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Country Report February 2004

North Korea

February 2004

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

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North Korea 1

Country Report February 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

Contents

3 Summary

4 Inter-Korean relations

8 Political structure

9 Economic structure9 Annual indicators

10 Outlook for 2004-0510 Political outlook13 Economic policy outlook

14 The political scene

19 Economic policy

21 The domestic economy

25 Foreign trade and payments

List of tables27 Merchandise trade between North Korea and Japan

List of figures

23 Major towns and ports in North Korea

North Korea 3


Summary February 2004

The 2004 new year official newspaper editorial highlighted the need to developthe national defence industry. The recent absence of North Korea's leader, KimJong-il, from public view, perhaps owing to illness, could augur ill for politicalstability in the country. No plan for a successor appears to be in place. Aresolution to the nuclear stand-off is unlikely, as neither North Korea nor the UShas a strong incentive to seek a breakthrough. The new year editorial made nomention of the price, wage and other market reforms of the past two years.Further reform over the forecast period may be little more than the bareminimum needed to patch up the existing system, rather than the start ofChinese-style change.

Reports in the Japanese press suggest that Kim Jong-il is ill with a seriousstomach complaint. Kim Jong-il's consort, Ko Young-hee, may have had a carcrash. Vice-marshal Jo Myong-rok, the first vice-chairman of the NationalDefence Commission, is thought to have gone to Beijing at end-2003 to betreated for kidney failure. Six-way talks, involving the two Koreas, the US,China, Japan and Russia, failed to take place by end-2003 as initially hoped,partly because the parties could not agree on the terms on which the talksshould resume. In January 2004 North Korea offered nuclear concessions inreturn for the lifting of political, economic and military sanctions by the US. InNovember 2003 the executive board of the Korean Peninsula EnergyDevelopment Organisation (KEDO) voted to suspend for one year constructionof the two light-water reactors that it is building at Kumho.

North Korea drew up a detailed list of regulations to govern the plannedKaesong industrial zone in December 2003. In November last year a UKnewspaper, the Financial Times, reported that European investors planned to setup a company in Pyongyang to help restructure the country's financial systemand promote foreign investment.

South Korea's Ministry of Unification claims that North Korea's economy grewmodestly in 2003, but has offered no data to back this up. In December a UNofficial reported growing disparities of income and access to food in NorthKorea. Press reports suggest that power supply remains intermittent. At end-2003 there were 20,000 mobile phone subscribers in North Korea, comparedwith just 3,000 at the start of the year.

The total value of North Korea's bilateral trade with Japan stood at US$134.3min the first six months of 2003—a fall of nearly 20% year on year. This mainlyreflected political tensions between the two countries. By contrast, in the first 11months of 2003 North Korea's trade with Yanbian, the adjacent Koreanautonomous prefecture in China, rose briskly.

Editors: Robert Ward (editor); Graham Richardson (consulting editor)Editorial closing date: January 19th 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2004-05

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 North Korea


Inter-Korean relations

The stand-off over North Korea's burgeoning nuclear weapons programme casta long shadow over inter-Korean relations towards the end of 2003 and in early2004, despite continued frequent and wide-ranging inter-Korean contact. SouthKorea's persistence in raising the nuclear issue in October 2003, at the 12thministerial meeting since the June 2000 North-South summit in the Northerncapital, Pyongyang, resulted in the meeting ending, unusually, with no agreedstatement, except on when to meet again. More concretely, the decision inNovember 2003 by a Western-led international consortium, the Korean Penin-sula Energy Development Organisation (KEDO), to suspend for a year its light-water nuclear reactor (LWR) project at Kumho in the north-east of North Koreais a blow to the South, which has spent almost US$1bn on the project.

North Korea threatens to take control of the site and has forbidden themovement of materials, so that Southern subcontractors are unable to retrieveequipment; some may go bankrupt unless they are assisted. Several hundredSouthern engineers still at Kumho are potentially vulnerable. Although at onelevel suspension merely formalises the limbo into which the project had fallenin the year since the nuclear crisis arose, its ultimate fate is far from clear.Whereas South Korea expressed the hope that work could resume a year hence,the US ambassador to South Korea, Thomas Hubbard, said that he saw nofuture for the LWRs.

Plans to relink North and South Korea by road and rail through two corridorsacross the demilitarised zone (DMZ, the de facto border between the twocountries) were the subject of many meetings at various levels. Not all wentsmoothly, but even the rows were of the constructive kind: addressing practicalproblems, rather than stalling or grandstanding. The security implications ofbreaching what remains the world's most heavily armed frontier are obviouslyimportant. In December, at the third attempt, agreement was reached on whereto put military guard posts to guarantee safe passage for construction and othertraffic. Earlier, South Korea made available to the North materials worthUS$60m, including—to the alarm of Southern conservatives—350 tonnes oftrinitrotoluene (TNT), to be used for blowing up bedrock.

Crossborder traffic is growing, even on the temporary tracks that are all thatexist so far. Working meetings are now routinely held in towns near the DMZ—Kaesong or Kumgang in the North, Munsan or Sokcho in the South—with thevisiting side commuting daily across the DMZ. The tours run by a Southernchaebol (conglomerate), Hyundai, to the Mount Kumgang resort go by land now,rather than by sea: in January 2004 Hyundai announced that after five years itis suspending its cruises to Mount Kumgang, owing to falling demand. October2003 saw the first private-sector trans-DMZ truck delivery, when Korea Express,South Korea's largest logistics operator, took 100,000 roof tiles to Kaesong. Thisis the first batch of 400,000 tiles donated by Southern Buddhists to help torestore a temple in this ancient capital city just across the border.

KINU forecasts stable inter-Korean relations

The LWR's projects suspensionis bad news for South Korea

North Korea takes over theKumho site

Work continues on cross-border road and rail links

Trans-DMZ traffic is growing

North Korea 5


Kaesong is also the site of the planned Kaesong industrial zone, which it ishoped will become to the South Korean capital, Seoul, what the Chineseprovince of Shenzhen is to Hong Kong. In December the Supreme People'sAssembly (the North Korean parliament) published residence, customs andmanagement regulations for the new zone. Some wording raised eyebrows:those forbidden to enter include "international terrorists, drug addicts [and]lunatics". There is concern in South Korea at a ban on taking out "printedmaterials ... films, photos, cassettes and video tapes, records [and] compactdisks", as these are items that many Southern firms need to carry back andforth in order to conduct business.

However, in general South Korea welcomed these detailed rules as a sign thatthe North means business. A basic monthly wage of US$57.50 for a 48-hourweek, and a corporate tax rate one-half of that in the South (14% comparedwith 27%), are seen as encouraging. Yet obstacles remain. In December SouthKorea's Ministry of Commerce, Industry and Energy (MOCIE) said that high-technology manufacturing, of potential dual use for military purposes, wouldnot be allowed to move to Kaesong for fear of violating the WassenaarConvention (a multilateral agreement designed to control exports of con-ventional arms and dual-use technology) and other treaties restricting transfersto rogue states. Sectors such as farm produce, foodstuffs, textiles, fabrics andsimple electronic appliances would be acceptable.

MOCIE also suggests using Kaesong to make parts and intermediate goods,with final production in the South as country of origin, since many countriesimpose high tariffs on goods from North Korea, which has few "most favourednation" agreements. Yet these security and commercial restrictions may preventKaesong from attaining its full potential, let alone the depth of businessintegration with South Korea that now exists between China and Taiwan(despite the security risk to Taiwan in transferring advanced technologies to themainland). Still, all this is some way down the road. Kaesong is not due tocome on stream until 2007, although a pilot project may start in 2004. A jointoffice to handle practical problems is also set to open in 2004.

Other business links too are gathering pace. Inter-Korean merchandise trade in2003 is estimated to have topped US$700m. This is a tiny sum relative to theSouth's overall trade, but confirms it as the North's second-largest partner, closebehind China, which is also North Korea's main export market. In January-November inter-Korean trade was worth US$671m, up by 18% year on year.Northern exports to the South rose by 6.4% year on year to US$264m, while theNorth's imports from the South rose by 27.3% year on year to US$406m. Asusual, almost three-quarters (US$294m) of these imports consisted of aid ratherthan true trade; they included fertiliser (US$126m) and food "loans" (US$97m),as well as equipment and materials for road and rail relinking (US$29m) andfor KEDO's LWR project (US$24m).

The Kaesong industrial zonehas new regulations

The North seems serious, yetproblems remain

Restrictions may limitKaesong's potential

Inter-Korean trade keepsgrowing

6 North Korea


Even so, genuine commerce is rising: at US$377m in January-November 2003, itwas up by 20% year on year. Although South Korea had a nominal surplus ofUS$142m on total flows, excluding trade it was the North that was in surplus, tothe tune of US$151m. A survey by the Korea Development Institute, a leadingofficial think-tank, found that experts and firms alike believe that North-Southbusiness will grow in 2004, although barely 40% of firms said that theyexpected to make a profit on this. That must change, or Kaesong may find fewtakers. Altogether 451 Southern firms traded 572 items, and processing oncommission (sending goods and materials to be made up in the North)involved 110 firms and 233 items.

Trade of US$700m is not much after 15 years compared with trade betweenChina and Taiwan, whose business thaw began at the same time. Investment isscantier still. In October the South Korean Ministry of Unification said thatsince 1996 a total of 25 Southern firms have invested a total of US$1.2bn in theNorth. But 83% of this went to KEDO's LWR projects, most of it being investedby Korea Electric Power (KEPCO), the state-owned Southern electricity gene-rator and distributor. It is surely misleading to classify so patently political aproject, carried out by an arm of government, as a business investment.

Stripping this out reduces the figure for total Southern investment in the Northto under US$200m, of which US$150m is accounted for by Hyundai. But thelatter figure is too modest, omitting both the US$938m that Hyundai paid forsix years' tourist rights to Mount Kumgang (besides having to build all its owninfrastructure there), and at least another US$500m that Hyundai sent illicitly tothe North, ostensibly in payment for vague business rights, just before the June2000 summit. That leaves just US$50m, one-half of which is accounted for by acar assembly plant at Nampo on the west coast built by Pyonghwa Motor, anaffiliate of the Unification Church, for which profit is not the aim. Theremaining US$25m is made up of a few tiny projects. The big chaebol, havingseen Hyundai sustain large financial losses on its Northern operations, arenotably absent. In any meaningful sense, then, South Korean investment in theNorth has barely begun.

Figures for inter-Korean shipping leave a similar impression. In the first ninemonths of 2003 tonnage carried rose by 44.6%, with one-way journeys up by17.8%. Yet the numbers—just 699,560 tonnes of cargo and 1,281 sailings—are stillsmall by regional standards.

In October South Korea's embassy in Beijing twice suspended consular servicesas it was inundated by North Koreans camping there while waiting to leave forSeoul. After the highly publicised dashes in 2002 for sanctuary by would-bedefectors to various diplomatic missions in China, this has now becomeroutine. Despite a strong security presence, a steady trickle of North Koreanshave succeeded in gaining sanctuary, often with forged documents. Onceinside, they are allowed, eventually, to proceed to Seoul. The far larger numbersoutside get no official support or encouragement from South Korea, whosepriorities are to avoid upsetting either China or North Korea. Occasionally

Profits are, however, few

Cumulative investment isbarely US$1bn

Hyundai's fate has been awarning to other chaebol

Inter-Korean shipping isminuscule

Northern refugees continue toseek sanctuary

North Korea 7


South Korea is shamed into action, as in November, when an elderly manarrested in China with false papers turned out to be one of their own: a SouthKorean prisoner of war, illegally detained by North Korea for half a century.

Given ever-rising numbers—1,047 in 2003 as at November 11th, 10% more thanin 2002—the Ministry of Unification's reception centre at Hanawon near Seoul,has had to be extended. In October 2003 it emerged that, since 1993, tenmilitary facilities near the DMZ have been designated to serve as temporaryshelters in the event of a possible mass influx of refugees. It is believed thatSouth Korea has many such secret contingency plans in case it has to cope withscenarios less benign than, but at least as plausible as, the soft landing thatofficial policy seems to take for granted.

Well outside the new Seoul consensus, ironically, is the former secretary of theKorean Workers' Party (KWP, the North's ruling party), Hwang Jang-yop, themost senior Northern defector to the South. In the Kim Dae-jung era, HwangJang-yop was forbidden to travel to the US, lest his outspoken hostility to KimJong-il, whom he once tutored, upset the "dear leader". Roh Moo-hyun relented,however, and in October 2003 the trip was finally made. Despite rumours thatHwang Jang-yop would seek asylum in the US, or even try to create agovernment in exile, the impact of his visit was relatively subdued. NorthKorean media dismissed him as "a mentally deranged old man", and—withtypically vivid and fierce rhetoric—likened his mostly right-wing hosts andaudience to bluebottle flies buzzing around rotten meat.

Ten military facilities areearmarked for a refugee influx

Hwang Jang-yop is finallyallowed to visit Washington

8 North Korea


Political structure

Democratic People's Republic of Korea

One-party rule, based on the ideology of juche (self-reliance)

Constitutional revisions in September 1998 abolished the Central People's Committee,renamed the State Administration Council as the cabinet, and reaffirmed the NationalDefence Commission (NDC) as the highest state body, albeit nominally under theSupreme People's Assembly (SPA, the parliament). The SPA is a rubber stamp, whichmeets for only a few days each year

In September 1998 Kim Il-sung (who died in 1994) was dubbed "eternal president". Thepresident of the SPA presidium performs the formal duties of the head of state, butultimate executive power lies with the chairman of the NDC

The unicameral 687-member SPA, directly elected for five-year terms. Its presidium,formally the standing committee, substitutes for the legislature when the SPA is not insession

Each province, city, county and district elects people's assemblies or committees. Thesecommittees elect local officials to carry out centrally decided policies

The 11th SPA was elected on August 3rd 2003; the next election is due to be held in 2008.These are communist-style elections, with a single list of candidates; the claimed turnoutand "yes" votes approach 100%

The Korean Workers' Party (KWP) controls all arms of the state. Since the death of KimIl-sung, military figures have grown in influence

Government: the KWP is nominally in coalition with the Social Democratic Party and theChondoist Chongu Party

National Defence Commission chairman Kim Jong-ilFirst vice-chairman Jo Myong-rokVice-chairmen Yon Hyong-muk; Ri Yong-muSPA presidium president Kim Yong-namVice-presidents Yang Hyong-sop; Kim Yong-daePrime minister Pak Pong-juVice-premiers Kwak Pom-gi; Ro Tu-chol; Jon

Sung-hun

Key politburo members Kye Ung-tae; Chon Byong-ho

Agriculture Ri Kyong-sikCommerce Ri Yong-sonDefence Kim Il-cholFinance Mun Il-bongForeign affairs Paek Nam-sunForeign trade Ri Gwang-geunLight industry Ri Ju-oMetals & machine-building Kim Sung-hyonPublic security Choe Ryong-su

Kim Kwang-rin

Key holders of state &party positions

Chairman of the State PlanningCommission

The executive

Form of government

Head of state

National legislature

Regional legislatures

National elections

National government

Main political parties

Official name

Key ministers

North Korea 9


Economic structure

Annual indicators1999 2000 2001 2002 2003

Real GDP growth (%)a 6.2 1.3 3.7 1.2 n/aPopulation (m)ab 22.1 22.2 22.3 22.4 n/a

Exports (US$ m)c 597 708 826 1,007 n/aImports (US$ m)c -1,212 -1,686 -1,847 -1,895 n/aTrade balance (US$ m)c -615 -978 -1,021 -888 n/a

Exchange rate (av; Won:US$)d 2.20 2.20 2.20 2.20 2.20

Origins of gross domestic product 2002a % of totalAgriculture, forestry & fishing 30.2Mining 7.8

Manufacturing 18.0Construction 8.0

Electricity, gas & water 4.4Services 31.6

Main exports 2002ef US$ m Main imports 2002ef US$ mAnimal products 261.1 Minerals 235.9

Textiles 123.1 Machinery & electronic goods 234.7Machinery & electronic goods 85.6 Textiles 158.5Minerals 69.8 Chemicals 122.1

Main destinations of exports 2002e % of total Main origins of imports 2002e % of totalSouth Korea 27.0 China 24.7China 26.9 South Korea 19.5Japan 23.3 India 9.8

Thailand 4.4 Thailand 9.1

a Bank of Korea (Seoul). b National Statistical Office (Seoul). c Korea Trade-Investment Promotion Agency (Seoul); includes inter-Korean trade.d Large wage and price rises implemented from July 2002 inevitably had exchange-rate implications. Although as ever nothing was formallyannounced, drastic devaluation was confirmed in February 2003, at which point the official Won:US$ rate stood at Won148:US$1. Against abackground of continuing inflation and citizens' mistrust of the local currency, black-market rates of up to Won1,000:US$1 have been reported.e Korea Trade-Investment Promotion Agency (Seoul). f Excludes inter-Korean trade.

10 North Korea


Outlook for 2004-05

Political outlook

North Korea's official outlook and prospects for the year ahead are charted inan annual joint editorial carried by three daily papers. The main publication isRodong Sinmun, the organ of the ruling Korean Workers' Party (KWP); the othertwo are Choson Inmingun, for the Korean People's Army (KPA, North Korea'sarmed forces), and Chongnyonjonwi, for the youth organisation. For somereason the government daily, Minju Choson, is excluded. These editorials takeon the role of looking forwards and backwards that was formerly performed inhis annual new year's address by the "great leader", Kim Il-sung, until his deathin July 1994.

The editorial for 2004 was headlined "Let's glorify this year as a year of proudvictory through revolutionary offensive on all fronts of building a greatprosperous powerful nation!" Its overall style and content differ little from pastyears, and give no comfort to hopes that North Korea has any intention ofmoving away from the militancy and militarism that have for many years beena staple of its rhetoric and policy—all the more so in the decade since the "dearleader", Kim Jong-il, succeeded his late father. Indeed, a retrogressive nostalgiapervades it, as when the editorial demands that "the Party organisations andofficials should work in the same style of work and struggle as displayed in the1970s when the revolutionary enthusiasm surged high".

If anything, the 2004 editorial is even fiercer than usual. Three "fronts" ofstruggle are highlighted: politics and ideology, anti-imperialism and militaryaffairs, and economy and science—in that order. In the first, a "revolutionaryoffensive" is needed to "increase the militancy of the Party organisations, effecta radical turn in the Party ideological work and mount a strong counterattackon the imperialists in the ideological and cultural fields". This reflects anxietythat even the limited opening and reform of recent years are eroding the party'sgrip; hence a call for "working people [to] firmly defend the gains of socialismwith transparent class awareness and in the spirit of anti-imperialist struggle".Reflecting the true locus of power in North Korea today, the party is instructedto learn from the army.

Accordingly, as summarised by the Korean Central News Agency (KCNA, theofficial news agency), the joint editorial calls for "giving top priority toincreasing the military muscle". This entails thorough militarisation, not only "tothoroughly establish the traits of giving importance to the military affairsthroughout the society [and] conduct all work on the principle of givingpriority to military affairs", but "to develop the national defence industry as theprimary strategic task in carrying out the revolution and construction".

Neither ideologically nor in terms of resource allocation do these prioritiessuggest a regime seriously orientated towards opening, reform and economicrecovery. Hopes that Kim Jong-il is a closet reformer at heart, forced by politicalweakness in relation to the KPA to veil his cunning plan behind a fog of old-style rhetoric, are wearing thin and now look like wishful thinking. If the "dear

Domestic politics

North Korea 11


leader" truly wanted to be North Korea's Deng Xiaoping, he has had nearly adecade to get his act together. Any further opening and reform, like the little sofar undertaken, will be meant as an ad hoc tactic to patch up and defend theexisting system, rather than as the first steps in a strategy to transform it intosomething different. The best hope is that the unintended consequences ofsuch moves may create a ratchet effect, forcing North Korea to go forward, inthe absence of any possibility of going back.

Behind all the sloganeering, real politics in the capital, Pyongyang, will continueto be opaque. The patent outmodedness, dysfunctionality and risk of this kindof political system in the 21st century, the last of its kind left in the world, arenot lost on the political elite's more thoughtful members. Despite the fact thatNorth Korea has clung on for well over a decade after communism collapsedelsewhere, the country's striking political stability (or sclerosis) cannot be takenfor granted indefinitely. Although a still-merciless police state inhibits popularuprisings or coup attempts alike, it is not impossible that either reformists orhardliners would act if they felt that their opposed concepts of the nationalinterest were in mortal peril.

Moreover, chance and mortality are wild cards. Kim Jong-il turns 62 in Februarythis year, and rumour suggests that his recent absences from public view areowing to illness. Unlike his own rise to power, carefully plotted over threedecades, no plan for a successor appears to be in place. Two sons, at under 35both surely too young to inherit the leadership, are said to be vying for themantle of crown prince. Were anything to happen to Kim Jong-il, therefore,North Korea would immediately become politically unstable, with a high riskof violence and in-fighting, potentially leading to regime collapse.

Foreign affairs will continue to be of central concern in 2004-05. In particular,the nuclear stand-off, now well into its second year, looks set to drag on; withno strong likelihood of resolution, or even much movement, in the near future.This is because at present neither of the two principal protagonists, North Koreaand the US, has a strong incentive to seek a breakthrough, while both haveample reason to procrastinate. For Kim Jong-il, it makes no sense to offerserious concessions to the US president, George W Bush, as long as there is achance that later in 2004 US voters will elect as his successor a Democratpresident, who would almost certainly revert to the softer line and engagementpolicy pursued by the previous president, Bill Clinton.

US policy too will be driven by electoral calculation, while taking into accountthe impact and burden of its existing strategic and military commitments.Already oddly insouciant, as widely noted, in its reaction to Kim Jong-il'svaunted weapons of mass destruction (WMD), in contrast to its assaultostensibly to neutralise Iraq's so-far-elusive WMD, Mr Bush's administration iseven less likely to prioritise North Korea in an election year than it has beenhitherto. Although a second Korean war would win no votes, neither—for aRepublican president trading on his toughness—would a Korean peace. Anydeal is bound to entail US concessions, and risks turning out as hollow as the1994 Agreed Framework, which defused but did not resolve the first NorthKorean nuclear crisis.

International relations

12 North Korea


The US-North Korea face-off will also be influenced by noises off. Given thatthe US is tied up in Iraq and Afghanistan, opening a Korean front is notsustainable either militarily or politically. Knowing this, Kim Jong-il may gambleon further provocations, such as conducting a nuclear test. But this would meanshowing his hand; at present, ambiguity as to what exactly he has in hisarsenal is of itself a powerful weapon.

Recent US gains—Iran and Libya coming clean on their own covert nuclear andWMD programmes, and the capture of the former Iraqi president, SaddamHussein—are bound to concentrate Kim Jong-il's mind. The first two seem likelyto detail North Korean complicity, long suspected, in both Iran's and Libya'smissile ambitions, and appear to confirm Pakistan's role as a supplier of nuclearknow-how and possibly nuclear materials. But while the fate of Saddam seemsto have inspired Libya's leader, Muammar Qadhafi, to come in from the cold,North Korea may draw the opposite conclusion: that only a nuclear deterrentcan stave off so ignominious a fate. Kim Jong-il will watch closely how soonand tangibly Colonel Qadhafi is rewarded for his surrender. At all events, NorthKorea has been left even more isolated. If and when the regime of Fidel Castroin Cuba falls or is superseded, Kim Jong-il may find himself wholly alone inpersisting in a defiant stance. That could be a moment which might prompt acoup attempt in Pyongyang.

However, perhaps perversely, North Korea will continue to be sustained by thereluctance of its regional neighbours to translate their disapproval of its nuclearantics into any serious pressure. Not only its traditional (if now disenchanted)sponsors, China and Russia, but also an increasingly pacifist South Korea, seemready to try to keep dialogue going at all costs. China and South Korea alsokeep North Korea itself going through food and other aid. The South'spresident, Roh Moo-hyun, will maintain his predecessor Kim Dae-jung's pro-engagement "sunshine policy", both for fear of the devastating effects on SouthKorea of any hostilities, and also because he believes that coaxing North Koreato open up is a better bet and much less risky than forcing Kim Jong-il into acorner. The likely rejoining of two crossborder road and rail corridors by 2005will be a powerful symbol in this respect, although how much use and trafficthey will see is another matter.

It follows that not too much should be expected of what has become theimmediate focus, namely efforts, especially by China, to reconvene the six-party talks—involving the two Koreas plus the US, China, Japan and Russia—thathave so far met only once, in August 2003 in the Chinese capital, Beijing. If it istaking months even to find a form of words for an agenda acceptable to boththe US and North Korea and to bring them back to the table, a fortiori anysubstantial progress will take even longer. At least one further round is likely,but a breakthrough will remain difficult for the reasons outlined above. NorthKorea's new offer in early January 2004, which hints at giving up not onlymilitary but also peaceful nuclear programmes, sounds hopeful, but may proveas illusory as past offers—and would of course have to be paid for, whichremains a sticking point for the US.

The offer also seems contradicted, at least in spirit, by the gesture of showingan alleged nuclear deterrent—what exactly this consisted of is not yet known—

North Korea 13


to a US delegation in January. How this will play out is not yet clear; however,on balance, stalemate and tacit de facto tolerance of a possibly nuclear NorthKorea are likely to continue in 2004. What happens beyond that is a differentmatter. If re-elected, Mr Bush may lose patience with Kim Jong-il, should heremain in nuclear defiance. But other countries will remain unwilling to pressNorth Korea too hard, unless its provocations tax their patience excessively.

Economic policy outlook

As noted above, "economy and science" is listed last among North Korea'savowed priorities for 2004. Despite declaring that "it is necessary to make aleaping advance on the front of economy and science", there is no sign of anygrasp of, or commitment to, the steps that serious pursuit of such a goal wouldentail. Indeed, a frankly contradictory sentence avers that "the economy andscience and technology in the Songun (army-first politics) era should be somodern and viable as to materially and technologically guarantee the overallnational power with the military muscle as the core and enable the people tolive as well as others."

But muscle does not come cheap. Giving priority to the military starves thecivilian economy of the investment it needs to grow. Conversely and ironically,as China shows, if growth were put first this would in time deliver theresources for serious military modernisation and expansion. Indirectly too,North Korea's bellicosity and nuclear defiance scare off much-needed foreigninvestment. All this looks set to continue.

Just as reactionary is a call that could have been made at any time in the last50 years: "In order to inject dynamism into the overall economy of the countryit is necessary to channel main efforts into the development of the power, coalmining and metal industries and railway transport", whereas "light industryshould make an effective use of the existing production foundation andenergetically push ahead with the technical modernisation to boost theproduction of consumer goods and decisively improve their quality." In classicStalinist fashion, heavy industry is prioritised, while consumer goods must fendfor themselves. In farming, faith is placed in science rather than reform: "Tosignificantly increase the agricultural production it is necessary to … bring abouta radical turn in the seed improvement so as to effect a signal change in thepotato farming and develop the two-crops-a-year farming on a large scale."

Completely unmentioned are the price, wage and other market reforms of thepast two years. The word "market" appears nowhere. If anything, the emphasisis on increased central control: "It is important to increase the role of thecabinet, the economic headquarters, and improve the economic management.To this end it is necessary to establish a proper work system guiding andadministering the economy and science and technology in a uniform mannerand closely combine science and technology with production." This harping onscience and technology suggests that these are seen, erroneously, as analternative to market reforms as a means of increasing output. In Marxist terms,North Korea wants to boost the productive forces, yet not to change therelations of production, which have manifestly become such fetters on growth.

Policy trends

14 North Korea


Or at least, not overtly. In practice, on the ground, there is no going back fromthe (still officially unannounced) market reforms already made. But the rhetoricquoted above suggests that there may not be much going forward either. Thefear is that North Korea will do only the minimum necessary to patch up itsmoribund economy, rather than grasp the nettle of real Chinese-style change.South Korea and China will try to offer tangible incentives to persuade NorthKorea that opening is a better way, and thus to strengthen the hand of those inPyongyang who favour this approach.

But the nuclear crisis will set limits to such co-operation and sweeteners. Thefact is that Kim Jong-il, as in the old nostrum, must choose between guns andbutter. He cannot viably pursue both at once. Veritable butter mountains waitin the wings as his reward—if, and only if, he fully, verifiably and irreversiblygives up on the guns. This might seem a straightforward choice. Yet for a leaderdependent on his generals, and personally identified with introducing amilitary-first policy, it may be a step too far.

The political scene

There is speculation as to the health of three of the top figures in North Korea.Concerns over the physical state of the national leader, Kim Jong-il, rife in theyears when he was hidden from public view, seemed belied when he emergedinto the limelight from 2000 as an energetic and quick-witted host to SouthKorea's then president, Kim Dae-jung, the US secretary of state, MadeleineAlbright, and others. In January 2004, however, Japanese press reportssuggested that the "dear leader" had a serious stomach complaint, and that thiswas why a high-level Chinese delegation had been forced to delay a visit thatwas due to take place in late 2003 (at the time this was attributed to discordover nuclear talks). Although there is no way to confirm the reports, Kim Jong-il's absences will be watched closely henceforth.

Separate rumours query the health of Kim Jong-il's consort, Ko Young-hee (theyare thought not to be married). A former dancer and returnee from Japan,North Korea's de facto first lady is never seen in public, but is taken to be thesubject of an official campaign, revealed in 2003, to emulate an "esteemedmother" who serves Kim Jong-il "closest to his body". Japanese press reportsclaim that Ko Young-hee sustained head injuries in a car crash in September2003, whereas a South Korean daily newspaper, Chosun Ilbo, says that she issuffering a recurrence of cancer, for which she has previously been treatedin Europe.

According to Radiopress, a Japanese news agency that monitors North Koreanbroadcasts, Kim Jong-il made fewer public appearances in 2003 (as reported inPyongyang's media) than in 2002. As at December 25th the tally stood at 86appearances, down from 117 in 2002. Within this total, the number of military-related visits more than doubled from 24 to 56, or 65% of the total. The lowertotal reflects three long periods when Kim Jong-il went to ground: for sevenweeks in February-April, at the height of the Iraq war; in September, asmentioned above; and again during the whole of November.

Kim Jong-il is rumoured tobe ill

His consort may have had acar crash

Kim Jong-il appears less oftenin 2003

North Korea 15


Vice-marshal Jo Myong-rok, the first vice-chairman of the National DefenceCommission and the second most powerful figure in the Pyongyang regimeafter Kim Jong-il, was reported by unnamed South Korean officials in Decemberlast year as having gone to the Chinese capital, Beijing, to be treated for kidneyfailure. This is not the first such rumour. Aged 73, Jo Myong-rok is thought onlyto have one kidney left. If he dies, this could lead to a power struggle withinthe top brass for Kim Jong-il's ear. If Kim Jong-il too has health problems, thatcould prove doubly destabilising.

Kim Yong-sun, who as chairman of the North's Asia-Pacific Peace Committeewas North Korea's senior official covering relations with the South, died onOctober 26th 2003. He had been in a coma since a car accident in June,rumoured to have followed one of Kim Jong-il's hard-drinking parties. In SouthKorea Kim Yong-sun was seen as a key figure in the inter-Korean thaw of recentyears. Although there was no official comment on the death from the South,the Southern unification minister, Jeong Se-hyun, said that he "express[ed]condolences from a humanitarian perspective".

Although latterly in charge of inter-Korean ties, in earlier years, as theinternational secretary of the Korean Workers' Party (KWP), Kim Yong-sun wasone of North Korea's most experienced, well-travelled and able diplomats—heonce even attended a congress of the Welsh nationalist party, Plaid Cymru. InJanuary 1992 in New York, in the last days of the Reagan era, he met seniorofficials in the first ever formal bilateral US-North Korean contact of moderntimes. At 69 he was one of the younger figures in the Pyongyang gerontocracy.According to press reports in South Korea, in March 2001 he was brieflyarrested as part of a power struggle and backlash in the Pyongyang regimeagainst the "sunshine policy", but was freed on Kim Jong-il's orders.

South Korean media reports claimed in January 2004 that North Korea haslaunched an anti-smoking drive. Kim Jong-il, who gave up the weed butignored medical advice to stop drinking too, is leading the campaign, whichdescribes smokers as among the "three main fools of the 21st century", alongwith those ignorant of computers and music. Television slogans and pro-grammes link this with the official call to build a powerful and prosperous state(kangsong taeguk). It is estimated that 40% of North Korea's 22m people smoke,one of the highest rates in the world.

One of the last quarter's main events was a non-event. Despite muchdiplomatic shuttling in various permutations, it proved impossible to reconvenea second round of six-party talks—involving the two Koreas, the US, China,Japan and Russia—by end-2003. At first North Korea refused to return to aforum which, after the first round in Beijing in late August, it had lambasted as"a stage show to force us to disarm … not only useless but harmful in everyaspect". It took several Chinese visits to soothe these feelings, notably one onOctober 29th-31st by Wu Bangguo, the second most senior figure in the ChineseCommunist Party. Japanese press reports in January claimed that China hadoffered North Korea aid worth US$50m as an inducement to return to the talks.

Vice-marshal Jo Myong-rokmay be unwell

North Korea's point man onthe South dies

Kim Yong-sun was a keydiplomat

North Korea launches an anti-smoking campaign

Much shuttling fails toreconvene the six-party talks

16 North Korea


The next sticking point was, and still is, the question of the terms on which thetalks should resume. No party wanted to repeat a merely formal gathering, butthe US and North Korea were divided on preconditions, even though the USsaid it had none. From the North Korean and US governments alike camestatements with often conflicting emphases, implying continued debate in bothcapitals over whether to engage and in what form. The US continued todemand full, verified and irreversible nuclear disarmament at an early stage.North Korea, for its part, wanted wide-ranging compensation and a phased dealwith step-by-step simultaneous actions by both sides. This gap would notunbridgeable if the will for an agreement were there, which at present itappears not to be.

On January 6th 2004 North Korea offered to "refrain from test and productionof nuclear weapons and stop even operating nuclear power industry for apeaceful purpose as first-phase measures of the package solution". In return, itdemanded that the US lift political, economic and military sanctions, delist it asa sponsor of terrorism, and supply heavy oil and other energy resources.Although the US secretary of state, Colin Powell, described the offer asinteresting and positive, the quid pro quo goes beyond what the administrationof the US president, George W Bush, is prepared to offer at this stage. Mr Powelllater backtracked.

Harder to read was North Korea's hosting of a private but senior US delegation,also in January. Led by John Lewis of Stanford University, the delegationincluded Charles "Jack" Pritchard (who until August 2003 was the USgovernment's contact point with North Korea's UN delegation in New York), SigHecker, a former director of Los Alamos nuclear laboratory, and twocongressional staffers. Their itinerary included Yongbyon, North Korea's mainknown nuclear site to the north of Pyongyang, from which monitors from theInternational Atomic Energy Agency were expelled a year ago, and the likelysource of plutonium for any nuclear weapons programme.

On January 10th the official Korean Central News Agency (KCNA) said thatNorth Korea's "nuclear deterrent force" had been "displayed" to the visitors. TheUS delegation, in transit in Beijing, confirmed that they had visited Yongbyon,but would say no more until they had first debriefed the US government. Inadvance, the Bush administration had made clear that this was a private visit,but did not try to stop it, unlike in October 2003 when it vetoed a trip by asenior Republican congressman, Curt Weldon. It remains to be seen what themembers of the delegation saw, what messages if any they were given toconvey to the White House, and whether this will help or confuse efforts toreconvene the six-party talks. If they were shown reprocessed plutonium, thiswill make the US less likely to bend on its conditions for an agreement; but theUS will not take precipitate action either.

An earlier attempt to mediate came when a senior EU delegation, led by thedirector-general of the Italian foreign ministry, Guido Martini, visited Pyong-yang on December 9th-12th 2003. EU efforts to strengthen ties with North Korea

US and North Korea differ onthe terms of the talks

A new offer raises cautioushopes

Private US visitors maymediate

North Korea says it showeddelegates its nuclear deterrent

The EU pitches in as well

North Korea 17


and demonstrate the virtues of engagement have been on hold since thenuclear crisis arose. Humanitarian aid continues, but plans for assistance withtraining and infrastructure have been frozen.

On November 21st 2003 the executive board of the Korean Peninsula EnergyDevelopment Organisation (KEDO) voted to suspend for one year the con-sortium's main project: the two light-water reactors (LWRs) being built atKumho on North Korea's north-eastern coast. (The board comprises the US,South Korea, Japan and the EU.) Although South Korea expressed the hope thatwork could resume a year hence, the US ambassador to Seoul, ThomasHubbard, said that he saw no future for the LWRs. It was the US that hadpushed for formal suspension.

So ends, perhaps, one of the odder yet more creative pieces of multilateraldiplomacy of recent times. The KEDO consortium was set up under the 1994US-North Korea Agreed Framework, which defused the first North Koreannuclear stand-off. In return for mothballing its Yongbyon nuclear site, NorthKorea was to be given two new reactors of a type supposedly less susceptibleto military abuse. During construction it also received 500,000 tonnes of heavyfuel oil annually, until this was suspended a year ago when a fresh nuclearcrisis blew up over a suspected new covert nuclear programme, this time usinghighly enriched uranium rather than plutonium.

From the start critics, especially US Republicans, condemned the AgreedFramwork and KEDO as rewarding blackmail. Others saw it as a charade: KimJong-il pretended to give up the bomb—not that he admitted having one at thatstage; the pretence was that Yongbyon was about electricity—while the US andits allies pretended to build him new reactors, while expecting his regime tocollapse before delivery, which was scheduled for 2003. All this is years late,owing to delays by both sides: the reactors are about one-third built. In anycase, North Korea's decrepit grid could not handle the output from the LWRsunless modernised.

Yet the Agreed Framework and KEDO also produced positive results: averting asecond Korean war, which was a real risk in mid-1994; shutting North Korea'sknown nuclear facilities; and launching a bilateral US-North Korea relationship,which widened to cover missile talks, food aid, searches for US soldiers missingin action since the Korean war in the early 1950s, and more. Furthermore,KEDO enabled US, Japanese and South Korean officials to visit North Korearegularly for the first time. Some went often, gaining extensive field experienceand first-hand knowledge in tough negotiations over the many practicalities ofsuch a project. This was a valuable learning experience for both sides, not leasta lesson in co-operation for the three allies.

KEDO also cunningly gave South Korea and Japan (the EU was a later addition)a say and stake at a time when North Korea refused to talk to either directly.South Korea and Japan moreover agreed to foot most of the eventual US$5bnbill; South Korea has spent US$1bn already, which has been another reason forits reluctance to call a halt. KEDO thus played a vital role in beginning practical

KEDO's LWRs are in limbo,officially

The LWR project may neverresume

Creative diplomacy orcharade?

On balance, KEDO has had apositive effect

KEDO also laid a foundationfor North-South ties

18 North Korea


inter-Korean co-operation. Four years before Kim Dae-jung's pro-engagement"sunshine policy", this saw South Koreans living and working in the North forthe first time, eventually in their hundreds. To facilitate this, the first everregular direct inter-Korean sea, telecommunications and air links were created.Recently nuclear training has begun at Kumho; with little fanfare, Northernengineers have come to the South to inspect nuclear plants similar to thosebeing built at Kumho. Although the new nuclear crisis had put KEDO in virtuallimbo, the ending of the project, which the current suspension may turn out tobe, is therefore regrettable.

Unlike in South Korea, in Japan few tears were shed for KEDO. Despite the visitof the Japanese prime minister, Junichiro Koizumi, to Pyongyang in September2002—or because of it, given the backlash over the deaths of eight Japanesewhom North Korea admitted having abducted—Japan during the past year hasadopted a hard line, which plays well with public opinion. Japan has tightenedscrutiny of visits and commerce, causing bilateral trade to plummet, and isconsidering unilateral sanctions, as well as having joined the US-sponsoredProliferation Security Initiative. In January 2004 a leading left-leaning Japanesedaily, the Asahi Shimbun, said that Japan was seeking bilateral treaties in Asia toprevent components for weapons of mass destruction reaching North Korea.Hong Kong, Singapore and Thailand were mentioned as candidates; nonebelong to the Wassenaar Arrangement, which exists to control trade in dual-usetechnologies.

Despite this, unofficial and perhaps some secret contacts have continued. NorthKorea is said to have offered concessions, including allowing the children of thefive abductees who returned to Japan join them there if their parents comeback to North Korea to claim them. Japan's reaction is that everything hinges onnuclear progress and sincerity, but here too it is taking a harder line, suggestingit will not tolerate any nuclear activity, peaceful or military, in North Korea. Thatwould rule out resuming construction of KEDO's LWRs.

Russian policy towards North Korea can be hard to read. Ties were frostyduring the Gorbachev and Yeltsin eras. The current Russian president, VladimirPutin, has, however, tried to mend fences, meeting Kim Jong-il three times in2000-02. No such meeting took place in 2003. Russia shares the general disquietat North Korea's nuclear plans, although like China it counsels patience andurges the US to meet North Korea halfway.

Local political priorities in the Russian far east are different, with botheconomics and demography playing a part. North Korean contract workers,long familiar in forestry around Khabarovsk in eastern Siberia, where theirconditions have given rise to human rights concerns, are now a familiar sighton construction sites in cities like Vladivostok. Some 10,000 such contractworkers are reckoned to be in Russia. Sergei Darkin, the governor of Russia'sMaritime Territory, visiting Pyongyang in October 2003, asked for the non-forestry quota to be doubled to about 5,000 in 2004. These extra people wouldbe employed mainly in farming (less than one-third of the region's arable landis cultivated), construction and rubbish collection.

Japan takes a harder line

North Korea hints atconcessions, but Japan is wary

Russian policy is hard to read

The Maritime Territory wantsmore contract workers

North Korea 19


North Korea should have no problem with that, but it will look askance atanother of the governor's ideas. He was quoted in December by a USnewspaper, the New York Times, as "ready to help, and financially too" byaccepting as many as 200,000 North Korean refugees—the true number may besmaller—now living furtively in China, which treats them as illegal economicmigrants and deports those it catches, sending them back to an uncertain fate.

That is a startling suggestion, which if meant seriously would have a majorimpact on the region's politics as well as its demography. As it stands, the ideaseems a non-starter: North Korea would be furious, and China would not letrefugees out. For both countries this is—like US conservatives' efforts topersuade the US to take North Korean refugees, which Mr Darkin said hesupported—ominously reminiscent of Hungary's opening of its border withAustria in 1989, which, by allowing East Germans to travel to the West, iscredited with having precipitated that year's crumbling of communist regimesin eastern Europe.

In mid-2003 Russia considered a mass North Korean refugee exodus from adifferent angle: as a contingency for a civil defence drill. Whereas such planningis only prudent, it is another matter actively to solicit such a scenario. Yet inextremis, if Russia and China become terminally fed up with the regionaldestabilisation caused by Kim Jong-il's nuclear antics, it is not inconceivablethat either country might be driven to seek regime change. Whether theywould act in concert is another matter. For Russia, to people the far east withKoreans is seen as a bulwark against Chinese demographic and politicalpressure to regain these coastal areas, ceded to Tsarist Russia in the 1860s.

Ireland established diplomatic relations with North Korea on December 10thlast year, leaving France as the only EU member state yet to do so. Ironically,there has been a North Korean mission in Paris since the 1960s: initially a tradeoffice, upgraded in 1980, to South Korea's fury, by the French president, FrançoisMitterrand, to a "general legation", an odd status shared with Quebec andthe Palestine Liberation Organisation. North Korea's delegation to the UNEducational, Scientific and Cultural Organisation (UNESCO) works out of thesame office. Despite this pioneering role, France has stood aloof from the rushof EU recognitions of North Korea in the past four years, apparently because ofhuman rights concerns.

Economic policy

Despite North Korea's nuclear defiance and "army-first policy", on the economicfront the signs of progress continue. There is now no doubt that economicreforms, radical by past standards if not by today's global norms, are underway. At last the markets that since the 1996-98 famine have increasinglysupplanted the old state distribution system are receiving official acknowledge-ment: formerly off limits, they are now on show to visitors. More officials arebeing sent abroad for training in market and transition economics; Vietnam,significantly, is one such destination.

A Russian governor says hewould accept refugees

Shades of Hungary in 1989

If pressed, Russia or Chinamight consider regime change

Diplomatic relations areestablished with Ireland

Economic reform is nowunmistakable and irrevocable

20 North Korea


In November 2003 Swedish visitors involved in such training were told that thenational leader, Kim Jong-il, has decreed a three-year experiment of opening tothe global economy, but that this would not be announced and would havelimits. There are, for example, apparently no plans to start publishing anyeconomic statistics, even though foreign investors would need such data—aswould the World Bank and the IMF, should North Korea ever feel inclined toapply for membership and the much-needed loans this would bring.

The lack of published statistics is one of several obstacles which, if notremedied, will limit the potential of the new measures to transform society.Another is the curiously unannounced nature of these changes, creatinguncertainty and suggesting a regime not fully committed to a reform pro-gramme that dare not speak its name. As mentioned above (see Outlook for2004-05: Political outlook), the new year joint newspaper editorial was awashwith the traditional bellicose rhetoric, but made no mention of reform. Thisdoes not suggest a commitment to press on further to a fully market-basedeconomy.

For political reasons, more radical reforms may be confined to the four specialzones created at each corner of North Korea. South Korea regards the adoptionin December 2003 of a raft of detailed regulations for the planned Kaesongindustrial zone, which lies just north of the Southern capital, Seoul, as a signof seriousness.

Little had been heard lately of another special region, declared in 2002 atSinuiju, on North Korea's north-western border, facing Dandong in China acrossthe Yalu river. Sinuiju's first head, Yang Bin, a Chinese-Dutch orchid tycoon, wasswiftly arrested and jailed for corruption in Shenyang in China's north-easternLiaoning province. But on December 5th 2003 a South Korean daily newspaper,JoongAng Ilbo, reported that North Korea had not yet given up on Sinuiju. Inmeetings in Dandong the North Korean government has been trying to wooChinese and European firms; Mr Yang's arrest scared off investors from HongKong and Macao. Kim Jong-il's brother-in-law and right-hand man, JangSong-taek, is said to be in charge, and four vice-ministers have been appointedunder him. A plan to move 100,000 people from the north to the south ofthe zone "to allow realignment of infrastructure" is scheduled to start in April2004, even though construction of new housing for them has been halted bylack of funds.

By some accounts wider reform spells opportunity for foreign business. OnNovember 21st last year a UK daily newspaper, the Financial Times, reportedthat European investors planned to set up a company, International Develop-ment Capital (IDC), in the North Korean capital, Pyongyang, to help restructurethe financial system and facilitate foreign investment. They may also establish abond market and a credit-card settlement system. According to Tony Michell ofthe UK-based Euro Asian Business Consultancy, which has an office inPyongyang, about 20 mostly European partners (no names were specified) haveformed the London-based Northern Development Consortium, which signed

There are no plans to publishfigures

Reform remains unannouncedand incomplete

More radical reform may beconfined to enclaves

The Sinuiju special zone isstill alive

There may be opportunitiesfor foreign business

North Korea 21


an agreement to set up IDC jointly with North Korea's Ministry of Finance.There has been no further word since this initial report.

Separately, another consultant, Michael Hay of KoreaStrategic.com, said onOctober 28th that North Korea wants to license international law andaccountancy firms in order to help attract foreign investment. To do so wouldput it a step ahead of South Korea, where neither sector is yet open toforeigners except in joint ventures. Although these are encouraging signs, thefear is that North Korea's track record of defaulting on foreign payments, aswell as the nuclear stand-off, may for now deter all but the least risk-averseventure capitalists.

As widely observed in transitions from old-style communism elsewhere,reform can create losers as well as winners. The UN's humanitarian co-ordinator in Pyongyang, Masood Hyder, warned in Seoul on December 2ndthat North Korea's shift towards a market economy had made an extra 1mpeople vulnerable to food shortages. Although he supported the reforms aspromoting economic vitality, he emphasised the need for a safety net. He alsourged donors not to cut off aid just when real change was beginning, despitenuclear worries, lest the reforms be reversed if they are seen to be failing.

Mr Hyder also warned that North Korea could soon face a humanitariandisaster if aid falls further. In 2003 the UN World Food Programme (WFP)received only 70% of what it needs to feed the 6m people—over one-quarter ofthe population—on its rolls. Japan, once a major donor, has given nothing fortwo years. But the US decided in December to give 60,000 tonnes of grain viathe WFP, bringing its total donation for the year to 100,000 tonnes. The samemonth saw completion of the delivery of 400,000 tonnes of rice by SouthKorea, whose officials were allowed to monitor its distribution in three ports. InJanuary 2004 the European Commission announced fresh food aid worth€5m (US$6.8m).

The domestic economy

At the end of 2003 South Korea's Ministry of Unification (MOU) declared thatthe North Korean economy grew modestly in 2003. However, it provided nofigures to support this claim. According to the MOU, the North's more dynamicsectors included light industry, grain production (due to a better harvest than in2002), commerce and construction. Increased inter-Korean trade also contri-buted, although much of this probably in fact consisted of aid. The MOU said,however, that certain "key industries" suffered from low production. Theministry did not name the industries, but it presumably meant traditionalheavy industrial manufacture and mining.

The MOU gave particular weight to the fact that North Korea's use of internalmarkets as a means of facilitating "official commerce and distribution". Thereare now some 300 markets nationwide, including ten in Pyongyang. Whether

North Korea is said to wantforeign lawyers

The UN warns that reformsare at risk from hunger

South Korea, the US and theEU are donors, but not Japan

South Korea reports modestgrowth in 2003 in the North

Some 300 markets now playan official role

22 North Korea


this is indeed the initial phase of a wider and irreversible push towards a fullycapitalist economy, however, remains moot.

The Bank of Korea (BOK, South Korea's central bank) is also cautious. In earlyDecember 2003 a report by the BOK said that, although "the North Koreaneconomy is faltering … there exist some environmental factors that can helpintroduce a market economy". The BOK also reckoned that North Korea'sindustrial structure is similar to that of China in 1978 when it had just begun toopen up its economy.

That is a bizarre gloss on what most accounts view as a disastrous deindus-trialisation and great leap backwards. The comparison with China is queried byMarcus Noland of a US think-tank, the Institute for International Economics,who argues that, as a formerly industrialised country, North Korea cannotemulate China in basing growth on the transformation of a dynamic ruralsector. Likewise, the BOK's view that international financial institutions willplay an important role in helping the North switch to a market economyignores the fact that North Korea does not belong to any international financialinstitutions. Nor would it be able to join the World Bank or the IMF withoutchanges, including publishing economic data and getting itself removed fromthe US list of countries sponsoring terrorism, without which the US wouldoppose its membership.

But the move to marketisation also has a downside. Rick Corsino, who at end-2003 completed three years as the local head of the UN World FoodProgramme (WFP) and has had wider access to North Korea than any otherAmerican, spoke in a press interview in December of growing disparities ofincome and access to food in the North, and of how some North Koreans werenow having to spend all their income on food.

As usual, North Korea's bitter winter is taking its toll. In December last year theVladivostok office of the South's Korea Trade-Investment Promotion Agency(Kotra), citing Russia's Itar-Tass news agency, reported that power cuts wereaffecting heating and other facilities, even in Pyongyang. Power can be cut offfor days at a time; even when the power is on, the decrepit state of the gridmeans that voltage rarely rises above 190 v rather than the rated 220 v, and candrop as low as 160 v. So lights flicker dimly, television pictures are poor and toheat an iron may take 40 minutes. Power-hungry appliances are banned. Publicbuildings, even schools, are not heated; visitors and photographs confirm that itis normal, because necessary, to keep overcoats on indoors.

To cope with power shortages North Koreans practice self-reliance, if not in themanner that their rulers may wish. Senior cadres and officers have privateboilers, although Itar-Tass did not specify what fuel was used. Smoke and thesmell of coal suggest that others are resorting to open fires. However, thepresent situation is said to be not quite as severe as last winter.

The BOK likens the North'sindustry to China's in 1978

The comparison with China isquestionable

A cold winter bites

Self-reliance provides asolution for some

Income disparities grow

North Korea 23


The WFP reported in January 2004 that winter was worsening the suffering ofat least 2.7m North Koreans. Besides cuts in the WFP programme owing to ashortfall in aid pledges, severe weather makes it difficult to reach more remoteareas, and lack of heating is leading to a rise in cases of pneumonia amongchildren. The European Commission, which on January 12th approved new aidworth €5m (US$6.8m), said that malnutrition is a persistent problem, especiallyfor children, with high mortality rates feared for under-fives. It estimates that3.5m children will not receive adequate food rations from January unless newdonations are forthcoming. The EU is continuing to provide humanitarian aideven though its broader plans for developmental assistance are on ice becauseof the nuclear stand-off.

While most freeze, a favoured few now have access to the trappings of modernlife. In its December 13th 2003 issue The People's Korea, published byChongryun, the organisation of pro-North Koreans living in Japan, featured thespread of mobile telephones in North Korea, if hardly yet on the scale seenelsewhere in the region. From just 3,000 subscribers at the start of 2003 thenumber of mobile phone users has now reached over 20,000. Originally

Child malnutrition andpneumonia remain concerns

Mobile phone serviceexpands, for a wealthy few

24 North Korea


confined to Pyongyang and to Rason in the Rajin-Sonbong special zone in thenorth-east, from September 2003 mobile phone coverage was extended to allprovincial capitals, the special cities of Nampo and Kaesong, three counties ofRyanggang province, and five main highways: those from the capital west toNampo, south to Kaesong, north to Hyangsan, and east to Wonsan, plus theroad north from Wonsan to Hamhung. Remote Ryanggang is unexpected: otheraccounts suggest that Chinese mobile phone networks can be, and are, illicitlyaccessed in such border areas.

Besides limited networks, the main factor restricting growth is cost. Handsetscost €300 (US$405), with a sign-up fee of €750. Call charges of Won15 (about10 US cents) a minute are moderate, but well above the absurdly low Won0.35for three-minute local calls on a land line. The fixed-line network is alsoexpanding, with the avowed aim of a line for every household within fiveyears; other sources suggest that at present barely 1.1m lines exist, for a popu-lation of 22m. Operator service is still the norm, but a plant to make phones forautomatic switchboards was built in Pyongyang in October 2003. Constructionis also in progress of a plant that will make fibre-optic cables, which alreadylink large cities—by some accounts mainly for secure military communications,as radio and other air links are more vulnerable to US and South Koreanlistening devices.

The North's official Korea Central News Agency (KCNA) reported on November28th last year that the International Communications Centre (ICC) inPyongyang has offered international e-mail services since May 2003. Hithertothe only such access was via Silibank, a firm based in Shenyang in China, atgreat expense. The ICC also charges for sending e-mails, but receiving them isfree. Users dial 165 and are assigned an identification code and a password: this"guarantees the privacy of correspondence" thanks to a locally devisednetwork-security system. One may doubt the privacy; but for a state whereradios still have fixed dials, this seems bold, if belated. An official in Seoul saidhe understood that Internet access and web searches are still forbidden.

For that matter, South Korea still bans the exchange of e-mail, letters and faxeswith North Koreans without official approval. Security circles in South Koreafear that one motive for the fondness for information technology displayed bythe North's leader, Kim Jong-il, is to threaten cyberwar against the heavilyInternet-dependent Southern economy. Hence there was concern in December2003 when a Northern posting popped up for the first time on a Southernwebsite. In fact this came from a Southern-invested but unapproved onlinegambling site in Pyongyang that was keen to deny allegations made against it inan effort to deter its use by punters in South Korea, where gambling is illegal.The same operator, Hoonnet, runs Pyongyang's first Internet café.

Land line coverage too is farfrom comprehensive

E-mail access is said to beexpanding

South Korea still bans e-mailexchanges with the North

North Korea 25


Another entrepreneur, this time a German, Jan Holtermann, said in Decemberthat he would open an Internet service in North Korea in February 2004, tomark the birthday of Kim Jong-il. Mr Holtermann, a former banker who onceworked at North Korea's embassy in Berlin, claimed that his company, KCCEurope, signed a contract in January 2003 and has invested €1m in networkinfrastructure. Acknowledging that access will be selective, Mr Holtermannexpects slim profits at first. How this relates to ICC's operation is unclear—unless Kim Jong-il has grasped that market reforms work better with a dashof competition.

North Korea's first chewing-gum factory opened in late October 2003 inRagnang district, Pyongyang. Its capacity is 1,200 tonnes a year. Flavours arestrawberry, mint and grape.

Foreign trade and payments

One of the ironies of South Korea's avowed goal to become east Asia's businesshub is that, as a glance at the map reveals, it is in fact North Korea that lies atthe heart of the emerging north-east Asian economic region. So far this is anabsent centre and a missing link—indeed, a black hole, as in satellite photo-graphs of the region at night, which show North Korea in almost total darkness,surrounded by a blaze of light. If the North's leader, Kim Jong-il, is seriousabout opening and reform, then his location affords comparative advantage.

So far North Korea has failed to exploit its geographical position. Fifteenyears ago already, Chung Ju-yung, the late founder of a Southern chaebol(conglomerate), Hyundai, proposed a pipeline to bring gas from Siberia to bothKoreas. Such a scheme would benefit North Korea doubly: providing much-needed energy, and allowing it to charge rent for the onward pipeline to SouthKorea, while intruding far less on a closed society than most other formsof opening.

But North Korea evinced no interest and now looks set to lose out. OnNovember 14th 2003 China, South Korea and Russia announced plans for aUS$17bn pipeline—at just over 4,800 km, Asia's longest—to bring Siberian gas toChina and South Korea. Yet the proposed route bypasses North Korea, crossingthe Yellow Sea instead. This is a missed opportunity. Similarly, North Korea'sslowness in upgrading the infrastructure in its first special economic zone atRajin-Sonbong, bordering China and Russia in the north-east, in the 12 yearssince this was gazetted means that its neighbours are bypassing it. New roadand rail links have opened, or are planned, linking Hunchun in China with theRussian ports of Kraskino, Posyet and Zarubino, south of Vladivostok. Hereagain the lesson is that delay may prove fatal.

Victor Popov, the head of the far-eastern section of Russian railways, said inJanuary this year that Russia would soon start repair work on a 65-km stretch oftrack connecting North Korea to the trans-Siberian railway. It has alreadycompleted the modernisation of the 240-km stretch within Russia from Khasan,

A German entrepreneur gets inon the act

You got gum, comrade?

A black hole could become ahub, in principle

A trans-Korean gas pipelinewas first mooted 15 years ago

Now the pipeline is set tobypass North Korea

Russia will help to reconstructborder railways

26 North Korea


at the border, to the trans-Siberian railway junction. "Repair" is an under-statement; Mr Popov said that "as the railroad … in North Korea is very inferiorin quality, I think the repair work will be de facto new railroad construction." Headded that in 2003 Russia spent US$16m on rail surveys in North Korea—presumably the same exercise that Russia's state-owned radio, Voice of Russia,reported as concluding on December 23rd after a three-stage survey of theDonghae (eastern) line, focusing especially on bridges and piers.

There is some ambiguity as to the extent of Russia's role. The 65-km stretch oftrack identified for repair is dual-gauge track to the Rajin-Sonbong economicand trade zone, intended to revive past transit trade using the zone's specialisedice-free ports: Ungsang for timber, Sonbong for oil and Rajin for bulkcommodities. But Russia is also keen to create a more ambitious freight routelinking South Korea to Europe, which would entail not only completing linksacross the demilitarised zone (DMZ, the de facto border between the Koreas),but rebuilding the network along North Korea's entire length. This in turn willrequire tripartite co-operation between Russia and the two Koreas. South Koreamay well be expected by the other two to shoulder most of the costs.

An article in Asia Times Online on January 7th detailed North Korea's growinguse of labour exports as a way of earning foreign currency. As noted above, thisbegan with forestry in the Russian far east, where by the late 1980s the numberof North Korean workers had risen to 30,000. The fall of the Soviet Unionreduced this figure, but despite human rights criticisms the flow continues.Tynda-Les, one of the largest timber firms in the Russian far east, employs 1,800North Korean loggers. Its partner, a state-owned firm, Korean Logging CompanyNo. 2, receives 35% of the timber and sells it on mainly to China and Japan,earning US$1m per year.

Lumberjacks aside, North Korean construction workers in Vladivostok earnUS$400 a month; they keep US$100, the rest being remitted to North Korea. It isunclear how this meshes with reports that some workers, who are presumablyunpaid or poorly paid, are repaying North Korea's long-standing debts from theSoviet era, totalling US$3.8bn.

Now the practice of sending workers abroad is spreading further afield,especially to the Middle East. It began in Kuwait, where North Korea has kept atrade office since 1968. Some 2,000 North Koreans work there, mainly inconstruction. In Yemen, according to the (Southern) Korea Trade-InvestmentPromotion Agency (Kotra), a North Korean company, Changgwang, employssome 200 workers in construction in the Yemeni port of Aden. Other countriesinclude Qatar and possibly Oman; there are also hopes of sending workers toSaudi Arabia. In this, ironically, the North is following in South Korea'sfootsteps, a generation later. After the 1973 oil price rise, the chaebol piled intoconstruction in the Gulf and brought their workforce with them. At one pointthere were 100,000 South Koreans in Saudi Arabia alone.

The precise scope of Russia'srole is unclear

More contract labourers areworking overseas

Some in Russia are paying offKim Il-sung's debts

The Middle East is a newerdestination

North Korea 27


The Austrian capital, Vienna, is the base of Golden Star Bank (GSB), NorthKorea's only financial institution in western Europe. Established in 1982 as awholly owned subsidiary of the North's Daesung Bank, GSB is subject torestrictions, as it fails to meet Austria's threshold for paid-in capital require-ments. Business is not brisk: according to Kotra, GSB's assets fell from €23.4m(US$31.6m) in 2001 to €15.5m in 2002, although profits rose from €6 (sic), orUS$8, to €8,730 (US$11,800) in the period. The bank has eight employees. In2003 the Austrian finance ministry conducted a special audit of GSB, which theUS wants shut down. The US alleges that it is a centre of North Korean spyingoperations in Europe, as well as being involved in money laundering andarms deals.

In November 2003 Kotra reported a fall of nearly 20% year on year in the totalvalue of North Korea's merchandise trade with Japan in the first six months of2003. The slump appears to be mainly owing to the chilling of bilateralrelations, following the North's admission in late 2002 that it had kidnapped anumber of Japanese citizens in the 1970s and 1980s and Japanese concerns overthe North's nuclear weapons development programme. Bilateral trade duringthe period was also hindered by Japan's increased surveillance of North Koreanvessels entering its ports and by the clampdown on unauthorised remittancesfrom Japan to North Korea. Trade will suffer further if proposals released atend-2003 by a group in Japan's ruling Liberal Democratic Party, to ban ships ofcountries deemed to be a threat to Japan's security from entering Japaneseports, become law.

Merchandise trade between North Korea and Japan(US$ '000; Jan-Jun)

2002 2003North Korean exports to Japan 103,942 88,394North Korean imports from Japan 60,780 45,886

Total 164,722 134,280

Source: Korea Trade-Investment Promotion Agency (Seoul).

Kotra reported on January 6th that in the first 11 months of 2003 North Korea'strade with Yanbian, the adjacent Korean autonomous prefecture in China, roseby 25% to US$103.9m, just ahead of Yanbian's trade of US$103.5m with SouthKorea. Trade with Russia, which Yanbian also abuts, was much lower, atUS$24.8m. Yanbian's trade with the rest of China was not mentioned, but isno doubt larger. The figures suggests a degree of resilience in North Korea'seconomy.

Given that foreigners, including journalists, are now occasionally allowed tocross the DMZ by land with tours run by Hyundai to Mount Kumgang, anumber of rather similar recent press accounts have focused on the efforts ofthe cash-strapped chaebol to turn a profit on other lines in order to balance itslosses on tourism. The focus here is Kosong, a small town where Hyundai hasinvested in a 28-acre farm whose 70 greenhouses and 80 workers grow lettuce,cabbages, peppers and turnips. Although state-owned, the farm boasts a freshslogan—"Let's run our farms as if we own them ourselves!"—and is said to be

Golden Star flickers

The North edges out the Southas Yanbian's first trade partner

Trade with Japan slumps

Hyundai branches out

Trade with Yanbian risesrapidly

28 North Korea


five times as profitable as the average co-operative farm. (Others, of course, lackaccess to Southern capital, technology and training.) Around 20 tonnes ofvegetables are harvested each month, of which Hyundai takes 60% to recoupits investment (the amount of the investment is not mentioned). Hyundaiopened the farm in 1999, soon after the tours started, and handed it over toNorth Korea two years ago. It has also set up a pig farm.

Change has its limits. Photography is strictly forbidden; slogans praising KimJong-il abound. Still, it is a start. If economic change can work without beingpolitically destabilising, the better the chances that a nervous regime willpermit more Kosongs elsewhere: at first, perhaps, near at hand. Hyundai hopesto develop a 4,000-sq-km area from Mount Kumgang to the port of Wonsan,100 km to the north. Significantly, a young woman farmer, who dutifully toldforeign visitors that she was "working out of love for my dear leader, KimJong-il. Everything I do is for my great general", changed her tune once minderswere out of earshot: "I work here because of the future that is coming."

Change is limited, but this isa start

north korea - iuj.ac.jp filenorth korea drew up a detailed list of regulations to govern the planned...

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