The Hidden People of North Korea (18 page)

Shortly after the inter-Korean summit of 2000, Hyundai received permission from the North Korean government to lease a sixty-six-square-kilometer zone outside the city of Kaesong. The zone would remain under North Korean jurisdiction, but foreign companies would be permitted to rent land in the zone for a period of fifty years. South Korea would provide the infrastructure, including the electricity. By early 2009, over one hundred South Korean companies were operating in the Kaesong Industrial Complex, employing almost forty thousand North Korean workers. Because the South Korean government hopes that investment will stimulate North Korea to engage in broader economic reforms, various investment guarantees and insurance coverage are available to the mostly small and medium-sized companies going into Kaesong.

Even so, the odds against profitability are great. In addition to the usual logistical problems that bedevil any project involving North Koreans, such as getting permission to visit one’s own factory or communicate with the home office, the zone faces problems because of North Korea’s problematic trade status in the international community. Numerous trade embargoes, especially of “strategic” items, make it necessary for South Korean companies to screen production equipment destined for Kaesong carefully. Another problem companies in the zone face is that North Korea does not have preferential trade agreements with many of the Organization for Economic Cooperation and Development countries, so Kaesong-made products exported beyond South Korea are subject to stiff tariffs. South Korea’s Roh Moo-hyun administration, which left office in early 2008, considered Kae-song the economic cornerstone of inter-Korean reconciliation but viewed the project more as a political confidence-building measure than a hard-headed business investment. President Roh, a former human rights lawyer, not a businessman, pushed companies to invest, saying that “businessmen had better move a step forward to enhance inter-Korean economic exchanges and explore the North Korean market.”
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For its part, the Kim regime has undoubtedly always planned to keep tight control over the Kaesong zone. Only authorized North Korean workers are allowed into the zone, and South Korean workers are not permitted to leave the zone to go into Kaesong city; they must commute directly between South Korea and the zone, and they may do so only with the permission of the North Koreans, who can revoke that permission at any time. Only a few non-Korean foreigners have been permitted to visit the zone, even though it is supposed to be an international trade zone. Commercial advertising, which is practically banned throughout North Korea, is permitted in the zone, but regulations ban “any advertisement hamstringing the process of improving the north-south relations, decadent and fraudulent ads, ads for commodities whose production, sale and supply are prohibited, banned services and those ads unreasonably comparing or slandering other enterprises or commodities or services.”
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And then there are the political problems inherent in doing business in North Korea. From the very first, at the December 2004 inaugural ceremony for the zone, North Korea’s government representative, presumably in protest against what he considered slow progress in building the zone, walked out on the speech of his South Korean government counterpart. In February 2008, Lee Myung-bak, a hardheaded businessman (known as “the Bulldozer”) and former mayor of Seoul, was elected president of South Korea, and the Kim regime flew into a rage. In an apparent bid to turn the South Korean people against their new president, the regime instituted what could be called a full-court press against South Korea, cutting off government-to-government dialogue, imposing travel restrictions, and issuing threats to take military measures. As one of the few cases of ongoing inter-Korean contact, Kaesong became an obvious target of the Kim regime’s ire.

One month after President Lee’s inauguration, the eleven South Korean officials assigned to Kaesong were expelled. In June, the North Koreans began to restrict the border crossings of South Korean businessmen going to and from Kaesong. In November, a group of North Korean army officers paid an unexpected visit to the zone and pointedly asked factory managers how long it would take for them to shut down their operations. In December, half of the sixteen hundred South Koreans working in the zone were expelled, seriously crippling operations. During the annual U.S.–Republic of Korea (ROK) military exercises in March 2009, the North Koreans cut all communication links between South Korea and Kaesong, forcing even more South Koreans to return home. In May 2009, the North Koreans shredded all contracts relating to Kaesong, claiming that because the South Korean government had become hostile to the North, the previous “favorable” contract terms were no longer appropriate. Faced with a demand for dramatically higher land-use fees and wages, most South Korean companies began looking for a way out. As this book goes to press in 2009, it is uncertain if the Kae-song zone will survive; in any case, it offers yet another lesson about how difficult it is for foreigners to do business in North Korea.

Many foreign observers have suggested that North Korea must inevitably follow the Chinese model in its foreign trade and investment policies, but business conditions in North Korea differ in several important respects from conditions in China, where, along with private farming, the first foreign trade zones were the major drivers of the economic boom that began in the 1980s. Unlike North Korea, China had a vast domestic market to which goods could be sold, and wealthy Chinese living abroad became early investors. More importantly, China never insisted on the high degree of control over the zones that North Korea does. For example, the factories can freely hire Chinese laborers, whereas in North Korea the state provides the workers and rotates them to prevent their being unduly influenced by their market experience. Finally, the North Koreans at least pretend to believe that foreign investors, especially those from South Korea, should invest for patriotic rather than business reasons. Responding to the criticism that many South Korean companies find it difficult to make a profit in North Korea, a North Korean official said, “Why is money a priority? Inter-Korean business must be about something more than just monetary calculations.”
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Realizing that it lacks the financial and technical resources to develop a modern economy solely by its own efforts, the Kim regime has become more accepting of foreign investment outside the trade zones. A few South Korean entrepreneurs have established joint ventures in Pyongyang and other cities, generally to their regret. North Korea’s only automobile plant, which assembles cars from imported parts, is a joint venture with Pyonghwa Motors, a South Korean company affiliated with the Unification Church. It produces only a few hundred cars a year, most notably, the “Whistle” (
Hwiparam
). In recent years, the North Koreans have been making a strong investment pitch to the Chinese, who already have a variety of joint ventures throughout the country, including a contract to run the Pyongyang Department Store No. 1 and joint ventures in a number of large mines.

North Korea is an exceptionally difficult country to conduct business with, and doing so is a hardship tour for the few foreign businesspeople who live there. The government provides land, natural resources, and labor, while foreign investors are expected to provide everything else, including infrastructure. Bribes must be paid at every turn, and signed contracts are considered merely the first step in continuing negotiations. When a foreign business begins to turn a profit, rather than rejoicing, the North Koreans try to squeeze out more of those profits for themselves.

The business viability of North Korea’s trade zones remains very much in doubt. According to two separate surveys of businesses reported by South Korea’s
JoongAng Ilbo
newspaper in 2005, 45 out of 150 South Korean companies that had signed contracts to do business with North Korea had ended their business ventures within six years, and only 22 out of 241 companies that had opened factories there continued to do business after five years.
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In a 2008 poll conducted by the Korea Chamber of Commerce and Industry, 80 percent of South Korean businesses in North Korea said they were experiencing difficulties, and over half said they believe China or Vietnam would be more attractive foreign business sites than North Korea.
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The businesspeople’s most common complaints relate to problems traveling between the two Koreas, customs procedures, limited access to telecommunications, and the ban on importing strategically important goods into the North for manufacturing purposes.

A South Korean newspaper article sums up the results of a survey with this “first commandment of investment in North Korea”: “Don’t.”
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A Korean American industrialist who had business dealings in North Korea for fifteen years before finally pulling out recounts some of his experiences.
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Looking back, he admits that his investments were motivated more by compassion for the North Koreans than by good business sense. He first planned to start a ship-repair facility, but two years of delays changed his mind. Instead, he built a farm to harvest scallops, but once it was built, the North Koreans wanted to run it themselves and would not permit his technicians even to visit the farm. Since the North Koreans knew nothing about running the business, it failed. A shoe factory he set up likewise failed because worker morale was so low that production could not keep up with his shoe factory in China. Other business ventures likewise failed.

The Court Economy

While North Korea’s socialist economy struggles to survive, a parallel economy seems to have done quite well for itself. Operations directed by Offices 38 and 39 of the Korean Workers’ Party supply funds to support Kim Jongil’s lavish lifestyle and to reward his followers. Legitimate funds come from party-owned trading companies that sell the country’s most marketable commodities, including minerals such as gold, agricultural products such as pine mushrooms, and seafood such as sea urchins. Trade statistics from other countries suggest that the regime may also earn as much as several hundred million dollars a year from the sale of illicit drugs and counterfeit pharmaceuticals (most notably, Viagra), currency (dollars and yen), and cigarettes. North Korea’s arms exports contribute tens or hundreds of millions of dollars a year as well, but the military controls the trading companies selling arms, and presumably most of the profits stay in the separate military economy.

The party further raises funds by requiring the people to contribute local products such as sesame, salt, scrap metal, and rabbit skins. It also collects money from people in the form of “contributions” to a variety of national causes, including Kim Jong-il’s birthday celebration. People have always grumbled about these donations, and in recent years the grumbling has been growing louder and more public.

The party also withholds a significant portion of the wages of North Koreans working overseas as “contributions.” Furthermore, diplomats engage in smuggling to support embassy operations and to remit donations to the party offices back home; in fact, smuggling could be considered an integral part of a North Korean diplomat’s job. Diplomatic pouches are used to smuggle goods such as gems, ivory, gold, counterfeit or foreign cigarettes, alcohol, and compact discs from one country to another, and diplomatic status protects the smugglers from conviction when they are caught. According to a U.S. government source, since 1976 North Koreans have been arrested for smuggling at least fifty times in more than twenty countries, including Sweden, Finland, Estonia, Russia, China, Nepal, Thailand, Cambodia, and Egypt, as well as various other African countries.
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One of the largest cases of North Korean smuggling was revealed on a stormy night in April 2003—on April 15 (Kim Il-sung’s birthday) to be exact—when two crewmen from the small North Korean freighter
Pong Su
, which was standing just off the Australian coast, unloaded 125 kilograms of pure heroin. One of the crew members transporting the drugs to the beach drowned, and another was captured, along with a three-man shore party waiting to receive the drugs. When the Australians ordered the
Pong Su
into port for investigation, the ship fled and was only apprehended after a four-day chase. At the trial, the surviving courier and the three shore-party members were convicted on drug charges, whereas the
Pong Su
’s captain, party secretary, first mate, and chief engineer were acquitted by a jury who chose to believe the improbable defense argument that the men had no knowledge of the smuggling operation. Because the ship had been involved in drug smuggling, the Royal Australian Air Force confiscated and sank it. After the acquittal was announced, the North Korean press issued its own version of events, somehow managing to make the United States the guilty party:

The United States, a past master at lies and deception, is now suffering bitter shame before the international community for a series of conspiratorial plots hatched by it recently. This is proved by the recently announced results of the final investigation into the case of the ship “Pongsu,” a trading cargo ship of the DPRK. … The High Court of Australia declared the crewmen of the ship not guilty and set all of them free. … The above-said case inflicted no small damage upon the DPRK’s ship and its crewmen. The U.S. should make a formal apology and compensation for its piratical act and political swindle.
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Why Doesn’t the Regime Reform the Economy?

It is a notable characteristic of socialist command economies such as existed in the former Soviet Union and Eastern Europe and still exist in Cuba and North Korea, that they are plagued by chronic shortages, especially of consumer goods.
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To improve the situation, the party promises to “perfect” the system under the assumption that the basic characteristics of socialism are “scientifically correct.” Even a leader as enlightened as Mikhail Gorbachev could not escape the commitment to communism, saying in 1988, “Trying to restore private ownership means to move backward, and is a deeply mistaken decision.”
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The people who get blamed for the system’s defects are not the leaders who impose it but the mid-level bureaucrats who administer it and the working people who use it. Socialist organizations are constantly reorganized, officials replaced, and new economic plans announced with great fanfare, but nothing changes.