification!

It was in a restaurant in Vietnam that served a handful of South Korean products, so we had the chance to do unification shots: Dansamsul pours in Chamisul glasses.

With the craft beer revolution sweeping Asia and a consumer class that gets into artisanal products, one imagines more hand-made small batch sojus coming out of the South. Until such time, Dansamsul reigns as the best we have have tasted.

Note: Geoffrey K. See wants to trademark the term 'Sojunification'. Any counsel on how best to do this would be appreciated.

Meeting North Korean Movie Stars

Walking with the stars

Walking with the stars

Touring the studio grounds

Touring the studio grounds

The closest I have ever been to celebrity-dom was 2 years ago on a business trip for Bain & Co. I was wandering the streets of New Orleans and chanced upon the filming of an episode of True Blood. Being stuffy and boring, it was only after I posted a photo of the scene on Facebook that I realized I was in the proximity of stardom. This all changed recently.

Thanks to Tatiana Gabroussenko, a researcher at Australia National University and scholar on North Korean cinema, I managed to not only stand in the proximity of North Korean starlets, but to even order drinks for them while Tatiana interviewed them! Tatiana had joined a Choson Exchange trip to attend the Pyongyang Intenational Science and Technology Bookfair. Our North Korean colleagues, knowing Tatiana’s interest, kindly arranged for her to interview a scriptwriter, actor and actress of 90s movie “도시처녀 시집봐요” (Urban Girl Goes to Get Married). You can watch the movie here, and hear the title song, incidentally my favorite North Korean song.

"Did you really kiss?"

"Did you really kiss?"

The romantic comedy revolves around a Pyongyang-dwelling lady (played by Ri Kyong Sim) who dates and ends up marrying someone from the countryside (played by Ri Gun Ho). Tatiana, a walking encyclopedia on North Korean films, explained that the movie caused a stir among South Korean scholars when it first came out, as it supposedly showed the first on-screen kiss in DPRK cinematic history…or maybe not. Ri Gun Ho and Ri Kyong Sim laughed as they explained that it was a hug filmed to look like a kiss. And so we solve this 20 year-old controversy. 

The artists we met explained that it was important that their sector better understand “world trends and tastes” and asked us if we would consider exchanges in this sector.

Hanging in Hanoi

Our wonderful Vietnamese student volunteer, Jetty, who helped us bring the North Koreans to an awesome street-side dessert shop.

Our wonderful Vietnamese student volunteer, Jetty, who helped us bring the North Koreans to an awesome street-side dessert shop.

While the media and much of the North Korea watching-world has worked themselves into a 'is there or isn't there not a coup' frenzy, we have been busy running a training program in Vietnam for North Koreans. Not as wild, not as exciting, but we think much more meaningful than squinting over photos trying to say whether some North Korean general appearing in Incheon with bodyguards indicates something. The focus of the program is on land development and property entrepreneurship. Our program fellows seem oblivious to the media frenzy surrounding North Korea at the moment. Here are some photos.

You can run but you can't hide (from Psy) in Vietnam.

You can run but you can't hide (from Psy) in Vietnam.

North Koreans treat the group to ice-cream at the famous Kem Trang Tien ice cream shop in Hanoi

North Koreans treat the group to ice-cream at the famous Kem Trang Tien ice cream shop in Hanoi

Transport in Vietnam sure is eclectic. 3 hours on a boat and 4 in a bumpy busy all in one day.

Transport in Vietnam sure is eclectic. 3 hours on a boat and 4 in a bumpy busy all in one day.


"Asian Games Roundup", or "Wait, What Just Happened?"

"Yoboseyo?"

"Oh, hey, its Pyongyang. We're wondering if you'd be fine with like 3 of our most important guys coming to check out the Asian Games finale thing tomorrow. Maybe there could be an important meeting in what will look like a broom cupboard on the news?"

"Um, yeah. Sounds good! We'll check for tiny rooms in the Incheon area."

OK, so maybe it didn't go down like that. And maybe both sides had days or even weeks of visibility on the high level meeting that took place between North and South last week. But the planning was not most guessworthy element. What might it mean? Why now? What's going on?

Andray took a stab at those questions in an article on 38north.org this week. Click here to read the original, longer version that also tackles what the domestic value of the Koreas' on-field performances hold.

 

On the penultimate day of the competition, notifying Seoul that three of its highest officials wanted to attend the closing ceremony the next day. Seoul granted permission to Kim Yang Gon, Hwang Pyong So and Choe Ryong Hae, sparking a media frenzy and wide speculation about the reasons for the visit. The trio had lunch with South Korean Unification Minister Ryoo Kihl-jae and Defense Minister Kim Kwan-jin. They are reported to have said that Kim Jong Un’s health was not an issue and to have delivered a message of “warm greetings” from Kim Jong Un to President Park Geun-hye. An October surprise, indeed.

That might all be interesting, but did Pyongyang put anything of substance on the table to back up a potential charm offensive? It is not yet known, though something may emerge at high-level talks agreed upon for later this month or in early November. This proposal is also somewhat of a surprise, given that North Korea rejected a similar proposal made by Seoul in August.

Seoul, while looking to shift its North Korea policy somewhat, is wary of moving too fast and has not said much about the visit. If an improvement in relations takes place in the rest of Park’s term, we may be able to point to this meeting as an important part of that process.

The trip certainly signals willingness on North Korea’s part for more direct communication. The factors motivating Pyongyang to make this gesture remain unclear at this point, but it could be a combination of several things.

First, Pyongyang wants more non-Chinese investment and understands, in particular, that its grand plans for Wonsan as a tourist destination will ultimately not get far without South Korean capital and visitors. This is especially true if Japanese connections to Wonsan are not rehabilitated. Promising DPRK-Japan talks earlier this year on the abduction issue seem to have stalled as Pyongyang has delayed a key report due in early autumn. Pyongyang may have decided the chances of getting the abduction issue right are too low to justify the risk. Creating an outreach effort to the ROK could be an alternative.

It could also be a test of Park Geun-hye’s trustpolitik as she comes up on the mid-point of her term: this is around the time that she would need to start an initiative if she wants to see it bear fruit under her administration. However, Park has consistently said that aid and investment into the North would increase if steps towards resolving the nuclear issue were taken. We’ll know later if Pyongyang is able to put anything on the table that doesn’t undermine its ‘Byungjin Line’ (dual nuclear/economic development) but this type of reciprocation is something she feels she can work with. This is a narrow window though, and in initial follow-up talks Pyongyang may just be testing to see what it can get while avoiding the nuclear issue for as long as possible.

If she does appear to compromise, it quickly becomes a test of ROK-US relations. Washington was not so keen on Japan’s solo outreach to the DPRK earlier this year; it likely will not be thrilled if its other key ally breaks ranks as well. Pyongyang is always happy to foment divisions between Seoul and Washington when it can.

Finally, it shows Beijing that Pyongyang is ready to ‘play nice’ with its neighbors. After serious stresses between the two allies in the past 18 months, reaching out to Tokyo and Seoul shows China that the DPRK doesn’t have to be a disruptive force while at the same time signaling that Pyongyang may not always be as beholden to China’s economic might as it is today.

Sports diplomacy only works when both governments are actively seeking some sort of shift in relations that an athletic event can help facilitate. It is far from clear that this is what is happening, but suddenly it is a prospect that we are now compelled to watch.

Even if this new North-South dialogue goes nowhere, for both countries the Asian Games will leave a domestic legacy—this is particularly clear in the North, where the victories will be featured and used to justify the sports policy and promote nationalist sentiments. Southerners will join the list of griping citizens around the world who get stuck with the bill for costly sporting events while corporate sponsors walk away with the profits. At the same time, there will be some residual feel-good factor from besting Japan in the medal table and further cementing the ROK’s status as a regional power.

Athletes from both Koreas have and will continue to make great progress on the field. Let’s see now if their leaders can make a little progress off the field as well.

North Korean Senior Leadership in South Korea

While the media and pundits aggressively speculate on the meaning of army chief Hwang Pyong So, and WPK Secretaries Choe Ryong Hae's and Kim Yang Gon's visit to South Korea, we want to leave you with this picture of our Women in Business program in Singapore in June.

Andray has written one year ago about how North Korea will use sports in its diplomatic outreach, and will follow up with more on the Asian Games soon. And I apologize for saying that September will be an exciting month in DPRK's foreign relations. Turns out that the excitement came a little late...by 4 days.

North Korean female entrepreneurs doing field research on retail concepts and strategies in Singapore. Let the road to unification begin at the Samsung retail corner of a department store. Oh, and while we are on speculation, can we say that Kim Jong Un could be seeking a summit with Park Geun Hye?

Pyongyang International Science & Technology Book Fair 2014

With our colleague Ryan in Pyongyang 

With our colleague Ryan in Pyongyang 

Hmmm...what to fill that space with?

Hmmm...what to fill that space with?

September can a busy month in North Korea, as it hosts three international events that overlapped this year. For movie buffs, there is the spiffy not quite red carpet Pyongyang International Film Festival. For businesspeople, there was the Pyongyang Trade Fair and for us, the Pyongyang International Science & Technology Book Fair (PISTBF). Having been represented at PISTBF twice previously, it remains pretty much the same staid affair, except that guests now travel as part of a mish-mash convoy of vehicles.

We heard that the Pyongyang International Film Festival (PIFF) seems to be leading the pack in terms of innovation, with a new format somewhere in between the Oscars and a political lecture. The PIFF organizers decided to jazz things up with a male and female co-host bantering with each other on a set much alike those of modern movie awards, interjected by various performances. But they did not forget to include the odd politician delivering a speech. Some participants expressed nostalgia for the good ol’ DPRK-style film festival. 

Article in North Korean press on book fair. 

Article in North Korean press on book fair. 

We presented EdX at PISTBF. This was a good way for Korean students to access university courses at top universities around the world, when they get Internet access of course. This follows on our presentation on OpenCourseWare and Wikibooks in 2010, which people were fascinated by. We also exhibited books from the London School of Economics, Nanyang Technological University and other publishers. During the evening festivities, we ran into several alumni from our programs in Singapore and North Korea.

Party Secretary for Science & Technology Choe Tae Bok was the guest of honor for PISTBF, along with Chairwoman Kim Jong Suk of the Committee for Cultural Relations. At the opening banquet at the head table, both guest of honors were nested between Russians, and sang Russian songs with them. Russia is featuring more prominently at events in Pyongyang and the mutual courtship looks to be continuing.

Tatiana meets with the stars of 도시처녀 시집봐요

Tatiana meets with the stars of 도시처녀 시집봐요

Outside of PISTBF, we had a packed schedule of meetings with a microfinance company in Pyongyang, architects and urban planners, the Ministry of External Economy and most refreshingly, actors from a famous 1990s Korean movie (“City Girl Goes to get Married” - soundtrack here).  The actors emphasized that it was important for them to understand "world trends and tastes" and asks if us Philistines at Choson Exchange could consider expanding its work to the artistic arena.

We hope that the next PISTBF in 2016 would feature more innovation. Booths should have electricity so that they can do multimedia presentation, perhaps authors can give book talks or organizations can give pamphlets. And definitely, group discounts for hotel bookings. But all that would be an even bigger security nightmare, so I guess this would still be a long way off.  

Japan-DPRK Progress Stalls...

Japanese Press in Pyongyang last week, covering the visit of Japanese coming to visit the graves of family members in North Korea

Japanese Press in Pyongyang last week, covering the visit of Japanese coming to visit the graves of family members in North Korea

The question is, "is it a grinding halt or a temporary slowdown?"

For the past year, Japan and DPRK looked to be on the way towards repairing a relationship frozen since Prime Minister Koizumi’s visit in 2004. After secret talks that led into formal negotiations, Japan relaxed some of its autonomous sanctions when North Korea agreed to reinvestigate the abductions of Japanese. In the chill of DPRK-China relations, frozen ties with the US and South Korea, this was an perhaps unexpectedly bright spot in Korea’s foreign relations. But it seems that progress has stalled again.

Reports by Japanese press indicate that discussions over the preliminary abductee report have broken down. By all indications, the content of the preliminary report, which will be delayed, will not please the Japanese public. It appears that no new information regarding the officially recognized abductees will be released. Japan has signaled that it will reject the results of the preliminary investigation. North Korea has emphasized that full investigations will take a year to complete.

Questions loom on how this breakdown came about. A likely reason could be North Korean displeasure with the degree to which Japan is willing to provide aid in exchange for progress on the abductions issue. In the weeks leading up to this, North Korea signaled desire for further measures from Japan including the delivery of humanitarian aid. On the high end of numbers, North Korean has always tried to secure “war reparations” from Japan, supposedly with some proposals calling for up to $20 Billion.

Or perhaps the powers that be concluded that damaging revelations are not worth the benefits that would accrue from progress here. There are elites who surely believed that the admission of the abductions in the 2000s was a mistake. With Kim Jong Un absent from any public appearances for the last two weeks, possibly from ill health or other more mundane reasons, one wonders if that has impacted the nature of the preliminary report.

North Korea has not closed the door entirely. The reinvestigation supposedly goes on. But the question is whether both sides can agree on a deal. It is truly disappointing to see this happen, and the prospect for improved Japan-DPRK relations, for a moment tantalizingly close, once again seems distant. It is now up to decision-makers in Pyongyang and Tokyo to see if they can can find an acceptable agreement during the delay. If not, one or both governments might just decide the status quo will do.

Feasibility Studies, Project Economics and a Puzzle

Perhaps not a sexy title for a blog post, but important, nonetheless. Because, as one Korean told us:

“We often prepare proposals to potential investors, but they are less interested after seeing them. More than subjective proposals, I understand that items with concrete numbers reflected in cash-flow models are very important.”

-Participant Feedback

In July, a Choson Exchange team traveled to Pyongyang and Wonsan to deliver a workshop titled “Introduction to Cost-Benefit Analysis and Project Economics.” Workshop sessions in both cities focused on the policies and provisions necessary to make investments successful, especially in the context of Special Economic Zones. In the DPRK in 2013 a new SEZ policy was established, as well as a new organizations to oversee them, which have since been in flux. There is a palpable passion for investment and economic issues, but there are significant knowledge gaps and serious misunderstandings about what investors want to see in an SEZ.

The Crowd in Wonsan

The Crowd in Wonsan

Our workshop attempted to address some of these through some basic economics principles, before moving towards project and cash-flow modeling. The basics centered on trade-offs and opportunity cost: the notion that lose what you would have gained from other alternatives when one alternative is chosen. It included this tricky puzzle - 

Please circle the best answer to the following question:

You won a free ticket to see a piano concert (which you cannot sell on to someone else).  An orchestra is performing on the same night and is your next-best alternative. Tickets to see the orchestra cost $40On any given day, you would be willing to pay up to $50 to see the orchestra.  Assume there are no other costs of seeing either performance.  Based on this information, what is the opportunity cost of seeing the piano concert? 

(a)$0    (b) $10   (c) $40  (d) $50           (Source: Paul Ferraro and Laura Taylor)

Don't feel bad if you didn't pick the correct answer, which you'll find at the bottom of this page. Only 21.6% of surveyed participants at an Allied Social Sciences Association (ASSA) meeting got it right, and they were mostly economics Phds. We didn't track individual answers, but in our sessions, a low number got it right. (the author of this blogpost was sadly with the majority)

Once participants mastered the basic principles of economics, the workshop introduced tools private investors use to quantify the value of an investment and analyse decisions: time value of money, discounting, the link between risk and expected return, assessing uncertainty, cash flow modeling and cost estimating. A few keen participants even asked for a demonstration in Excel!

Ultimately, the more complicated content, including accounting for inflation, the time value of money and discounting, project valuation and cash flow modeling led to these key questions:

Why invest?

What makes a good investment? 

Too often, the tools used to assess benefits and risks are not employed by the people tasked with doing trade, attracting investment or developing zones in the DPRK. Nor is there enough understanding of just how much planning based on hard numbers is generally put into investment. Some of the participants were familiar with some of the concepts, but for the vast majority, this was an eye-opening introduction to the thinking that should drive investment decisions.  

The crowd at the Grand People's Study House, Pyongyang

The crowd at the Grand People's Study House, Pyongyang

On a positive note, there was very, very high interest in the topic. The participant numbers smashed CE records for participants in one week: 42 people took part in Wonsan and 86 in Pyongyang. 


Ten bucks. Then answer is (b). For real. Check the internet.