FT.com / Comment & analysis / Analysis - North Korea toys with risk and rewardSkip to main content, accesskey 's' Homepage, accesskey '1' Thursday Sep 1 2005 . All times are London time. Roger Bove Edit Profile Take a Tour Log out Comment & analysis / AnalysisPrint article | Email article Main page content: North Korea toys with risk and reward By Anna Fifield Published: September 1 2005 20:24 | Last updated: September 1 2005 20:24 At Pyongyang Wire Factory, business has never been so good. Once limited to making electrical and communications cables for public infrastructure, the state-owned North Korean company now profits from selling its core products and exporting a new line of audio-visual leads. ADVERTISEMENT “In the past, we could only produce but now we can sell and trade just like overseas companies,” says Kim Seok-nam, the factory’s manager, as the purring machinery loops wire on to spools. “It has made a real difference.” He has used some of the earnings to buy German wire insulating machines and give the 1,000 staff pay rises. Some earn Won20,000 a month – about $8 at the black market rate, or eight times the country’s average salary. “The factory has become more efficient and the zeal of the workers has increased,” says Mr Kim, who completed a six-month management course to adapt him to this way of doing business. He has started an “employee of the month” board, from which photographs of diligent workers beam. In the notionally egalitarian stronghold that is North Korea, such an innovation would have been unthinkable three years ago. With steadily increasing productivity and profits, the factory is one of the success stories of the economic reforms that the regime introduced in mid-2002, labelling them “epochal”. Once motivated purely by collective need, the world’s strongest remaining adherent of communism is beginning to open up to market-oriented ideas as it tries to revive its degenerating economy. State-set prices fluctuate more in line with supply and demand while markets, once called “an obsolete form of commercial activity”, are recognised as legitimate. Younger, innovative managers such as Mr Kim have been installed at state enterprises. Although the regime says it is merely perfecting the juche ideology of self-reliance formulated by Kim Il-sung, the state’s late founder and father of “Dear Leader” Kim Jong-il, the reforms represent a significant departure both from the practices and principles of the past. The Korea Institute for National Unification, a think-tank in Seoul, says the changes have been so wide-ranging that there can be no going back. The extent and impact of the changes are difficult to assess, partly because of a dearth of data (North Korea has not published official statistics since 1965) and partly because access to the “Hermit Kingdom” is highly restricted. But, on a 10-day trip, the Financial Times toured the wire factory, visited markets, state shops and street stalls and talked to ordinary North Koreans to get a picture of the country’s economy. The changes, though tentative, carry a heavy political weight. Three years on, analysts say, the regime is likely to be evaluating how to proceed. Further reforms would bring in much-needed capital. But the loss of central control could threaten its grip on power. For, just as the reforms have rewarded staff at efficient operations such as the wire factory, they have not been so kind to many other North Koreans. Mrs Hwan, a widow in her early forties, works eight hours a day in the office of a state food processing factory near the Chinese border but struggles to feed her teenage son and daughter. She is supposed to earn Won3,000 a month but, two months out of three, the cash-strapped factory cannot pay salaries. So she spends every spare hour selling vegetables in the market. That way she can make enough to provide two-thirds of the minimum calories her children need. The United Nations’ World Food Programme helps with the rest. Widening disparities among North Koreans and spiralling inflation, which some economists put at 130 per cent a year, are the most obvious results of the reforms. As Kathi Zellweger of Caritas, the humanitarian agency, puts it: “Poverty is no longer equally shared.” With vast mineral reserves, the northern half was historically the industrial powerhouse of the peninsula, while the agrarian south was the breadbasket. After division at the end of the 1950-53 Korean war, the North’s economy outperformed that of the South and it was propping up its estranged brother even in the 1970s. But ideology and nature altered North Korea’s fortunes. The collapse of the Soviet Union saw the disappearance of one of its two main benefactors – the other being China – and ended the socialist bloc that had enabled Pyongyang to barter coal and magnesia for food. Then in 1995 a flood wiped out crops and led to a famine that aid agencies estimate killed as many as 2m, almost 10 per cent of the population. China meanwhile largely lost interest in its communist sidekick as it discovered economic opportunities in the wider world. At the same time, North Korea’s belligerent isolationism, brandishing nuclear weapons as a bargaining chip to extract economic benefits from the outside world, has scared off foreign donors and potential investors alike. Far from being the wealthy part, the North’s national income is about $21bn (£11.5bn, €17bn) a year, just 3 per cent of that of the South, according to the central bank in Seoul. A South Kore­an’s pay is on average 15 times greater. “Because of the collapse of the socialist countries in eastern Europe and after some other countries changed their systems to more capitalist ways, we do acknowledge there have been difficulties in managing our economy,” says Seo Jae-yong, a professor at North Korea’s University of National Economy. “We have needed hard currency to cope with the new situation and develop our country. But I would say there has been some progress.” Indeed, there are many positive signs of change. A bustling service industry has sprung up since 2002, with privately run or co-operative tailors, barbers, bicycle repairmen and ice cream vendors setting up shop. More than 300 general markets dot the country, selling surplus produce from farms as well as goods from China and Russia. Previously, North Koreans could buy food and items such as televisions and electric fans only from state stores. Now that these are widely available in markets, the state shops have cut their prices. One employee of a state automotive company says life feels better these days. “I’m not an economist or a politician – I didn’t even go to university – but from what I see and what I hear, I can feel our economy developing,” he told the FT. Aid agencies report a new prosperity among traders and farmers. Also, “there is clearly a wealthier class emerging in Pyongyang in particular”, says Richard Ragan, country director for the WFP. “In the five richest cities, you see a sort of middle class with disposable income. The roads are full in the mornings with people cycling, just like in China in the 1960s and 1970s – that’s a new phenomenon here.” The cost of a new bicycle equals about three years of the average wage. But just as there are winners, there are many losers. “What about the factories and collective farms that are not performing so well?” asks Lee Jong-won, a North Korea specialist at the South’s Korean Institute for Economic Policy. “They no longer have any subsidies and the workers in those sectors do not receive any wages. So people who are making money can start other businesses but the people who are vulnerable do not have any way of improving their everyday lives.” This problem is particularly pronounced for the growing number of urban poor in cities such as Hamhung and Kim Chaek, two industrial centres on the east coast, where tens of thousands of factory workers are jobless as plants stand idle. At the end of last year, aid agencies estimated that at least 30 per cent of the national population of working-age was either underemployed or unemployed and, while some continued to receive salaries, those had often fallen below subsistence levels. “These are the people who are hurting the most,” says Marcel Wagner of the Adventist Development and Relief Agency in Pyongyang. About 70 per cent of the population gets its staple food from the public distribution system but daily rations have been cut to 250g-380g per person, about half of the minimum energy requirement. Those receiving salaries have some scope to buy more – although this is increasingly difficult as a kilogram of rice, which cost Won44 before the reforms, has shot up to Won550-Won700. But the jobless of Hamhung and Kim Chaek, Mr Wagner says, “have only two options – foraging or trying to make a [vegetable] patch in the mountains, or trying to sell handmade items in the markets”. Ironically, 2005 is the year of agriculture. Kim Jong-il’s regime listed an increase in farm production as a priority for the year. While soldiers and labourers over the past two decades often headed to the fields on Fridays to help plant and tend the crops, high-ranking officials from government ministries have this year been joining in. But many question this use of resources. “It’s unlikely that they will ever be able to produce enough food to feed themselves,” says the WFP’s Mr Ragan. “The bigger question is, should they try?” he asks. “North Korea’s competitive advantage is in the industrial sector – it would make sense for them to grow their nascent market economy into something strong enough to have capital to purchase.” This is something the regime is likely to consider as it weighs the successes and failures of its moves from an ideologically motivated economy to one driven more by material rewards. Cho Myong-chol, a Kim Il-sung University economist who defected to the South, argues that the reforms have not been successful because they have failed to raise economic growth. “Successful economic reforms should be able to improve people’s quality of living, but North Koreans are still suffering from food and commodity shortages and the gap between the rich and the poor is widening,” Prof Cho says. At the capital’s gleaming new Tongil market, a showcase bazaar where shoppers can buy everything from snake wine to computer keyboards, there are cheap imports but competition is high, profitability is low and paying customers are scarce. “Business is just so-so,” says a Mrs Kim from behind her stand selling Russian vodka and Chinese noodles, where five saleswomen stand idle. “There are too many other shops selling the same thing,” shrugs the former grocery store employee. “I’m slightly better off than before I opened this stall, but not much.” Economists and aid workers nevertheless agree that the regime must press ahead with reforms. “They need to move forward with the economic reform process and make sure the transition is managed,” says Ms Zellweger of Caritas. “It needs to go beyond price and wage adjustments to allow more trade and investment and privatisation of small and medium enterprises – otherwise where will the income for the government come from?” Putting greater emphasis on industry – and moving away from heavy manufacturing towards lighter, more profitable enterprises such as beer, shoes and cosmetics – would help alleviate imbalances. The International Crisis Group said in a recent study that the government should first focus on the shortage of hard currency, the lack of economic know-how and worsening corruption. But even if North Korea fully embraces reform, the ICG says the process will fail without a more favourable international climate. The two countries most important for access to international assistance and financing – the US and Japan – have also been the most vigorous in confronting North Korea’s nuclear activities. For these reasons, Marcus Noland, a Korea specialist at the Institute of International Economics in Washington, maintains that Pyongyang must integrate into the world economy. “They have a certain amount of productive potential in the economy but no real way of way of linking that to the western world,” Mr Noland says. “They have workers who appear to be reasonably literate and numerate with quite good technical skills, and who are extremely well disciplined. If they can start linking up more with investors in China, South Korea and Japan, that would start to stabilise their economy.” There are domestic political incentives for further reform as well. Mr Kim’s regime needs to bring in enough money to satisfy the army and the elite. Opening up his country to the products, the capital and the ideas that circulate outside would help it prosper – but it would also highlight disparities, both among farmers and factory workers and between North Koreans and the rest of the world. Prof Cho says the reforms will not be successfully extended while the regime puts its own survival first. “Without the Communist party’s consent, the North Korean economic reform team cannot do anything. They can’t make it easier for foreign businessmen to get a visa or streamline administrative services to attract more foreign investment,” the defector points out. “The party’s priority is to ensure the stability and safety of the regime, so it will never approve measures that can threaten the regime’s stability.” Either way, for the Dear Leader, reform is a remarkably risky game. Stout-hearted investors need luck and patience Untapped markets? No competition? No proper tax-collecting mechanism? It sounds like an investors’ dream. But throw in a nuclear crisis, trade sanctions and an authoritarian regime and opportunities in North Korea do not look quite so attractive. Still, increasing numbers of foreigners are trying their luck as the world’s most isolated state warily opens its doors to business. “North Korea is changing and we are living proof of that,” says Felix Abt, who represents ABB and Sandvik, the engineering companies, and is chairman of the European Business Association in Pyongyang. With the economy stagnating, Kim Jong-il’s regime is accepting more foreign investment, especially in infrastructure. China is most active, with companies investing in food processing and coal and mineral mining joint ventures, but South Korean and European businesses are increasingly being allowed in. North Korea’s Ministry of Foreign Trade has even established an investment promotion division. “We are trying to induce foreign capital into our country to help revive the national economy,” says Jon Jong-chil, the agency’s deputy director. Investing in North Korea is not for the faint-hearted. Access is highly restricted and the operating environment uncertain, largely because of the unresolved crisis over Pyongyang’s nuclear capabilities. “There is a lot more interest in business now than there has been for quite some time,” says Tony Michell, a business consultant in Seoul. “You have to choose your investments very carefully but there are a large number of small-scale investment opportunities – they’re not at the multinational level.” Only a handful of those who try to open businesses in North Korea succeed, and an even smaller number make money. But for the brave, North Korea means a chance to make a difference, if not always a profit. The fact that the internet is all but banned has not stopped Jan Holtermann, a German entrepreneur, investing in an internet service provider. Korea Computer Centre, a joint venture through the Ministry of Telecommunications, has been providing e-mail and web access to selected North Korean institutions for the last year. No individual North Koreans are allowed to use the internet. “We don’t expect to have any private users in the next year or even in the near future but just having institutional customers will not meet our financial needs,” says Günter Unterbeck, a long-term Pyongyang resident, who is running the business. “But IT companies generally need two years to break even and, even after one year, we have a stable cash flow.” Foreign investors are bringing international practices as well as information. Daedong Credit Bank, which opened almost 10 years ago, has just introduced anti-money laundering procedures. A 70/30 joint venture between a private foreign consortium and a state-owned bank, Daedong’s main business is remittances for foreign companies and aid agencies. It has become the first North Korean institution to require proper documentation of where its customers are incorporated and what they do. “Everyone assumes that this is a hotbed of counterfeiting and illegal transactions,” Nigel Cowie, general manager, says. “We want to show people that we have nothing to hide; this is not a conduit for missile money.” He sees bigger opportunities ahead. “We want to be well positioned for when the nuclear crisis is resolved,” Mr Cowie says. “When the day comes that restrictions are lifted, maybe Citigroup will move in and help us do that.” Other foreign investors also look beyond the nuclear horizon. Kim Doo-uk, a businessman originally from South Korea who has set up a joint venture with the Pyongyang Wire Factory, says North Korea can exploit having cheaper, better- educated labour than China. “Once we have better relations with countries near us, this country will grow so fast, maybe 10 times faster than China,” he says. EMAIL ARTICLEPRINT ARTICLEMOST POPULAR Skip to remaining content Main navigation menu: Home World Companies Markets Markets & funds data Lex Comment & analysis Comment Analysis Columnists Editorial comment Letters Debates & polls Most read Technology Business life Your money Arts & Weekend In depth FT Reports Jobs & classified Site services Partner sites Chinese.FT.com FT Deutschland Les Echos The New York Times Vedomosti Investors Chronicle Sub-menu navigation: "Home" sub navigation Asia Europe UK US "World" sub navigation US Europe UK Asia-Pacific Middle East & Africa Americas International economy "Europe" sub navigation Brussels briefing "Companies" sub navigation By industry By region Companies A-Z "By industry" sub navigation Aerospace & defence Autos Basic industries Consumer industries Drugs & healthcare Energy Utilities Mining Financial services IT Media & internet Property Retailing & leisure Telecoms Transport "By region" sub navigation US Europe UK UK smaller companies Asia-Pacific Middle East & Africa Americas "Markets" sub navigation Equities Currencies Capital markets Commodities Emerging markets Investor's notebook Markets headlines "Equities" sub navigation US Europe UK Asia-Pacific "Markets headlines" sub navigation News headlines Market alerts UK regulatory news "Markets & funds data" sub navigation Equities Currencies Bonds & rates Commodities Funds Portfolio Analytical charting "Equities" sub navigation US UK Japan Germany France Canada Netherlands Sweden South-east Asia Australia & New Zealand "Funds" sub navigation Daily fund focus Fund ratings "Comment & analysis" sub navigation Comment Analysis Columnists Editorial comment Letters Debates & polls Most read "Columnists" sub navigation Amity Shlaes John Gapper Lombard Lucy Kellaway Martin Wolf Notebook Philip Stephens More ... "Technology" sub navigation Technology main FTIT "Technology main" sub navigation IT Telecoms Media & internet "Business life" sub navigation Business education Management Media and marketing Entrepreneurship Law and professions Science & technology Investing in China "Business education" sub navigation MBA rankings EMBA rankings "Management" sub navigation Business books Business travel "Media and marketing" sub navigation Creative Business "Your money" sub navigation Your home Your investments Your banking Your insurance Your tax Your pension Global investing FT Wealth Advice & comment Money guides Compare and apply "Advice & comment" sub navigation Ask the FT Money makeover "Compare and apply" sub navigation Credit cards Loans Mortgages Life assurance Travel insurance Current accounts Savings accounts Share dealing Gas & electricity Telephone suppliers "Arts & Weekend" sub navigation Books House & garden Luxury Film & television Food & drink Fashion & beauty Collecting Art, music & theatre Travel Sport "Travel" sub navigation Paris Berlin New York Hong Kong San Francisco Rome London "In depth" sub navigation London terror German election Japan election More ... "FT Reports" sub navigation Cyprus Tanzania More ... "Jobs & classified" sub navigation Jobs Businesses for sale Notices "Site services" sub navigation Subscribe to FT.com Edit your profile Portfolio News tracking Corporate solutions "News tracking" sub navigation Desktop alerts Email news summaries Email news alerts FT mobile RSS news feeds Remaining navigation menus: Remaining page content: Additional content: Search & quotes News Quotes Power search My portfolio Editor’s choice Ask the expert: North Korea Anna Fifield’s exclusive North Korea journal Chance to end Pyongyang nuclear impasse Site services News tracking FT mobile Personal office FT Research Centre FT conferences Currency converter Working at the FT FT diaries Research tools Analyst reports FT Research Centre Free annual reports Market research Growth companies D&B business reports = requires subscription to FT.com HomeWorld | Business | Markets news | Markets & funds data | Industries | Lex | Your money Comment & analysis | Reports | Arts & Weekend | Sport | In today’s FT | Media inquiriesContact us | Help © Copyright The Financial Times Ltd 2005. "FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms | Advertising | Corporate