Winds of Change Blowing Eastwards: From Burma to North Korea

The following was written by a Choson Exchange team member. Views reflect those of the team member, and does not represent the institutional position of Choson Exchange. We have had casual conversations on the changes taking place in Burma with some North Koreans. You can’t teach an old dog new tricks. Apparently, not true in Burma. While the winds of change in the Middle East have been largely mass movements invigorated by the idealistic passions of young vanguards, Burma’s gerontocracy has surprised many by their willingness to reinvent themselves and their moribund economy. The visit by Mrs Hillary Clinton, the highest ranking US State Department official to Burma in more than 50 years, has renewed hopes that Burma will continue to carry out progressive reforms to gain acceptance in the international community. Anticipation of change is in the air.

Old men can lead change

What does this mean for North Korea? First, the assumption that change must come from the youth, unencumbered by ideology and motivated by a better Western way of life, ought to be seriously reexamined. Old men in power can open up their country, if only because of self-interest to entrench themselves and their privileges. Thein Sein, currently 66 and the President of Burma, is hardly the poster boy for change. He spent his entire career as a member of the military junta responsible for the repression of pro-democratic forces. Just today, he signed a law to allow his people to peacefully protest in Burma. And all these volte-faces are taking place while Senior General Than Shwe, a man who ruled with absolute power and an iron fist till 1992, is still alive. Perhaps the international community should seriously consider sponsoring senior North Korean leaders to Burma to understand their rationale for voluntarily ceding and sharing power. This is likely to be a more effective prep talk than any democratic lecture or visit by former US Presidents. These old gentlemen may be your unlikely agents for change.

Initiating change from the top

Second, it is a good idea to initiate change from the top of the Bastille than from the streets. While their European counterparts like Nicolae Ceausescu tend to have their doors kicked down before going down with a bang, socialist dictators in Asia seem to better understand the true meaning of power, and often voluntarily open their doors to change. If change is inevitable, existing leaders might as well start learning to control change in a non-destabilizing way. This will allow the old dogs to be seen as agents for change and claim credit for bringing the fruits of economic progress to their people. It is ultimately in their political self-interest to legitimize their rule. A social compact with their people for economic growth and a higher standard of living can only better cement their power in the short-term. This is because the energies of the masses will be channeled towards hungry stomachs and material needs, rather than any abstract democratic ideals. If democratic change eventually catches up and takes power from them, it will be at best be an uncertain and long-drawn process (i.e. just look at China). By then, they will have comfortably retired in their graves. If the old gentlemen in Burma can give up their cherished Burmese Way of Socialism, surely the North Korean leaders should take a hard look at Juche again. The old gentlemen in North Korea should be confident in the knowledge that, by initiating economic changes today, they not only benefit themselves by stabilizing their regime, but also benefit their progenies by creating a more stable and rewarding economic system.

Fast and Furious Change

Third, when change comes, it will be fast and furious. It pays to be prepared and to have a ready agenda. Ever since the Burmese military junta orchestrated a transition to civilian government earlier this year, reforms and progressive announcements have been rolled out at a rhythmic pace. Within a year, the freeing of Aung Sung Suu Kyi from house arrest, ceasefire with the Shan State Army South and the latest lifting of a blanket ban on protests constitute a nice chronological flow on the political front. Positive signs have also been signaled on the business and economic front with talks of simplifying the FX system and reforms in investment law to give foreigners more control over their businesses. Senior North Korean leaders should watch Burma closely. Even if they are not interested in pushing for reforms today, they will be wise to start thinking through the agenda and timetable for economic and political change. One does not need to tell the master practitioners of power that it is better to dictate the terms of your agenda to others than vice versa. Also, elite North Koreans have studied overseas and understand how the capitalistic system operates, so the expertise and knowledge to actualize change is already there. If their Burmese counterparts can find it in their hearts to be young again, there is no reason why the old gentlemen in North Korea can’t start a bit of experimenting and share the joy of their cognac with their fellow countrymen.

Interview on Economic Training 2.0 in North Korea (Part 2)

This picks up from a previous blogpost. I was interviewed by a Korean journal focused on inter-Korean issues. I provided my opinion on how economic policy should evolve in North Korea, and what organizations like Choson Exchange must focus on to facilitate that transition. The interview was translated into Korean. I have included parts of the English transcript below: What are your thoughts on meeting North Koreans? What is interesting about how North Koreans think?

The generation gap in people's thinking is obvious and important. A young candidate we selected for our program in Singapore impressed our ex-Foreign Minister and former Managing Director of Temasek Holdings by asking why Singapore chose to hold assets under a sovereign wealth fund rather than privatizing those assets. Such an insightful question requires the ability to think about abstract differences in systems, and also reflected the generation gap in the way North Koreans over 50 years old think, versus someone in their 20s. While the people over 50s tend to stick to more "politically correct" answers, younger people in the program are able to ask tough and insightful questions.

North Korea's living standards are low. What is necessary for them to improve their living standards?

When Singaporean policymakers emphasize the Rule of Law in developing a competitive economic system, older North Koreans rebut by claiming that they already have investment laws in place guaranteed by their constitution - forgetting that laws are only as good as its implementation. North Korea focuses too much on hard infrastructure (e.g. roads, technology, equipment) as a solution to their development problems, and too little on soft infrastructure (e.g. good governance, rule of law, and informed economic or monetary policy). This is a major obstacle to long-term economic development or even to their short-term efforts to bring in investments.

See part 1 here.

Who Does Business in Rason?

When possible, we will try to profile companies and organizations we come across. This is our first. Jilin Tobacco Industry Co. Ltd. (JTICL)

When visiting North Korea or China, one is struck by the number of men who smoke -  the two countries have some of the highest rates in the world. In China, about 53% of men smoke. In North Korea it is a similar figure, despite efforts by the government to lower the smoking rate. As such, the tobacco industry is of huge significance in both countries and will undoubtably play a role in in the ever-expanding trade relations between the two countries.

Jilin Tobacco Industry is based in Changchun, where apparently they will soon have a shiny new building. They are a private-sector company, but in China the tobacco industry is not so simple. A State Tobacco Monopoly Administration exists, which oversees the China National Tobacco Company. This SOE controls all distribution channels and pricing mechanisms, but allows regional firms to  develop regional brands and fill orders, effectively outsourcing production. The two national organizations work closely with regional companies -  in the case of Jilin Tobacco, helping develop the Changbaishan brand, for example. They take a cut of the locally earned profits in the form of a tax or fee.

In 2008, the State Tobacco Monopoly Administration gave Jilin Tobacco permission to establish a joint venture with North Korea’s Taedong River Tobacco Co. Ltd. and Nason Shinhung Tobacco Co.

They now operate a factory in Rajin, which primarily produces cigarettes for export to countries including Qatar, Japan and Taiwan. The Rajin factory has 100 employees, a small percentage of Jilin’s total workforce of 5000, so it appears that some combination of concerns about infrastructure and political commitment have prevented rapid expansion of the Rajin operation.

The factory  also produces cigarettes for the local market, which I had the 'good fortune' to try.  It was harsher than KCNA rhetoric. A company representative then showed off Jilin’s top brand, which he proudly claims sells for over 10 dollars. The higher quality brands are made in China.

The rep told us that labor costs are cheap enough to warrant the current level of commitment. Expansion in the future was a possibility, he said, but did not know of any concrete plans. The imminent completion of the highway to China may facilitate more production of cigarettes for the Chinese market.

Interview on Economic Training 2.0 in North Korea (Part 1)

I was interviewed by a Korean journal focused on inter-Korean issues. I provided my opinion on how economic policy should evolve in North Korea, and what organizations like Choson Exchange must focus on to facilitate that transition. The interview was translated into Korean. I have included parts of the English transcript below: What are your current activities and what are you focused on?

Currently, we focus on training next-generation North Korean policymakers (under 40) in economics, business and law. Based on internal discussions and feedback from programs, we decided that we need to 'upgrade' to a training 2.0 model. General exposure to economic, business or legal theories are not helpful. Instead, we pursue a "consulting" relationship, where we work with NK partners to understand the economic problems they need to solve, and work with foreign experts to provide concrete solutions that can be communicated to our partners during our programs.

Can you introduce the primary activities of your organization?

It is an exciting time for us in North Korea, as there are a lot of new economic institutions or departments being set up that we think is worth working with, although progress is slow because of a lack of funding. In general, we work with North Koreans to identify specific economic or business challenges, and develop an agenda defining what they need to learn based on the issues. Based on this agenda, we provide workshops (e.g. fiscal strategy and taxation) in North Korea where 1 workshop leader is assigned to at most 8 North Koreans to facilitate discussions. We have also brought North Koreans to consult policymakers in Singapore, as North Koreans are very interested in Singapore's economic development.

Our longer-term strategy is to move to the training 2.0 model which I mentioned above. We identified two key problems with capacity building programs which we think is feasible to tackle:

First, the gap between training and implementation of knowledge must be made smaller. Instead of general discussions of economics or business, we now require NK institutions to prepare a specific agenda where they identify policies they think is feasible to review within a five year time frame. We can then focus training programs on these areas if we think the change will be positive for NK's economic development.

Second, there is also a lack of cross-institution communication in North Korea. As a result, institutions lack a common understanding of problems and a common economic strategy. What we need is to provide opportunities for these institutions to develop that common vision. An idea we are keen to explore was raised by a young North Korean who attended our program in Singapore. He suggested that North Korea create an economic strategy think tank.

(To be continued...)

Have Management Consultants Infiltrated North Korea?

McKinsey, BCG and Bain-type consultants have been involved with business training for North Koreans informally and in their private capacities through our programs. As more North Koreans dive into business and entrepreneurship, the transfer of data-driven analytics and modern management theories is increasingly important. On the other hand, corporate America and management consultants in particular are often (and perhaps unfairly) accused of speaking in jargon and buzzwords that confuse more than they illuminate, and it would be a shame to inflict such horror on North Koreans. To my surprise, a corporate buzzword has penetrated North Korean society. On November 4th this year, KCNA, North Korea's state-run news agency, reported on a Provincial "Innovators" meeting.

Pyongyangites Meet to Welcome Jagang Provincial Innovators Pyongyang, November 4 (KCNA) -- A Pyongyang mass meeting took place at the Pyongyang Indoor Stadium Friday to welcome officials, labor innovators, scientists and technicians from the Huichon Ryonha General Machinery Plant. … Those innovators set an example in every aspect including development and production of new products, economic management and improvement of production environment by fully displaying the Kanggye spirit, thus further glorifying the undying leadership feats of Kim Jong Il and strikingly proving again that science and technology guarantee a thriving nation, he said.

October Rason Trip Findings

In October 2011, John Kim, a board director of the Choson Exchange, visited the Rajin-Sonbong Special Economic Zone. The following is a summary of some of his findings based on site visits and talks with senior officials in the SEZ. An longer account of his travels and impressions will be available soon. This information helps elaborate on our report from August. Rajin Port

The Rajin Port employs 1400 workers. The Chinese have conducted feasibility tests regarding two new piers, but currently the port houses three piers with 9-9.5 meters draft. A 30,000 metric ton coal storage warehouse was built at Pier 1 by the Chinese, who moved 80,000 metric tons through the facility in five shipments from January to September. Pier two, largely dedicated to container shipment, is currently dormant and a Swiss company is currently using Pier 3 to ship manganese and talc out of the region. The Russians also have a 49 year lease agreement signed in 2008.

Oongsang Port

Oongsang Port exported Russian lumber until 1985, but remains largely quiet now except for the occasional fishing boat. The present draft of 7 meters constricts any major future activity, so the North Koreans hope to bring in over $100M to widen the draft to 9 meters. After Rajin Port activity surpasses capacity there, Oongsang Port will become the next regional hub for drybulk activity.

Sonbong Port

Originally opened in the early 70’s, the draft within the port is 7 meters, but a fully laden Very Large Crude Carrier containing 270,000 metric tons of oil can offload at an offshore facility further out at sea. Two pipes, 63 cm in diameter, run for 9km underground before reaching the storage facility at “Victory Petrochemical”, a simple refinery that was designed to refine crude and send oil products (gasoline, naphtha, jet fuel, diesel and fuel oil) back to the port for export. In addition to this two way flow, fuel oil also arrived sporadically at the port as part of aid packages from 1994 to 2008.

Sonbong Power

This power plant was originally designed to take fuel oil from Victory Petrochemical as feedstock and generate power to feed back to Victory. Since the refinery has been offline, Sonbong Power has at times provided electricity to the region, but with fuel oil prices close to $700/metric ton and current electricity prices at 6.5 eurocents/kwh, the economics of running the plant do not work leaving the 800 workers employed here largely idle.

Victory Oil Refinery

Literally translated as “Victory Chemical Plant”, this refinery was completed in 1973 with a 40,000bbl/day crude distillation unit that typically yields 40~50% residual fuel oil for an average crude feed. Investment into upgrading capacity in the international market has led to an eroding of margins for simple refineries like Victory. Currently the refinery is idle and would need over $500M in investment to become competitive.

Hye Song Trading Company

Mr Kim visited a Sewing Factory owned by Hye Song, which runs 8 such factories employing 2000 workers. Output is recorded for the entire year on a bulletin board at the front entrance of the company. All employees except the handyman were women.

Cell Phone use more prevalent

The number of cell phone users in the DPRK crossed 1 million earlier this year and one official commented that the overwhelming majority of urban households have at least one cell phone. This particular official had 4 phones for a household of 3. Foreigners are allowed to use cell phones on a different network, and users of the domestic and foreign network can not call each other.  All usage is prepaid.

Handset Type	Purchase Costs	Usage Costs
Local	1570-2200 RMB	250 minutes and 20 text messages, while each additional minute is charged at 60 NKW (about .1 RMB/min)
Foreigner	1800-2400 RMB	Does not include any free minutes and are charged at 2RMB/min

Banking System has room for growth

There are two banks in Rason, the Central Bank, which is focused on domestic transactions, and the Golden Triangle Bank, which is focused on foreign currency transactions. Transactions for goods and services are conducted almost entirely in cash, usually in RMB or NKW. Mechanisms for savings are credit have room for development. As banks take a fee to deposit and withdraw cash, merchants prefer to hold money in cash (usually RMB). Credit is also available almost exclusively through friends or family.

Bottlenecks

A number of issues require solving if Rason is serious about attracting large scale foreign investment. Among these are reliable access to travel visas, reasonable communications costs with the outside world, a more mature banking system with savings and credit mechanisms and favorable tax treatment with a consistent legal framework. The mere fact that Rason is experimenting with market reform is encouraging, and Mr Kim is optimistic about economic development in the region and the nation as a whole.

Presentation at Philips Exeter Academy

Managing Director Geoffrey will be making presentations in Boston in early November at Exeter and Harvard University in the Boston area. These will be off-the-record sessions. The Strange World of Pyongyang: Helping North Koreans Learn About Economics & Business and Learning How North Koreans Think Phillips Exeter Academy Assembly Talk 10.15am November 1, 2011

This will be a general introduction to what it is like doing fieldwork in North Korea and an attempt to dispel the common media trope of North Koreans as brainwashed unthinking automatons.

-------------------------------------------------- Assembly Speaker Gives Glimpse Inside North Korea

Some excerpts from coverage of the talk in Lion's Eye at Philips Exeter Academy:

"I want to focus on understanding how we look at North Korea. The main issue with North Korea is that it is a very poorly understood country. We still don't really know a lot about the country despite much having been written in the media."

With that opening, Geoffrey See – founder and managing director of Choson Exchange, a nonprofit focused on economics, business and legal training of young North Korean government officials – began his assembly talk. By drawing on his own experiences from multiple visits to Pyongyang over the last year, See was able to give PEA students a glimpse behind North Korea's shrouding curtain...

To close his talk, See left his audience with several questions: "If you believe North Korea is run by a single dictator and the country is not changing, is it possible to reach a negotiated solution to the nuclear crisis? On the other hand, if you believe North Korea is changing, that it is a more complex country, does that give you more options on how to effect positive change in the country?" See added by way of ending, "How we understand North Korea affects what kind of foreign policy solutions we put forth in trying to tackle issues such as human rights, economic development or the nuclear issue."

Pyongyang Trade Fair

tradefair1

In mid-October, a fund-manager and workshop volunteer with Choson Exchange visited Pyongyang during the trade fair. These are some impressions. The 7th Autumn International Trade Fair opened in Pyongyang on Monday, October 17th with great fanfare, attendance and exhibitors.    It is by far the biggest trade show to happen in the DPRK since the 90’s, with most major industries represented.

105 exhibition booths filled the giant hall; with businesses from the automotive, construction equipment, machinery, garment, consumer goods (both staples and discretionary items), and a large number of what technically fall under the “pharmaceuticals” banner, but for practical purposes can be best described as “herbal remedies”.    A number of foreign embassies also had booths; Germany and India were the two most prominent.   There were 25 “trading companies”; 9 based in Rason and 16 from a mix of Hong Kong, Dandong, Taiwan and China.

The fair gave local residents with hard currency a chance to pick up foreign-made electronics, house wares and garments (most vendors seemed to favor USD over Euro or RMB).    The attendees numbered in the hundreds and were mainly DPRK citizens, though there were a number of foreigners (languages I overheard included Russian, German, Chinese, French and Spanish).   I’m fairly certain I was the only American.  As I reflect on the attendee mix, it was surprising to see just how much hard currency was in the room.

tradefair2

Taking center stage in the exhibition hall was Chinese auto-making giant BYD, whose presence in the DPRK has expanded considerably in the past year.    They had their full range of vehicles on display in the exhibition hall as well as representing a disproportionately large share of the noticeable increase in traffic in the capital this year.   The MSRP for their mid-sized L3 model is approximately US$12,000 in most markets, however, the car commands roughly a 70% premium in the DPRK due to the higher costs to import foreign goods.

While the BYD booth enjoyed a steady stream of people walking through it to get a free keychain, Chinese construction equipment makers Sany and LiuGang and engine manufacturer DCD seemed to have real customers in them.    All three had small curtained breakout areas in their booths, which were occupied pretty much the entire time I was there.    In unrelated meetings and conversations with members of the Foreign Investment & Economic Cooperation Committee throughout the week, mining projects (originating mainly from China) are on the uptick and the number of heavy trucks on the road has markedly increased over the past two years.

When I left the fair around noon, the line waiting to get in had grown from about fifty to several hundred.

Overall, my main takeaway from the 9 days I spent in the DPRK compared to my trips over the past two years was that the “activity” in Pyongyang has picked up substantially.    The number of building projects that simply didn’t exist six months ago and that now dominate the skyline is staggering, though not surprising given the goals the country has for itself.

tradefair3

I counted no fewer than 25 high-rise projects (10+ stories with a handful over 30 stories) that were undergoing “active construction”, though at this point are still concrete shells.  In the case of one hotel project, they are actively looking for an outside investor to help them complete the build-out.  Time will tell how many of these projects move from their current state to completion.

Six-Party Talks, 2012 and Economic Development

Negotiations over the North Korea's nuclear program, whether through the six-party talks or through bilateral meetings, are moving ahead. The signs seem to point to some urgency on North Korea's part, with even the National Defense Commission Chairman Kim Jong Il weighing in on the issue.

In August, Andray and myself argued that economic development appears to be increasingly important to the North Korean state - something that seems unusual when placed in the context of its past propaganda efforts and the government's track record on the economy. China's ambassador to North Korea, Liu Hongcai, agrees with us. As 2012 looms, North Korea's promises of becoming a "strong and prosperous" country by next year have obvious failings. During visits to Pyongyang to discuss economic issues, older officials might claim successes in the areas of ideology, culture and security, but acknowledge openly the lack of economic development. Perhaps now that China is bringing in the Chairman of the China Development Bank, maybe we can look towards less bumpy roads in North Korea.

I wonder whether a renewed priority on economic development is a factor in North Korea's urgency to reconvene talks? Will this priority drive flexibility and commitment, and would it have an impact on the contents of a deal?

Orascom's Internet Service in North Korea

On my last trip to Pyongyang, I had the opportunity to catch up with some Egyptian expatriates from Orascom Telecom Holding over popcorn and whiskey. They were also kind enough to bring our team clubbing into the wee hours of morning.

Orascom Holdings is three companies each headed by a different brother of the Orascom family. Orascom Telecoms is headed by Naguib Sawiris, while the resorts arm Orascom Development is run by Samir Sawiris, and the construction arm Orascom Construction by another brother. All three brothers have stakes in different assets in North Korea, with the infamous Ryuggyong Hotel owned by Samih Sawiris. As of May 2010, when I had met Samih Sawiris in Switzerland, he had yet to visit Pyongyang. Recent pictures from Pyongyang indicate that this has changed.

The most exciting development to us was Orascom's 3G Internet service which was still under the testing phase. The plan is to roll out this service in the near future, although the service will only be available to resident foreigners in the initial phase. Approval for this service to be provided on a larger-scale to North Korean citizens, in any censored form, has yet to be given although the infrastructure to do so is in place. For foreign residents in Pyongyang, the service could offer cost-savings of up to 60-80 percent over current satellite internet offerings. There is no information on what security trade-off such a service might entail.

We also discussed text advertising and the current mobile service business. While text advertising is possible, there has yet to be approval for the company to run such a service. Currently, handsets cost Euro 50 each and there is a monthly subscription fee of 900 Won (we are not sure how this cost scales with usage). For reference, the unofficial exchange rate has fluctuated around 2500 to 3500 Won to 1 Euro this year.

Martyn Williams, over at North Korea Tech, has interesting coverage of Orascom's business in North Korea.