2012: Economy vs. Military?

Expect fireworks next week in North Korea: both of the ancient Chinese gunpowder and the ballistic missile sort. The former was always going to happen. Was the latter also inevitable? Does it mean military-first is the guiding principle of the new government? It certainly struck people as strange the way North Korea accepted an aid deal with the United States on February 29^th, only to announce a few weeks later that it was going to launch a satellite on or around Kim Il Sung’s birthday celebrations. This was seen as a violation of the spirit of the deal, if not the letter, which appears to have left a loophole regarding satellite launches.

Satellite or missile – the technology is basically the same – it is certainly readable as a military provocation and it broke the already cynical hearts of people who saw the ‘leap-day deal’ as a small step in the right direction for US-DPRK relations. It also appears at first glance to run counter to what I’ve argued elsewhere, which is that economic issues are coming to the fore, while military first will begin taking a lesser role in organizing society.

The most likely explanation is that both the deal and the satellite launch are parts of a long term strategy, but one that not everyone in Pyongyang’s policy circles was privy to. Moreover, it looks like the timeline was supposed to be different. The aid-for-moratorium package might have been decided in late December, but then Kim Jong Il died and negotiations got pushed back.

What kind of debate took place in Pyongyang about adjusting the plan, given the compressed timeline for accepting the deal and announcing the satellite launch, is impossible to know. The harder line was probably the easier to take, but whatever options were laid out, the domestic value of a big rocket launch won out. That is perhaps key to understanding what’s happening right now: the satellite test isn’t about us.

At least not primarily. The countries that can produce space-faring ballistic technology form an elite club. More than anything, this display of technological prowess is designed to link Kim Jong Un to an image of strength and independence. It will instill pride in national accomplishments on North Korea’s biggest day of celebration since….ever. (Liberation might be a contender, not much of one.)

So while North Korea’s legal revisions, newfound attention paid to SEZs and domestic media campaigns all point to an increased interest in economic issues, this doesn’t mean that suddenly the military is unimportant. It is one half of the ‘great and prosperous nation’ North Koreans have been hearing about and is the half that Pyongyang can really point to and say ‘we’ve got this - this part we know how to do’. At the risk of being obvious, the military bureaucracy in general and national defence specifically are too significant in this time of transition to be radically altered.

The new generation of leadership is working on finding the balance between revering Kim Jong Il’s methods and finding its own. So while Kim Jong Un has visited several military sites this spring, the first major event after Kim Jong Il’s death was a rally focused on economic growth. Check out these compelling pictures of the event taken by Xinhua. Note catchy phrases such as ‘light industry first-ism’ and ‘constructing an economic power: the people’s lives upward’.

This long-term quest to find a new governance style also gives birth to articles such as this one that makes the claim “Songun Political Method is Driving Economic Construction”, while not actually establishing any real link between the two.

Whatever drove construction of the Huichon Power Station (referenced in the Songun article), those of us with an interest in seeing progress in North Korean economic development hope that it functions well and helps more North Koreans experience a more comfortable life. It is also not too much to hope that after the launch, all parties find a way to return to dialogue and compromise, rather than spiraling towards greater confrontation.

Commercial Lending Workshop – How We Choose Programs

Early last year, we asked a banker in Pyongyang what finance-related workshops we should implement in Pyongyang and she replied that “Exchange-Traded Funds” and “Private Equity” were topics of interest. We immediately considered these impractical and when we asked why she wanted to learn about the topics, she said that she had come across the words in the Financial Times and was “curious.”* While we encourage our participants to be curious, given limited resources, we had to pick issues where we believe we can make an impact that leads to positive outcomes. The way we do this is through a due diligence process where we identify key priorities of partners on the ground, see if this is in line with developments we would like to see, and decide what kind of workshops could help make it happen. This normally takes 3-4 trips and occasionally a pre-workshop (i.e. a workshop where the purpose is more to find out about a policy issue in North Korea and its associated challenges) before we can identify the opportunity. For our most recent workshop, which focused on systems supporting commercial lending, we started the due diligence phase as far back as 2010 through workshops and extended discussions over several trips.

Our North Korean partners have identified aspects of banking knowledge needed for commercial lending, and we agreed that these were key priorities that can be implemented in a 2-3 year time frame. Currently, at least on paper, banks lack a lending system. We believe that for new enterprises to grow and develop, a true lending system needs to be in place to provide capital on a commercial basis. This was the basis for covering risk management and asset-liability matching in our most recent workshop in March 2012, which are systems needed to support commercial lending.

*According to a friend who works for the Financial Times, one of the FT reporters had met the same person in Pyongyang and asked her what she thought about FT. Her reply was that FT focused too much on traditional equity coverage, and not enough on derivatives.

March Pyongyang Workshop Album

Choson Exchange held its first Pyongyang Workshop Series for 2012, with a two-day training session on March 13-14th. Approximately 30 participants from a variety of financial and regulatory institutions took part in the workshop. The main topic was “Asset-Liability Management,” which is a banking practice to ensure the difference between deposits and loans does not create exposure to excessive risk. Discussions also focused on how private equity can be used to grow businesses.

We'll have more details soon, but for now enjoy these snapshots.

Young Pioneer

Workshop

subway

forms

Students

Kiddo

Rush Hour

DVD Workers

Lecture Materials

Rason's Legal Code

In 2010, the DPRK revised the laws governing Rason Special Economic Zone. This booklet, scanned into pdf form, sketches out the new laws in both Korean and English (English is in the back half). It was at this time that the authorities removed Rason from provincial administration, giving it more autonomy in some ways, while also giving authorities in Pyongyang a more direct link to planning for the SEZ.

cover1

Potentially interesting clauses include:

- Ships regardless of nationality are permitted to port (article 26)

- Business licenses can be revoked if DPRK law is "seriously" violated. (article 15)

- Prices will be set between the buyer and seller, though some basic consumer goods may be fixed by the local government. (article 26)

- Disputes may be resolved by arbitration either in the DPRK or a 3rd country. (article 45)

Geoffrey: Some of the things I like are the decentralization of decision-making to the province, the allowance for managerial autonomy, and an emphasis on technical training. That said, these things will all boil down to implementation. As rule of law and legal training is a cornerstone of our work, we think there are opportunities to work with Rason in the future on such programs and we will continue with our project scoping and audience due diligence before deciding whether an expansion is warranted.

Download the complete booklet here:

Law of the Democratic People's Republic of Korea on the Rason Economic and Trade Zone. (English translation at the end)

For an analysis of Rason's prospects check out Andray's paper at the Korea Economic Institute.

Update on North Korea’s Economic Strategy – JVIC and Taepung Merger is a Positive Step Forward

Last year, we met with both the Taepung Group and the Joint Venture and Investment Commission (JVIC) to discuss potential training programs in economic and investment policy. We ended up working with the JVIC on some training programs as most of their staff came across as being professional, earnest, and well-intentioned. They were focused on critical issues such as reshaping investment laws and strengthening the rule of law in general. Many of them were aware of key challenges businesses faced in North Korea. Many of the staff also lived abroad and brought with them creativity and pragmatism in looking at problems and in devising solutions. During programs and meetings, workshop leaders constantly reinforced the themes of establishing credible investment laws, tackling corruption, providing more information on the business environment and reducing expropriation risks. We emphasized the need for a consolidation of investment-seeking efforts as we were worried that having multiple investment agencies would lead to investments being funneled into different patronage networks instead of being redirected to broader development objectives. There was also the risk that different agencies would offer inconsistent terms to investors, leading to an unfair playing field.

While we heard over the course of last year that a JVIC-Taepung major was in the works, we never knew when this might take place. Hence, we are gladdened to read that Taepung is going to be merged into JVIC (which we have yet to confirm). We believe that this is a positive step forward for North Korea’s economic development, as they will need an effective agency to support foreign investors, shape the domestic business environment, and help foreign investors navigate the domestic business environment. Perhaps a next key step would include JVIC formally taking on some of the roles of the State Planning Commission, as foreign investment is critical if North Korea is to revive its moribund state enterprises and overall economy.

What is the Taepung Group?

As of April 2011, executives at Taepung describe a business model more reminiscent of a holding company rather than a government institution. Investors place their capital with the Taepung Group or create joint-ventures with the group. Taepung acts as the manager of the companies. There could be potential deviation from this description, although this is the model envisioned by leading executives on the group. The group aims to “build an economy outside of the state-planned economy.”

What is the Joint-Venture & Investment Commission?

The JVIC is similar to the more traditional investment-promotion agencies in other parts of the world. In addition to promoting North Korea as an investment destination, JVIC officers also work with investors to navigate the North Korean business environment, as well as provide feedback on key policies influencing the investment and economic environment. They oversee North Korea’s Special Economic Zones in Rason and Wihwa Islands and lead government negotiations with China in developing these zones.

DPRK-US Agreement Does Not Reflect Significant Policy Change (Yet)

With the news that North Korea has agreed to halt uranium enrichment and allow inspectors into the country to verify its nuclear activities, we are probably going to hear from pundits making claims about Central Military Commission Vice-Chairman Kim Jong Eun’s role in this decision and whether it marks a sea change in the North Korean leadership. What I would like to emphasize is that this deal was negotiated before the National Defense Commission Chairman Kim Jong Il passed away. While there was some pushback on the amount of food aid and the composition of food aid, the announced details for aid do not mark a major shift from initial positions (based off US assessment of North Korean needs), although it does indicate some concessions from North Korea’s Ministry of Foreign Affairs which was supposedly angling for a larger amount of aid.

As such, I don’t think we can at this point draw any strong conclusions as to whether Kim Jong Eun’s leadership will indicate a significant policy shift from before, but rather, conciliatory measures seem in line with ongoing trends from 2011 which emphasized economic development and standard of living over traditional security themes.

There could still be significant changes down the line, but we believe people will start mistakenly attributing North Korean policy trends emerging in 2011 that were not covered by the media as changes implemented in 2012 because of a new leadership.

Upcoming presentations (Harvard/DC) and thoughts on what drives impact in North Korea

Upcoming Presentations Andray will speak at the Korea Economic Institute this Friday on Rason’s economic development. More details at the KEI webpage.

Geoffrey will speak at the Harvard Social Enterprise Conference this Sunday. More details at the SECON website.

Speaking at HPAIR - What Drives Impact in North Korea

Last weekend, I spoke at the Harvard Project for Asian and International Relations at the Harvard campus. The hosts did a great job of putting together a great program despite their busy schedules as students. The moderators also did an amazing job of putting together a very interesting panel, and I was able to speak alongside Rainer Holl, head of Fellow development for Ashoka Germany, as well as two other very accomplished social entrepreneurs.

I am glad to have the opportunity to share our experiences shaping developments in North Korea, as well as the unique challenges of being in a very unusual (to put it mildly) environment. Most amazingly, I walked away with a great set of new ideas for our work crowd-sourced from a wonderful audience, a great panel and our wonderful moderator Grace Chung from the Kennedy School of Government.

We made the following key points on what we believe drives success in our work in North Korea. I have to qualify these statements that these are our guesses at what works. But really, who knows given that this is North Korea! Also, we have met other people running successful programs in North Korea who probably have different thoughts on this so don't take our word as the last word.

1. Social innovation is critical in North Korea – programs should not focus on “sexy” high-tech solutions, but on understanding the social structures in North Korea and how our programs add value (e.g. by providing cross-organization platforms for dialogue)

2. Finding the right people is essential – we find that the content of our programs or the quality of workshop leaders, while important, have far less of an impact than simply picking the right North Koreans to take part in those programs

3. Managing politics is key – everything in North Korea is politicized, and understanding the policy and bureaucratic processes at play is important for creating impact

Teaching business skills in the Hermit Kingdom

We were profiled in the Korean Herald:

Teaching business principles to communists in the world’s most isolated state may seem a thankless task, but for the NGO’s founder Geoffrey See it can engage the so-called Hermit Kingdom in a constructive and a-political way.

State-run enterprises are already working to attract international business and foreign investment in joint ventures. With infrastructure investment in areas such as the Raseon special economic zone, there is a thirst for commercial knowledge there like never before.

“The old generation in North Korea has very little incentive to experiment,” Abrahamian said. “This is true in any country ― younger generations tend to be open to new ideas. There’s definitely that sense in North Korea too, the young people are more interested in broader way of doing things. In that sense North Korea is going to change.”

While North Korean startups tend to be smaller branches of state enterprises, Abrahamian explained that the growing number of joint ventures with international companies has created the need of better understanding of how to manage assets and resolve disputes. Seminar attendees have asked for help in setting up ventures from chicken restaurants to a spa resort, areas that can prove lucrative if they can position themselves at the top of a state-run venture.

“The last couple of years have seen a bit of a shift in North Korea so there is more of a focus on economic issues,” he said.

“You are seeing some developments at their special economic zones in the far north, there have been positive developments there, they revised laws regarding foreign firms operating in North Korea last year and we can see the international trade numbers soaring upwards especially vis--vis the Chinese.”

Read more here...

Chart Focus: North Korean Resumes & Their Listed Hobbies

We recently received some resumes from North Koreans we are evaluating for an overseas program in economics and business. While both sexes share reading as a hobby, males are more likely to take part in other sports, while females are more likely to list singing and dancing as hobbies. I am still thinking of the love a North Korean lady has for Madonna (Y O U, You Wanna, L U V, Madonna).

Pyongyang in Amsterdam

This article was contributed by Hamel, who is among other things, a connoisseur of Northern Korean cuisine and graphic novels.

If you’re reading this blog you have probably heard by now of the chain of North Korean restaurants throughout Asia.

They have them in Beijing, Shenyang, Shanghai, Hanoi, Siem Reap, Vientiane and Jakarta, among other cities. Their number has been increasing since 2000, and now they have finally hit Europe.

The ladies are all beautiful, from elite Pyongyang families, and are musically skilled. You can find videos of their singing and dancing performances on Youtube and at least one has been likened to a famous South Korean actress. In China the restaurants often also have coffee shops and noraebang (Karaoke rooms) attached. I had never before seen a gayageum playing together with an accordion, and it actually wasn’t that bad – though you could hardly call it traditional Korean music.

Various media outlets have had a crack at a story on these fine dining establishments, including CNN and the NYT. Several articles about restaurants are collected at NKEconWatch.

Well, now they have finally hit Europe! Just last month, a North Korean restaurant opened in Amsterdam. Nine chefs, waitresses and minders arrived at Schiphol in mid-December to set up the place, which opened on the 27th of Jan.

Initially media attention was only in Dutch.  The Korea Times picked it up just over a week later. I imagine the photo used in that article was a promotional one supplied by the restaurant, but gee, it doesn’t look that exciting or cozy.

A maximum of 24 people at any one time can eat there, and a set menu (table d’hote) runs at 79 euro a person, including a floorshow.

There is a key difference between this restaurant and those in Asia. Basically, it has been opened by two Dutchmen (both of them named Remco – though not Korean Studies professor Dr. Remco Breuker) and was apparently self- financed. All the Pyongyang restaurants in Asia are owned and run by North Koreans, and the profits are thought to flow back to the homeland. In this case, only the staff have been flown in (and they had been trained at the NK restaurant in Beijing). They are living in a hotel in Amsterdam.

Here is the website of the place, which hopes to grow into a cultural center, selling North Korean artworks – sadly, not the propaganda art that people in the West actually want to buy.

The restaurant is located in what used to be the Tulip Hotel in an eastern corner of Amsterdam (far from the center). Here is the channel of the new Amsterdam restaurant so you can watch for yourself what a 96 euro per person looks like.

Here is an extract of an interview with one/some of the waitresses who work there:

What is it like to be in the Netherlands? “Very special, everything is different, it’s a very beautiful country, thank you”

You are selected by the Korean government? “Yes, all. We were selected and trained for half a year in the Pyongyang restaurant in Beijing. Then we came here.”

Do you know the stories that are circulating about North Korea? “Of course. That’s why we are here. We are here to show Europeans the other side of country, our beautiful traditions. We are thrilled to be here. You will stay to eat, won’t you?”

Actually, perhaps it was misleading to say North Korean restaurants "finally" reached Europe. There was also a North Korean restaurant in Vienna in the 1980s. This one did not provide a floorshow, however. It was next to the Kumsong Bank (a DPRK outfit) near the Vienna West train station. There was also another restaurant in Vienna run by pro-Pyongyang Japanese-Koreans, but that seems to no longer exist either.