Bikes in Kaesong

parked bike

Daily NK reported this week that a 20 year old order forbidding the riding of bikes by women was repealed in August. No one seems to know exactly when the order was instituted, nor when it was repealed. North Koreans I talked to disagreed amongst themselves, with some saying the rule had actually been dead for three or four years, and others saying several months.

Certainly, whatever they'd been, the rules seem to be another example of Pyongyang exceptionalism: to see a woman on a bicycle in the capital is rare, but elsewhere it is exceedingly common. Moreover, some have estimated that while a decade ago, 30-40% of households had a bike, now it is up to around 70%.

The increase shows. Recently, both Koreans and visitors have noted that bicycles in and out of the capital generally seem shiny and new.  Absent are the clunky 25 kilo rustbuckets than one finds all over Beijing. (Of course, Beijing's plummeting bicycle use is now something the government seeks to reverse.)

On a recent trip to the DPRK, we noted that in particular, Kaesong seems to have enjoyed an explosion of bike use. Streets that were a few years ago dominated by pedestrians are now clogged with bicycles. (Check out this gorgeous shot, apparently from this winter. More here from the same photographer.) This can only be due to to the influence of the Kaesong Industrial Complex. The KIC has grown consistently since it opened in 2005 and now has over 50,000 employees. This is out of a total Kaesong population of something like 300,000, so one in six Kaesongers/Kaesongites/Kaesongians works directly in the zone. This means the vast majority of Kaesong families will be in some way dependent on the KIC for income. Income that apparently that has gone towards more bikes. Good news for them, wages have been bumped up 5% this month. The bad news being this almost certainly does not keep pace with inflation.

Nonetheless, people can now get around better than ever before in this city where someday they will literally bike to South Korea in under half an hour.

Entrepreneurship in North Korea

While giving a talk at the Wharton School in April, I stopped by the Knowledge@Wharton publication to chat about my work. The following are excerpts from the interview.

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Knowledge@Wharton High School: Geoffrey, thank you for joining us today. Why did you start this organization? Why did you focus on financial education as a way to support long-term economic development in North Korea?

Geoffrey See: When I was a student at Penn in 2007, I [chose] to go to China for one of the summers to do research and to intern in China. I had some time during my internship, so I went to North Korea as a tourist. I was familiar with the usual stereotypes of North Korea as a communist country, but what really surprised me was [that] I met university students who were very interested in business and economics. They wanted to get access to books and topics, they wanted to find ways to learn about business, and they were very curious to hear about it, especially from someone who was studying business in a university setting.

KWHS: Can you give us a snapshot of economic development today in North Korea? What does it look like?

See: [Many] young people there are very interested in trying new things. They want to set up their own businesses. They want to implement the things that they’ve learned and heard from the rest of the world. The problem, though, is that it’s still a very restrictive economy and society, so [they can’t implement] a lot of the things that they want to do. We have discussions with younger people who are trying to implement some of these ideas.

KWHS: Tell us about the workshops. How do they take shape?

See: We first go [to North Korea] and talk to the various institutions to try to understand what they want to learn about. It’s a very interesting process because when you talk to these people, they have very limited access to information and they are trying hard to understand the world around them. We have conversations, say, with a banker in North Korea, and she tells us, “I’ve read this term in the Financial Times and I don’t know what it’s about, but it sounds very interesting and I’ve seen it come up quite a few times in the paper.” Some of these terms are “private equity” and “exchange trader funds” — topics that are relevant in the rest of the world.

But in North Korea, the sad thing is that we [have to] tell them, “These are not things that you can implement in [this country] in the next 20 or 30 years…” But it’s interesting to see them being curious about a process. So we normally talk to them about these different topics, get a sense for what they’re interested in and what they can realistically try to change in the next three to five years. Then we say, “This is a topic we want to work on.” We bring in a team of workshop leaders who are volunteers from the business or policy sectors. They do small group workshops to discuss these topics and try to get [participants] to think about how they can potentially implement this knowledge within their environment.

KWHS: How strong is business education in North Korea?

See: They don’t have access to most of the modern knowledge that’s being created in the business area. We have looked at some of the universities and the books they have in the libraries, and we see financial textbooks from the 1970s published in the Soviet Union, which makes us a bit dubious about the extent to which they capture the current field of knowledge in some areas. The [people here] are really conscious of the fact that the world sees them as being very isolated. When we do a workshop, participants tend to drop big words that they might have read somewhere on the topic or heard about from someone. Very often, they don’t understand the concepts behind them. [For instance,] we had some of them raise [the concept of] corporate social responsibility (CSR) in a [context] that had nothing to do with [what CSR is]. They were trying very hard to show that, “Oh, I’ve read a little bit, I’ve heard a little bit of what’s happening outside and I’m in tune with the theories.” But very often, you realize that there’s a weak conceptual understanding of some of the things that they raise.

KWHS: As you build out your organization, say, in the next five years, what do you see as your main goals? What do you see as your biggest challenges?

See: We are very happy targeting younger adults aged 20 to 40 – [they have] high potential, and are very curious and very intellectually motivated. This group of people is [excited by interesting ideas]. They want to test and try them out. We probably want to expand the number of people we involve from that age group and get them to think about the next steps. It’s not just learning about business or finance or economic policy, but also saying, “Okay, now that I’ve learned this, how can I actually set up something and implement some of these ideas that I’ve learned?” We may try to support them, maybe by setting up a business incubator. The concept behind it is that people are interested, but they don’t always know how to set up a business, raise capital, set up a proper accounting system. We would come in and help them realize their dream by providing them with these kinds of resources and some of the funding to create businesses.

KWHS: Does North Korea have an existing incubator infrastructure?

See: This is the exciting part of our work and also the most challenging part. Currently, it’s a very alien concept to them. They’ve never seen it before and they need to get permission to get it done within the system. So we have started introducing the concept to them to get them to feel a little bit more comfortable with it. I think it’s something that we have to work towards, and I’m guessing in two to three years time, we may be able to get it set up.

KWHS: Are the young people you speak with in your seminars very entrepreneurial? Have you found that they really want to start their own businesses?

See: I think for most of them, there is excitement because they read and have had the opportunity to go to other countries. For example, they visit a supermarket in China or visit a fast food chain in China and [think], “Wow, this is a very interesting concept.” It has the connotations of modernity, so they look at a fast food restaurant and see it’s not just convenience and cheap food, but it’s fast, it’s clean, it’s modern. A lot of them want to bring those concepts back because [these ideas are] very innovative and exciting. There’s so much curiosity, but people haven’t had a chance to go out and try to get it set up in a space where none of this exists.

KWHS: It sounds like they have hope.

See: I think there’s a lot of hope. There are challenges, too. There’s always going to be an opening-up process where there’s more leeway to do things, and then [other times] it’s going to be more strict and restrictive. When you’re between 20 and 30, you [get excited]. When we see them getting to 30 to 40 years old, people tend to be a bit more rational and want a more stable path in life.

Opening, Reform & Media Frenzies

There has been, as we noted on this blog last week, a frenzy of speculation on North Korean reform and opening, leading to a headline from yesterday claiming that North Korea has virtually ditched state planning. This news comes from RFA (which has its own particular concerns and standards) and has now been cycled into South Korean English language media. It will not unlikely pop up in some Western media outlets, also. Whatever the veracity of this latest and greatest claim about dramatic change - and there is good reason to be skeptical - it is clear that there has been a shift in media coverage of the DPRK. Why?

There are the usual issues that relate specifically to reportage on North Korea. The opacity and unwillingness to abide by western norms essentially mean all bets are off regarding what can be said about the North. The normal journalistic rules don't apply. Much of the rumor comes from South Korean media and outlets like RFA, who are more willing to quote unnamed sources, both official and otherwise, when constructing a story.

But it can also be in large part explained by the Competitor-Colleague concept put forward by Jeremy Tunstell in his pathbreaking 1971 book, Journalists at Work. In this paradigm, a particular journalistic specialist receives regular, usually daily, acts of competitive (and co-operative) behavior from other specialists in his or her field. Asia correspondants are few in number, and Korea correspondants are fewer still. Their interactions are frequent, with offices often in the same buildings or neighborhoods and foreign correspondants' clubs providing social and professional support.

When an idea sweeps through the professional group, and particularly when several experts in the social sciences are willing to support those ideas, it can be difficult for individual journalists to avoid reporting on a story. "If everybody else is doing it, I should be too." Institutional and social pressures provide too powerful a guiding hand.

These stories then get picked up by regional publications and given even more certain and ridiculous headlines by editors and writers who are not specialized in the area and are more interested in selling papers that working out nuanced caveats.

When a new narrative about  a "mysterious and unknowable place" like North Korea comes out it can quickly become the dominant construct through which any North Korea-related information is filtered. Especially, as Chris Green puts it, when it is "exactly what so many of us would really like to hear". So unlicensed (shock!) Disney characters are signs of opening with western culture. Ri Yong Ho's retirement was due to a battle over economic reform. And a single rumor in Yangangdo about an economics lecture becomes "state planning ditched".

We will probably see the "reform and opening" paradigm shape news stories on North Korea for many months to come.

Let's finish with a little more from Tunstall's assesment of how ideology constrains competitor-colleagues:

"The ideology of a particular competitor-colleague group appears to be carried forward in a largely oral tradition. It is probably all the more potent for not being written down. The group’s ideology cannot be easily challenged by outsiders. It also cannot easily be challenged by members of the competitor-colleague group. Indeed the group ideology –strongly influenced as it is by news organization goals, news sources, and by the previous careers of competitor-colleagues – is in its very nature likely to be well adapted to occupational realities and to the forms of pressure which are regularly exerted on group members. The group ideology is expressed in conventional wisdoms, some of which appear so obvious, or are so strongly held by a majority of members, that they are never challenged." (p. 270)

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.