3Ps of Japan & North Korea Negotiation – Process, Price & Priorities`

Following Foreign Ministry talks in Sweden, North Korea has agreed to reinvestigate the cases of Japanese abductees, and Japan has pledged to remove some sanctions and offer humanitarian aid conditional on progress on the issue. While official talks were only announced on March 20, you can be sure that Japanese negotiators have been steadily working on the issue for the last 2 years ever since Shinzo Abe assumed the Premiership (and maybe even before). It also seems that Japan has been waiting for North Korea’s intelligence arm (Ministry of State Security) to reach out, to be assured that North Korean negotiators in Sweden have the authority to conclude a deal.

Given that the Japanese have been trying to untangle this issue for more than a decade, what continues to stand in the way, and why are things moving now? 3 Ps are important in understanding the issue:

Process

The last visit fell apart when Kim Jong Il admitted that kidnappings happened, apologized and offered to allow some of the abductees to visit their relatives (being assured that they would return to North Korea). The abductees never returned, and among the remaining abductees that North Korea admitted to, North Korea claimed that they had passed away. The Japanese public rejected the deal with North Korea, and both Koizumi and Kim Jong Il walked away from a failed process. Both sides took significant risks to make a deal happen. For North Korea, the admission splintered their supporters in Japan.

Both sides recognize that the next deal has to be the last deal on the issue, in that the Japanese public has to be certain that all abductees are accounted for, or the negotiations will collapse again. This is not a trivial obstacle. First, there is the question of verifying and confirming if the abductees claimed to be dead are truly dead. Second, there is no agreement on both sides on the true number of abductees. Third, it has to be assumed that any abductees (and their families) must be given the option of moving to Japan.

To placate the Japanese public, a process has to be created to ensure that the issue is addressed conclusively. There might even be a need on both sides for an ‘honest broker’ who can mediate between rival claims. As yet, neither side has seen the need to draw in a third party. Internally, North Korea will run up against vested interests in its investigation, as people could be made to assume responsibility for the kidnappings. Or maybe they could just lay that responsibility on some recently deceased uncle…

Price

North Korea seeks reparations for its colonization by Japan. In the case of South Korea, Japan has paid reparations for its colonization period. While both sides dance around the amount, using a mix of principles and figures raised in past negotiations in their arguments, this will at the end of the day be a realistic and necessary lever to get North Korea to agree to a resolution on the abduction issue.

For a North Korea beginning to think more about economic development, Japanese aid and investment is critical. Rapprochement with Japan could also pressure South Korea to engage more with North Korea. In fact, North Korea’s significant state investment in tourism facilities in Kangwon province (think Wonsan beach resorts, Sinphyong, Masikryong ski resort…etc.) seem strategically positioned to attract Japanese and South Korean tourists in the event of rapprochement. Perhaps a Japan-DPRK summit in Kangwon province (Masikryong or Wonsan), could be a good way to kick-off a potential epicenter of DPRK-Japanese grassroots and economic interactions in the future.

Priorities

Why are things moving under Shinzo Abe? Aside from the stability of his government, Shinzo Abe has been at the forefront of the abductee issue for more than a decade. Traditionally, abductions, North Korea’s missile program, and nuclear program, form an unholy trinity of obstacles between Japan and North Korea. Abe’s personal identification with the abductions, and drive to resolve it, has pushed abductions ahead of other DPRK-Japan issues.

For Japan, putting all three issues on the same level does not make sense, as the missile and nuclear issues cannot be solved bilaterally without US and South Korea at the table;  both allies have at times considered Japan’s obsession with abductees an idiosyncratic or at least peripheral complication in past negotiations. At the same time, there could be constituents in Japan who worry about how a bilateral deal deprioritizing the nuclear and missile program could affect the US-Japan alliance.

Politically, its clear how there is an opening for North Korea with regards to Japan. What is more opaque is how and whether domestic politics in North Korea is creating a reciprocal opening for Japan in North Korea. Either way, a deal can be in both countries’ interests, and more broadly beneficial to regional peace and security. 

Overheard at SEZ workshop: "People are here to learn"

Someone explain to me who put the windmills in Suzhou Industrial Park?

Last month, we ran a workshop on Special Economic Zones in Wonsan, with people from 5 provinces attending. Workshop leaders were practitioners, focusing on the nuts and bolts from an investor perspective, rather than on academic theories on SEZs. One such practitioner, a British with over 15 years of experience investing in North Korea, shared Singapore’s experience developing the Suzhou Industrial Park (SIP) in China. He was a big fan of the project, and called it the “go-to place for businesses looking to set up in China.” He also spent considerable time explaining Irish SEZs, which he also recommended as another model for North Korea to study.

The $30B SIP generated significant controversy in Singapore in its early years. Local Chinese officials undermined the project by building a competing park next door. From a financial point of view, the project lost money in its early years. But as a special zone, it established its reputation as a good location for businesses.

Perhaps in Singapore, lessons from this experience laid the foundation for future projects. The experience definitely did not deter Singapore from getting involved in developing a string of industrial parks, high-tech zones and other SEZ-type projects in India, Vietnam and China. SIP is more relevant to North Korea than Shenzhen, given that the sizes of the proposed SEZ corresponds more to an industrial park than to an entire region.

Singapore’s experience from these projects will be highly relevant as North Korea continues to focus on developing its SEZs. A Singaporean friend who visited North Korea in 2009 mentioned how the government officials he met had studied SIP and quizzed him about Singapore's experience developing it. It is this practical knowledge, good managers, and strong political support that is very much needed to ensure SEZs in North Korea stand a chance of taking off.

We hope to see more efforts by North Koreans to send their SEZ managers overseas for extended training and research and would like to support them in doing so. We have often pressed our partners on the need for DPRK policymakers to focus not just on the short-term, but understandably urgent, goal of attracting investments, but also on laying a proper foundation by ensuring that their managers are well-equipped with international knowledge and experiences. Frequently, we fail to recruit the best managers for long-term scholarships, as their organizations need them for more immediate projects. At the national level, we have yet to see significant efforts made to ensure the process for sending people abroad for programs is more easy, efficient or transparent.

And the best part of the workshop last month? A workshop leader who was terribly cynical about the SEZ effort felt he was self-censoring. He did not think the investment conditions or infrastructure was anywhere near ready for foreigners, but did not want to be brutally honest. We brought his concerns to a young Korean partner, who told us that workshop leaders should be direct and honest in replying to questions. “People are here to learn,” he said.

Update: Calvin, our resident urban planning expert, adds:

The main learning points for SIP are strong leadership, good management, strategic implementation in phases. Physical scale wise, SIP is almost a city / region actually, much larger than other typical industrial parks developed by Singapore and even Kaesong.

SIP: 8000ha

Bintan: 270ha

Wuxi: 340ha

Batam: 320ha

Kaesong: 300ha approx.

Calvin previously wrote a post comparing Rason and SIP.

News and Pyongyang's Middle Class

In our last post, we dated a propaganda shift to 2012, but, after further thought, we wonder if perhaps 2009 is another notable moment related to the coverage this tragic building collapse. That might be the first time that decision-makers realized that Pyongyang's citizens needed to be kept (somewhat) in the loop and that policies need to keep them happy - having the last functioning remnants of the PDS isn't good enough. The needs and aspirations of Pyongyangers now needs to be taken into account. There is a feedback mechanism through which their opinions filter upwards fairly quickly and the authorities need to decide how to respond to public opinion - especially the opinions of Pyongyangers - on particular issues.

This release of information about the collapse , vague and delayed though it was, reflects that awareness on behalf of the leadership. This understanding was birthed in the firey rage of the Pyongyang middle class that felt betrayed in 2009 after the sudden currency reform seriously damaged the savings of so many people. Pyongchon is central Pyongyang, they can't be aloof, especially on something so symbolic: housing is one thing that the central government still supplies and controls, despite an emerging property market.

Remember, five days is pretty rapid for the North Korean system. Once they realized that they needed to control the narrative on an event that is clearly going to get around not only town, but the countryside as well, they did take action. The article took five days to come out, once the preliminary story was set, though it wasn't front page news and they don't appear to be following up in the media. The story doesn't appear to have made an appearance on TV.

Regardless, the authorities want gossipers to be saying, "they've done a really good job fixing this tragedy." Their messaging, not just from this weekend, but in the days and weeks going forward will be interesting to watch.

Will there be ongoing coverage of firings of officials and heroic rescuer's tales? Will Kim Jong Un visit and show the human touch that has characterized his public image? Will they decide they don't know what to do about it and leave it at a single news release?  

Don't be surprised if any of those things happen - the authorities will be keeping an ear to the ground, no doubt, deciding how the message should evolve. Though perhaps we shouldn't read too much into it if there isn't much more coverage - our news environment has conditioned us to expect wall-to-wall coverage. North Koreans don't have the same expectations, even the middle class, with their TVs and tablets.

Phyongchon-gate and what it means for North Korean propaganda

North Korea’s state media, Rodong Sinmun, recently reported on “a serious accident in the construction site in Phyongchon District, Pyongyang on May 13,” and on subsequent rescue operations. Senior public officials were cited by name and took responsibility for the accident. This article (or “Phyongchon-gate”) is unusual in that North Korea media rarely reports publicly on errors attributed to the government. Even more rarely has it publicly attributed these errors to specific government officials.

Some commentators link this to an attempt by North Korea to contrast its efforts against South Korea’s Sewol Ferry Disaster, while others claimed that North Korea couldn’t hide the accident from foreigners, and needed to seize the media initiative. Of course, the fact that the accident happened on May 13 (5 days earlier), and is only known to global media through North Korea’s announcement, calls into question the latter claim.

Instead, people are missing out on broad shifts in North Korean propaganda over the last 3 years. The propaganda narrative, and this specific Phyongchon-gate article, captures fairly dramatic shifts in the context of State-Grassroots relations in the country. Accidents and mistakes do happen in North Korea, as in any other country, but have traditionally been glossed over in domestic media. In the past, problems highlighted in public media were attributed to foreign causes (e.g. saboteurs, spies and sanctions) or natural disasters (e.g. droughts). Phyongchon-gate reflects a new propaganda style, where the government acknowledges a mistake, have senior-level officials or party cadres assume responsibility, and highlight corrective measures.

This shift started in 2012, when North Korea publicly admitted that its attempted rocket launch in April did not succeed. North Korea mentioned at that time that its scientists were assessing what caused the failure. Kim Jong Un followed up on this narrative when he castigated officials for failing to properly maintain Mangyongdae funfair in May that year, pointing to the funfair’s dilapidated state, even pulling weeds from the ground himself. Last month, Kim Jong Un during a military exercise, “severely criticized the [artillery] sub-unit for failing to make good combat preparations.” It is the public nature of such criticism and the blame attributed to government officials that should draw our attention.

Phyongchon-gate and similar stories reflect a government trying to portray itself as accountable and responsive to its grassroots. The top leadership acknowledges public concerns, and shows that it is standing with the grassroots by holding middle- or senior-level management responsible. This message is not just reactive. It is also proactive. Economic development is an area where the leadership is assuming responsibility for progress, by saying it is possible despite sanctions. In the past, sanctions were blamed for a stalled economy. This style also appears to have filtered down to the grassroots. Younger participants in Choson Exchange's workshops ask us to be more blunt with our advice on economic or business issues, even though they might reject or argue with our criticisms.

Skeptics might argue that this propaganda shift is a belated acknowledgment of a richer information environment in which the government has to defuse potential public dissatisfaction by taking the initiative, and that the shift is focused more on optics than action. A more hopeful assessment includes rising government accountability, tied to a shift in the basis of political legitimacy to government performance. We highlighted the shifting basis of legitimacy back in 2011 in the Harvard International Review, focusing on economic performance.

North Korea is changing its public image, domestically, and this approach is a defining trait of the new leadership team under Kim Jong Un.

Patronage Post-Jang

Author/poet Jang Jin-Sung has been splashed across the media this past week as his new book, "Dear Leader", has just come out in English. Meanwhile, over at New Focus International, he has a post from a couple weeks ago about government appropriation, distribution and...well, a whole bunch of things - it kind of meanders around like an off-the-cuff lecture from an aging professor. But near the bottom of the ironically unfocused post is an interesting nugget:

"But above all, in the wake of Jang Song-thaek’s execution, the mood has remained savage; and cadres consequently have not had the stability and confidence to extort bribes the way they have done before."

This at first seems like a good thing. Less corruption is good, right? Well, not necessarily. You will have heard this case made already if you're a fan of Ha Joon Chang, an overseas compatriot (to use a very North Korean phrase) and Cambridge reader in Economics (to use a very British phrase). In his 2007 book, Bad Samaritans, he argues that corruption is not inherently bad for economic growth, unless the money taken in bribes is not invested productively in the economy. Bribery can also sometimes "enhance the efficiency of an over-regulated economy by reintroducing market forces" (p.150), allowing productive businesses to get moving when otherwise they would bog down in red tape. The related question Chang brings up is, "what would have been done with the money had there been no corruption"?

The DPRK has, officially, no private sector at all and is perhaps the definitive over-regulated economy. In reality, an increasingly vibrant grey market exists because reports indicate that officials can be convinced to look the other way or actively facilitate market activities if they benefit from the actions. This greasing of the wheels is what allows North Korean businesses to run and has driven tremendous social change in the last decade.

If post-Jang officials are scared and there has been a disruption in established patronage channels, this temporary paralysis could cut both ways. It could either turn into: 

a) an opportunity for Kim Jong Un to consolidate influence over key enterprises and make sure they invest profits into areas that go towards the national good, as he sees it. This would be not dissimilar to what Park Chung-hee, his Granddad's rival and pops of the current ROK President, did in the South. Key officials would still get enriched, but would be on notice that their wealth is subordinate to the concerns of the state. 

b) some of the efficiencies created by patronage channels being reduced, stalling economic growth. Businesses will find it more difficult to get permission to produce products, move goods or make other decisions. Eventually over time, pathways of patronage will probably re-emerge and look the same as they once did, though profits may end up with different patrons along the way.

It's not yet clear how disrupted the DPRK's economic sphere has become since the ouster of Jang. Like businesspeople everywhere, the emergent business classes in North Korea will be seeking predictability and stability in their environment. They'll have to wait to see if things will go back to 'normal' or if some new modus operandi will be forged.

Review of "NK Travel" app

A version of this was originally written for the Beijing Cream Blog. 

A new North Korea travel app hit the stores today. Niche? Fore sure, but not as niche as targeting fans of Playboy who literally do “buy it for the articles”. How does it work?

The creator, Chad O’Carroll, who runs the indispensible NKnews website, told CNN that the app “is designed for armchair travelers as well as people who are actively interested in visiting”. Armchair traveling is fine and the app certainly is good for that: it has great pictures, interesting tidbits about the locations and facilities and geo-tagging by Curtis Melvin, perhaps the world’s foremost North Korea satellite imagery expert.

However, if you’re living in Beijing – or, God forbid, disgusting vapid Shanghai* – the cost is relatively low and Pyongyang is really quite easy to get to. So is this app useful for people thinking of actually visiting the Democratic People’s Republic of Korea?

 In short: useful. In particular the “custom tour” section is uniquely worthwhile and is a better interface than any of the DPRK tour operators have for putting together such tours. Really, without this app, you have to get on the phone with someone and talk through options. Here, one neatly chooses what one wants to see and then sends out requests to tour companies to get back to you with pricing.

For group tours – which are quite a bit cheaper – I couldn’t get the results to pop up, though I think this was a first-day-in-the-app-store-glitch. It promises to be a handy one-stop shop for comparing the offerings of the various tour agencies rather than wading through the websites of individual tour companies. (Who has the time, right?) This glitch was the main problem with my experience. I’ve given feedback to the developer and they’re on the case. (note: this glitch was fixed by 8 p.m. CST on the first day of the app's release.)

Just for the fun of nitpicking, the language section could be more focused: I don’t really need to know how to say 10,000,000,000,000,000 in Korean. Indeed, I’m not sure what it is in English. Nor is a section on “asking directions” much needed when visiting a country in which you don’t have freedom of movement.

Other useful sections include a comprehensive FAQ and an “ethics” section, which is essentially an essay by the eminent professor Andrei Lankov, making the case for the positive effects of tourism in North Korea.

Still, if you're a non-American businessperson, economist or lawyer and feel uneasy about “just touring”, one can also travel to North Korea with Choson Exchange, a Singaporean non-profit that runs workshops in entrepreneurship, economic policy and law. Um. I may work for that organization.

*sorry, I just wanted to get stuck into this silly expat faux-rivalry.

Can North Korea make SEZs work?

Recent workshop on SEZ development in Wonsan with participants from many of the East Coast provinces

When the Special Economic Zone policy (SEZ) rolled out throughout 2013, I admit to being initially skeptical of its odds for success. We first heard about the policy in March 2013, when it was on the verge of being passed. In May, Choson Sinbo leaked details of the policy, which was followed by an international conference on SEZs in October unveiling the policy to the Western press. Since 2013, we have conducted 4 workshops related to SEZ setup and development and interviewed over 30 persons from multiple provinces involved in the SEZ effort. Chatting with them has given me some cause for cautious optimism.

My initial skepticism kicked in because the investment amounts North Korea suggested they were going to attract for these zones looked unrealistic, making me wonder how much of the lessons of the past 20 years have sunk in. Finding enough investments for Rason and Hwanggumppyong has been a challenge, much less for the proposed 14 zones. Furthermore, it seemed unlikely that the North Korean government could provide the infrastructure for so many zones - infrastructure needed to make these zones attractive to foreign investors. Rason had to depend on Chinese support to pave its road to the border.

North Korea’s prior approach to SEZs also leaves much to be desired. In particular, SEZs' value in driving economic growth comes in part from their integration with the rest of the economy (e.g. through domestic companies supplying to the zones). In Rason, North Korea fenced off the zone, figuratively and literally. The SEZ was meant to be a self-sustaining bubble. Additionally, the creation of a new organization to manage SEZ investment reminded me of the proliferation of investment attraction bodies in North Korea, many of which are now defunct.

Cooped-up workshop leader practices mattress jumping in Wonsan

However, chatting with zone administrators and policymakers, it does seem that there is value to the SEZ policy. Experimentation is clearly on people’s minds, perhaps more so than investments. In one example, a 'spot' SEZ  allows deviation from prescribed agricultural methods, allowing adaptation of agricultural production to local conditions. This is important in North Korea's context as tinkering with highly politicized and nationally-set agricultural methods has gotten people into trouble in the past.

I also speculate that the new zones will be much more connected to the domestic economy through various mechanisms. Fencing off zones at the corners of North Korea is possible, but doing so for “spot zones” of 2-3 square kilometers, all around North Korea, seems a lot harder. The spatial characteristics of these zones favor linkages with their hinterland, whether by design or accident.

Thought appears to have been given to attracting not just foreign investments, but also domestic investments. This is another linkage between the zones and the broader Korean economy. I hope that the SEZs will provide a more favorable environment to domestic entrepreneurs, by providing them with flexibility and security in building new businesses (which is already happening), and eventually giving official and legal sanction to do so.   

More Border Tensions (not that one)

Choson Exchange has heard that Chinese customs officials inspecting trains crossing from Dandong to Sinuiju have recently begun imposing a weight-based tariff on goods going into North Korea from China.

Most of those goods will end up going through here...

It was described to Choson Exchange as a "flat fee for anything over 30 kilograms at 18 RMB per kilo". Bags were weighed at the platform, but not inspected with any detail. Thus, in one's bag, a kilo of gold, apples, printer toner or chocolate would all appear the same on the scale and be charged accordingly. 

Crucially, this fee does not apparently apply to Chinese or other foreign passengers, just DPRK citizens. Nor is it applied to freight or commercially shipped goods that cross the border. It isn't a huge amount of money either, even if it can add up quickly: Koreans tend to bring back a lot of consumer goods after excursions or sojourns in China. This merely appears to be a small squeeze on the classes of people that can take such trips, probably designed to annoy and frustrate, but not cause any real harm to trade. It is the latest manifestation of China's displeasure, after tightening up residence visas and delaying goods that are shipped to Nampo through Dalian. 

Masikryong Speedos and Other Clothes - Too Expensive.

Two weeks ago we had the chance to stop by Masikryong on the way back from our workshop in Wonsan. The DPRK has grandiose plans for Wonsan as a tourist destination, a big part of which will be the ski resort we've all heard so much about.

We arrived just after the season had ended, so the hills were bare and there were no other guests, creating a very The Shining vibe. But just as we arrived, the the skies opened and 5 inches of snow descended within a few hours, turning the pass into a really enchanting landscape.

Sunrise

Overall, the place seems fairly well built, though one can see that it was done fast and some of the trimmings are less than perfect. The design is quite modern and seems very much like a Chinese/European ski chalet. There are two main buildings, one with quite fancy, quality hotel rooms, a very nice pool and sauna, a communication room with internet for $6 per hour and a 9th floor bar with a lovely view. The other building hosts the ski equipment rental area and dorm-style rooms, presumably for the work-teams and youth groups they'll be bringing up for vacations.

One weird thing we noticed was the prices seemed to be all over the place. In the snack shop you could find cartons of 100% juice imported from Thailand for $2. In the restaurant, Tempura was 70 cents and a serving of pork ribs was $1.50.

Yet in the clothing shop, this was going on:

That's over $150 for googles

Jackets on sale for well over $1000

A ski helmet for nearly $600

I'm no expert, but a quick good search reveals that Carrera helmets go for about $40. We suspect that whoever is running it hasn't yet had time to sit down and think about a pricing strategy that will actually move these things - even privileged locals can't afford this and foreigners aren't going to buy it. Especially when you can rent all ski equipment, including clothes, quite inexpensively.

They didn't really run it a full season, it was only ready to go in mid-January and I'm sure the management had a lot of other things to worry about. It will be interesting to see if these prices are all different when winter rolls around and they decide they actually want to try to get some of them off the shelves.

Record 180 participants in Q1 2014

Choson Exchange teammate Nils and a workshop leader in front of a funky restaurant decoration

Provincial Development

Two weeks back, our team endured a bumpy 4-hour ride to Wonsan from Pyongyang. We were heading there to conclude our fourth and final workshop in the country for March. Key topics focused on economic zone development, improving the environment for businesses, and on provincial development. Workshop leaders cautioned that initial investment amounts from outside might be small, but emphasized the importance of starting with small investments and recognizing it as a learning journey for local officials and for investors.

We started 2014 strong, completing 4 workshops in North Korea in the first four months and 1 workshop overseas. Workshops were split between the provinces, attracting participants from the provinces, and Pyongyang. Over the 5 workshops, we covered provincial development, improving the business and investment environment, entrepreneurship, and fiscal and monetary policies. In total, 180+ participants took part in programs in the first quarter of 2014.

Workshop leaders take a break in the provinces in what we think is the funkiest hotel - the Dongmyol Hotel in Wonsan has an atrium above the atrium on the fourth floor.

During the workshops, I was also heartened to meet researchers who were interested in learning how to build an ecosystem to commercialize IT research. In North Korea, there is a tendency to focus on technical skillsets at the expense of figuring out a market and a business model for IT products. I am glad to see that there is recognition at least among some people that they need to balance technical skills with commercial savvy.

Women in Business

In particular, we would like to highlight a workshop we did for our Women in Business program. As we mentioned, we are in the last phase of this program. This program was set up to target female managers in the growing small and medium enterprise segment with training in business management skills and entrepreneurship. In March, we had 45 participants in the program, with 84% being females. This is the highest ever percentage of females we had for an in-country workshop, reflecting continued interest in this unique program. The female participants were incredibly bright, curious and full of questions. Our main regret was that we were unable to extend the length of the workshop to answer all those questions, despite requests from North Korean partners to do so.

Snowflake selling exercise had our Women in Business actively running up and down the workshop space

Going forward, given limited funding support for this program, we are likely to start reducing the frequency of workshops for the Women in Business initiative. We expect to continue maintaining a low level of activity for the program. We will continue with other programs focused on policy and entrepreneurship, but look forward to having an active program dedicated to women in business again at some point. We would like to thank our workshop leaders, sponsors, volunteers and partners for the work we have been able to do this quarter.