North Korea Economic Reform/Non-Reform

South Korea-based analysts and even the conservative media seem to have caught “reform” fever. Analysts and the media (both South Korean and international) are rushing to point to signs of “economic reform” under the Kim Jong Un government. Even government-affiliated entities appear to be leaking news of business discussions with North Korea in previous years, which only makes the Lee administration in Seoul look more of a lame duck. DailyNK's Chris Green has written about how some of the those claims are based on rather shaky grounds. Knowing the people making those claims, I actually suspect that some of them are simply using bad data to paper over their true sources – contacts in North Korea that they have. Journalists have also picked up recent comments from North Korea's United Front Department (CPRK) denying that "reform and opening up" is happening in North Korea. I strongly recommend reading the statement by the North Koreans as the actual message is actually more ambiguous than the headlines would suggest for the following reasons:

1. It is issued by the United Front Department as a message specifically targeted at the current South Korean administration

2. Externally, the terms "reform and opening up" conflates political and economic reform especially when South Korea references the Myanmar example, and the North Korean statement is heavily focused on the political implications of the terms

3. North Korea claims that it already has an open policy and that any changes are really signs of continuity by claiming to put forth "new strategic and tactical policies in keeping with the changing and developing situation in each stage of revolution"

Different journalists and analysts craft different narratives on North Korea by cherry-picking North Korean party and government statements. It is easy to do so as their articles do not need to be subjected to reality checks from comparisons againsts actual situations or policies on the ground. People who would normally readily dismiss North Korean policy statements as mendacious propaganda or smokescreens readily pick out any small sign that proves that North Korea is either reforming or not reforming from the same set of statements that they otherwise normally dismiss.

Going back to the statement, there are several ways to parse the meaning of this announcement. It should be taken in the context of actual economic policy shifts and North-South political tussles and reasons need not be mutually exclusive. North Korea wants to be able to claim a system that is ideologically different from South Korea and China. It also does not want to be seen as a lesser "South Korea", which will be the case if its system is seen as a belated copy of South Korea. Given that there have been ongoing and significant focus on economic development and new policies associated with this focus, and that North Korea claims that they are simply adapting to changing circumstances, the message appears to be that any new policies should be seen as being rooted in past precedents. North Korea also wants you to know that regardless of what changes, their system should be seen as being unique. Note that this does not necessarily mean that policies will be the same as before.

Looking at the economic policies taken by North Korea over the past year and this year and the general public message the government is sending, I believe that changes on the economic front is happening, although with several caveats and at what will be for the moment a frustratingly slow pace. Since early last year, there have been many policy initiatives that indicate a different economic direction. While “reform” is still not openly discussed in Pyongyang, the key phrase used in North Korea is “improvements (개선)” which provides some ideological cover for experimenting with "innovative" economic methods. At the same time, this allows the ruling elites to dismiss challenges to the political foundation of North Korea by claiming that nothing has changed at a fundamental level. Just next door, people forget that China still lays claim to a socialist system even though it has a system that is vastly different to the one that existed in the 1970s. Statements following the Mickey Mouse concert in Pyongyang emphasized two messages: its ok to import some foreign ideas but they should be made indigenous by making Korean adaptations to it. Of course, what those adaptations really should look like could mean any number of things.

My key questions going forward is (a) will new economic approaches be effective and (b) can it be reversed? Underlying these two questions is the constant trade-off between control and the openness needed to attract investments, and the institutional capacity North Korea has to execute on its chosen economic strategy.

The Square Peg in a Round Hole

One of the best perk of our work is the opportunity to read what young North Koreans write when applying for our overseas programs. I often laugh or smile on reading some heart-warming aspirations, or get a sober reminder that North Koreans live in a very different society. One thing that caught my eye is how North Koreans use English idioms that are no longer commonly used. A candidate talked about how he was a “square peg in a round hole” on his first job, failing to fit into a role that was prescribed for him. Luckily for him, he eventually found his calling in a new position that clearly suited his expressive character.

Other metaphors reflect the militarization of North Korean society. One candidate was advised to “stand local, see global,” and “studied against the clock” to perfect her language skills. She called English her “gun” and talked about how her goal of “stand local, see global” was a battle in which she was “armed with a powerful weapon [English] to guarantee the victory in battle.”

Another theme that emerged is how personal aspirations are often linked to national imperatives. Many candidates talked about their desire to learn how to help the country’s economy grow, or how they need to obtain knowledge that would enable them to improve relationships between their country and the rest of the world. Others focus on the desire to learn and to gain new experiences, but tied this back to how they want to improve their organizations.

It is a lot of work picking the right people for programs, but it is also where we get our fun from in this thankless job!

Is Orascom Looking at Resources in North Korea?

While most reporters are scrambling to cover Ri Yong Ho’s sudden dismissal and analysts are busy giving us the 101 signs of where North Korea is going based on this single event, business people closer to the action in North Korea might be having a different consideration in mind. North Korea is supposedly rich in mineral resources, and there is no shortage of investors salivating at the opportunity to exploit these resources. Andray and I have argued that the “resource curse” can end up supporting marketization in North Korea, while not leading to sustained economic development or political reform, if the resource development process is uncontrolled and poorly parceled out to the various fiefdoms in North Korea. We are wondering whether a serious investor might be moving in big-time to exploit the resources sector in North Korea.

Orascom runs North Korea’s telecom networks, in addition to having a stake in the Ryuggyong Hotel. They also used to own cement production facilities in the country, although this has been sold to Lafarge as part of a broader sale of the construction portfolio of the Sawiris family. North Korean investment policymakers we have talked to often trumpet Orascom as a success story for foreign investment.

Recently, Orascom Telecom Chairman Naguib bought a Canadian gold exploration and production company La Mancha. Given the many places in Africa, in addition to North Korea, that Orascom has businesses in, it could be possible that he might be trying to leverage his existing access in North Korea (and these other places) to develop resource assets with his new acquisition. This is a development worth monitoring.

North Korea's mining sector has for many years produced and sold gold bullion on the London markets. However, resource investments in North Korea has been plagued by overlapping jurisdictions, lack of access, and high political and expropriation risks. There have been horror stories of multiple investors being sold the same exclusive rights. If Orascom decides to move into this sector in North Korea, they might be able to leverage their visibility in the country, existing ground operations, political connections, and deep pockets to exploit opportunities that smaller investors are not able to.

North Korea’s Insurance Market

Editor: Insurance plays an important role in supporting economic development and foreign investors. Aside from its usual role in pooling and transferring risks, it also helps companies to obtain financing by protecting collateral. We have begun preliminary research into North Korea’s insurance industry and how we can help develop it. This guest piece by Jakub Rehor, a workshop leader who helped us lead a series of workshops on risk management in Pyongyang, reflects very preliminary understanding we have on the sector, which we will fine-tune as we continue to build our internal knowledge base. It is based on dated sources, and current practices may diverge from what Jakub has highlighted. In the planned, state-controlled economy of North Korea, familiar concepts (including insurance) acquire a very different meaning. In a market economy, insurance coverage indemnifies individuals or corporations for losses suffered due to natural disasters, accidents, sickness, or death. In North Korea, what is called “insurance” functions as a fundraiser for certain entities in the government.

There are two kinds of insurance products in North Korea, individual and enterprise insurance. Both are compulsory and are administered by KNIC (Korea National Insurance Corporation). Compulsory individual insurance is deducted automatically from salaries, and is used to fund the state-run healthcare system. Individuals cannot file claims under this insurance; all payments go into the healthcare system to cover its costs and to other state-directed uses. This individual insurance program was originally administered by Korea Central Bank, but parts of it were moved to KNIC where it formed a new department.

Individuals do not have the option of buying property or life insurance in DPRK. Only state-owned enterprises can use property insurance. Compulsory enterprise insurance covers property losses from all major perils (there is exclusion for war). There are no separate policies or riders for windstorm, earthquake, flooding, etc. Instead, policies specify coverage by type of property (animal insurance, machinery insurance, etc.)

Pricing is set without regard to individual risks and loss history. Rather, insurance operates on a pooled basis, with the goal of roughly matching premiums with claims and administration costs. There are no reserves and the state absorbs any losses or profits. As a result, KNIC has no incentive to care about profitability or correct pricing (and, presumably, service) for local insurance operations priced in North Korean won.

There is no independent regulatory authority in DPRK overseeing KNIC’s activities. In theory, the Central Bank and Finance Ministry should be involved, but in reality they don’t have the expertise or political backing. The only oversight of KNIC comes from the party which provides mainly political supervision.

Given the pooled nature of the compulsory policies and lack of risk-based pricing, KNIC acts mainly as an administrator, collecting premiums and disbursing payments. In this position it functions as a revenue generator for the government via two channels:

1. It fails to pay market replacement value of losses. Claims are settled at official government prices which do not reflect market reality.

2. It has been alleged that KNIC has been involved in reinsurance fraud. Media reports claim that European reinsurers write policies for KNIC which then submits false claims, or retains a portion of the claim settlement payments rather than passing it on to the insured.

The existing insurance arrangements in DPRK are clearly inadequate for the needs of foreign joint ventures operating in the Special Economic Zones. If North Korea hopes to attract foreign investment, it needs to modernize its insurance system to bring it into line with expectations of outside investors.

Written by Jakub Rehor and edited by Geoffrey See

Upcoming CE Presentations (Arizona, Poland & Germany)

Our team will be presenting at the following locations this summer on North Korea: Executive Director Andray will be in Poland and will present at the KSGSC (Korean Studies Graduate Student Conference) in Warsaw in September, 2012.

The Social Role and Media Descriptions of the Arirang Mass Games and Superbowl

This study explores the social roles of the Superbowl and North Korea’s Arirang Mass Games, while analyzing English-language media coverage of those events. This essay finds that while embedded in different cultures and patterns of state/civil society relations, both serve to support dominant social values and are very much in harmony with the interests of the state. English language media, however, affirms the role of the Superbowl, while criticizing the role of the Mass Games.

Managing Director Geoffrey will be speaking on more practical topics at the following events:

Update on recent changes in North Korea's business environment and emerging trends GRS 2012 Summer Conference Tuscon, Arizona July 27-28

Workshop on generating innovative ideas for positive change in North Korea Melton Foundation Global Citizenship Celebration Jena, Germany August 21-25

For bios, please see Our Team.

KCNA Gives Updates on Rason

KCNA ran a story about Rason on Monday in both Korean and English. The story informs us that the paving of the Road to Rason, which was initially hoped to be completed before the onset of winter last year, is still not finished. It is now expected to be completed within 2012. Reports from visitors this spring have indicated that it is "almost done". One wonders if they plan to have a grand unveiling just before or during the 2nd (Annual?) Rason International Trade Exhibition, which runs from August 20th to the 23rd.

The report also mentions that progress is being made on a mixed use railway line from Rason to the border at the Tumen River. It also mentions that plans for the three-nation Tumen triangle tours (to borrow a Koryo Tours phrase) are proceeding apace and that the self-drive Rason tours "are popular". Following traditional DPRK style, specific numbers are lacking.

Perhaps most interestingly, in the original Korean report, the legal reforms of December 2011 (Juche 100 to some of us) as "amending entirely" the Rason Special Economic Zone. (The English version just says the law was "amended and supplemented".)

There are a number of important changes in the newest version of the legal code. Perhaps most importantly, there is clearer delineation of the responsibilities of the Rason People's Committee and the central government. Interestingly, there are now also provisions for telecommunications to be used 'freely' in the zone.

In fact, however, the legal changes made in in January 2010 were probably more significant, having cut out provincial governance and given local authorities more autonomy. Drawing attention to and praising the reforms from 7 months ago does associate the changes in Rason with Kim Jong Il's last days, however, thus implying they  are in accordance with his final wishes. Obviously, this confers legitimacy on the current development decisions being taken there.

Meanwhile, Asahi Shinbun recently reported that in January, Chinese businessmen living in North Korea established an association in Rason, saying "they wanted to serve as a bridge between the North Korean government and Chinese companies."

Unfortunately, fixed hyper-linking is tough in the revamped KCNA website. Just visit KCNA and search for 'Rason'.

Debt Deal Looks Like Set Deal*

Russia has decided that if North Korea’s Soviet-era debt is never going to be repayed, it might as well not stand in the way of better trade relations and geopolitical influence. Over the weekend, Russia’s finance ministry said it has agreed to write off 90% of North Korea’s debt of $11 billion. This is a huge sum, obviously, equivalent to 20-25% of North Korea's GDP, depending on which set of made-up statistics you like best. North Korea's previous attempts -and failures - to free itself from the burden of Cold War era debt are well documented, including asking Hungary to write off 10 million in debt two years ago and, more curiously, offering to pay part of a similar sized debt to the Czech Republic in Ginseng. The debt that Russia holds dwarves the amounts owed the other former Eastern-bloc states. As such, it represents a huge victory for the budding Kim Jong Un era.

Kim Jong Il's "fun trip" to Siberia last fall to meet President Medvedev was partly about political succession, but was also in no small part about debt, aid and economic co-operation. It was then that the debt restructuring was agreed upon and now looks set to be implemented.

The debt forgiveness maintains a fairly broad Russian policy in recent years to forgive debt in Asia and Africa in exchange for access to trade and investment deals. However, it also reflects a specific interest in peninsular affairs that Russia has not demonstrated since the fall of the Soviet Union.

Russia's re-emergence as an economic player on the Korean peninsula has already begun with its gradual investments in the Rason SEZ. As of late last year,the SEZ is connected via a shiny new rail line to Vladivostok. Russia has also leased a berth at Rason's ice-free port, which is envisioned as a link between the Russian Far East and markets in Japan, South Korea and beyond.

Russia is also interested in extracting North Korea's reserves of zinc, lead, and other non-ferrous metals. On top of that, there is also apparently a plan to lease 200,000 hectares of land to North Korea  in the Amur region. Finally, there is the Russia to South Korea gas pipeline, which still faces significant political hurdles, but comes a step closer to reality if North Korea's debt to Russia disappears.

Back in February, Russian Ambassador Valery Sukhinin told Bloomberg that “All these existing agreements are supported by the new leadership in North Korea" (mostly referring to the pipeline). Kim Jong Il's deal with Russia looks especially shrewd and well-timed, given his death just five months later. The harmony in interests looks set only to increase, as Kim Jong Il's successor appears increasingly focused on economic management issues, while Medvedev's successor/predecessor is interested in increasing Russia's influence in the Far East.

Maybe, for all of this, the DPRK will publicly acknowledge the Russian Federation as the USSR's legitimate successor. Carefully worded, of course.

*Apology for the rhyme.

An Indecent Proposal?

A curious rumor has popped up in Chinese media over the weekend - one which states that North Korea is promoting transnational marriages as a means to attract foreign investment. This financial site, for example, attributing the "Chinese News Net" (中国新闻网), says that for a fee of 300,000 yuan a foreign man can obtain a marriage license in Korea. With the dashing suitor then bonded to a family, he is then expected to make further investments. Failing to do so will result in a 1,000,000 fine.

So far, this difficult-to-believe story hasn't made a splash on the English-language web. Some of the more obvious search terms give results for mostly crappy translation-bot blogs and websites. The only 'reputable' site to carry the story is the illustrious Global Times, which cites a defector group, rather than any Chinese sources for the information. Writes the Global Times:

"The North Korea Intellectuals Solidarity (NKIS), a group of North Korean dissidents resident in South Korea, claimed that entrepreneurs who want to marry North Korean beauties need to pay a deposit of $47,130 to get permission from North Korean authorities, the report said."

The NKIS helpfully goes on offer that "the promotion of transnational marriages at a national level proves that the country is in urgent need of attracting foreign investment to cope with its economic downturn."

First, this story, while possible, seems highly implausible, given North Korea's official view of itself and the value of its homogeneity. It is often claimed that marriage between a North Korean and foreigner is actually illegal, though North Koreans I've asked have said otherwise. That, said the social pressure against such a move would be staggering. To now promote such unions for the good of the nation would not only be a dramatic policy shift, but would be highly contradictory.

Second, it will be interesting to see if this makes it over into English language media in the next couple days. It is after all the kind of thing outlets like the Daily Mail are keen to print.

This story doesn't have the inherent drama of the "Kim Jong Un is dead rumor" that gripped the world back in February, which originated on Weibo and came to dominate a news cycle. But if the "investment wives" story catches some buzz on the Chinese web and then gets picked up by Western outlets, it could be a signal that Chinese netizens are going to act as another - and separate - filter for how we get our North Korea "news".

Female Participation in North Korea's Business Sector

In our workshops in North Korea, we have interacted with a number of highly-educated female managers in state-owned enterprises as well as businesswomen who run their own enterprises. Many of them are both highly capable and excited about growing the businesses they own. They have come a long way, and some even have the opportunity to take their businesses overseas. Haedanghwa, a North Korean restaurant and food business in Beijing, has a female General Manager by the name of Han Myong Hui. The restaurant aims to “provide pollution -free raw materials and seasoning from Korea and ensure unchangeable taste based on the strict hygienic quality management system” which is not too bad a value proposition given the perpetual smog sitting over Beijing. During my first trip to North Korea I met a female university student who talked about how she wanted to go into business and show that females can be good business leaders. In fact, this the initial impetus for setting up Choson Exchange. Females play an important part in North Korea’s business sector, which we attribute to their greater labor mobility compared to male colleagues who have to stay in government-assigned positions. Unsurprisingly, service sectors tend to have a higher representation of female managers compared to industrial sectors.

However, at many levels they are still under-represented. We previously surveyed a North Korean who is familiar with North Korea’s business sector, and found that as we go up the organizational hierarchy, female participation rates fall to 10-15% at the General Manager and more senior levels, compared to 65% at the entry level (we believe they are over-represented here because of stagnant career progression).

Our initial hypothesis was that access to business training and international opportunities could go a long way towards leveling the playing field for female managers in North Korea. We found that at the University of National Economy, a key focal point for business training, only 20% of enrollees are female. Furthermore, only 5% of international business opportunities are given to females. Depending on our ability to fund-raise for such a program, we hope to be able to more actively target this segment in order to bridge the capacity gap.

A program that will ensure a more level playing field should focus on providing networking opportunities, business and leadership skills training, and opportunities for international business exposure.

A Week of JVIC

Early last week, the Rason City Administration announced that their inaugural Rason International Trade Exhibition of 2011 was going to have a second incarnation this summer. The invitation has been helpfully uploaded on NKeconwatch. As with the video presentations last year, materials for the trade fair seem to be primarily in English, with Chinese as a distant second. This is indicative of a long term goal to have this trade fair (and Rason more generally) develop as something greater than just a two nation affair. Interestingly, The Rason Exhibition Corporation, founded specifically to organize the trade fair, only has advertised offices in two foreign countries: China and in Singapore. Meanwhile, Kim Yong Nam was on a trip to Indonesia, via Singapore. Kim had with him Ri Kwang Gun, chairman of the Joint Venture and Investment Commission and An Jong Su, minister of Light Industry. The Singapore portion was brief, but the Indonesia portion was largely focused on economic issues.

From the Jakarta Post, largely quoting Foreign Minister Marty Natalegawa:

“There was indeed sharpened focus on economy and trade during the meeting. Not only about investment itself, but there was also interest [on the part of] North Korea that Indonesia could share how to regulate or manage foreign investment in the country. We noted that North Korea’s attention was quite high on the topics related to economic development and investment,” Marty announced at the State Palace after the meeting.

“Talks on this issue were also raised during the meetings of North Korea’s ministerial-level officials with the Indonesian government before President Kim’s visit today,” the minister added.

There were, however, no concrete business agreements made.

Minister Marty described the discussions on investment as at the "exploration level". North Korea is no doubt keen to reestablish what was once a close relationship with Indonesia in the hope of striking large investment deals down the road. Indonesia, by the way, is sometimes lauded as an example of a "Reformist Autocracy" that has managed to avoid a resource curse.

Friday saw the Rodong Sinmun carry a story called "DPRK Official Outlines Investment Environment". Kim Il Sun, who is a section head of the JVIC gave a speech at the Koryo Hotel. Among other things, he said that to "keep apace with the developing world economy which is characterized by cooperation and exchange, the DPRK government has been paying due attention to the expansion of external economic cooperation based on the constant development of the foundations of the self-reliant socialist economy and making active efforts to create favorable environment for investment."

JVIC is the main organ though which FDI is regulated and managed. It is also involved in overseeing the Rason SEZ.

Kim also touted underground resources, saying "rich natural resources serve as a strong foundation that guarantees the development of the self-reliant economy."

We will be most interested to see if the Rason trade fair expands, if Indonesia and the DPRK strike and large deals in the coming months and if expanded trade and self-reliance are compatible. One thing is clear: JVIC seems increasingly in the news, taking a more visible role for both North Koreans and foreigners.