Mr. Schmidt Goes to Pyongyang

News reports suggest that by now the Executive Chairman of Google has touched down in the DPRK. (I wonder which of Beijing Terminal 2 Starbucks' soggy  sandwiches he grabbed on the way to his flight.) Is he going on business? Is it a humanitarian mission? Is he beginning a foray in international policy issues?

Thursday, as Google Wave lit up with news about the Richardson/Schmidt trip, these questions came to the fore.

An interesting wrinkle was thrown in by the US State Department saying "we don't think the timing of this is particularly helpful". This is probably very little to do with Schmidt, however.

With North Korea's recent rocket launch, South Korea joining the UN Security Council this week as a non-permanent member, a new government in Seoul from next month, State Department would probably rather keep more control over contact with North Korea at the moment. They'll be concerned that Richardson suggests/does/promises something that they aren't interested in.

Schmidt is probably not going to hammer out some investment deal, though tech is a safer bet than many sectors because it doesn't necessarily require much capital investment in the local partner. Pyongyang has many software engineers and programmers and the Korea Computer Center is eager to get more outsourcing work.

That said, it is unlikely that Pyongyang sought out Schmidt in particular; he was probably contacted by Richardson's team, though PY is happy to have him. As Geoffrey mentioned last week, Schmidt probably has a personal interest in the DPRK as a global issue. This is likely an attempt to lay the groundwork for a long-term connection between people he knows and people in Pyongyang.

Furthermore, his company, with revenues bigger than the GDP of some countries, has to engage in corporate diplomacy. For Google, Schmidt has become the figure in charge of this nexus between business and government relations.

In the end, Google will probably be lauded for this trip to North Korea. They have a reputation as fighting for information freedom and so whatever comes or does not come from this trip, what Schmidt does will likely be seen as a good faith effort to build positive ties with Pyongyang. This is not something many other tech companies could get away with, given their varying degrees of cooperation with China. A scandal a few years ago involving Google's rival, Yahoo!, comes to mind. In contrast to don't-be-evil-Google, the PR for them would be unmanageable.

CE’s work in the context of the New Year Address

Back in 2011, when many observers were still pessimistic about North Korea’s strategic intentions after the 2006-2009 tightening of North Korean economic policy, Andray and I pointed to how North Korea is shifting the basis of its legitimacy to economic performance. This year’s New Year Address by Kim Jong Un bears this shift out in its strong focus on the economy. As we have discussed before, North Korea faces significant challenges in developing its economy. Many observers of North Korea conflate intention with capability when it comes to economic development in North Korea. “Intention” deals with the question of whether the leadership in the country considers economic development a priority. “Capability” is about whether North Korea is able to successfully pursue the priority. Andray and I question whether North Korea has the economic policymaking capabilities and institutional capacity to avoid falling into the “resource curse.”

Some observers have argued that North Korea will not pursue a new economic trajectory, as this would risk regime collapse once North Koreans learn more about South Korea’s economy. In making this prediction, these analyses conflate “intention” and “capability,” and assume that North Korean policymakers also share the analysts’ conjectures.

As with any strategy, quality of execution matters. North Korea can prioritize economic development without risking collapse, if it executes well on this approach. People are more apt to compare their present and future to the past than to South Korea. If standards of living are getting better, and people believe it will continue to improve, North Korea can enjoy significant stability for a time. And the mood on the ground (in Pyongyang at least) is definitely one of optimism – people expect things to improve although clear policies supporting economic development have yet to be put into practice (but are being discussed). At the same time, Pyongyang has been using re-defectors to send the message that going to South Korea will not necessarily lead to better lives, and that it just might be better to stay put.

What does all of this mean for Choson Exchange? We first started pursuing the idea for CE in 2007, and launched our first program in 2009/2010 after a currency reform and the sinking of the Cheonan. Despite the gloomy and tough start, over the last 2.5 years, we have impacted over 200 program participants. Next year, we are poised to rapidly grow our program and we are excited that we will be reaching more young North Korean professionals in the 20-40 age range, and reaching more women through our Women in Business in program. We will be covering a wider range of policy and business topics. However the future evolves in the country, North Korea will need young businesspeople and young policymakers who have the skills needed to develop the economy and raise living standards. We are excited for the New Year.

Time to Party Like it's 1994

For Korea-watchers who were expecting to work through their hangovers by sifting through another New Year's Editorial, Kim Jong Un had a surprise in store. Returning to his grandfather's template, he gave a speech instead. The speech centered on the slogan for 2013, "Let's Use the Spirit and Consciousness that Conquered Space to Change the Situation in Constructing an Economically Powerful Country"and Kim set the tone during his introductory niceties, calling for "a devoted struggle for the fatherland's wealth and prosperity".

So, following on from the themes we've seen in 2010 and 2011, the citizenry's attention is being drawn towards economic issues, with military ones taking a back seat. The mode for improvement still harks back to classic communist imperatives, however, where spirit, unity and struggle will bring about development.

Nonetheless, this New Year's Address should be seen in the context of an ongoing transition, the foundations of which are both generational and ideological. Kim Jong Un can be seen as moving away from Military First, which is a lengthy and uneven process. In the speech, North Korea's need for military might was still highlighted as necessary for a thriving nation. Indeed, a strengthened military was called for, but ultimately "building an economically powerful country and going forward fulfilling the feat of building  a powerful socialist country is today's greatest task," he says at another point. That this speech had only very weak military-related content is quite clear.

Much of the speech unsurprisingly comprises vague exhortations, but some noteworthy passages stand out. The Huichon power station is linked to improving the material-technological foundations of the economy. Kim also states that they "must improve the people's dietary life to be more bountiful." Demands for "actual development" must also be met through improved economic leadership and management.The word 'reform' was used a handful of times, primarily in reference to the need to improve industry, specifically the coal and metal mining industries.

For those of you with an interest in empirical measurements, Kim Jong Il's "Songun" only got six mentions this year. Kim Il Sung's "Juche" got 13. But as much as the content of Kim's speech is important, the very fact that he made a speech at all demonstrates his continuing efforts to associate himself with the pre-Songun era of his grandfather. Implicit in Kim's style is a return to the relative stability and prosperity that Kim Il Sung oversaw.

Returning to content, perhaps the most striking thing was how Kim Jong Un spoke about South Korea and did not speak about the United States.

As Park Geun-Hye prepares to take office in less than two months, Kim called for a "removal of the confrontation" between the two Koreas. He didn't offer details on how relations would be improved, though he did state that previous North-South joint statements must be respected and implemented.  Regardless, it bodes well that both he and the South's president-elect Park are talking about changing the relationship.

Importantly, there was no criticism or even mention of the United States in the speech. Perhaps this signals the potential for some kind of outreach from Pyongyang to Washington D.C.. If the Obama administration is willing to take a backseat to initiatives between Seoul and Pyongyang, there is the opportunity for the three countries to move forward on trust-building and development projects to a degree that has not existed in over a decade.

One musn't be naive, but in Pyongyang's first New Year's speech since 1994, there were at least hints that it could be a happier 2013 on the Korean peninsula.

A Choson Exchange Milestone

Merry Christmas and best wishes for the New Year to all our supporters. We are glad to see our work grow so rapidly in the last few years, and it would not be possible without the amazing support of our networks. Choson Exchange will be reaching an important milestone next year. We will be opening a full-time Beijing office in January 2013, which will initially be staffed by Geoffrey See and Andray Abrahamian as the full-time team, with the continued assistance of our part-time volunteers. This will allow us to expand opportunities for young and high-potential North Koreans to attend innovative programs in business, economics and law. In addition, this will allow us to more actively support our 2013 flagship Women in Business program, which aims to support female managers and entrepreneurs in learning about business.

Geoffrey will be leaving Bain & Co., a company often mistaken as the Mitt Romney political action committee, to rejoin Choson Exchange as a full-time director. Andray will be completing his PhD and will leave his lecturing duties to join us for the exciting journey we have ahead of us.

Our Singapore office will continue to be staffed on a part-time basis, and our team will continue to make frequent trips back to Singapore for programs, to meet with partners, and to communicate with our board members.

The Problem with Group Think

It is probable that through informal channels progressives in South Korea had been communicating a certain progressive victory to contacts in Pyongyang prior to this election. In turn, this feedback loop might have convinced Pyongyang to up the propaganda against president-elect Park Geun Hye. Given the bad relations with Lee Myung Bak and Saenuri over the past few years, this is understandable from Pyongyang’s perspective if tragic. It is tragic because Pyongyang will now have to deal with a conservative presidency for another 5 years - a presidency it has aggressively attacked over the past few months. This is a presidency that has at least in words (but not yet in actions) promised to resume some form of engagement. As opinion polls showed a narrowed gap, Pyongyang’s message clearly responded to this by moderating its tone. But a potentially better strategy at the start would have been for Pyongyang to hedge its bet against either outcome given how close the race was.

An interesting question to ponder is whether group-think and a self-reinforcing feedback loop might have led those analyzing the situation in Pyongyang to assume that a progressive victory was all but guaranteed (assuming that Moon and Ahn did not split the vote). And the more interesting question is how Pyongyang will respond to the new President-elect.

Goodbye, Sunshine?

With bedtimes looming across South Korea, it looks like Park Geun Hye has the election in South Korea. This will leave a number of pro-engagement NGOs in the ROK disappointed, but still hopeful that things will be easier for them than during the last few years. Like the freshly defeated Moon Jae In would have, Park likely will reach out to the North, the major difference being her advisors and governing coalition will be made up of people with a much lower threshold for continuing engagement through rough patches. They will demand reciprocity, but probably nothing like the outgoing president Lee. Moon had promised a return to the Sunshine Era.

Did North Korea influence this outcome by testing a rocket last week?

A few interesting editorials have emerged since the North's rocket launch last week suggesting that Pyongyang may actually prefer this outcome, in order to be able to use a conservative as a force to rally against. This idea isn't completely without merit, but it seems very much an exercise in counter-reasoning to explain the act. It doesn't take into account a number of things:

- North Korea doesn't really need a conservative South Korean to rally against. The US and an Abe-led Japan will (as always) certainly suffice in that regard.

- The rocket launch last week played little on the minds of the electorate, according to an Asan Institute Survey. Very few people I've talked to suggested it was on their minds at all when heading to the polls. Rocket launches don't affect the imaginations of the electorate here the way naval or border skirmishes might. They tend to be of far greater concern to Japanese and American interests. "Nerves in the South were frayed" last week, one newswriter stated on election day, but really they weren't. Despite the outcome of the election, this blase response to the launch was something Pyongyang was banking on.

- Pyongyang's domestic concerns were paramount in its decision to launch last week. Really, it makes more sense for North Korea, looking to lure investment but maintain stability, to have had Moon in office. If they did fear influencing the election, they decided it was worth the chance for what the domestic value was - massive.

North Korean media has criticized Park publicly several times in the last few months, but Park may have a few contacts from her trip in 2002 and follow-up communications that may be workable. Much may depend on the coalition she puts together to help her govern, however.

This election was in large part a referendum on Park herself and very little about North Korea. The doors to inter-Korean cooperation may not be flung open as they would have under Moon, but the coming years should look quite different from the last few.

How to think about market opportunities in the DPRK

I recently presented at an annual conference an emerging markets-focused hedge fund (>$1B AUM) held for their investors. They had some (small) exposure to North Korea in their portfolio and felt that it was necessary to learn more about the market, and educate their investors on the place. North Korea is probably ill-defined as an emerging or even frontier market, and until the word for such a market exists, I think it is better classified as a provocative thought exercise for investors. A point I made at the event is that execution matters far and above most other factors in evaluating opportunities in North Korea. Classifying opportunities by industry in North Korea is one way to study potential opportunities. However, I prefer a framework with different categorizations that better aids financial investors in understanding the challenges of executing in this market. I classify the economy broadly into the following segments:

1. Informal markets: These are the small-scale businesses that have been the focus of much scholarly work. However, given the lack of scalability in most of these businesses, these should not be the focus of most investors.

2. Scalable “private” businesses: These are businesses that are often run with tacit approval from the government, but whose managerial control and decision rights can be traced to specific individuals. These businesses span a range of sectors and have potential to be scaled up.

3. “Complex” industries: Unlike #2, businesses in this sector are not clear opportunities at the moment, but might be so in the unclear future. These are industries where there are no clear regulations or proof-of-concepts, resulting in uncertainty over how the government will treat the business. Examples include advertising or insurance, which faces restrictions that make them unlikely near-term opportunities.

4. State-Owned Enterprises: These entities are increasingly looking for joint-venture partners and like #2, they have the potential to be scaled up. The key differences with #2 are that they carry more legacy issues, have different incentive structures, and generally require more effort to navigate.

Internship Roundup

Some observations from team members who were involved in our pilot internship in Singapore, during which 5 Koreans spent a four-week practicum at a start-up incubator. We took five interns aged 25-39, three of whom were ladies. Our statistics department informs us this equals 60%. The staff and interns got along well and the Koreans got a chance to see how a business in a trending industry is run, as well as understand the norms and goals for their equivalent young professionals.

For CE, this internship was a good opportunity for us to understand better the role which women play in North Korean business contexts and how also to better comprehend how programs should be conducted moving forward.

The three women were very bright, well-spoken and thoughtful. On some occasions,  the women really shone and led the group. In  group discussions or company visits, it tended to be the women who provided insightful pointers and asked pertinent questions. Over the weeks they became more integral to decision-making, also. It became clear one of the ladies had the best sense of direction towards the end, when the team nick-named her, in English, “The Navigator!”

Of all the company visits and dinners we organized, the interns were especially impressed with a visit to a large accounting firm and they also left a good impression their English fluency and curiosity.

They also went crazy for the ice-cream selection in Singapore, with unconfirmed reports that one of the ladies was averaging a tub a day. The enjoyed the global cuisine options, but were pining for Korean food by the time they got back to Beijing.

This was a good pilot run for us in many ways. Next year we kick off our Women in Business Program, which will last for all of 2013, and this helped us assess how comfortable our partners are with sending majority-female groups abroad, among other things. We're ramping up our activities next year, with more in-country programs and trips abroad for Koreans.

Of course, there is a business-culture gap between North Korea and Singapore. It became clear that the interns were not entirely sure of what an internship usually entails and this led to a mismatch in expectations. Hopefully now that our Korean partners have seen one program and with more time and experience on our side, we'll overcome this for 2013 internships.

Mobile banking in North Korea

Last year, I blogged about testing Orascom's 3G internet service in Pyongyang after meeting some of Orascom's employees. The original plan was to roll out the internet service to the expat community in Pyongyang. As far as I can tell, that has yet to happen, although doing so would greatly reduce the costs of existing internet options (ursurious broadband/ satellite internet) with some security trade-offs for users. However, it appears that Naguib, Chairman of Orascom, might have other ideas. In his words, "Orabank, our banking arm in DPRK, is actively working towards developing mobile-related businesses and projects." The 3G network provides a platform for a range of other services that emerging market economies would need including remittances and payments through mobile banking and mobile payments. Given the primitive development of the services sector, mobile provides an opportunity for Orascom to upend the services industry in North Korea.

This was something I was originally looking at in North Korea. Payments are currently messy in the country. On a previous trip, I remembered an account of a North Korean trying to pay the handphone bill. Apparently the payment went to the wrong account, and the North Koreans spent the morning calling and shouting at some people to make the mistaken beneficiary return the money so that the payment could go to the right account. For what mobile banking and payments could potentially look like in North Korea, check out M-pesa.

Presentations: Entrepreneurship and VC in North Korea

I will be traveling quite a bit over the next month to talk about a topic close to my heart: What is the state of entrepreneurship in North Korea today? Who are the entrepreneurs? How can venture capital provide a structure to support them and accelerate their efforts? I will be pretty busy in the coming weeks so I won’t be able to answer queries about what time/place these events will be at.

Tufts Fletcher School Boston 11/20

Oxford Said Business School Oxford 11/26

Conference organized by Henry Jackson Institute etc. London 11/28

UC San Diego San Diego 12/5

Google Mountainview 12/6

Investor conference for a hedge fund New York City 12/11